Exact Sciences Corp (EXAS) 2016 Q3 法說會逐字稿

Good morning. My name is Lindsay and I will be your conference operator today. At this time, I would like to welcome everyone to the EXACT Sciences Corporation third quarter 2016 earnings call. All lines have been placed on mute to prevent any background noise. (Operator Instructions). Thank you.

Mr. JP Fielder, Director of Corporate Communications and Investor Relations, you may begin your conference.

Thank you, Lindsay, and thank all of you for joining us for EXACT Sciences' third quarter 2016 conference call. On the call today are Kevin Conroy, the company's Chairman and CEO, Maneesh Arora, our Chief Operating Officer, and John Bakewell, our Chief Financial Officer.

EXACT Sciences issued a news release earlier this morning detailing our third quarter financial results. If you've not seen it, please go to our website, exactsciences.com.

Following the Safe Harbor statement, Kevin will provide an overview of today's call. Next, John will provide a summary of our third quarter 2016 financial results. And then, Kevin will provide an update on our corporate priorities.

During today's call, we'll make forward-looking statements based on current expectations. Our actual results may differ materially from such statements. Descriptions of the risks and uncertainties associated with EXACT Sciences are included in our SEC filings, which can be accessed through our website.

It's now my pleasure to introduce the company's Chairman and CEO, Kevin Conroy.

Thank you, JP, and good morning, everyone. We are pleased with our third quarter financial performance. We generated 123% year-over-year revenue growth. We expanded our gross margin sequentially by more than 430 basis points, and we are successfully managing cash through efficient investment in our business. Our financial performance was achieved through outstanding execution. We have a great team at Exact, which is demonstrated by our third quarter results.

It is now my pleasure to introduce John Bakewell, EXACT Sciences' Chief Financial Officer, for our third quarter financial review. John?

Thanks, Kevin, and good morning, everyone. Our third quarter revenue results exceeded our expectations, with completed Cologuard test volume totaling approximately 68,000, generating revenue of $28.1 million, which represents year-over-year growth of 123%. Q3 revenue increased sequentially by 33%. Average recognized revenue per test increased to $412 for Q3, reflecting improved collections during the quarter on tests that we recognize on a cash basis. This brings our year-to-date ASP performance to $395, and positions us to exceed the ASP goals we previously established for the full year.

The scale and leverage potential of our manufacturing and lab operations was evident again this quarter. Third quarter costs of sales totaled $178 per completed test, sequentially improved by $8 per test from Q2's result of $186. During the quarter we again experienced the favorable effects of careful cost control combined with increased test volume. All together, our Q3 improvements in ASP and COGS per test drove gross margin to 57% for the quarter.

Third quarter operating expenses totaled $54.2 million, lower sequentially by $2 million. Third quarter cash utilization totaled $30.5 million, below both our Q2 2016 cash utilization of $38.5 million and the low end of our guidance range, primarily the result of our revenue performance combined with our ongoing cost containment and prudent investing in our business.

With the addition of our $144.2 million raised in our July follow-on offering, we ended the third quarter of 2016 with cash and cash equivalents of $337.8 million.

I will turn the call back to Kevin.

Thank you, John. We are pleased to see that Cologuard's growth trajectory continued during the third quarter. This growth was supported by the outstanding performance of our commercial team and the ongoing success of our direct-to-consumer marketing campaign. Together they drove increases in the number of ordering providers, orders for Cologuard, and completed Cologuard tests during the third quarter.

Based on our commercial and operational performance during the past several quarters, we expect full year 2016 test volume of approximately 240,000 completed Cologuard tests. With the improvements we have achieved in Cologuard's average selling price, we anticipate this test volume will deliver full year 2016 revenues in the range of $93 million to $95 million.

Looking further ahead, there is an extraordinary market opportunity for Cologuard. With approximately 80 million Americans eligible for our test, our market penetration goal of 30% represents a $4 billion opportunity. Our guidance for completed tests in 2016 is 3% of our long-term market penetration goal. While we have made outstanding progress since Cologuard was launched, and EXACT Sciences is in a unique position to capitalize on this opportunity, there remains considerable runway ahead.

Let's turn to EXACT Sciences' compelling fundamentals. These fundamentals include Cologuard, a differentiated product supported by a unique compliance service and a strong commercial team. The compliance service helps to ensure that patients follow through and complete their screening with Cologuard. Our test's inclusion in the HEDIS quality measures also provides long-term potential for additional growth.

In addition, patient demand for Cologuard and the number of commercial insurers that cover our test continues to grow. Our commercial team and strategy is focused on continuing to expand patient and provider awareness and demand for Cologuard. This strategy is working. We added more than 9,000 new ordering providers during the third quarter for a total of roughly 50,000 since Cologuard was launched. Our sales team and marketing campaign are generating approximately 700 new providers each week, consistent with last quarter, and an increase of 200 to 300 new providers since the launch of our national television campaign.

