Exact Sciences Corp (EXAS) 2017 Q4 法說會逐字稿

Good afternoon.

My name is Christine, and I will be your conference operator today.

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

(Operator Instructions)

Thank you.

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

Thank you, Christine, and thank all of you for joining us for Exact Sciences' Fourth Quarter and Full Year 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 fourth quarter financial results.

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

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.

The Exact Sciences team delivered an outstanding performance in 2017 with $266 million in revenue, 571,000 people screened with Cologuard and more than 40,000 new ordering physicians and other health care providers.

Today, we'll start by reviewing our performance against our 2017 priorities.

Then we'll discuss our financial results and guidance, and we will conclude with our 2018 priorities.

Our goals for 2017 were to improve the customer experience, grow profitably and innovate for future growth.

The entire team worked together to achieve these goals, united by our mission of playing a role in the eradication of colon cancer by making Cologuard the leading screening option.

During 2017, we made significant progress in improving the Cologuard customer experience.

Our market access team increased insurance coverage for Cologuard from about 70% of the addressable population to nearly 90%, and we signed contracts with several major players -- payers during the year, including UnitedHealth and Aetna.

We are driving a greater percentage of providers to order electronically, which makes it easier for them to order Cologuard.

The percentage of orders placed electronically grew from about 18% at the end of 2016 to 27% at the end of 2017, and this percentage continues to grow.

These and other efforts have led consistently to high patient and provider satisfaction for Cologuard.

Our second priority for 2017 was to grow profitably.

Cologuard revenue increased 168% to $266 million in 2017.

Our gross margins improved by 12 percentage points over the past 4 quarters.

We also significantly improved our operating expense efficiency while investing to support continued growth.

Innovation is a core value at Exact Sciences, and 2017 was another year of accomplishments for both Cologuard and the pipeline.

Enhancements in our lab and manufacturing operations helped significantly improve our cost per test and capacity for Cologuard.

Looking at our pipeline.

We completed biomarker discovery for 9 of the top 10 deadliest cancers through our scientific collaboration with Mayo Clinic.

In December, we acquired Armune BioScience's portfolio of protein biomarkers to complement and enhance potential future cancer tests.

We are extremely proud of what the Exact Sciences team accomplished during 2017.

Our CFO, Jeff Elliott, will now review our fourth quarter and full year financial results and provide guidance.

Thank you, Kevin, and good afternoon, everyone.

Please note that when discussing financial results I will refer to changes compared to the third quarter unless otherwise stated.

Fourth quarter revenue increased 20% to $87.4 million, and completed Cologuard test volume was 176,000, up 9%.

For the full year, revenue and completed tests grew 168% and 134% from 2016, respectively.

Fourth quarter average recognized revenue per test was $498, an increase of $47 on higher-than-expected year-end collections from both insurers and patients.

Please note that our blended accrual rate closely mirrors our time-lagged average collections.

On a time-lagged basis, our average recognized revenue per test was $438 at the end of the fourth quarter, an increase of $10.

Fourth quarter cost of sales totaled $134 per completed test, up $5 and better than expected due to continued efficiencies in our lab and manufacturing operations.

We expect first quarter cost per test to be in the low to mid-$140 range.

The increase is due to investments we're making in our lab, manufacturing capacity and personnel to prepare for expected volume increases.

Fourth quarter gross margin improved 170 basis points to 73% on increased revenue per test.

For the full year, gross margin was 70%, an increase of 1,600 basis points from the prior year.

Fourth quarter operating expense totaled $87 million, an increase of $6.8 million, slightly below our expectations.

The growth in G&A included investments in personnel to support our expansion.

R&D spending increased primarily to support pipeline development and medical affairs programs.

Selling and marketing increased due to expanded media and public relations efforts.

For the full year, operating expense totaled $305 million, an increase of 37% from the prior year.

Fourth quarter cash use totaled $37.8 million.

Cash use increased by $16.1 million due primarily to capacity expansion projects and the acquisition of certain assets from Armune BioScience.

We ended the quarter with cash and marketable securities of $425 million.

Subsequent to the end of the quarter, we raised an estimated $671 million through an offering of convertible notes.

Cologuard's compliance rate at the end of the fourth quarter was 65%.

We continue to expect a decline in our compliance rate near term due to mix shift.

We remain optimistic about the rate increasing over the long term.

Turning to our guidance.

For the full year, we expect revenue of $420 million to $430 million and Cologuard volume of 900,000 to 920,000 completed tests.

For the first quarter, we expect Cologuard volume of 176,000 to 181,000 completed tests.

Our first and fourth quarters are typically negatively impacted by seasonality, and our second quarter is normally our strongest quarter for Cologuard volumes.

