Exact Sciences Corp (EXAS) 2017 Q2 法說會逐字稿

Good afternoon, my name is Christine, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Exact Sciences Corporation's Second Quarter 2017 Earnings Call.

(Operator Instructions) Thank you.

Megan Reiss, Investor Relations analyst, you may begin your conference.

Thank you, Christine, and thank all of you for joining us for Exact Sciences Second Quarter 2017 Conference Call.

On the call today are Kevin Conroy, the company's Chairman and CEO; Maneesh Arora, our Chief Operating Officer; and Jeff Elliott, our Chief Financial Officer.

Exact Sciences issued a news release earlier this afternoon detailing our second quarter financial results.

If you have not seen it, please go to our website at www.exactsciences.com.

We intend to release results and host our quarterly conference calls after the market closes going forward.

Following the safe harbor statement, Kevin will provide an overview of the company's second quarter performance.

Next, Jeff will provide a summary of our second quarter 2017 financial results, then Kevin will provide an update on our corporate priorities.

During today's call, we will 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 is now my pleasure to introduce the company's Chairman and CEO, Kevin Conroy.

Thank you for joining us this afternoon.

Exact Sciences delivered another strong quarter with $57.6 million in revenue, 135,000 completed Cologuard tests, and 11,000 new ordering physicians and other health care providers.

There are 3 key takeaways from today's discussion: Cologuard's strong momentum continues; Cologuard is 2% penetrated into a large 80 million-person market; we're making investments into the business to ensure long-term sustainable growth.

The entire Exact Sciences team has been working diligently to enable growth.

In the second quarter, the reimbursement team secured key coverage in in-network contracts for Cologuard.

Our sales and marketing teams have continued to drive increasing order volumes, and the lab, manufacturing and customer care teams are scaling efficiently to handle volume growth.

We recognize that reaching our goal of eradicating colorectal cancer will take time and require further investments, hard work and intense focus from the entire team.

Our CFO, Jeff Elliott, will now review our second quarter financial results.

Thank you, Kevin, and good afternoon, everyone.

Second quarter results exceeded expectations with revenue of $57.6 million, up 19% sequentially, and completed Cologuard test volume of 135,000 tests, up 35% sequentially.

Cologuard's compliance rate at the end of the second quarter was 66%.

This slight decline compared to the last few quarters is consistent with our expectations, and primarily due to an increased mix of commercial volumes.

Second quarter average recognized revenue per test was $428.

After adjusting for the onetime impact of the first quarter accrual shift, the $14 sequential decline was due to payer mix and normal volatility and patient cash collections.

Second quarter cost of sales totaled $133 per completed test, down from $170 in the first quarter and significantly better than we expected.

During the quarter, we saw volume leverage and efficiencies in our lab and manufacturing operations and benefited from the previously disclosed royalty buyout agreement.

We believe the underlying improvement in cost of sales per test is sustainable over the long term.

However, we expect scaled investment in infrastructure and personnel will lead to a temporary increase in cost per test starting in the third quarter.

In the second quarter, decreased cost per test lifted gross margin to 69%, up 400 basis points sequentially.

Based on these strong results and our optimism for the future, we're raising our long-term gross margin target by 5 points to at least 75%.

Second quarter operating expense totaled $71.1 million, an increase of $4.2 million sequentially, slightly below our expectations.

Second quarter cash utilization totaled $43.9 million, including $15 million paid to MDxHealth, as previously announced.

Excluding the MDx payments, cash used improved by about $7.5 million compared to the first quarter, driven by better-than-expected operating results.

We ended the quarter with cash and marketable securities of $484 million, which includes net proceeds from our June equity offering.

Turning to our guidance.

As Kevin mentioned, we had a strong second quarter and we are pleased to raise our full year revenue guidance.

We now expect revenue of $230 million to $240 million and Cologuard volume of at least 550,000 completed tests.

For the third quarter, we expect Cologuard volume of at least 150,000 completed tests.

I will now turn the call back to Kevin.

Thanks, Jeff.

Cologuard represents a significant advancement in colon cancer screening.

Cologuard has captured about a 2% share of the more than 80 million average risk Americans in the addressable colon cancer screening market.