The success of our national television campaign has complemented the work of our sales team. The television campaign is aimed at both men and women, age 50 and older, with an emphasis on those 65 and older. As you may have seen during the past several quarters, the campaign is providing significant support to our sales strategy. As a result, we expect to continue to invest in the direct-to-consumer television campaign. We believe Cologuard's inclusion in the HEDIS quality measures also provide a long-term opportunity to increase demand for Cologuard.

With its inclusion in these quality measures, Cologuard is now part of the standard of care for colon cancer screening. The HEDIS measures are important to commercial insurers, health systems, and healthcare providers. These measures also directly affect the CMS Star Ratings, which guide the quality measures for Medicare Advantage plans.

Both measures provide incentives for health plans to cover Cologuard and for providers to prescribe it. Quality measures rate payers on things such as screening compliance, patient satisfaction and a host of other metrics. For example, Cologuard's compliance rate is 67%, significantly higher than either colonoscopy or FIT testing. The compliance rate edged down one percentage point during the third quarter because of a higher mix of commercially insured patients who presently comply at a lower rate than Medicare patients. Over time, we expect this rate to increase as we secure broader insurance coverage for Cologuard.

Patient satisfaction also is another important component of the HEDIS measures. The latest survey of patients who completed the Cologuard test shows that 90% had a positive experience with Cologuard and EXACT Sciences' compliance service.

Let's turn now to the growing commercial insurance coverage of Cologuard. We made progress, significant progress with commercial insurers during the third quarter. Today, approximately 144 million people are insured by health plans that cover Cologuard, including Medicare and commercial insurers. This is an increase of 40% since Cologuard was included in USPSTF's final colon cancer screening recommendations in June. In all, two of every three patients eligible to be screened with Cologuard are now covered by the test.

We remain in active discussions with commercial insurers to obtain additional coverage. The recent additions of coverage by Healthcare Services Corporation, Cigna, TRICARE and Health Net represent significant progress. Together, these plans insure more than 44 million people. We are pleased that the ramp for new commercial coverage of Cologuard continues to grow.

Let's turn now to the foundation for Cologuard that has been built upon the achievement of key milestones. These milestones include a partnership with the Mayo Clinic that developed a unique, highly accurate, innovative, DNA-based colon cancer screening test and built a patent portfolio that continues to protect it, a 10,000-patient clinical trial and publication of the results in the New England Journal of Medicine, FDA approval and Medicare coverage and pricing of Cologuard, Cologuard's inclusion in key guidelines such as the American Cancer Society, NCCN and USPSTF guidelines, inclusion in the HEDIS quality measures, the buildout of our commercial infrastructure including the lab, call center, and sales and marketing teams.

Now we continue to work to secure broad commercial insurance coverage of Cologuard and to make it as easy as possible for providers to prescribe our test with electronic ordering. These achievements, accomplished while maintaining a strong balance sheet, represent the significant hurdles that must be overcome by any company looking to develop another colon cancer screening test. With this foundation, the EXACT Sciences' team is focused on executing our sales, marketing, and reimbursement strategies while continuing to leverage our lab and compliance services.

We are now happy to answer your questions.

(Operator Instructions). Our first question comes from the line of Brian Weinstein with William Blair. Your line is open.

Hey, guys. Thanks for taking the questions. If we start on compliance here, Kevin, I know you talked a little bit about it in the prepared remarks, where do you think it's going to go near term? Is there a possibility that it ticks down a little bit here as you see a shift maybe towards more private pay? And then, if you could break out, if you have the detail, what do CMS patients comply at versus the private side? Thanks.

Okay. Well, it's first, there is a significant delta between the compliance rate of a Medicare patient versus a commercially insured patient, and this is driven by a rational explanation that patients who are insured by commercial insurance plans, we are very forthright in telling them that we will work to get their bill paid for by the commercial insurer but at the end of the day, the patient may be responsible for that bill. As a result, as you would expect, few of those commercial payers pay. We have not broken out, Brian, the specific delta between those two, but it is enough that when you see an increase in commercially insured patients, which is a very positive dynamic that is occurring in the business, you will see a slight decline in the overall compliance rate.

That compliance rate, we think, over time will exceed 70%. And it is hard to predict what will happen quarter to quarter but the underlying dynamic is a good one. Number one, Cologuard is being used more by physicians across their entire patient population. And that is positive. And Cologuard is still a test that is significantly better than colonoscopy, which the research shows fewer than 40% of people comply within one year of a doctor writing a referral to a GI -- or the FIT test which the data shows as little as 10% to 30% of patients comply with the FIT test when given the test by a physician. So that's a positive news there and we expect the rate to increase over the next year to two years and beyond.