We are experiencing a historically severe influenza season that has significantly reduced the number of patient wellness visits when colon cancer screening is usually discussed.

We recently conducted a survey of 600 primary care physicians.

Those physicians had canceled 21% of wellness visits over the last 2 months due to the flu outbreak and extreme winter weather.

Many other physicians have restricted the number of wellness visits or rescheduled them for when the flu subsides.

The survey also showed that 22% of physicians had personally taken time off work because of the flu.

Those results largely match the feedback we've gotten from our sales force.

Many physicians are delaying preventive care while they deal with the flu.

As the outbreak subsides, we expect normal wellness visit activity to return.

In the meantime, we have undertaken additional sales and marketing initiatives that we expect will benefit Cologuard growth for the remainder of the year.

I will now turn the call back to Kevin.

Thanks, Jeff.

As we look to 2018, the Exact Sciences team is focused on 3 priorities: one, commanding the core business; two, preparing for future demand; and three, advancing the pipeline.

Our first priority is to command the core Cologuard business to reach our long-term market share goal of 40%.

Our sales force is highly effective at engaging providers and increasing ordering.

Significant growth in our base of ordering health care providers has limited the ability of our reps to reach providers with optimal frequency.

To successfully reach this growing customer base, we plan to add 100 additional sales reps in the field and 100 representative to our inside sales force during 2018.

We will continue our successful national television advertising campaign this year.

We'll also enhance our video content and increase our social and digital presence to more effectively engage our target audience.

We will kick off Colon Cancer Awareness Month with the Cologuard Classic, a PGA TOUR Champions event in Tucson, Arizona.

The primary audience for this event closely aligns with our target market.

In March, we plan to announce a celebrity spokesperson for Cologuard.

Our partnerships offer an opportunity to highlight the importance of colon cancer screening beginning at age 50 and to raise awareness for Cologuard as a screening option.

We are investing in our lab processing facilities to prepare for the rapidly growing demand we see from patients and providers and ensure we can achieve our long-term market share goal.

We are expanding our existing lab capacity, and we broke ground on a new lab in the fourth quarter.

These state-of-the-art facilities are expected to raise our combined annual lab capacity to 4.5 million tests.

At the same time, we continue to strengthen our operational infrastructure and take steps to secure our supply chain.

Our third priority for 2018 is to advance our pipeline.

Together with Mayo Clinic, we have demonstrated the ability to take a product from research to development and then to successful commercialization.

Our product development process includes, first, marker discovery; then validation in tissue; and subsequently, validation in blood and other samples.

We have multiple pipeline programs running in parallel and have run 2 case-control studies for both the lung and liver programs.

Early last year, we saw excellent results from the first case-control study in our lung program.

More recently, we didn't see the same performance in the second case-control study, particularly in Stage I cancers.

Before we move the lung test forward to a pivotal trial, we will work to optimize its performance.

We are presently evaluating additional markers, including protein markers recently acquired from Armune, to improve performance.

We are excited about the opportunity to impact the current state of liver cancer surveillance.

There are 42,000 new liver cancer cases and 30,000 deaths every year in the U.S. And globally, it's the #2 cancer killer.

The 3-year survival rate for patients not in a regular surveillance program prior to diagnosis is only about 30%.

That rate doubles to nearly 60% when patients are under regular surveillance.

Unfortunately, more than half of people are diagnosed late stage because surveillance rates are persistently low.

Liver cancer is treatable if detected early stage through either resection or ablation of the tumor.

A more accurate surveillance test could lead to early treatment and better outcomes.

With more than 3 million people eligible for surveillance in the U.S., the opportunity for a blood-based biomarker test is significant.

The current guideline recommendation for surveillance includes ultrasound, with or without alpha-fetoprotein, every 6 months.

Those 2 tests have a combined early stage sensitivity of only about 69% and specificity of 89%.

Primary care physicians, GIs and hepatologists recognize the limitations of this approach and as a result don't follow all patients through surveillance.

Our research indicates a significant unmet need for an accurate surveillance test, and our early data show over 90% sensitivity and specificity.

We have completed 2 feasibility studies and expect to begin enrolling patients in a case-control study midyear to set the cutoff, followed by a prospective clinical trial.

An abstract from our second round of feasibility data will be presented at a scientific meeting in the coming months.

Again, thank you for joining us today as we discussed the performance against our 2017 priorities, reviewed our financial results and outlined our 2018 priorities.

Exact Sciences is uniquely positioned to create value in the early accurate detection of cancer.

We have the experienced team, resources, lab, technology platform, IP, compliance engine and proven capabilities to be a leader in the field of liquid biopsies.

