Exact Sciences Corp (EXAS) 2018 Q4 法說會逐字稿

Good afternoon.

My name is Jessie, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Exact Sciences Corp.

Fourth Quarter 2018 Earnings Call.

(Operator Instructions)

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

Thank you, Jessie, and thank all of you for joining us for Exact Sciences' Fourth Quarter and Full Year 2018 Conference Call.

On the call today are Kevin Conroy, the company's Chairman and CEO; Jeff Elliott, our Chief Financial Officer; and Mark Stenhouse, President of Cologuard.

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.

2018 was a landmark year for Exact Sciences, and we're incredibly excited about the company's long-term potential.

The team delivered $454 million in revenue, helped screen 934,000 people for colon cancer and launched a partnership with Pfizer to bring Cologuard to more patients.

The momentum we built in 2018 gives us greater confidence we'll grow from 4% market share today to 40%, which is our long-term goal for Cologuard, and we will continue delivering life-changing innovations in early cancer detection.

We fully intend to create a new standard of care and significantly impact the health prospects of millions of people.

Today, we'll start by reviewing our performance against our 2018 priorities, then we'll discuss our financial results and guidance and conclude with our 2019 priorities.

The Exact Sciences team set and then achieved each of our 2018 priorities.

Our first priority for 2018 was to command the core Cologuard business.

We expanded our sales force and made tremendous progress, contracting with top payers, helping address 2 key barriers to Cologuard adoption.

The Exact Sciences sales team focused its efforts on a targeted group of high-potential primary care providers.

Our data show that higher frequency of sales calls on this core group will help increase Cologuard adoption.

We now estimate that 94% of people who complete a Cologuard test will have no out-of-pocket cost, thanks to the efforts of our market access team.

We have signed in-network agreements with most major insurers and added nearly 80 million total contracted lives in 2018.

We expect the benefit of widespread coverage to increase over time as our sales and marketing teams deliver that message broadly to physicians and patients.

Our partnership with Pfizer is off to a strong start.

We concentrated our efforts on 2 objectives during the first few months of the partnership: first, launching Cologuard to Pfizer's U.S. internal medicine team; and second, developing and executing a detailed marketing plan.

In 2019, our efforts will expand to [increase in] adoption within large health systems.

Moving to our second priority for 2018, preparing for future demand.

We increased our annual Cologuard lab capacity from 1.5 million to 3 million tests, while lowering cost of goods per test by more than 9% during 2018.

We achieved this by expanding our current lab's footprint and introducing automation throughout the lab.

We've increased the size of the reagent labs that we manufacture, resulting in increased capacity and lower cost of goods.

This ensures we can scale efficiently to meet growing Cologuard demand.

Moving to our third priority, advancing the pipeline.

We made significant progress in 2018 on multiple pipeline opportunities, representing billions of dollars in incremental U.S. market potential.

Following the American Cancer Society's colorectal cancer guideline update to include people ages 45 to 49, we initiated a prospective trial for Cologuard's use in this population.

We also published promising data on liver cancer biomarkers to support further development of a liver cancer test in high-risk individuals.

We're pleased with the enhanced results in one of our pipeline opportunities after incorporating DNA preservation technology from Biomatrica.

Our development work showed that the LBgard tube provides the best overall sample stabilization approach.

We expect this superior preservation technology will be a critical advantage as we develop additional liquid biopsy tests.

We're proud of what the Exact Sciences team achieved in 2018.

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

Thank you, Kevin, and good afternoon, everyone.

When discussing financial results, I'll refer to changes compared to the fourth quarter of 2017, unless otherwise stated.

Fourth quarter revenue increased 64% to $143 million.

And completed Cologuard test volume was 292,000, up 66%.

For the full year, revenue and completed tests grew 71% and 64%, respectively.

Fourth quarter average Cologuard recognized revenue per test was $486 and better than expected on strong collections.

On a time-lagged basis, our average recognized revenue per test was $476 at the end of the fourth quarter, an increase of $38.

Fourth quarter Cologuard cost of sales improved by $5 to $129 per completed test, which was slightly better than expected due to scale efficiencies in our lab.

We expect our first quarter cost per test to rise to the mid-$130 range, a temporary increase as we expand our total lab capacity to 7 million tests this year.

Fourth quarter gross margin was steady at 73%.

For the full year, gross margin was 74%, an increase of 380 basis points from the prior year.

Fourth quarter operating expense of $154 million was slightly above our expectations due to the fees owed to Pfizer as a result of increasing Cologuard revenue.

Selling and marketing expense increased due to the [full] quarter impact of new sales hires during the third quarter and some additional advertising.

G&A expense increased due to the hiring across the company to support our growing business.

R&D expense increased to support multiple pipeline initiatives, including Cologuard 45, Cologuard 2.0 and our liver cancer test.