Got it. And then on ASP, it was a nice increase this quarter. You talked about improved collections with some of the cash pay stuff. But it sounds like for the fourth quarter, you guys are kind of guiding that back down just a little bit. Can you talk about the sustainability of this ASP? Was there anything kind of one-time in nature, and how should we think about this ASP going forward?

Brian, this is John. We indeed had a really outstanding ASP performance in Q3. As we reported, it was $412 for the quarter which was up $21 sequentially from Q2. And as we noted that, that increase is attributed to improved cash collections on tests. And those are tests that we recognize only when cash is received and, more specifically, that's from our Medicare Advantage and our patient payment payer classes following our June USPSTF decision.

We've pointed out in the past that there is potential for variability in our ASP from quarter to quarter, and that's due to the factors around the timing of cash-based revenue and changes in payer mix. That continues to be the case going forward. So while we are very pleased with this quarter's ASP performance and we do believe our baseline has improved, at the same time we don't look for a full repeat of Q3's performance into Q4. There is an element of conservatism in that ASP assumption for Q4 just because of the predictability of cash collections from quarter to quarter. So consequently, there is upside to the assumptions that are presumed in our guidance range this quarter if indeed cash collections are strong in Q4, but we haven't factored that into our guidance outlook.

Got it. And then last one from me. In light of the HEDIS success, can you talk about the ability to sustain this 700 new providers per week that you are adding as well as, when do you think that you will start to see some additional potential payer contracting -- or payer coverage decisions start to come onboard?

Yes, Brian. It's Maneesh. I will take that. And what I would just like to just finish off of the comment around ASPs saying that we expect that to increase over time. We absolutely expect that to increase over time. And what you see is just an inability to predict when those cash collections are going to come.

But as it relates to new customers, we are really excited about the quarter we just had. The sales team is executing and the marketing campaign is working. That is driven by patients actually going and asking their physicians for Cologuard, and that is driving patients and physicians to ask their systems and their payers to cover Cologuard. And that's really where you see great wins like Cigna and TRICARE, which really set the stage for 2017. We have yet to feel the benefit of any of these wins that are happening and that's really what gives us all the confidence.

The other thing that's really important in your question is around contracts. We have been really, really disciplined and expect to continue to be disciplined in the contracts we enter into and making sure that whatever we do, we do not impact our PAMA rate. And we haven't done that and we don't expect to do that. So that will be an important consideration before we enter into contracts. What's really important is that patients want the test and that insurers recognize USPSTF and HEDIS and are going to expand coverage. And so we look forward to providing more updates over time.

Our next question comes from the line of Brandon Couillard with Jefferies. Your line is now open.

Thanks. Good morning. Maneesh, a question for you. If we look at the sales force, I mean, if we think about the first year of the launch, you were focused on a very select group of high volume docs with the initial sales focus. This year has been more about the total office. As we look out into next year, how does the day-to-day activity of the work, of the sales force change? And under a broad-based reimbursement scenario that seems to be taking shape, how many docs do you expect a steady state rep to be able to support?

So a couple of parts to that question. Let me speak to the first part which is how have things evolved. And in early days, the rep was really focused on those early adopters. And what we have been able to see is we have a growing steady base of regularly ordering physicians, and so the focus now is on making sure that we not go broad but go deep and have reps focused, more intensely focused, on physicians that are ordering to get their ordering rates up. And that will continue to be the focus over the next, let's call it year.

And so, the specifics around productivity per rep, what I would say is we haven't commented on that but we have a long way to go. We are really excited about the base of reps that we have and there is a lot of room to be able to sustain with the current footprint to get them processing a whole bunch more by focusing more deeply in the offices that they are in.

Super. And one for Kevin. Is there any update to share on the status of the Ironwood relationship and perhaps any prospects for other co-promote deals that may be on the table?

Yes. So the Ironwood relationship ended early in the third quarter. As you may know, that was a one-year co-promote arrangement that was extended by one quarter. And Ironwood did a terrific job. They were a great partner. Cologuard ended up being in position three in their bag. We are presently in discussions regarding co-promote options, including the option of us carrying an additional product in our bag. And we don't know if that will come to fruition.

But it is very clear that Cologuard is sensitive to promotion and we are not reaching enough physicians. So with all the success we are having, with the number of physicians increasing by 700 a week, we are scratching the surface. That's the reality of this. We are at about 3% market penetration. And we are looking at creative ways to increase our reach without adding to cash burn. And we expect to be able to deliver on that and we will talk about that at some point in the upcoming quarters.