Our collaboration with Mayo Clinic and our commercial infrastructure will help fuel our success as we remain focused on the early detection and prevention of cancer.

Any questions?

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

I thought we could start out just at a high level here.

We're focused on where this business can go long term.

So Kevin, you seem to have all the pieces in place, right.

You have capacity, a ramping sales force, plenty of cash, payers coming on board.

So just as you think about going from 2% to, let's call it, 40% over time, can you just talk about where the challenges are at this point to doing that and how you manage the organization to do that?

Sure.

Thanks, Brian.

To take Cologuard from 2.5% market share to 40% market share, it's very important that Cologuard become a choice alongside colonoscopy.

So that when a physician is talking to patient about colon cancer screening they're, at a minimum, presented with a choice between those 2 options, which we believe are the best approaches to colon cancer screening.

There have been significant changes in the dynamics.

First of all, the guidelines changed for the first time in really a couple of decades to include an additional way to screening for colon cancer, namely Cologuard.

The guideline -- or the quality measures also recently changed, mainly the Stars and the HEDIS quality measures.

And last year, we saw broad-based reimbursement and coverage for Cologuard.

So those were prerequisites for us to start to really change that positioning of Cologuard to be paired alongside colonoscopy as a choice.

The guidelines reflect that by saying -- by stressing the importance of a conversation between the physician and the patient to see what is the best method for them.

How do we get there longer term?

We will continue to increase our investments and reaching and educating physicians through our sales force, reaching and educating people, consumers through our direct-to-consumer television advertising, social media presence.

And we know this is successful.

We know that we have a great opportunity to make a difference in colon cancer incidents in the U.S. and mortality.

And the way that we're going to do it is by continuing to focus on educating physicians and patients and to increase the amount of evidence that supports this positioning.

And then thinking about this year, it looks like you're calling for about 60% revenue growth.

We've seen about 10,000 new docs and providers signing up every quarter.

So is a reasonable way to think about this that about 40% growth from new people -- from new docs and providers coming on, is that still kind of the right run rate?

And then the remaining kind of 20% is a bump from utilization of existing docs?

(technical difficulty)

We'll pause for just one moment for a technical delay.

Thank you.

Brian, I don't know what you did to the telephone system, but we are back.

I just thought maybe you got to cash flow positive -- or you're thinking about getting to cash flow positive by not paying the phone bill or something.

I'm not sure.

We provided a lot of color commentary in the last few minutes, but we're going to keep that confidential going forward.

So the question, just to restate it was, as we think about growth for the year, you're looking at 60% revenue growth.

You've been adding about 10,000 new docs or providers a quarter.

So should we continue to think about that being the pace sort of inherent in your guidance?

So about 40% coming from new docs and providers and then the remaining 20% from a bump in utilization?

Yes.

Thanks for the question and thanks for highlighting the cash flow breakeven.

Just on that point, the cash burn in the quarter was $38 million.

I think, Brian, what you're pointing out is that, if you adjust for the CapEx of $29 million and the investments in Armune and a supplier, we were cash flow breakeven.

So thanks for pointing that out.

On the guidance, what we did is give a range for both the volumes and the revenue.

We haven't given all the assumptions underlying that in terms of the reorder rate improvement or the number of new physicians.

But when you look out at the market more broadly, clearly there's a long ways to go in terms of adding new physicians.

Today, we believe we're about 30% penetrated into the number of total PCPs out there.

And you're right.

Since we turned on the TV ad campaign about 2 years ago, we have been very consistently adding about 10,000 new providers a quarter.

But as far as what we've baked in the guidance, we've baked into the guidance a range of assumptions that we're not going to get into details, but we look forward to sharing you on future calls what we put up each quarter.

Okay, great.

And then last one for me is, can you just comment about the flat sequential growth that you guys are looking for here?

How confident are you that this is really just a doc issue and not a slowdown, temporary or not, in the trajectory that you guys were on?

Sure, yes.

Thanks, Brian.

So what we shared in the call was some information about the flu and weather.

So what we've seen is about a 21% impact on the overall rate of wellness visits.

Doctors have canceled about 21% of the visits, and that matches the feedback we're getting from the field.

Not only are doctors canceling wellness visits, which is typically when doctors are prescribing Cologuard, we also see a high rate of rescheduled appointments and an increased rate of restricted access.

So doctors are so busy with the flu, they're not allowing sales reps to actually come in and talk to them and educate them about Cologuard.

So that's pretty consistent with what we're seeing.

The survey aligns closely with the feedback from the field.

I would say we're -- right now, the flu is a bit uncertain.

We believe we've started to turn the corner, but the CDC data out there, right now the flu rates are extremely elevated.

And we don't know how long this will last.