At $496 million for the full year, operating expense increased 63%, which was 8 points lower than revenue growth.

Cologuard's compliance rate at the end of the year was 64%, as previewed.

We expect the compliance rate to increase to 65% in the first quarter and 67% in the second quarter as we educate physicians and individuals on the broad insurance coverage for Cologuard.

Fourth quarter cash use totaled $61 million, including $18 million for the Biomatrica acquisition.

Most of our cash use in 2018 was on CapEx as we work to expand our lab capacity.

Fourth quarter total CapEx was $52 million.

As we complete our new lab site in 2019, we expect total CapEx of $175 million to $200 million.

About $150 million of that relates to our capacity expansion projects and major IT upgrades, and the rest is associated with maintenance CapEx.

We expect most of our current expansion projects and related CapEx to phase out beginning in 2020.

We have largely been financing the capacity expansion with capital we have on hand.

Over time, we intend to explore financing alternatives to help free up capital that is currently tied up in our lab facilities.

We ended 2018 with cash and marketable securities of $1.1 billion.

For the first quarter, we expect operating expense of about $185 million.

About half of that sequential step-up is from selling and marketing, with the expected promotion fee payable to Pfizer, our national sales meeting and the Cologuard classic.

Looking at selling and marketing for the full year, we expect about 2/3 of the growth above the fourth quarter run rate to be the fee paid to Pfizer and much of the remainder to the hiring of GI sales force.

For the first quarter, G&A is increasing due to the broader growth of the business, initial staffing at our new lab and our IT initiatives.

Throughout 2019, we will continue to grow our customer care team to maintain our high standards for customer service.

Our data show that our customer care efforts nearly double the compliance rate for Cologuard and offer a very attractive return on investment.

The investments we're making in IT over the course of the year, including Epic, will allow us to scale the business more efficiently starting in 2020.

For the first quarter, R&D is increasing primarily to support Cologuard enhancements and our pipeline development efforts.

During 2019, we'll continue to invest in our medical affairs team and generate additional evidence to support Cologuard growth.

For the full year, we expect about 25% of our R&D to be Cologuard-related.

The remaining 75% will be on major pipeline initiatives, including Cologuard 45, Cologuard 2.0 and our liver cancer test.

We see our pipeline investments as a highly efficient use of capital.

For example, the potential Cologuard label expansion to age 45 would increase the total addressable market for Cologuard by nearly $4 billion.

We believe our investments in Cologuard 2.0 could increase U.S. revenue by at least 5% to 10% and reduce cost of goods.

The total addressable market for our planned liver cancer test is estimated in more than 3 million people in the U.S. alone.

Further, many of the investments we've made for Cologuard, such as IT and our commercial infrastructure, can be leverage for our liquid biopsy programs.

Over the past 3 years, we've made great progress growing Cologuard efficiently.

Revenue and gross profit growth rates have significantly outpaced the operating expense growth rate.

We're making investments now to reach our long-term goal of at least 40% market share and nearly $6 billion of Cologuard revenue.

At $6 billion in revenue, we see a path for Cologuard to at least 80% gross margin and at least 40% operating margin.

Turning to our guidance.

For the full year, we expect revenue of $710 million to $730 million and Cologuard volume of 1.49 million to 1.51 million completed tests.

For the first quarter, we expect 310,000 to 320,000 completed tests.

Historically, sequential growth is slowest from the fourth quarter to the first quarter due to the impact of holidays and regular seasonality on our Cologuard business.

Our internal goals are focused on revenue, and we run the business based on our expectations for revenue growth.

Because of this and due to the tremendous progress we've made securing reimbursement for Cologuard and its more stable revenue per test, we don't plan on disclosing Cologuard volumes starting in 2020.

I will now turn the call back to Kevin.

Thanks, Jeff.

As we look to 2019, the Exact Sciences team is focused on 3 priorities: one, power our partnership with Pfizer; two, enhance Cologuard; and three, advance our pipeline of liquid biopsy tests.

Working with Pfizer, we're aggressively seeking greater adoption from this important customer segment in the coming years.

More than half of primary care providers in the U.S. are employed by or affiliated with a large health system.

Today, Cologuard has broad coverage and is included in all major guidelines and quality measures, allowing us to increase adoption in this underpenetrated market.

It will take time to generate significant uptake within health systems due to their size, complexity, and therefore, longer sales cycles.

Cologuard complements Pfizer's existing women's health products, and this area represents another opportunity for growth.

Last month, Pfizer launched Cologuard to its women's health team.

We haven't historically called on OB/GYNs.

There are more than 30,000 in the U.S., and to date, only 4,000 OB/GYNs have ordered Cologuard.

Approximately 25% of OB/GYN patients are 50 years and older.

And cancer screening is often discussed in this setting, making it an ideal area to grow Cologuard's use.