We believe Cologuard will continue to grow its share of this market over a long period, as we steadily increase the number of ordering primary care physicians and as those physicians order Cologuard more frequently.

New data from the quarter show that 51% of Cologuard's users reported never before being screened for colorectal cancer.

Our last published survey results from 2015 showed 42% of Cologuard users having never been previously screened.

These more recent data demonstrate that we are converting unscreened people at a faster pace.

We know that many of these Cologuard users are in their early 50s and we have an opportunity to keep them as Cologuard users every 3 years for 3 decades.

81,000 health care providers have ordered Cologuard, with more than 800 per week placing their initial order during the second quarter.

The national television campaign has been remarkably effective in creating patient demand and driving new physician adoption at a consistent pace.

Approximately 50,000 primary care physicians of the more than 200,000 we are targeting in the United States have ordered the Cologuard test.

There are still many physicians and people ages 50 to 85 for us to reach.

We believe that Cologuard's estimated 86% insurance coverage will help increase adoption and reorder rates among physicians.

The number of total lives covered by insurers for Cologuard increased to $235 million as of today, from $197 million as of our first quarter earnings call.

Our market access team has been focusing on contracting to allow patients' access to Cologuard as an in-network benefit.

We are pleased with the new commercial contracts in place with 2 of the nation's top health insurers, UnitedHealth and Aetna.

We continue to emphasize that it can take time to progress from a positive coverage decision to a contract and subsequently to educate physicians and patients that Cologuard is an in-network benefit with 0 cost of share.

Looking to Cologuard's future, we are investing in our people, in our physical and IT infrastructure to support our continuing growth.

We are working to expand our current lab and manufacturing capacity to at least 2 million tests per year.

We plan to break ground on a second new lab facility later this year.

We are also working with our supply chain partners to ensure their ability to efficiently grow with us.

We will establish additional space for our customer care team and other functions, in addition to the investments being made in both the field and inside sales forces.

Our IT and data infrastructure are the backbone of our service capabilities.

This infrastructure can be used to enhance compliance and adherence during an individual's lifetime, which can lead to improved quality scores, outcomes and reporting for physicians and payers.

We are allocating additional resources to further develop and improve these assets.

Let's now turn to our promising pipeline.

Globally, cancer afflicts more than 14 million people every year, killing nearly 9 million people.

More than 10% of cancer diagnosis are in the United States.

Cancer incidence will increase by 70% over the next 2 decades.

Most cancers are diagnosed in late stages, resulting in lower chances for long-term survival.

Exact Sciences vision is to help win the war against cancer through early detection.

This vision can be achieved through the unique attributes that position Exact Sciences to change the paradigm in cancer detection.

We are one of the few companies in cancer diagnostics to possess the human and financial resources to make a major impact while creating significant long-term shareholder value.

Few companies collaborate with a more elite clinical partner like Mayo Clinic.

Together, we have spent more than 8 years methodically discovering and seeking IP protection on highly accurate cancer biomarkers.

Exact Sciences uses a differentiated, low-cost, highly accurate, proprietary platform.

This platform coupled with our capabilities will enable us to bring advanced, accurate test to people who need them in a cost-effective way, providing a long-term sustainable advantage.

The next step toward achieving our vision is to advance a test that addresses the pressing need and opportunity to differentiate between benign lung nodules and lung cancer.

We believe more than 1.5 million lung nodules are discovered annually in the United States, typically, incidentally on a CT scan.

The current diagnostic options are invasive, expensive, and sometimes harmful.

And the potential opportunity for a blood-based biomarker test is significant.

We look forward to sharing an update related to our lung nodule test in the coming quarters.

We're now happy to take your questions.

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

Just starting out, you talked about some of the contracting in the quarter.

Can you just say if you're comfortable saying that you have not signed commercial contracts over the Medicare rate?

So Brian, this is Maneesh.

And that's what we've stated and we remain committed to not signing any contracts that are going to ever impact the Medicare rate in the future.

Great.

And then, secondly, talking about the ASPs.

The guidance, at least, appears to counter-flat to maybe even down a touch as we think about ASPs in the back half of the year.

Is this conservatism there?

Or are there factors we should be considering regarding pricing and revenue recognition?