For the year, we are very confident in our ability to reach out to physicians, educate them on Cologuard, improve the reorder rate and drive new physicians to Cologuard.

On the quarter, the flu impact is a little tough to call because you have the same data we do in terms of the overall flu rates, and they are -- they do remain elevated.

Our next question comes from the line of Doug Schenkel from Cowen and Company.

Just first quick one for me on the flu.

Did you say it impacted both Q4 and Q1?

I was just trying to get an understanding of why there might have been a slight sequential decline from Q3, Q4.

Yes, the big impact -- and what you can see in the CDC data, the real big impact is in Q1.

And the survey we ran supported that.

But it's really the last 2 months is when the physicians are canceling more visits and rescheduling appointments.

They are overwhelmed with the flu.

So they've really pulled back on the wellness visits.

So the real impact that we're seeing is in Q1.

Maybe just a follow-up there.

Can you provide any color as -- I think the number of orders per physician decreased from Q3 to Q4, I just want to make sure that was indeed the case.

And any reason why -- what could have caused that?

The way that we look at physician reordering is on a weekly basis we look at the number of orders per week for physicians.

The way that I think you're referring to is what we call the street reorder rate.

That's the number of completed tests per physicians.

That number can move around.

And in the fourth quarter, you have this dynamic where fourth quarter does have the seasonal impact from holidays.

So that does weigh a little bit on the number of completed tests.

In the fourth quarter, we also saw a very strong quarter for new physician adoption.

We had 11,000 new providers.

And what that resulted in is a little bit of pressure on the numerator and a little bit of a higher denominator.

If we instead had added, let's say, 3,000 fewer physicians, that street reorder rate would have actually gone up from the third quarter to the fourth quarter.

The way we look at reorder rate we did see improvement.

We've seen consistent improvement over the last 6 or 7 quarters, and we did see that -- outside of the typical seasonal holiday impact, the street reorder rate does have the nuance I described in terms of the dynamics from seasonality and the high number of new physicians that added in the fourth quarter.

Okay, that's helpful.

And can you also provide any detail on your operating expense expectations for 2018?

Sure, yes.

So for the first quarter, we'd expected a sequential increase of about $20 million.

That's driven by a few things, primarily some investments in sales and marketing.

Some of those investments I would say are really onetime.

Kevin talked about the Cologuard Classic, which is coming up in the near term here.

We also have a celebrity spokesperson that will come out in the first quarter.

Those expenses are heavily weighted towards the first quarter.

We've talked today and before about the additional sales reps that we're hiring.

Those hiring will start to impact the first quarter.

Within G&A and R&D, there's some investments to support things like the growth in our business and our pipeline.

But the primary reason for the increase is selling and marketing.

I've also typically given comments on CapEx.

For the first quarter, we expect CapEx in the range of $30 million to $35 million.

That's really to support the increased demand we're seeing in the business and to support the growth in the lab as well as the new lab.

For the year in total, I would expect CapEx to be in the range of $150 million to $175 million.

Again, these are largely geared towards the increase in capacity to support the demand we're seeing.

On these capacity investments though, what we plan to do over time is look to secure other financing, such as the sale-leaseback.

So temporarily, we have to carry the cost of these investments on our balance sheet.

But over time, we can look to finance these through other ways.

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

Kevin, on the pipeline, 2 questions.

First, do you have any speculation as to why the second case-control study for lung might not have shown the type of sensitivity for Stage I cancer?

Just curious why that might have been.

And second, did I hear you right that you will -- you do plan to start a clinical trial for liver this year?

Or is that pending data?

Second question first.

Yes, we do plan to start at least one clinical trial for liver this year and maybe a second one as well.

So the next liver cancer clinical trial would be a cutoff study where we set a cutoff so we have a cutoff heading into a prospective blinded study.

And then in terms of the lung sensitivity for Stage I cancer, we believe that part of this is based simply on the size of the tumor and the amount of DNA that makes its way into blood.

This is consistent with what -- there was a publication by some folks at Johns Hopkins a few weeks ago where they looked at sensitivity by stage across, I think it was, 8 or 9 cancers.

And there, they saw for many cancers just difficulty in detecting Stage I cancers.

This is a program we still have a great deal of confidence in.

And we are likely to move towards a multimarker approach, multi-classes of markers, which just as a reminder, is how we got to 94% sensitivity for Cologuard for curable-stage cancers using protein mutations and methylation.

So we're confident.

And we're also excited about the liver study, and I think it shows that having more than one program going on at once will put us in a good position to execute going forward.

Got you.

Two for Jeff.

First one, can you share with us the mix between Medicare and commercial in the fourth quarter?