To educate gastroenterologists about Cologuard, we plan to build a specialty sales team through internal promotions and some external hires.

There are approximately 14,000 GIs in the U.S., and about 8,000 have ordered without frequent contact from our sales force.

GIs are important influencers in colorectal cancer screening, so we're optimistic about the potential within this physician group.

As we work to grow Cologuard in multiple channels, we're laying a strong foundation for expansion.

We expect to open our second lab later this year with an initial annual capacity of 4 million Cologuard tests.

We are also laying the groundwork to install Epic's electronic health record system as the core of our IT infrastructure.

This world-class EHR system will allow us to scale efficiently and enable greater connectivity with our patients and physicians.

Moving to our second priority, enhancing Cologuard.

There are 19 million average risk Americans between the ages of 45 and 49, who should be screened for colon cancer according to the American Cancer Society's guidelines.

That represents an additional $4 billion in total market potential for Cologuard.

According to the modeling work performed by the American Cancer Society, there's greater benefit to screening people ages 45 to 49 than people over the age of 70.

We want to make Cologuard available to younger Americans who are at an increasing risk for colorectal cancer.

We met with the FDA in January to discuss the path forward for a Cologuard label expansion to age 45.

We expect to submit our application in the first half of this year and hope to have a label expansion in the first half of 2020.

Working with Mayo Clinic, we discovered promising biomarkers for Cologuard 2.0 and are excited about the potential to make Cologuard an even better test.

The goal of this program is to increase Cologuard performance, especially specificity.

This would improve -- this would further improve the overall health economic case for Cologuard, which is already strong.

Cologuard 2.0 could also increase throughput at our lab, and therefore, reduce cost of goods, making the return on investment very attractive.

We will provide additional updates as we work to further validate these markers.

Moving to our third priority, advancing our liquid biopsy programs.

Through our 10-year collaboration with Mayo Clinic, our pipeline is focused on developing test for the early detection, accurate diagnosis and recurrence of the top 15 cancers.

The Mayo Clinic team has 50 experts working on nearly 70 protocols, helping form the foundation of our pipeline.

With Mayo Clinic contributing to early research and discovery, we have identified biomarkers for 13 of the top 15 cancers.

Our teams then perform multiple studies to validate these markers using our highly sensitive and specific technology platform.

Building off our success bringing Cologuard to patients, we believe this collaboration will be productive over the next decade.

We are developing and plan to launch multiple tests that meet significant clinical needs.

The current standard of care for liver cancer testing is inconvenient and not accurate enough, and more than 2/3 of high-risk patients avoid recommended testing.

Our goal is to provide a more accurate test than the current standard of care, which is ultrasound with or without alpha-fetoprotein.

Early stage sensitivity for ultrasound alone is 45% with a high false-positive rate.

Combined with AFP, that sensitivity increases to 63%.

We have published data that show improvement from these levels for a panel of markers, and we continue to enroll patients to finalize development of the test.

We plan to begin enrollment in a prospective head-to-head study in the coming months to strengthen the evidence supporting our liver cancer test.

We've demonstrated the power of this platform with Cologuard.

We have the experienced team, resources, technology, regulatory expertise and commercial scale to be the leader in cancer diagnostics, and we're confident we'll get there.

Now we're happy to answer your questions.

(Operator Instructions) Your first question comes from Brandon Couillard with Jefferies.

Jeff, in terms of the 2019 guide, I mean, you beat fourth quarter revenues by about $20 million.

You had talked about an outlook for 2019 of about $700 million.

That's about where the midpoint is today, even though so -- it suggests that your assumptions relative to where you were thinking 4, 5 months ago haven't really changed at all.

Is that the case in -- kind of talk to us about the factors that sort of formed your view -- initial view for the year.

Sure.

So the midpoint today is about $720 million.

So let's keep in mind that today is February.

It's still very early in the year.

There's a lot of unknowns out there in terms of the initiatives that we're putting in place and the productivity of our sales team and the Pfizer team.

So early in the year, we think that $710 million to $730 million for the range is the right place to be.

As far as what has changed in the last few months, we've seen very good progress both with our internal teams, the sales teams are doing a very nice job, the Pfizer partnership is off to a great start.

And we brought the midpoint up to $720 million versus -- the prior preliminary guidance we'd issued was around $700 million.

So things are a little bit better than we had issued back when we first announced the Pfizer partnership.

And then, Jeff or Kevin, you sort of spoke to expectations for the compliance rate ticking up over the next several quarters.

That seemed to be a program that was more doc-facing whereas I'd come to sort of think about the compliance engine as more patient-facing.

What are you doing differently in terms of programs to lift that compliance rate?

And how should we think about that opportunity kind of beyond the first half of '19?

So keep in mind how we report the compliance rate.

We look back 12 to 18 months, and we measure what percent of the kits we ship out come back.