Super. Thank you.

Our next question comes from the line of Catherine Ramsey from Robert W. Baird. Your line is now open.

Hey, guys. Thanks for the questions. I just wanted to dig into your holiday impact assumptions for fourth quarter. Last quarter, a 4,000 test increase quarter-to-quarter in the fourth quarter, guiding to about 10,000 this year. Realizing you have a larger, more mature ordering base, could you just quantify your assumptions of what kind of headwind you are expecting for the fourth quarter and what measures you are using to counteract that?

Yes. Well, thank you, Catherine. I think our models reflect what occurred last year, which was a significant follow-up in the last two weeks. And that's important to note. And we are probably a little bit more conservative off of even what happened last year. But know that there are a host of marketing strategies aimed at addressing the challenge of getting people who are coming off the holidays during a very busy time of the year to return a Cologuard collection kit. And so we are sober in our assessment of what the impact will be.

It's also important to note that we have started Q4 with real strength, that this September and October television advertising which went back up to a higher level than it was during for most of the summer, we've seen a real impact. So we have been setting records on a daily basis and a weekly basis in terms of week over week growth, and that feeds into confidence in terms of being able to have a strong Q4. But, again, there are some other marketing programs that we have to address the lack of compliance in that last two weeks.

All right. Great. That's very helpful. And then, you talk about a growing mix of commercial, which is great long term, realizing there are some compliance headwinds short term. But what is that mix Medicare versus commercial now? Is it 60/40 or approaching more 50/50? And where do you think that mix could go over the next 12 months?

Well, we haven't provided that level of detail on a quarter-to-quarter basis. But let's -- I would say that it's started that at launch over 85% of our tests were for Medicare patients. And there has been a steady increase in the percentage of tests that are commercial patients. And I would just give a real approximate number now, that it is roughly a third and growing. But please don't expect an update on that number on a quarter-to-quarter basis.

Okay. Great. Very helpful. Thank you.

Our next question comes from the line of Bill Bonello with Craig-Hallum. Your line is now open.

Hey, good morning. Thanks. I want to think a bit more about the potential impact from HEDIS on results. I know that there have been big health systems that have simply not been willing to promote the test at all, maybe even actively discouraging doctors from ordering the test because you didn't get HEDIS credit if you performed it. Can you just give us some sense of, one, if you have had an opportunity to actually have discussions with any of those big health systems yet, and maybe, two, the potential that we start to see sort of step function increases in sequential volume growth as we move into the second half of next year because of the HEDIS inclusion?

Sure, Bill. It's Maneesh. The conversations, we absolutely have been having them and they started when we saw the draft that NCQA published over the summer because we really wanted to engage with health systems. This is a really, really important measure for them to gauge quality and as you know, colon cancer screening remains one of the biggest, most significant opportunity gaps to raise quality levels. So we started having those conversations over the summer. And those conversations have intensified over the last month since we have gotten the final rating.

So, we do believe it is going to have an impact. We know that from the conversations and the tone and, as Kevin said, the record weeks that we are seeing since that became final. And I think that we will be in a better position to assess that over the coming months with both those conversations as well as order volume. So it's a big deal and it is impacting people's behavior.

That makes sense. And what about opportunities in terms of working more cooperatively with payers? Not just getting coverage, but actually seeing payers actively promote Cologuard as an option because of your compliance program and the potential for them to drive better HEDIS scores as well or when it comes to Medicare Advantage down the road, better start scores where we know there is a direct financial benefit? Have you had any of those conversations and are you envisioning plans that are in conjunction with payers to promote Cologuard?

So, Bill, yes, we have started to have those conversations with some smaller plans. But as you know, with this landscape and the newness of both the PAMA legislation as well as the relatively recent inclusion in the final quality metrics, what you're referring to is going to be an important part of the conversations, A, that we're having now and we're going to have over the next couple of months. But in answer to your question, it is starting to happen at smaller systems and we expect it over the coming quarters, but we do expect that it will take time.

Okay. And then just one last thing, obviously you have had success adding commercial lives. We continuously see new coverage announcements. There are still some very large payers that have not put out positive coverage decisions. Is there anything in your conversations with those payers that leads you to be concerned about whether they're ultimately going to cover the test or not?

So this is Kevin. We've had really positive discussions and we can't really talk about discussions with large payers. There are a limited number of them that are left. But I think suffice it to say that payers historically have told us they follow USPSTF, number one. That's the number one criteria that they look at in making a coverage for our cancer screening tests. And since we've got in USPSTF, you've seen a number of positive announcements. So I think we'll probably leave it there.