And then secondly, where do you see ASPs exiting the year and kind of the trend through the year?

Sure, yes.

So for the fourth quarter, our Medicare volume mix was about 60%.

Over the course of 2018, what we'd expect is a more rapid growth on the commercial side of our business.

So we would expect that mix to come down a bit.

As far as the revenue per test for the first quarter, I'd expect something close to the $480 range.

And for the full year, something in the range of $467 or so is what's baked into guidance.

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

The first question, I guess, just to segue off of that on ASPs.

I guess a bit confused as to why you would see ASPs compress over the course of the year if you're starting out around $480 million in the beginning of the year.

Is that something due to cash collections?

Or is there something else going on there?

Yes, sure, Anne.

So for the year in total, what we're guiding to is a very similar level of revenue per test, right around that $467 range.

But keep in mind that temporarily, mix shift that I referred to in Brandon's question, that mix shift temporarily puts downward pressure on the revenue per test because as of right now not all commercial payers are in network.

Also keep in mind that in 2018, our Medicare rate was revised just very slightly for PAMA.

So with those 2 things in mind -- and lastly, I'd point to the time-lagged revenue per test of $438.

That's a really good proxy to think about when you think about accrual rates.

So with those things in mind, I think $467 is a good position to be in.

Starting the year, we have seen stronger collections from both payers and patients.

So in the first quarter, we do expect a slightly higher rate.

But for the full year, we're not assuming that same level of collections continues.

Okay.

And then just a longer-term question, just thinking about the flu impact.

I mean, strategically, what can you guys do over the long term just to kind of help smooth out or avoid this type of care delivery friction?

That's a great question, Anne.

One of the -- we have thought of a lot of different ideas, gotten a lot of feedback from the field.

And there's an opportunity here to deliver a message in the primary care setting that highlights the advantage of Cologuard, which is you don't need a patient in the office to be able to get them screened.

This is a test that is an in-home test.

And so by working with the offices that -- even as a patient has to cancel a wellness visit, get them a Cologuard test.

So by the time they do make that visit the primary care physician has the result in hand.

And this is something that as we look into next year it -- we will start to put into place so that should we see another flu season like we saw this year -- and again, it's a highly unusual flu season, the worst in at least 9 years or 10 years -- that we're in a position to move the needle.

And truthfully, you can expand this during the course of the year.

So there is a silver lining here where we're able to creatively think about ways to improve the overall experience both for physicians and importantly for our patient customers.

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

I was just curious what's assumed in your guidance for when the flu season will subside and how long that headwind would last.

And then just if you take out the flu impact, what's your assumption for the doctor reorder rate improvement over the course of the year?

Yes.

So I mentioned before, Catherine, the flu today still looks very severe.

It's really near the peak, so what we're assuming is that it stays strong and over the balance of the next month or 2 it subsides.

But we'll watch the same data that you do from CDC and see how that progresses.

As far as -- I'm not going to get into what's baked into the guidance.

I think the longer-term trend is very clear here.

We're just starting to scratch the surface in terms of penetrating these physician offices, and there's a very long ways to go in terms of convincing new doctors to order Cologuard.

So I think this is really kind of a temporary blip, and the long-term trend is really unaffected by this.

Okay.

And then now that you've been in quality measures a bit longer, does your guidance assume any different behavior in terms of care gap orders at the end of the year?

Or are you assuming dynamics similar to last year?

Yes.

So that's a very good question.

I think that's a really important point about Cologuard and our business model.

As Kevin mentioned that Cologuard can be done very flexibly.

The patient doesn't have to be in the office.

Providers can know that with Cologuard you typically see a much higher compliance rate than you see with colonoscopy.

So that is a very attractive part of our business model.

As we consider these care gap orders, I think it's important to know that we want to pursue these in a very organized and thoughtful manner.

And we are seeing the demand.

We're in very early conversations with health insurers and the big health systems on these potential programs.

So we'll update you over the course of the year.

I think it's safe to assume right now it's a relatively modest impact.

But over the course of the year and the next few years, that will be a very big part of our potential opportunity.

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

You have a number of things -- this is a question on guide.

You have a number of things in terms of the sales force adds in second half and then the ones that you announced recently and then the hospital efforts going on to increase electronic and, obviously, penetrate the hospitals -- large hospital systems faster and 3-year repeat of the 2015 Cologuards coming back in.

So I get your comments on the flu, which are more near term, and those patients should come back later on.

So help us just understand why should we expect only 60% growth here in volumes, maybe not a little bit better than 920,000?

And I have a follow-up.

Well, Puneet, thanks for your question.

In terms of the growth of the business, we have 3 years of data that we are looking at.

So we have been able to refine a model.