So at the end of 2018, that was looking back on the second half of '17.

During that period was when we had that $649 message in place.

We talked about that last year.

We intend to remove that message, and that message now is today about 94% of our patients who get Cologuard have no out-of-pocket.

So that change in message has been a nice lift in the compliance rate.

On top of that, Kevin talked in his remarks about signing about 80 million incremental contracted lives last year.

Getting that incremental coverage is significantly important to drive in compliance rate.

What we've actually seen on the commercial side of our business, we use to talk about a compliance rate in the high 50% range.

Today, we're seeing that trend towards the low to mid-60% on the commercial side.

And we've seen that the Medicare compliance rate hover in the low 70s.

So by and large, the compliance rates are trending in the right direction now.

Maybe Mark can talk more about some of the other compliance initiatives we have in place.

I think the thing that I would add to complement your message is that the focus of our selling organization is not only getting physicians to write more Cologuard but also educating their back office.

We know that those offices that use our provider portal and order electronically, order more Cologuard.

So the, really, press from our selling organization is to holistically sell Cologuard and drive electronic ordering.

Your next question comes from Brian Weinstein with William Blair.

I thought we can just talk about, first, the sustainability of the doc adds that you guys saw in the quarter.

Obviously, it was above the recent trend line, the 15,000.

Can you just talk about what you attribute that jump to?

And if you think that, that type of a level is sustainable?

Or do you anticipate kind of going back more towards the trend line?

What's baked into your guidance there?

Sure.

So fourth quarter was a really strong quarter.

We jumped up from, what, about 10,000, which has been the run rate since about the second quarter of '16, up to 15,000 in the quarter.

As far as what drove that, I think there are several different factors.

One, the significant gains in insurance coverage, I think, have been very helpful getting covered with all the major payers.

And today, 94% of patients having no out-of-pocket.

That's a strong message that resonates well with physicians.

On top of that, we added to our sales force.

We added, [we talked,] 100 additional field reps in middle of last year.

And then we -- Pfizer joined the Cologuard commercial efforts in early October.

Those efforts have all helped.

In the fourth quarter, we also went out to network TV nationally for the first time.

And we contributed, together with Pfizer, a little bit more on TV spending.

So I think those factors broadly led to the increase.

As far as the sustainability, I think our goal is to drive as many physicians as possible to Cologuard.

Today, only about 37% of all the relevant providers have ordered Cologuard, so there's a long way for us to go.

At 15,000, though, that's a really strong number.

I would think of a range ideally above the 10,000 run rate we had been at, but likely somewhere below the 15,000 number as a more sustainable pace.

Got it.

And then a question for Mark.

On the performance response curves that you guys have typically talked about, are those [hoping on for] the same rate before?

And if so, given that, I think, last year at this point, you guys had a couple of hundred people that were calling on docs.

And now with Pfizer, this would be my estimate, of course, not yours, you're going to be combined well over 1,000 by my math.

It would seem that there'd be some pretty good opportunity there for utilization increases.

So can you just talk to the performance response curves and if I'm thinking about that right?

Thanks, Brian.

I think it is clear that reorder rate is the key to driving overall Cologuard share.

And we're trying to move it, of course, from a 4% to a 40% share, and that the ambition to do that is driving reorder.

We definitely look at responsiveness in the data that you're speaking about in terms of the response curves are similar today as they were in previous quarters.

We watch very closely the reorder rate by distinctive rep and physician cohorts, so where we have overlapping doctor relationships between Pfizer and Exact and where we have individual relationships between Exact reps and doctors and Pfizer reps and doctors.

And we're modeling that as a go-forward basis, which tells us a lot about message and frequency of message in each of those distinctive cohorts.

Your next question comes from Derik De Bruin with Bank of America.

So a couple of questions.

I guess, can you talk a little bit more about the plan for the health system and sort of like how should we think about the various area and what that opportunity ultimately could have been?

I mean, obviously, that's a huge opportunity for you.

Just what is more when you're going to have a little bit more visibility into winning some contracts there?

Derik, I think it's a great question.

So first -- the first thing to think about is that 50% of our U.S. health care practitioners are affiliated to a health system.

So obviously, it's a very important driver of value for us.

You're also seeing health system progress embedded in our revenue numbers.

Because you're already seeing health systems that have active colorectal cancer screening programs, many of which include Cologuard, that are driving value in the neighborhoods around that health system by the doctors that are affected by a positive health system decision, so the sales cycle is extended.

Typically, a year.

Why?

Because you have to influence a medical officer, the quality officer get in the electronic ordering system and then motivate the underlying physician population to write the product.

The really good news here is that Pfizer brings significant expertise as does the Exact team, and we're working on the right selling message contained to the most important health systems.

But I really think you're going to see this pick up over time.