And I'm really, really proud of the team that is working with payers to engage in a discussion around total value and total cost savings to the plans and the benefit on their patient population and the increase in the screening rates and ultimately an increase in member satisfaction. Those are the things that these plans care about and since USPSTF, we've been having really meaningful conversations.

Great. Thanks a lot.

Your next question comes from the line of Mark Massaro with Canaccord Genuity. Your line is now open.

Hey, guys. Congrats on a strong quarter. My first question, probably for you, Kevin, is do you think there's anything unique to the initial patients that are covered by commercial payers? Is it possible these folks are a little bit younger than your Medicare population? And could there be something unique to, say, certain plans, maybe Anthem or others, such that when additional commercial payers come on, they may comply at a better rate?

Well, of course commercially insured patients are younger than Medicare patients because they are in the 50 to 65 age category where Medicare patients are 65 and older by and large. And so in terms of the compliance rate, I think what you are seeing is that there is an element that people generally who see the television ad and then go in and ask their doctor for Cologuard comply at a higher rate than previously. But again, commercially insured patients who were, again, forthright and we tell them that you may be responsible for the cost of the test, comply at a lower rate.

Got it. Yes, I guess more pointed to the question is have you been able to survey your existing customer base that are covered by commercial payers? Given the fact that Medicare is older, commercial younger, is there a reason to think that more of your commercial payers are either working, busier, have younger children? And I guess related to that or a second part of that question would be, is there something you could do that could tweak the communication to patients such that that language could potentially be removed that they may be responsible for the bill?

Yes. Okay, so that is an important question. You're going to see a significant increase in the rate of commercially insured patients' compliance when we stop telling them that they are responsible for a part of the bill. That will happen when the Affordable Care Act kicks in, when we will no longer be telling patients that they are responsible, because under the Affordable Care Act, the insurance company will be responsible. That's clear. There is no question about that. And that will affect our communication with the patient and will drive the compliance rate. So this is a near-term dynamic. But in the longer term, starting in July of next year when we are able to start to communicate this and going out into the next plan year after one full year after USPSTF, everything changes.

Got it. I think that's important. So if I understood you correctly, as of, is it July 1, 2016, that language can be removed?

Well, once four plans that are new on that date, about 80% of plans will be fully -- will have to be compliant with the Affordable Care Act mandate provision by January 1 of 2018.

Got it. Wonderful.

And then the final 20% will have to be compliant by the middle of 2018. So it will occur between July 1 or so of -- so one year after USPSTF, and then during that following year as the new plan years evolve, all of those new plans will have to be compliant with the Affordable Care Act mandate provision.

Excellent. You added about 9,000 ordering physicians in the quarter, which is similar run rate as Q2. Given the backdrop of HEDIS and some of the momentum with commercial payers, is there reason for us to think that you can continue a run rate of 9,000, or what are some of the puts and takes to that number going forward?

So what Kevin alluded to and we mentioned, we have seen a strong start to Q4 at or above those levels. We do expect that at the end of Q4, a lot of offices are closed. But when you think about the fact that we have only penetrated 3% of the market and we have hundreds of thousands of primary care physicians to get to, there is a strong reason to believe that we can sustain and continue not just for a quarter or two, but for a really long period of time.

And that's what gives us confidence that with this HEDIS inclusion, that has been a significant barrier -- I think we got a question earlier, where some physicians, we performed the way we have in the face of a pretty dramatic headwind. And so that headwind is gone and so there is a whole host of physicians that we couldn't even access before that we will be able to. So there is a strong belief that if we execute, and this is now about our ability to execute, if we can execute, there is an opportunity to continue for a long time.

Excellent. And if I can just sneak a two-parter in. The first one is, when can we expect initial data on blood-based development? And the second one is, clearly the United States is a very large market. At what point can we maybe get an update on your thoughts on Europe?

Sure. Why don't we take the second one first? We have scaled back our spend in Europe because things are working so well in the US. It's -- a dollar invested in the US has a quick recovery rate, and the market is large and the dynamic is just really strong. We are seeing the combination of our sales force and the television advertising driving volume. So there is a real strong emphasis on the US right now. And there is a real strong emphasis on Cologuard.

But behind the scenes, so to address the first part of your question, we have a pretty remarkable technology platform, both an instrument platform and very importantly, a high-powered liquid biopsy platform that we now have seen data on four cancers out of blood and eight cancers from tissue with DNA methylation markers, most of them previously unknown that we discovered along with the Mayo Clinic that we believe will have a major impact on the way that cancer is diagnosed and monitored and eventually treated. And we can do this in a very cost-effective way, and this team also knows how to bring products to market.

So, in Q1 we will provide more color on our plans, and we will provide more data -- I don't have the particular conference yet that we are going to provide the first snapshot of data, but we expect it to be early in 2017. But we will provide more clarity around that probably around the JPMorgan conference.