And I'd just like to reiterate the -- we now have 102,000 providers, health care providers, who have ordered Cologuard.

The goal is to engage with those providers, to get them to order Cologuard more frequently.

And we are increasing the size of our sales force to be able to do that.

And we have also seen the dynamic of increasing insurance coverage, inclusion in the quality measures and inclusion in all the major guidelines, including USPSTF, ACS and NCCN.

So we are in a position now to be aggressive.

And some of these things that we're doing won't have an impact until late in this year.

For example, as we grow the size of our sales force by midyear, it will take time to impact the overall volumes as those people take time to get trained and up to speed.

We are confident in a strong year in terms of giving more color into everything that goes into the model.

We're not prepared to do that right now.

And I'd ask Jeff if you have any other color to provide to please do so?

Yes, I think -- to Kevin's point, what we've baked into the guidance is a range of different outcomes in terms of the physician reorder rate, the number of new physicians, flu, all the other factors, the productivity of the sales force.

I would point out that the guidance does imply an acceleration of the total volume of completed tests versus the prior year.

So we're still talking about a lot of growth here.

But as that base gets larger and larger, the law of large numbers kicks in and that percentage growth looks smaller.

Okay, that's helpful.

And my second question.

If you could help me understand, where does contracting the end contracts with the commercial payers stand currently?

And could you remind us on coverage, where do you stand on overall coverage as well?

Sure.

So this is Maneesh.

For coverage, we are just south of 90%.

And so really pleased.

As Kevin alluded to in his prepared remarks, 2017 was a strong year, bringing in some pretty significant payers.

So in terms of in-network contracts, we're right around 64%.

Now I know that's not something we're going to share on an ongoing basis, but it gives you perspective that we are making good progress, and it sets the stage for why we have the confidence that this year is going to be another year of strong growth.

Your next question comes from the line of Patrick Donnelly from Goldman Sachs.

Maybe one for Kevin.

Obviously, you raised quite a bit of cash this quarter, now sitting at over $1 billion on the balance sheet.

Can you just talk through the reasoning for the raise, given you guys already had over $400 million on the balance sheet?

And then strategically, just what should we expect the primary uses there to be in the near term?

Yes.

Well, Jeff highlighted some of those, which is we have significant capacity -- CapEx investments that we intend to make.

We've also talked about increasing the size of the sales force and being more aggressive even than we are today with our direct-to-consumer campaign.

We have always taken the view that being well capitalized is a real asset.

It gives us the flexibility to look at strategic M&A that allows us to continue to be in a very strong position, owning this space for years and years to come.

To also potentially add products that are synergistic with Cologuard, increasing the efficiency of our call point in the primary care segment, adding a call point in the GI segment and potentially giving us more of human and technical capabilities for our pipeline.

And we will continue to be good stewards of this capital as we have in the past, and feel great about the terms that we raised this capital on.

And that's our perspective on capital.

And I guess in light of the raise, should we shift our expectation around profitability?

How important that is to you at this stage?

I mean, are you more inclined to continue to invest to drive penetration higher and push out profitability?

Or just general thoughts there in light of that raise.

I would say, Patrick, that the additional capital does not change our thoughts on timing of profitability.

If you look at the cash flow this quarter, we had a very good quarter in terms of the cash use.

What I would say, though, we'll continue to look for ways to deploy capital to drive value for shareholders.

And right now, we see a whole lot of different ways to do that in terms of the additional capacity, the sales force expansion, the pipeline investments.

So as long as we have those ways that we can deploy capital and create value, we will do that.

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

The disclosure around 27% of electronic orders, should we think of that as potentially like maybe a 10-point lift each year?

And Kevin, can you speak to the value of bringing contracts in network?

I know you -- or I should say, going back to the electronic item, you said that it basically makes ordering Cologuard easier.

But can you also speak to the benefit of -- the incremental benefit from billing collections through electronic orders?

So in terms of the benefit of being in network is that you can assure the physician and the patient that they are not going to receive a bill.

So the vast majority of the patients who are -- have an in-network status with their payer, between their payer and Exact Sciences, the vast majority of them have no co-pay responsibility, and that's where you want to be with a screening test.

There's also -- typically with those patients, it doesn't even affect their deductible.

So they just get screened.

And there's an important message.

We're not there yet.

So as we move from the mid-60% in network towards 90%, 95%, you're going to see a lift in the ordering rate because it does affect physician's behavior.

In terms of electronic ordering, we're not going to provide guidance if we're going to go up 10% a year.

Our goal is to rapidly increase that, and you do that by bringing more of the large systems into the fold with Cologuard and set up an HL7 bidirectional interface between their EMR system, frequently it's Epic, and our Exact Sciences lab information system.