I would have thought that, with the contracts being signed, that potentially you'd be able to increase the amount that you're accruing for some of these newer contracts.

Yes, thanks, Brian.

So just a quick note on the term ASP.

We're going to use the wording average revenue per test going forward, rather than average selling price or ASP.

Really, ASP is a misnomer for us as we aren't selling at $428 a test.

We're really selling at a price much above that.

The $428 in the quarter, that is the amount of revenue recognized in the quarter divided by the number of tests completed in the quarter.

And as we said previously, the results in a given quarter can be affected by payer mix and the timing of cash collections.

And that's what's happened in the second quarter, and the guidance does reflect some continued impact from mix shift.

But long term, we do continue to see a path to at least $500 a test.

The one thing I would point you to in the Q and then to our K is that, since all Cologuard payers are now on an accrual basis, we do expect our average revenue per test to approximate our time-lagged average collections.

And this time-lagged average collection is a number we've been including in our SEC filings.

We define that figure as the average amount of cash received per test completed on, technically, on a rolling 12-month basis and lagged by 6 months to allow us time to collect.

Now if you look at that time-lagged basis, it does remove kind of timing differences and quarter-to-quarter fluctuations.

Our average collections on a time-lagged basis were $423 at the end of the second quarter.

That is up $5 from the end of the first quarter.

That number has shown nice improvements over the past year.

During the second quarter, we saw improvement from traditional Medicare, Medicare Advantage and commercials and, as I mentioned, long term, we do see a path to $500.

In the near term, there can be things like fluctuations in cash collections in the payer mix.

And that's what's reflected in the annual guidance.

Okay, that was very thorough and very helpful.

My last question is just relative to kind of where we started the year and where the guidance is looking at for the full year on a test volume basis.

Can you just talk about where the upside specifically is coming?

Obviously, the number of physicians that are signing up continues to be very strong.

But are you seeing just greater utilization from docs who have been ordering regularly?

Or is there anything -- any kind of a bulk order situation that's going on in the first half of the year, just anything else that we should be aware of or just thoughts about why you guys are doing as well as you are at this point.

What are the factors?

Well, Brian, it's Maneesh.

And what you see is the really consistent additions week in, week out of the new providers.

So what we're seeing is just the commercial execution and the integrated efforts of the sales and the marketing, really working to drive an increase in utilization of the existing base.

It really just speaks to the need to continue those efforts which we're doing.

Your next question comes from the line of Doug Schenkel from Cowen.

My first question is on guidance.

It seems like your guidance for Q3 volumes assumes that there's no material change in Q3 orders per practice or the rate of physician additions, at least, relative to what you did in Q2.

And I say this because you can get to those volume numbers with those assumptions.

So is that right?

And if so, is this just a function of conservatism along the lines of what Brian just asked?

Or are there other factors that we should be considering as we update our models?

Yes.

Thanks, Doug.

First of all, we're very proud of the results the team just put up.

But you shouldn't expect that same increase, that 35,000 increase we saw in the second quarter.

You shouldn't expect that same sequential increase going forward, really for a few reasons.

Second quarter is seasonally our strongest quarter.

Third quarter has the negative impact of Memorial Day.

Remember, there's about a 35-day lag between orders and completed test, and Memorial Day actually affects the third quarter; also, the Fourth of July and summer vacations all affect the third quarter.

And lastly, we previously talked about we are making investments in our sales and marketing teams.

And that should help us more as we get into 2018.

But as you change around sales territories and add -- bring new people onboard, that potentially could cause near-term disruption.

Again, this is the right thing to do for the long term.

But those are things we considered as we prepared guidance for the third quarter.

Okay, that is helpful.

Last quarter, you shared some metrics that demonstrated the success of your television advertising campaign.

And I think that was important in a lot of our minds because it demonstrated the operating leverage that you may be able to get moving forward out of continued spend on those ad campaigns without the requirement materially scale your direct efforts.

Specifically, I think you talked about a high percentage of tests ordered in Q1 by physicians, but didn't interact with direct exact rep.

Could you provide any updates on that metric and plans for advertising campaigns moving forward?

Sure.

Doug, it's Maneesh.

So the biggest metric we look at is the one you alluded to, and that is how many physicians of the new physicians that come in have been called on by a salesperson.