Sounds good. Thanks very much.

Thank you, Mark.

And our next question comes from the line of Isaac Ro with Goldman Sachs. Your line is now open.

Good morning, guys. Thank you for taking the question. I wanted to spend a few minutes just talking about the P&L performance or that the gross margin result this quarter was certainly ahead of expectations and showing a nice sequential trajectory. Can you help us understand what your baseline assumption is for fourth quarter gross margin given the volume guidance?

Sure. Isaac, our cost of goods is best viewed, as we all know it, at a per completed test level. And on that basis, we ran $178 for Q3, which was sequentially improved by $8 over Q2. And that improvement was the result of continued cost-centered spending discipline within our lab operations and our manufacturing. And that's the result of just some very keen focus on discretionary expenses, all while continuing to support our increased test volumes.

And what we have accomplished, what our operations team has accomplished thus far here this year is quite remarkable, considering we exited 2015 with COGS per test of $201 and then we made investments in Q1 that increased that up to $227 before we started to leverage it back downward again. So while we expect that we're going to continue to drive COGS per test downward over time, we don't expect to see improvements of that magnitude over the next couple of quarters.

For the rest of this year, cost-containment initiatives will we think continue to positively affect our COGS per test number. At the same time, we will be making some small incremental investments that are necessary to support future volume growth. So the net result of that we expect will keep our Q4 COGS per test relatively in line with the $178 that we realized during Q3.

Ultimately, over time it's going to be volume and absorption that most significantly influences that COGS per test number. And again, I will note that looking out over time, that COGS improvement trend may not always be linear, since we make incremental investments and that weighs on certain periods, but we do expect an ongoing trend of reduced COGS per test as our volumes continue to increase.

That's helpful color, thank you. And then maybe just a follow-up on the expense side. You guys have detailed a lot of the work you're doing to drive compliance and you've got the quality metrics on your side now.

So I was hoping maybe we can drill down into the dollar investment required specifically to ensure that the quality metrics translate into better volume. Is there a component to your sales and marketing spend that you can carve out that will help identify where the incremental dollar, or how many incremental dollars might go into that specific program as opposed to the TV initiatives and so forth that you guys have been talking about? I'm just trying to make sure I understand the incremental layers of spend on sales and marketing at least in the near term. Thank you.

Isaac, let me first just start with a good overview of our expense performance for the quarter and then we will address your specific question.

With respect to Q3 and our operating expense lines, as we reported, we had another very solid performance in Q3. Our overall levels of OpEx were, in aggregate, $2 million lower than Q2 and they were about $3 million better than what we were expecting for the quarter. The favorability there reflects continued successful efforts within our cost-containment initiatives across the business, with the biggest effect again being seen within the sales and marketing line. This better expected spending combined with the over-performance that we had at the gross profit line is what resulted in our cash utilization for Q3 being nicely below the low end of our communicated outlook range.

When you look at the specifics of the Q3 op expense performance, the sales and marketing expense line decreased by $4 million from Q2 levels. And that reflects, as we were expecting, a lighter quarter of national advertising as well as some further optimization of other program spending within other areas. So all together, selling and marketing expense ran about $2 million lower than previously anticipated and that was the result of further optimization in our program cost spend as well as some lower support costs for our field efforts, mainly lower travel and entertainment-related expenses, some savings there.

But within our other op expense lines, R&D was sequentially lower by $1 million, G&A was sequentially higher by $3 million. In comparison with our previously communicated guidance, G&A for Q3 was about $1 million higher than planned while R&D was about $1 million lower than planned, and that was the result of general expense control across R&D.

So now looking into Q4, we remain focused on being very efficient and cost-effective in how we are spending across the business. But accordingly, in Q4 we do expect to see operating expenses that in aggregate will be about $6 million to $7 million more than overall Q3 levels, essentially all of which we expect to be in incremental selling and marketing.

So both R&D and G&A should remain pretty consistent with their Q3 levels. But with respect to selling and marketing, that $6 million to $7 million increase that we are expecting is entirely in our program cost spending. So a majority of that will be spent for the resumption of a full television advertising schedule for the quarter. And we expect that this will increase our program cost spending to about $19 million for the quarter while our headcount-related expenses within sales and marketing should remain relatively consistent with Q3 levels at approximately $14 million.

Okay. That's a lot of detail. Thank you.

Sure.

Your next question comes from the line of Bruce Jackson from Lake Street Capital. Your line is now open.

Hi. Just two quick questions. First, was there any catch-up revenue for prior quarters in the revenue number this quarter?