But I think the key message is we have a lot of physicians, 50% that are affiliated to these systems already.

And you're already seeing an advancement in the productivity of health systems embedded in the revenue number today, and it will only get better over time.

Great.

And just one on the Biomatrica acquisition.

Is there any revenue embedded in the guidance for this year for that?

I mean, can you talk a little bit about the metrics on that one?

Sure.

There is some revenue.

It is immaterial, though.

Largely, what you're seeing is Cologuard.

Your next question comes from Doug Schenkel with Cowen.

This is Adam Wieschhaus on for Doug.

Jeff, I appreciate the detail you provided on how to think about the number of new provider additions this year versus Q4 level.

Can you provide any detail on what your 2019 guidance assumes in terms of how complete orders per practice in ASPs were compared to Q4 level?

Sure.

In terms of revenue per test, what's baked in is something in the range of right around 480.

I think the range is 477 to 483.

As far as test per provider, we expect that to trend up over time.

And keep in mind here that today, the 4% market share, in long term, our goal of hitting to 40%, there's a long ways to go.

If you look at the average physician today that's ordering Cologuard, our penetration rate is in the 5% to 10% range.

So we expect to make continued progress on that metric over time.

I believe you indicated you plan to submit your FDA application for Cologuard 45 in the first half of this year.

Does that mean the FDA does not require results from your ongoing prospective trial?

And would you be considered in the next USPSTF decision cycle?

We don't have a final agreement with the FDA on the plan forward.

However, there is an indication that the prospective data will not be needed to support the submission.

We are committed to that study, nevertheless.

We will be laying out what evidence we will submit to the FDA once we have a final understanding what the FDA -- of exactly what is required.

We are very pleased with the outcome of the meeting, and one thing to note is we're particularly appreciative that the agency team came in and met with us during the government shutdown.

Your next question comes from Catherine Schulte with Baird.

For the Pfizer rep, is there upper cap to their Cologuard-related bonus?

Or is the upside really unlimited based on their performance?

And then related, how frequently is that quota stat?

Is it annually, quarterly, monthly?

The Pfizer reps are comped with a, and I'm speaking in very general terms, with a base salary and a target bonus.

A portion of that bonus is driven off of Cologuard utilization within their territories.

So that is -- as we laid out when we announce this agreement, there is a -- depending on where Cologuard is positioned in the rep's bag, whether it's P2 or P3, that fraction of their overall bonus increases as it goes from P3 to P2.

So I wouldn't -- we don't have the information in terms of whether their bonuses are capped or uncapped, and that's not our purview.

What we have in the agreement with Pfizer is, at least, the minimum fraction of the rep's incentive comp focused and driven off of Cologuard.

I think the thing that I would to this is, I think, underpinning your question is what's the enthusiasm of the Pfizer representative for Cologuard, and I would tell you the qualitative feedback because I'm sure before it is extraordinarily strong, whether you're looking at the field reps, the health systems, the marketing team as evidenced by the addition of the OB/GYN women's health team, Pfizer is really committed to Cologuard from the top of their management structure all the way down to the reps in the field.

Very helpful.

And then, Jeff, just going back to ASPs.

Can you just walk us through the growth dynamics a bit more?

$480 million would be slightly down versus what you saw in 2018.

So just want to understand the puts and takes there.

The biggest thing to keep in mind is the mix shift that is underway.

If you look at our Medicare mix, that went from, in fourth quarter of '17, 60% of volumes to 52% in fourth quarter of '18.

And we'd continue to see that mix shift happen so far in '19.

So that mix temporarily puts some downward pressure on the overall revenue per test.

We expect revenue stability on the Medicare side of the business.

And as we've talked about here today, we expect to continue to make improvement on the commercial side of our business as we sign more and more contracts.

So it's really a mix shift factor here that provides a temporary drag on the overall blend of our ASP.

And it's -- really, it's because still today, not all commercial insurers are in network.

There's still a small percent that are still out of network.

Your next question comes from Daniel Brennan with UBS.

I guess, I wanted to ask on, first, the retest opportunity and what's possibly -- Jeff, what's kind of baked in for 2019 guidance?

I guess, you almost have 250,000 patients that are eligible.

I know it's a waterfall of which of those actually could be eligible.

But can you just walk us through what you've assumed for the retest opportunity?

Sure.

As you've heard us talk before, we've made some progress on the rescreen opportunity, but we're not quite to where we want to be yet.

So the long term, there's a huge opportunity.

If you just -- if you look back at the volumes that we tested last year and you look ahead 3 years, that's about a $250 million revenue opportunity.

So this is a huge opportunity.

We continue to make progress on it.

It's not where we need to be.

What we've baked in the guidance is continual gradual progress on it.

But keep in mind, when you look back 3 years ago from today, it's still relatively a small opportunity compared to the broader unscreened population that's out there.