And of the 800, we are still seeing a very consistent rate of about 80% being -- ordering without ever having been called on by a salesperson.

That's really, really important because we see that rate of new adds being consistent, and we see the underlying order rate go up.

So we know that the television is affecting both the acquisition of new docs, but it's really efficient across now the over 80,000 physicians that have been ordering.

So we -- with the spend being under $1 million, about $900,000 a week, we expect to continue to do that.

It is one of the most efficient things we do and we'll continue to monitor it regularly so that we know we're making prudent investments.

Okay.

And one last one.

We've seen postings for a number of third shift openings at Exact, you talked about plans to expand capacity late this year.

But keeping in mind that you do have some openings and you've exceeded most Street expectations for volumes over the last several quarters.

Could you just provide an update on your current annual capacity for test in advance of an expansion?

Sure.

So we want to always make sure that our ability to fulfill an order will never impact what we do.

So the things that you see, in terms of job postings and our expansion to a third shift, we just think is prudent operating management to get in front of the volumes that we see and the trajectory that we see.

So we do have ample capacity to be able to run 1 million tests a year.

We're expanding that capacity such that, in the next 6 months, we will be at 1.5 million.

And then you'll notice in the Q that was filed that we are -- excuse me, in the K that was filed, we were going to be in the ground, as Kevin said earlier on the call, with the new loan facility.

So we're staying 6 to 12 months ahead of any potential volumes, taking into consideration anything that could come at us.

Your next question comes from the line of Anne Edelstein from Bank of America Merrill Lynch.

First question, I guess, on the sequential growth in Q3 and Q4.

Just wondering why you expect volume growth to reaccelerate in Q4 over Q3 given that, that's typically your weakest quarter.

And that's the implied Q4 volume based on the updated guidance.

Yes, it says in -- really, the implied shows basically consistent number of completed tests through the balance of the year.

As I mentioned earlier, there's different puts and takes during the third quarter in terms of holidays and summer vacations.

But overall, the guidance is implying consistency and completed tests over the next couple of quarters.

Okay.

And then, I guess, maybe one on the COGS side.

I noticed that your personnel expenses fell something like 30% quarter-over-quarter even as test orders were up at 35% quarter-over-quarter.

So can you just -- I understand that you're going to be investing some more, maybe in the back half of the year in personnel.

But why did those fall quarter-over-quarter?

As I said in the prepared remarks, we saw very nice volume leverage and efficiency gains in the quarter.

When I look ahead in the third quarter, we expect cost per test increase to the mid-140s range as we invest in additional personnel and infrastructure to scale the business.

What you see from time-to-time is we'll add additional automation that will help the existing personnel get more efficient, but there's not a big shift in the base of personnel that's already there.

Let me take that opportunity to kind of walk through some of the P&L metrics for the third quarter.

When you look at operating expense for the third quarter, we expect a $10 million to $12 million total increase across the 3 main areas.

The things we're looking for are headcount additions inside of marketing.

Primarily there, we've talked before about the added sales reps.

In pipeline -- in R&D, we're making some pipeline-related investments.

And then within G&A, we are invested in IT and customer -- our customer care team.

When I think about CapEx, we do expect the total CapEx in the third quarter of $15 million to $20 million.

We do expect some larger onetime items as we scale up the business.

The main areas of focus for third quarter CapEx are increasing the lab and manufacturing capacity, some additional office space that we alluded to.

Our supply chain, really the goal here is to make sure we have a rock-solid supply-chain in our IT infrastructure.

Your next question comes from the line of Puneet Souda from Leerink Partners.

So maybe just to help me understand.

I mean, I think the questions around the third and fourth quarter and the seasonality and the difference have already been asked, so maybe let me ask around.

You have 81,000 physicians right now.

There's still a limited penetration.

Is there any sense of a threshold at which you get in the penetration starts to move away from sort of a linear growth to maybe an accelerated growth?

Help us understand that.

And are you sort of accounting for that?

It seems like you're already building the capabilities for facilities looking ahead to that.

Sure.

It's really, really difficult to forecast a dramatic change.

What we've seen is really consistent growth both of new physician additions as well as a pretty nice increase in the reorder rate.