Hi, Bruce. This is John. It's hard to distinguish precisely what is special nonrecurring versus what is just a new normal. So we don't break that out. We don't attempt to. We have some good disclosure in the MD&A section of the Q and that'll give you some insight into how our revenue breaks out between what's accrued at test completion and then what's recognized as cash received.

If you were to look at that, from Q2 to Q3, the portion of our revenue that we recognized upon cash collection has grown from roughly 8% of the quarter's total revenue in Q2 to about 15% in Q3. And in terms of dollars, that's about a $2 million improvement sequentially. But again, we don't attempt to break that out between what might be a -- I think what you referred to as a special recovery versus what is just a new normal for the business.

Okay.

And again, and timing - yeah, the timing and the amount of those collections really just cannot always be predicted, which is why we have an element of conservatism in our outlook as we move into Q4.

Okay. Then if we could just talk about the unit gains this quarter. I know you guys don't give out the mix between commercial and Medicare in any detail, but can you give us kind of a rough indication, was the incremental unit gain consistent with the previous quarter's revenue mix or did more of it come from commercial or Medicare? Just give us a relative indicator as to which of the two businesses is driving the unit gains.

Sure, Bruce. So, and I think this is consistent with what we said earlier that we are starting to see an increase in the mix of commercial patients, which we know long term is a good thing. So that's what we saw in the third quarter.

And was that enough to move the unit mix more in favor of the commercial side?

No. I think as Kevin said earlier, we are not providing specifics, but in generalities, when we started, it was over 80% Medicare and now in rough numbers it's about two-thirds Medicare.

Okay. Great. That's helpful. Thank you.

No problem.

Our next question comes from the line of Chris Lewis with ROTH Capital Partners. Your line is now open.

Hey, good morning, guys. Thanks for taking the questions. Just wanted to start, can you talk about what you are seeing in terms of reorder rates and how those are trending relative to your expectations both for new users and physicians that have been ordering over a longer duration?

I think one of the things that we see that we're really pleased about is the television advertising campaign has clearly increased the reorder rate of our existing customer base. We calculate that internally based upon physicians who have ordered two or more Cologuard tests and how frequently they order on a weekly basis, and that has steadily ticked up week over week, month over month since we started the television advertising. So we know, again, that Cologuard is very promotionally sensitive not only at the patient level, but at the physician office level that is responsible for ordering more tests. And we expect this to continue.

So when you look at the dynamic of adding about 700 new physicians on a weekly basis with a ticking up reorder rate, you have a growing base of customers and they are ordering Cologuard at a more frequent pace with broader insurance coverage, ease of electronic ordering, we expect that dynamic to accelerate, and it gives us the confidence to continue to invest in the commercial force that we have, both the television ad and the sales force.

In terms of adding to the sales force, how big is the sales force today and can you quantify or at least kind of talk about where you see that going over the next 12 months?

So it's approximately 200 people in the field and then approximately, without getting into specific details, 50 inside sales people. And the focus would be potentially to significantly increase the outside field force through a co-promotion partnership. We talked about that already on the call. And then, over time, significantly increase the inside sales force, which is a tremendous team of people who are doing a great job of engaging with the office to drive the reorder rate. And so that is directionally where we're going. That is grounded in the confidence that we have that this commercial strategy is a strong one.

Great. And then in terms of the volume outlook, I think just the previously implied guidance for the fourth quarter was around 81,000 tests. New guidance implies about 78,000 tests. Understand the holiday impact dynamic and maybe just erring on the conservative side, but you talked about real strength you're seeing at least in the beginning of the fourth quarter. So can you just help us better understand what's changed in that revised fourth quarter outlook since the last update? Thanks.

Well, I think the important thing to point out is that nothing has changed with respect to our full year outlook which was a completed test assumption of 240,000.

Yes, so one year ago, we provided guidance of 240,000 tests and we had undoubtedly a challenging first quarter. Since then we had a very strong second quarter and a very strong third quarter. And so the pace that we are on is a pace that we are very happy about.

Again we need to be -- we're very pleased with the way that the fourth quarter has started. We're just cognizant of last year, the last two weeks of the year the percentage of people who returned the collection kits fall. And so we're not there yet. We've got a lot of work to do. But we have pretty thoughtful marketing plans in place to address that. And the team is working hard to make sure that we deliver a strong fourth quarter.

Okay. That's really helpful. Thank you.

Thank you.

Our next question comes from the line of Drew Jones with Stephens Incorporated. Your line is now open.

Thanks. Good morning, guys.

Good morning, Drew.

I'm just curious, is there still outstanding litigation with any commercial payers out there? And if so, how do the HEDIS and task force decisions maybe impact your thinking on that?

Sure. So we still have the same two, I would call them conversations that we are having with payers around obligations to cover our Cologuard in the mandate states where state law mandates the coverage of any test that is in USPSTF. And I think those -- it's been productive and we'll see where this goes.