Okay.

Great.

And then maybe as a follow-up, just back on the utilization question, I guess.

Our presumption was that with Pfizer, given the frequency of visits that a Pfizer salesperson likely has and the familiarity with the docs, that you would probably see a faster ramp and kind of doc usage as Pfizer came onboard.

So maybe, Mark, I don't know if you can comment on that and kind of what you're seeing in practice right now.

I know it's early.

But you've got, call it, 4 -- kind of 4 months under the belt or almost 5 months under the belt.

And is it possible the utilization increase you saw sequentially in Q4 from Q3 to continue?

Yes.

A couple of points to make here.

One is the Exact Sciences rep, because of their experience level with Cologuard and the fact that it is a single product promotion, has the most productivity relative to Pfizer.

They sell more per visit than the Pfizer rep.

That is in part because the Pfizer is a portfolio representative that has multiple products, and Cologuard is in the second or third position.

So I think you have to judge the value of Pfizer's contribution in that way.

That being said, where Pfizer and Exact Sciences overlap promotion on a single doctor, you do see incremental value creation.

So we're spending a lot of time understanding the right target, physician target selection.

Because again, a vast number of the Pfizer targets were specific to their sales force, meaning that they're calling on them alone, not with Exact.

And that's a majority of their target.

So they have low historical use of Cologuard, so they're starting from a low position of experience.

So that's influencing the uptake curves within Pfizer alone relative to the contribution of Exact and the shared focus between the 2 companies.

Your next question comes from Patrick Donnelly with Goldman Sachs.

Maybe, Kevin, just at a high level, can you talk through the strength in the quarter kind of leading to the guidance raised, parsing out how much was driven by the increased advertising, the sales force additions, you guys did 100 reps last summer, and then the Pfizer impact?

I know you can't sometimes do that much granularity, but just at a high level, trying to get a feel for how much was underlying momentum compared to Pfizer being layered on during the quarter.

Well, first of all, Jeff wouldn't be very happy with me if I provided that much granularity here.

It's really a mix of those things, and it's early in the year.

We have significant aspirations to execute it.

It's complicated.

There are a lot of Pfizer reps, and there are a lot of Exact Sciences reps.

We are about 4 months into launch, and we need to continue to drive a common, clear theme and repeat messaging to the physicians who are very receptive to changing their colon cancer screening behaviors when reached.

So long way of saying, I don't want to break that out.

Jeff, you may want to, so I'll pass it over to you.

So Patrick, we track each of the things very closely, and we're very pleased with the progress that we all have made.

We're not going to break it out here.

I think it's more important to say this was a broad quarter.

We had strength in from our reps, strength from the Pfizer reps.

The TV ads are working wonderfully.

We also had the market access wins that we talked about.

So this was a very broad-based quarter.

We're not going to break out each one specifically, though.

Okay, and I don't think you would, but that's helpful.

And then just on Cologuard 2.0, getting to market early in 2020.

Can you talk through the process to get there, the biggest variable for that time line?

Just trying to get a sense of the confidence level and the time line, what steps you have control over versus things that are out of your hands over the next year or so.

Yes.

So I assume you're asking about Cologuard for 45 to 49.

We haven't given guidance on Cologuard 2.0.

Right, yes.

Yes.

So Cologuard 45, in terms of that time in the first half of next year, we have -- we're reasonably confident.

Now anything can happen based upon -- submitting real data to the FDA, and this will be a thorough review by the agency.

We are reasonably confident that we will meet that time line.

And the real challenge and opportunity here will be that there is a large number of people to address, and that age 50 has been an embedded understanding for a couple of decades, more than a couple of decades now.

And so changing the understanding of physicians and consumers and also payers will take some time.

We're really committed to this age group.

And then if you go back and take a look at the materials that the American Cancer Society put out, they put out a great PowerPoint presentation when they made this change, and you can see the impact on each cohort.

And not only is there greater life years gained for the age 45- to 49-year cohort than the age 70 to 74.

You're having an impact on people who are in the kind of middle of their life with kids and jobs and economic activity and big circles of people who depend upon them.

And so that's why, as a company, we're really passionate about making sure we get this right.

Your next question comes from Puneet Souda with SVB Leerink.

So Kevin, if I was trying to understand, in terms of -- if you could elaborate a bit on the controls and measures that you have in place and the early read on metrics.

I mean, I'm asking because you're able to track orders with excellent precision.

You were upgrading the software.

You're upgrading a number of capabilities here.

You're driving a lot of performance.

So I'm just trying to understand.

Last year, in 2017, September, I think we had pricing transparency for patients.

That was implemented, but that wasn't visible 2 -- sort of 2 quarters into -- 2 quarters after.