But the real thing I think to focus on is the fact that we're still 2% penetrated into an enormous market.

So rather than think about a hockey stick, it really is important to think of a long, extended years period of steady and consistent growth that is going to be strong.

We want to make sure we're ready for the upticks in demand, which is why we are making the investments that we are to stay ahead of it.

But what we see is 2% penetrated into a market that has an opportunity to grow for a really, really long time.

Okay.

And just briefly, the patients that are coming back after the 3-year repeat, I suppose you are accounting for those 2. Is there a different strategy of reaching out or reminders for those patients?

Or is that also accounted in your full year guidance with the current test?

Well, 2 different questions.

I would say that it is accounted for in the guidance and we do have active plans to outreach to everyone that has taken Cologuard both to the patient and to the ordering physician, so -- and very similar to our compliance program, where we built a system that outreach systematically to the patient.

We are doing the same thing at the 3-year interval.

First, with the mailer with a postcard outreach and then a call outreach.

And we'll learn a lot, but that will just be beginning in the fourth quarter of this year with 100,000 patients that we'll outreach to in 2018.

Okay.

And then just one last one.

Any change in the assumptions for compliance rate over the next few months now that you have adoption at maybe a faster clip and United coverage also that's in place and getting activated on July 1. So help me just to understand any change in the compliance rate here?

Yes.

Thanks for the question.

So we've been saying for the last couple of quarters, don't be surprised to see a modest decline in the compliance.

And really this is because of mix shift, we're seeing faster growth in the commercial side of our business.

The commercial side, at least, historically, has carried a lower compliance rate.

We've reported before something in the upper 50s range for commercial compliance compared to the low-70s on the Medicare side.

So that mix shift has been bringing the overall rate down.

But long term, we're still very optimistic on the overall compliance rate ticking back up.

Longer term, we do see a pathway to get that back above 70%.

Your next question comes from the line of Catherine Schulte from Robert Baird.

You talked about increasing your sales force by about 100 people this year.

Could you give us an update on how that's progressing, the timeline for full build-out, and then what your productivity goals for those incremental adds are?

Sure, Catherine.

So I think one of the things that Jeff alluded to was that we're in the process of making those adds, and we expect them to happen here in the third quarter.

And just historically, what we've seen is it takes some time to get new adds productive.

It takes -- usually, we would say about 6 months to get them fully up and running.

So we expect these additions, as Jeff said in his prepared remarks, to be really helpful for us in calendar '18.

But the vast majority of the additions will be made in Q3.

Okay, that makes sense.

And then as you've gotten broader coverage from insurers, has there been an uptick in talking with health systems or payers to strategically position Cologuard or do more program orders?

So one of the things that we've always wanted to be really careful about is program orders, partially because our goal is to really change behavior and make Cologuard the standard of care as an A-rated screening test.

So the emphasis for us has not been on program orders, and I think that was a question that was asked earlier.

Our results do not reflect any bulk or program orders.

This reflects ongoing strength in the business on a day-to-day basis.

But the first part of your question is an important one.

And we have seen increased interest from systems and have invested in that as, over time, we are now included in the second quarter in the Stars and the quality metrics.

So we are having increased dialogue at systems, those lead times, those sales cycles are longer so we don't expect them to drive material results this year, but are going to be critical for the long-term trajectory in 2018, '19 and beyond.

But we have invested, are investing in system sales staff, and we have seen increased interest from systems.

Your next question comes from the line of Brandon Couillard from Jefferies.

A quick one for Maneesh.

Could you give us an update on your progress of shifting some of the ordering volume over to -- away from fax to electronic and what that mix looks like today?

Yes.

So when we started off, it was 95% fax and we've been shifting away from it.

The team has done a really, really nice job.

So today, we are just about a quarter of orders that are electronic.

And so it's been modest moves every quarter.

We continue to invest in it and we expect it to continue to tick up a little bit at a time.

But it's right now about a quarter, Brandon.

Two housekeeping ones for you, Jeff.

Could you quantify the impact of the MDx royalty going away in the second quarter?

And then as we look into early '18, understanding that you're not in a position to really give guidance, but as new capacity comes online, should we expect the cost per test to step up again, like in the first half of '18 relative to the back half of this year?

Yes.