Clearly there is an obligation for payers to pay in the mandate states. But what this really is about is making sure that patients have access to a test that is in the USPSTF guidelines. All those tests are rated A under that A umbrella. And then under the Affordable Care Act, an extra mandate comes in at the federal level.

And so, it has been productive and I think it's helped all payers understand that we know that we are going to constantly advocate for the patients who want -- and this is clear and you can see it in the numbers this quarter, they want a different way to get screened with colon cancer. And I think that the conversations that we are having with both Humana and Blue Cross/Blue Shield of North Carolina are indicative of other conversations we are having.

Great. Thanks, guys.

Our next question comes from the line of Tom Tobin with Hedgeye Risk Management. Your line is now open.

Hey, guys. This is Alex. Thanks for taking the question. We've heard a lot of physicians we have spoken to complain about EXACT's service levels, patient and physician balance billing and other problems, to the point where they are telling us they've stopped ordering Cologuard at all. Can you tell us how many of the physicians out of the ordering physicians stat you provide in the press release are dominant[sic] accounts or do not order at least one test in the quarter? And also, can you address the complaints we're hearing and do you hear them and what are your steps that you're taking to fix them?

Yes, so let's first start by saying that we do a very frequent survey of physicians. And over nine out of ten physicians who order Cologuard rate it either a four or a five. So they are either satisfied or very satisfied with the service. So I'm not sure what physicians that you are speaking to that have that opinion but that it's clearly the minority. That's a tracking figure that we track religiously. And it's very rare to see any product with that type of high satisfaction.

But that's not good enough. We know, and I have said this to investors over and over and over again, there are two big issues that we have to address to really make physicians order Cologuard at a two, three, four times higher rate than they are ordering it today. And number one, that is commercial insurance coverage. So there are a lot of docs who don't want to order Cologuard for all of their patients unless they know that it's covered for, call it, 70%, 80% of them. And we are starting to get to that point.

And then secondly, the challenge that some primary care physicians have -- I would certainly have if I was a primary care physician -- is the ease of ordering electronically. So the office is moving to electronic ordering. And as we see with docs who are on an old EMR platform that has a Cologuard ease of ordering built into it, we see about a double the rate. So for example, with docs who use the Athena EMR, they see over 2x the order rate than over docs who aren't on the Athena system or who aren't on an electronic system.

And so we think that -- we don't think, we have plans in place to increase the rate at which docs can order electronically and that will drive volume. And it will also further strengthen our customer satisfaction. It is not only the docs who are satisfied, but the patients that are satisfied too. As we noted, 90% of patients, that's ticked up from 88% of patients, are either satisfied or very satisfied with Cologuard.

Okay, great. Thank you. And then could you just speak upon the ordering physicians and any dormant accounts or if they didn't order at least one test in the quarter and how many that might be?

Yes. So the vast majority of doctors who order Cologuard once order it again and again and again. And that rate has been ticking up in the last couple of quarters as we see more patients coming in asking for Cologuard. That dynamic, and it is really important to understand, is that the television ads are driving people in to talk to their doctor about colon cancer screening, and it is about the first time that these doctors have had patients come in and ask to be screened for colon cancer. That is driving an increase in not only the reorder rate, but also the percentage of physicians that try Cologuard once and then try it again and again.

All right, great. Thank you very much.

Thank you.

Let me add one quick add-on comment here before we wrap-up Q&A and go to Kevin.

We typically comment on cash utilization in our outlook for the next quarter. So looking into Q4, we do expect our utilization to be about $35 million to $39 million, which lines up nicely with the gross profit expansion we are expecting from Q3 to Q4, offset by the additional sales and marketing investments we'll be making.

And there are no further questions in queue at this time. I will turn the call back over to Mr. Kevin Conroy, Chairman and CEO, for closing comments.

Well, thanks again for joining us this morning. We are really pleased with EXACT Sciences' commercial, operational, and financial performance during the third quarter. This performance continues to be built on the hard work and dedication of the great EXACT Sciences team and the rapidly growing demand for Cologuard among both providers and patients, driven by a commercial strategy that is working.

That growing demand can be seen in the expanding number of ordering providers, orders for Cologuard, and completed Cologuard tests. By all of these and other measures, demand for our test is accelerating.

Cologuard's inclusion in the HEDIS quality measures means that our test is part of the colon cancer screening standard of care. Cologuard's inclusion in the HEDIS measures is the latest in a series of milestones that are the foundation for Cologuard's long-term growth.

We look forward to updating you as we move forward. I especially wanted to thank the entire team at EXACT Sciences for another strong quarter. Thank you.

This concludes today's conference call. You may now disconnect.