That's critical.

And to do that, we're going to increase the size and we believe reach and effectiveness of our team that calls on those large systems.

Just to add to what Kevin said, the benefit we often see is from electronic ordering.

Doctors that order electronically today order at almost double the rate as doctors that order via fax.

And that just speaks to the difference that ease of ordering can make.

There's also the impact of going in network on the patient side.

And you see that in the compliance, the patient compliance rate.

We've talked before about the spread that we see on Medicare versus commercial.

Historically, we've talked about a 10-point spread.

So when you're on Medicare, it's very, very clear that there's generally not any patient cost your responsibility.

On the commercial side, because there's still some plans where we're not in network, some patients don't want to receive a bill, and you see a lower compliance rate.

But over time, as we go in network, we would expect that overall compliance rate to go up.

One last thing I want to add on the compliance rate is that keep in mind how we calculate and report it.

The 65% rate that we talked about for the fourth quarter is measured for kits that were shipped out 2 months prior and looking back 12 months.

So 2 to 14 months ago, how many of those kits have come back?

Well, just know that when kits are shipped out, say, 60 days to 90 days, in that kind of the front end of that range, the compliance rate is relatively low.

It takes patients some time to comply.

But if you were to look back, let's say, 9 months, 12 months, what we see for Medicare patients, for example, is a compliance rate at that point of about 75%.

The rate -- the 65% again is an average over that 12-month window.

So we're not going to get that rate out every quarter, but just know that the compliance rate -- the ultimate compliance rate we see is well above that 65%.

And that gives us confidence long term that we can drive that 65% rate higher.

That's really helpful.

My second question is on the focus of Cologuard.

I know that it's really about primary care physicians.

But at the same time, you have had some pretty good interest from gastroenterologists.

I know it's a small number today.

But as we think about potentially seeing Cologuard adopted by more GIs, can you speak to whether or not you have any plans of developing Cologuard perhaps with a different label, perhaps in the high-risk patient population?

Sure.

As we discussed earlier this year at the JPMorgan Conference, we have a plan to work with FDA and run a clinical trial to support a label indication for Cologuard's use in -- among high-risk patients.

By high risk, we mean patients who have a first-degree relative, a mother, father, brother, sister who has been previously diagnosed with colon cancer or if that patient has had a cancerous polyp in the past.

For those patients currently, colonoscopy is indicated every 3 years to 5 years.

But as you can imagine, many of those patients do not follow through with colonoscopy, so there's a real opportunity for Cologuard's utilization in that higher-risk patient population.

There are 20 million Americans presumably -- there are 20 million Americans in that population, and presumably Cologuard would be indicated more frequently than 3 years for higher-risk patients.

We'll do the work.

We think this is a significant expansion opportunity as we look forward.

We have not provided time lines around this or details, but we will in the future as those plans firm up.

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

A lot has been asked, but I guess first off, going back to some of your comments, Jeff, on the cost per test.

I think you said Q1 would be in the low to mid-$140 range.

Do you expect -- how do you expect that to trend throughout the year?

Yes.

Kevin, what we've typically done is just given 1 quarter forward guidance.

I would say keep in mind that over the next couple of years we'll have heightened investment in capacity.

And so what you're seeing is an underlying improvement in the efficiency.

Our labs keep getting more and more efficient.

Our manufacturing team keeps getting more and more efficient.

But that's temporarily masked by the added depreciation for the new capacity, the new fixed costs.

Longer term though, we're incredibly confident of getting that cost per test down to $125 or better.

But in the next year or 2, you will have some upward pressure because of these new investments.

That's helpful.

And then I know a lot -- go ahead.

Did you have something to add?

No, go ahead.

Okay.

I know a lot has been asked about the flu, and those are some interesting comments.

And I appreciate it's probably hard to quantify, but if you were to back out flu impact in Q1, what do you think -- how much would that have affected -- how much -- just what's the impact in Q1 relative to your revenue guidance and Cologuard volume guidance?

Yes.

Kevin, I'd just rather not do that.

There's so many moving pieces here.

I think we've given some comments that kind of directionally help you understand what the impact was, but I'm not going to try to guess what the quarter would have looked like without the flu.

I think one point is that we're still in the middle of the quarter, and we have a world-class sales team that is working very, very hard to deliver a great quarter.

And they are charging hard, and we're really proud of the work that they're doing and don't want to diminish that at all.

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

Kevin, among the providers who have prescribed Cologuard at least once in the past year, what are their most common reasons that they don't order more frequently?

That have only ordered once in the past year or have ordered once or more?

I'd say that the ones that order once but then don't order more frequently, why aren't they ordering more frequently?

Part of that is -- there are different reasons depending on the physicians.