So just wanted to get a sense of the controls and measures that you have in place now and how quickly you will be able to see things if, in the sales channel, marketing is having an impact or flu is having an impact or any of those things that usually impact the sales channel because you have a much larger sales force, 2 great organizations.

So just wanted to get your view on that.

Well, first, I'd say that we just took guidance up to the midpoint, $20 million; and to the high end, $30 million.

So we have visibility into what we expect will be a really solid year of growth, and that's obviously significant growth over last year.

In terms of our infrastructure and ability to see trends, we have deep data capabilities embedded within our IT infrastructure, and we look at that on a daily or multiple times a day basis and are able to do extensive analysis.

That gives us the comfort, as Mark mentioned, that we can see performance differences between the groups that -- physicians that our reps call on, that alone, that Pfizer reps call on alone and then physicians that both reps -- teams of reps call on.

And so that data, it gives us great confidence in our ability to kind of predict what is going on.

It's just really early in the year.

And so any line that we draw is -- depends upon execution.

Mark?

The other thing I would add, Kevin, and to answer the question is we ran, you'll recall, a TV pilot test in the third quarter.

We incrementally spent in 5 distinct markets with matched controls, and that pilot was successful.

And then informed our immediate strategy in the fourth quarter and into '19, and that afforded us the opportunity to both go into syndicated cable, where we have been historically, and then to go into network TV.

It also is helping us think about, in our media strategy, the mix of 30-second spots versus 60 and how we kind of managed the overall media strategy TV relative to digital, relative to social, all of which we've learned a lot in the last 6 months.

And we can test responsiveness very quickly and reallocate our spend in a way that operationalize and makes our spend more efficient.

So I think it's a very learned organization that's using the learnings to inform strategy in real time.

Okay.

That's very helpful.

And the -- my second question is on Cologuard blood and liquid biopsy opportunities that you're looking at.

So we noticed that the number of trials, these are sub trials of the 48 and 45-year-old, 49-year-old -- 45- to 49-year-old populations that are also collecting blood, and it seems to be part of your liquid biopsy approach.

So I just wanted to make sense, just to understand, when you go and submit the data to the FDA, is any of the blood dataset going to be a part of it?

Or is it just this is largely being collected for R&D studies currently and longer term potentially looking at future liquid biopsy potential for Cologuard and CRC screening test down the road?

Thanks, Puneet.

These are 2 separate programs.

Cologuard 45 is our current Cologuard test.

And then Cologuard blood is research work that we're doing with Mayo Clinic and other institutions in the U.S. and around the world to collect samples so that internally, we can continue to test different markers [in] different technologies to see if we can achieve the level of sensitivity and specificity that we feel is needed to bring a blood-based colon cancer screening test to market.

Two different programs.

So no, the -- any blood data will not be submitted as part of Cologuard 45 submission.

Your next question comes from Per Ostlund with Craig-Hallum Capital.

Two questions for me.

Kevin, first on Cologuard 2.0, I think you said before that you hadn't articulated any time lines on that.

But wanted to give you a chance to do it now, if there's anything that you can speak to, even very, very broadly.

And I guess, going back to the prepared remarks, the comment was made, if I heard it correctly, that it could drive the U.S. revenue growth up 5% to 10% on that next-generation test.

When you look at that, is that an assumption that there's going to be a higher ASP attached to that?

Is that an expectation maybe of greater adoption given the superior test?

What might we be thinking about there?

The -- we aren't providing a time line around Cologuard 2.0 other than we've said this will be measured in years, not quarters.

Think -- this is, at least, a 3-year program to bring a new test through, yet another likely potentially 10,000 patient clinical trial while we're doing product development.

We've identified markers that we're testing today.

And the purpose is to improve the sensitivity and specificity of Cologuard, number one; is to improve the FIT test that is embedded within Cologuard so that the stability of that sample extends beyond 3 days, which brings the cost of goods down and drives up total compliance because there is less wastage when you lose a sample because it came back 4 or 5 days later.

That's a lost opportunity to screen a patient.

Also it -- presently, with a 3-day return, there are added costs of overnight shipping with UPS.

And we also limit the days on which patients return their test because -- so there are a number of different benefits both in the overall compliance.

You're losing fewer patients unnecessarily to colonoscopy if you have improved specificity, and the FIT test benefit is real.

Jeff, I don't know if you want to try to quantify any of those.

Those factors that Kevin just ran through are how you can easily get to the 5% to 10% rate when you add up the -- let's say you improve the false-positive rate by 3 points, you get rid of a low single-digit percent of spoilage due to the FIT test stability, and then you increase the compliance rate, that's worth at least 5% to 10% of incremental revenue.

And then on top of that, you have the reduction in cost of goods.

So when you do that math, the net present value of this program is usually over $1 billion.

So we think it's a highly efficient use of capital to invest in Cologuard 2.0.

Fantastic.

That's a lot of color.