So just on MDx, we can't get into the details of what the effect was.

I would say that the primary drivers of the cost per test improvement were operating leverage and the efficiency gains in our lab and manufacturing operations.

We previously have broken out the size of the royalty in our filings, but we can't get into what the impact was in the quarter.

As far as the 2018, I'd rather leave that for another call, but I think it is safe to say that the gains we had, the improvements we had in cost per test are sustainable for the long term.

Temporarily, as we scale the business, we will see some impact in the third quarter in terms of slightly higher cost per test as we add people and additional capacity.

Your next question comes from the line of Mark Massaro from Canaccord Genuity.

Going back in time, I think you had 4,000 tests completed in Q4 of 2014.

So it seems like you have almost like a pilot opportunity in Q4 this year for the initial reorderers.

You cited the 100,000 that ordered in 2015 that are eligible to reorder in 2018.

Can you talk about what your internal forecast is on the percentage of those 100,000 you think you can convert?

And do you think that the conversion will be potentially more successful from an outreach to the patient or to the ordering physician?

So Mark, I think it's way too early to project that.

I would say, we obviously have our own expectations and it's incorporated into our guidance.

But it's too early to comment on that.

I think we'll know a whole lot more as we start to roll these programs out and we'll be able to provide better visibility to it.

But don't get us wrong, we are going to be actively pursuing it.

Got it.

And maybe a question for Kevin.

Can you speak to maybe some of the milestones we can think about in terms of the R&D development with liquid biopsies?

Should we be thinking of potentially an RUO launch in 2018 for lung nodules?

And can you maybe rank order what could be behind lung nodules, assuming that is the first test?

I think taking a step back, we are focused, along with the Mayo Clinic, on developing a breakthrough approach to diagnosing cancer early through typically blood draws, but other liquid biopsies, for example, pancreatic.

And where we are today focused is in lung nodules and then, potentially, a lung cancer screening test.

The technology also applies to prostate cancer, liver cancer, breast cancer, colon cancer recurrence, esophageal cancer, et cetera.

So we're focused on the top cancer killers in the U.S. But what powers our ability to detect cancer early from plasma is the technology, same technology platform and the similar class of biomarkers, DNA methylation markers, primarily.

We may add some other markers to the mix, like what we did with Cologuard, but the same markers that power Cologuard.

One of the things that's important to note about the technology platform is its low cost relative to sequencing or race, et cetera.

This gives us an opportunity to upend the pricing approach that cancer diagnostic companies rely on sequencing equipment they've historically relied upon.

And we're doing that in partnership, a deep partnership, with the Mayo Clinic, that has been very productive to date, as you know, and we'll continue to do this.

We haven't yet, Mark, answered your question about what's coming next, laid that out.

And we -- there is a -- there are just more opportunities truthfully than one company can pursue over a short period of time.

And so as you know, we tend to get very focused to make sure that we hit all of our milestones, and that's going to be our approach with a lung nodule test, help discriminate between a benign nodule and cancer, and then, also, whatever test we'll announce will be next.

It is -- there's a huge impact for us to make a difference, and that's the important thing.

Your next question comes from Isaac Ro from Goldman Sachs.

I wanted to come back to the earlier question I think Doug had regarding the cadence of volume you guys are assuming your guidance for the year.

And I think you went through all the moving parts, Jeff, for third quarter, which is great.

I was hoping you could maybe do a similar exercise for fourth quarter as we think about kind of the third quarter cadence and what you expect to happen in the fourth quarter to get to your full year guidance.

Yes.

What's implied by the guidance is about 15,000 incremental tests in the third quarter and then another 15,000 incremental kind of growth in the fourth quarter, so walk to that from the third quarter.

In the fourth quarter you have some dynamics from Labor Day.

You do have some dynamics from around the holidays we've talked before about people taking vacation around Christmas and New Year's rather than being at home and return their collection kits.

So there are some impacts there.

Second quarter is certainly our strongest quarter of the year.

But we took all those things into consideration when we thought about guidance.

Okay, that's helpful.

And then maybe on the cost side, I was interested in how you guys are thinking through the CapEx required from new facility.

Maybe you could help us think to the timing and magnitude relative to what you guys have done in prior years for CapEx, that would be helpful.