But probably the -- one of the big reasons is just our ability to reach 100,000 physicians with 250 people in the field.

And what we have done is focus that field team on the highest potential physicians.

And we've asked them to drive that reorder rate of that current customer, and we're going to keep that focus there as we expand both the field team and the inside sales team.

It's all about education, getting the physicians to read and understand The New England Journal study, the study that Mayo Clinic did highlighting the increase in the polyp and precancer find rate when the GI knows that there's a positive Cologuard result, the USMD study, educating the physicians around this clinical evidence and, importantly, the guidelines.

So you can't do that with the size of the sales force we have relative to the size of the customer base, and we're just going to keep at it.

There's just -- I can't emphasize enough the size of the opportunity here with only being 2.5% penetrated and only recently being included in the quality measures.

2018 is the year for us to continue to step on the accelerator.

Right.

And then from the 64% in-network contracted people, what was that comparable rate a year ago?

And do you have any visibility or expectation of how much progress you expect to make this year in that figure?

We don't want -- this is one data point that we're providing.

There are a handful of payers out there, including Anthem, including HCFC, Cigna, that we don't have in-network agreements with and that we're highly focused on working with those payers to bring Exact Sciences into an in-network status.

Those 3 would move the needle greatly.

And what happens when someone gets a Cologuard, it's covered but it's not in-network, what happens to them?

Well, it depends on what their plan says.

And many plans say there's 50% cost sharing for out-of-network services.

That is not universal by any measure across the board, but that is something that is -- that frequently exists in the member agreement with that plan.

And then we send a bill for the balance to the patient.

That -- sending a bill to the patient frequently gets the patient to file an appeal with their plan, call their plan and the plan starts to get educated.

And over time, they say, well, Cologuard makes a lot of sense, especially relative to the cost of colonoscopy, and we really want to improve our quality measures.

And that's been the consistent theme that we have heard as we've entered into the in-network agreements.

Right.

Regarding those quality measures, can you remind us what changed in January with those quality measures and whether you've seen any change in physician behavior as a result?

So last March, we got into the Medicare quality measures, which is called the Star system.

And shortly before that, we had gotten into the HEDIS quality measures.

Those are the 2 main quality measures, and they influence health systems and their behavior.

Frequently, the health systems don't update their measurement tracking systems except for once a year.

So there were many systems that still in their minds didn't count Cologuard because despite the Star's measures being updated their own internal systems weren't updated to include Cologuard as a check for colon cancer screening.

So we see 2018 as the year where many of those health systems will update their own internal systems.

Does that happen in January?

Or is that throughout the year?

It's throughout the year depending on the health system.

Great.

And did you give operating expense guidance for 2018?

If so, can you repeat that?

What we said for the first quarter was we expected about a $20 million sequential increase, but we didn't comment on the full year.

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

I wanted to focus on the onboarding of the new sales reps.

Can you tell us a little bit about the cadence of the hiring?

And then what are your assumptions for how long it will take to train and get a new rep up to speed?

Sure.

So we have already begun the process.

And as you can imagine, the process of hiring the inside sales reps is a little quicker.

And we have that well underway.

We expect to have both the inside and outside reps filled, I would say, by midyear.

That will begin the process then of their training, and over time, we have seen it takes a period of time.

And this points back to something Kevin said earlier.

These are benefits we expect to see late in the year and into next year as those reps start to get into their territories and become effective.

It definitely takes a couple of quarters for them to get in market and to be -- and to see the effectiveness lift of them.

So you start to see it right away, but really it doesn't happen for about 6 months to 9 months.

Okay, great.

And then, Jeff, I just want to give you one more opportunity to give us some 2018 operating expense guidance.

Yes, thanks for the question, Bruce.

Yes, I think we'll stick with the first quarter.

And then throughout the year, we'll give comments on the other quarters.

There are no further questions at this time.

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

Well, first of all, thank everybody for joining us.

And to the Exact Sciences team that may listen to this, congratulations on a tremendous year.

We started last year consensus estimates were $116 million.

We delivered $266 million.

That required an immense team effort.

2017 is over and we're into 2018, and we're kicking off 2018 next week with the Cologuard Classic in Tucson, Arizona, where we'll have Jerry Kelly, the rookie of the year last year, wearing the Cologuard hat along with Steve Stricker's presence and Vijay Singh and others.

It's really a great way for us to expand awareness in a really important segment of our customer base.

And also, we expect in March to announce the celebrity spokesperson for Cologuard and with a real focus on getting 50-year-olds to start getting screened with Cologuard.

Thanks to everybody, and we look forward to talking to you on our next call.

This concludes today's conference call.

You may now disconnect.