Then quickly, just turning to the -- to your points for the GI market.

Have you quantified what you're thinking about in terms of hiring the number of staff there?

And I guess, I'm curious, you talked about the 14,000 practitioners within that discipline and 8,000 kind of already ordering more or less unprompted.

You've talked about OB/GYN being almost a de facto primary care market in women.

Is there anything that you have to do differently with the GI market in terms of messaging in order to get over any sort of hurdle that Cologuard is somehow competitive with colonoscopy or something that, that practitioner already does?

Yes, so it's a great question.

So yes, we have calculated the number of reps we need to call on a prescriber population in GI, those that we think that are most receptive to the message.

It's in the neighborhood of 50 to 64 reps.

We're still kind of finalizing the number.

But it's -- that gives us adequate coverage into the population.

We know that we need to call on GIs to support their use.

Because as you pointed out, 8,000 have written.

So we know that they're supportive of the product, likely in a limited capacity.

But you don't build a relationship with the customers when and if you're not actively calling on them.

So our strategy is to call on them because we know that we can unlock kind of a relationship, build a relationship that -- and affects not only their prescribing, but their referral network of internal medicine physicians.

Clearly, we'll need a different message.

I do think you're right there, and we're working on that message with our partner to figure out the exact strategy from a messaging that will influence the GI.

But ultimately, we know that GIs and Exact Sciences have the same ambition, which is to get more people screened.

And we think they're going to be receptive to that message, and we know that people need choice.

And then when they're offered a choice, their compliance with testing goes up.

So that's the fundamental message that we're going to be carrying forward.

(Operator Instructions) Your next question comes from Mark Massaro with Canaccord Genuity.

Can you speak to how the Exact reps are working with the Pfizer reps, just the collaboration that might be going on there?

Can you also speak to any early progress with large health systems as it relates to Pfizer's impact?

And can you share any surprises or lessons you've learned in the first 4 months?

Yes, it's a great question.

So the first is how do the reps work together, it can be as tactical as physician-by-physician strategy, where we share physician overlap targets, the receptivity of a doctor to a message and how we sequence messages to influence the doctor's comfort with our product.

It could be how do we handle objections that a physician may have and how do we share training experiences or experiences in general to improve our efficiency as a selling organization.

So that's kind of in the weave, but it's certainly one way those reps work together.

In terms of health systems, as mentioned, Pfizer brings significant expertise here.

The sales cycle is long, but first thing we're doing is we're coordinating efforts.

Because our team also has spent a fair number of quarters, years focused on these systems.

What we know about them is the sales cycle is long.

But we also know there is embedded revenue already happening because we've seen growth.

We've seen care pathways in systems where Cologuard is part of that care pathway, and we're seeing utilization influenced by that care pathway.

So what Pfizer brings to the table is in understanding and relationships, and we're leveraging them to advance our business.

In terms of surprises and lessons, I think, frankly, what is most encouraging is that the mission of both companies, Pfizer and Exact, are very similar in terms of our core values, which then lends a effective partnership.

And there's not kind of one organization shouting over another about what we need to do.

There is a common voice, and that's to get more people screened and to grow our share from the 4% we have today to 40%.

Great.

And then maybe another question for Jeff.

Jeff, you talked about 1/4 of the R&D will go to Cologuard, and that the balance will go on new products.

To me, that would suggest that a lot of the spend is going to be ongoing throughout the year.

So over the last couple of years, you had OpEx scale higher after Q1.

So I'm just curious if we should think of the $185 million of operating expenses sort of as a baseline consistent with the last couple of years.

So the comments on OpEx or R&D specifically was 25% on Cologuard.

Let's call that Cologuard 1.0.

75% would be on the other programs like Cologuard 2.0, liver, Cologuard 45.

So the vast majority is on the new products, which we think carry a very attractive ROI, which is why we're making those investments.

As far as the step-up in OpEx more broadly, Q1, we believe will be the biggest step-up of the year for OpEx.

We've talked about some of the investments there in terms of the fee paid to Pfizer, which in the first quarter is a significant portion of that total uptick.

We also have our sales meeting.

We have the Cologuard [classic] event and some additional hiring we're doing.

So those are the main factors that we think Q1 will be, by far, the biggest step-up of the year.

There are no further questions at this time.

I'd turn the call back to presenters for any closing remarks.

Thank you for joining us today to review our performance during a landmark year and to preview our 2019 priorities.

Exact Sciences is positioned to become the leader in early cancer detection.

We're getting the life-changing capabilities of Cologuard in front of more health care providers and people than ever before and advancing our liquid biopsy capabilities to help detect other cancers earlier.

A special thanks to the entire team at Exact Sciences for an outstanding 2018 and for the energy and focus they're bringing to achieve our goals in 2019.

Thank you.

This concludes today's conference call.

You may now disconnect.