Yes.

So earlier, I mentioned the third quarter number for CapEx, somewhere in the $15 million to $20 million range, and that's across a variety of things.

It's IT, supply chain and some facilities.

And I would expect something kind of similar in the fourth quarter.

We're still relatively early in the planning phase for some of these investments, so I'd rather wait and talk more in future quarters about the longer-term items.

But near term, we do expect it to step up.

But we're doing this from a position of strength.

We're doing this because we're optimistic about the long term.

And we're doing this as a way to prepare for that 30%-plus long-term market share target that we have set out before.

Your next question comes from the line of Raymond Myers from Benchmark.

Kevin, you note that you have reached now 86% of the market covered.

Can you now start to give us more visibility to what proportion of the market has been shifted to contracted?

Presently, we don't plan to publicly disclose the percent contracted, and our goal is to move that, both of those numbers, to virtually 100%.

But the number we're comfortable disclosing at the present time is just the 80% -- 86% coverage number.

Okay.

Great.

And as contracted -- or as lives move from covered to contracted, are you seeing an increase in utilization?

Or is it too early to say?

I think that it is definitely too early to say the impact on the contracted and network status.

We know that it is -- the lack of contracted commercial insurance coverage is one of the greatest pushback on the part of primary care ordering physicians.

So over time, as we, a, eliminate that barrier; and b, educate physicians to that barrier, we will see an uptick.

But it is too early, certainly the impact of the contracted wins that we've seen so far this year probably have not had a significant impact.

Great.

We look forward to -- hopefully, with test.

You now have, I believe, more cash at Exact Sciences than anytime in your past, close to $0.5 billion.

Has your marketing support or other investment plans increased commensurate with the cash that's now available to the company?

As we've said to investors, we raised that capital knowing that we would be making investments for the long term but that we expected to go cash flow positive with the capital that we had on the balance sheet at the time of that raise.

It is -- we are playing the long game with Cologuard, and we think it's important to make long-term investments.

But the fact that we have that capital on the balance sheet has not changed our perspective on investments into the business for the future.

Jeff, do you have additional color?

Yes.

It also doesn't change our thoughts on timing to cash flow breakeven.

So we're not pushing it out, because we have additional cash.

That is unchanged.

Okay, very good.

And lastly, I wanted to ask you about the increase in cost per test.

We had a nice decline in the cost per test here in Q2.

And can you reiterate why it is you expect that cost per test might increase in Q3?

Sure.

Yes, I'd be happy to raise it.

Really, it's a temporary increase because what we saw in the second quarter in terms of extremely good operating leverage and efficiencies, it will take time as we scale the -- we add personnel, we had infrastructure, it will take time to then get additional leverage on the incremental investments.

So temporarily, we expect that cost per test to increase while we absorb the incremental investments.

Is this related to opening or scaling up the new production facility?

The comments I gave on third quarter were above the expansion of the existing facility, the existing regimen manufacturing capacity.

These weren't comments on the new facility.

That's something that would potentially impact future years.

Your next question comes from the line of Kevin Ellich from Craig-Hallum.

A lot of my questions have been answered.

Just Jeff, I hate to beat the dead horse here.

But the CapEx, you guys have expanded, I think, you started in maybe mid-June expanding your lab on East Badger Road.

Is that all, that $15 million to $20 million, that you called out for Q3?

Or was that some of that for the second site that you guys are going to start building at some point?

Yes.

Thanks for the question, Kevin.

So the $15 million to $20 million, there's multiple different areas.

So it is -- some of that is the expansion of the existing lab, some of it is the expansion on the existing manufacturing capacity.

We're also adding additional office space.

We're making investments in our supply chain and we're making some of the investments in our IT infrastructure.

Those items all collectively sum up to $15 million to $20 million.

Got it.

So when you guys start the construction on the next site, the second site for additional Cologuard processing and customer service, have you guys put a number to that?

And I mean, how should we think about that?

We have not yet, in part because the new lab, there are still some design elements that aren't finalized.

But I would say that, within the $15 million to $20 million, there are several, also there are multiple larger kind of onetime items that won't repeat in 2018.

So I'm not going to give a number for 2018 now, but the step-up we're doing -- this is because we see the growth coming.

We've talked about the guidance.

We've talked about our longer-term goals, and we want to make sure that our capacity is a number a rate permanent for patients.

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

Can we get an estimate on the commercial percentage of the total tests performed during the quarter?

Sure, Bruce.

So the way we typically break it out is the Medicare mix, if this is Medicare, all-in Medicare, was about 52% of volumes in the second quarter.

Okay, super.

And then one question for Kevin.

I know that you've got a lot of moving parts on the development pipeline with the blood-based platform.

Can you give us just anything to look forward to in the next 6 months in terms of a date of release or a publication or a presentation, something that gives us some indication that you're making progress on any of the development programs?

Well, why don't I take a step back and talk about the key elements to develop and bring to patients a new test.

First, you need to analytically validate a test and we released data recently showing a 90-plus percent sensitivity and specificity for detecting lung cancer in diagnosed patients with less than a 10% false-positive rate.

The next thing that you need to do is rerun that data with a new -- rerun that study with a larger end so that you can -- cut off heading into a pivotal clinical trial.

As part of that FDA clinical trial, we will be speaking with the FDA so that -- we expect that to occur in later this year, towards the end of this year or beginning of next year.

And then initiating the FDA pivotal study, which provides clinical validation of the test in patients with lung nodules.

And we would expect to kick off that pivotal study in the first half of next year.

And then, similarly, we're in the process of developing the economic models and working with key opinion leaders to -- that boosts that modeling and making sure that we're able to show 2 things at the end of the day that a new lung nodule test will help save lives and that will -- it will save the health care system money.

So that's the longer-term perspective, and it's really first half of next year that you will see additional data.

Your next question comes from the line of Chris Lewis from Roth Capital Partners.

Just a few for me.

In terms of the upwardly revised gross margin long-term goal of 75% up from 70% previously, I think.

Can you help us understand just kind of the key drivers supporting that updated outlook?

I guess, what's changed relative to the previous assumptions?

And at what level of volumes do you see that type of gross margin goal being -- becoming achievable?

Sure.

Thanks for the question, Chris.

So in the second quarter, we were pleasantly surprised by the ultimate cost per test.

We had not expected a $37 test sequential decline.

So we were pleasantly surprised.

I would say the 2 main buckets were the volume leverage.

So that really came from the volume upside versus our expectations.

And then on the efficiency side, both our lab and the manufacturing teams did a very nice job in the quarter at delivering improvement, which gives us increased confidence in the long-term ability of the team to get to a 75% gross margin, at least 75%, rather than the prior guidance of at least 70%.

So it's really the results in the quarter, as well as our -- as we look towards the incremental investments we're making for the future, give us the confidence to raise that number.

And are you quantifying kind of where you think that 75% gross margin goal is achievable in terms of volume level?

Yes, it's a long-term number.

But we're at 69% in the second quarter.

So we've made some nice progress towards it, but it is a longer-term number.

I would quantify it as being at full scale.

Okay.

And then, in terms of the planned sales force expansion this year, can you just help us understand how you're adding to your management team to kind of support that expanded direct sales force?

Sure, Chris.

So one of the things that we did and hiring new managers was really, really important to us.

So it was actually the first thing we did before hiring the additional reps was bring on a really, really talented set of new managers so that they could be involved with the hiring process.

So we're in the throes of that and we expect that to be complete in Q3.

But we're really excited, and I'm really excited about the sales team that has been built, the leadership with the existing team that's out there and the new folks that have recently joined.

There are no further questions at this time.

Mr. Kevin Conroy, Chairman and CEO, I turn the call back over to you.

Thank you all for joining the call.

First of all, thanks to the entire team at Exact Sciences for delivering a great quarter and, importantly, for making a big impact in the lives of people.

Many, as you can see, from this quarter, have never been screened for colon cancer, who are getting screened.

We are changing the paradigm.

We're excited about it.

We're not going to stop.

We're going to keep going here until the job gets done.

And we're excited about that path forward.

And then, finally, we're also excited about what this technology can do for other cancers.

And we're committed, along with our partner, the Mayo Clinic, to deliver on the promise, and the team is energized.

So thanks for your continued support, and we look forward to talking to you again next quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.