J.P. Fielder - EXACT Sciences Corp. Kevin T. Conroy - EXACT Sciences Corp. Jeff T. Elliott - EXACT Sciences Corp. Maneesh K. Arora - EXACT Sciences Corp..

Brian David Weinstein - William Blair & Co. LLC Catherine Ramsey Schulte - Robert W. Baird & Co., Inc. William Bishop Bonello - Craig-Hallum Capital Group LLC Brandon Couillard - Jefferies LLC Mark Anthony Massaro - Canaccord Genuity, Inc. Bruce D. Jackson - Lake Street Capital Markets LLC Isaac Ro - Goldman Sachs & Co.

Christopher William Lewis - ROTH Capital Partners LLC Raymond Myers - The Benchmark Co. LLC.

Good morning. My name is Lindsey and I will be your conference operator today. At this time, I would like to welcome everyone to the Exact Sciences Corporation Fourth Quarter 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Mr. J.P.

Fielder, Senior Director of Corporate Communications, you may begin your conference..

Thank you, Lindsey, and thank all of you for joining us for Exact Sciences' fourth quarter and full year 2016 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 morning detailing our fourth quarter financial results. If you've not seen the release, please go to our website, exactsciences.com. Following the Safe Harbor statement, Kevin will provide an overview of our 2016 performance.

Next, Jeff will provide a summary of our fourth quarter and full year 2016 financial results. And then Kevin will provide an update on our corporate priorities. During today's call, we'll make forward-looking statements based on current expectations. Our actual results may differ materially from such statements.

Descriptions of the risks and uncertainties associated with Exact Sciences are included in our SEC filings, which can be accessed through our website. It's now my pleasure to introduce our Chairman and CEO, Kevin Conroy..

Thank you for joining us this morning. We are very pleased with Exact Sciences' strong performance during 2016. Full-year revenue grew 152% to more than $99 million on Cologuard test volume of approximately 244,000 tests, an increase of 135% over 2015.

Cologuard represents a significant growth opportunity as roughly 80 million Americans are indicated for its use. Nearly 60,000 providers have ordered Cologuard since the test was launched, an increase of 123% during 2016. With more than 200,000 primary care physicians in the country, we have a long runway for growth.

The 2016 increase in revenue completed tests and ordering providers was outstanding. This is a compliment to the work of the entire Exact Sciences team. Last year's success helps position Cologuard to become the standard of care in colon cancer screening. Our performance also solidified the foundation for long-term sustainable growth.

We are excited by the opportunities of 2017. We will continue to invest in Cologuard's commercialization and the development of our pipeline, which holds great promise for helping to diagnose the deadliest cancers. Jeff will now provide our fourth quarter and full-year 2016 financial review. Jeff..

Thanks, Kevin, and good morning, everyone. I'll take you through our financials in more detail and then review our guidance. Fourth quarter results exceeded our expectations with revenue of $35.2 million, up 25% sequentially, and completed Cologuard test volume of 82,000, up 19% sequentially.

Relative to our fourth quarter revenue guidance, about 75% of the upside came from higher-than-expected ASP and about 25% came from higher-than-expected volumes. We saw strength throughout the quarter in reorder rates and new provider additions, which averaged nearly 750 a week.

The commercial team did an outstanding job executing during the slower holiday period. For the full year, revenue of $99.4 million grew 152% and came in at the high end of our original expectations. Cologuard volumes were 244,000 for the year and exceeded our original guidance of at least 240,000 tests.

Fourth quarter ASP increased to $432 per test, up 5% sequentially, primarily due to improved cash collections. ASP for the full year was $408. We continue to expect quarter-to-quarter variability in our ASP due to payer mix changes and normal timing variations in cash collections.

The scale and leverage potential of our manufacturing and lab operations were evident again this quarter. Fourth quarter costs of sales totaled $170 per completed test, improved by $8 sequentially. During the quarter, we experienced the favorable effects of careful cost control and increased test volume.

The fourth quarter improvement in ASP and cost per test lifted gross margin to 61%, up 400 basis points sequentially. For the full year, gross margin was 55%, up 1,700 basis points compared to 2015. We remain comfortable with our long-term margin trajectory.

We expect scale-up in investments to moderate the pace of gross margin expansion this year relative to last year. Fourth quarter operating expense totaled $59.1 million, higher sequentially by $4.9 million primarily due to the higher level of national TV advertising described on our third quarter call.

Given the success of that campaign, we plan to continue it throughout this year. Last year, total operating expense was to $223 million, up $49 million or 28% versus the prior year. That growth was significantly below our rate of growth in revenue and gross profit.

Fourth quarter cash utilization totaled $26.7 million favorable to our third quarter use of $30.5 million. This was the result of our revenue performance combined with ongoing cost containment and prudent investment in our business. Cash use for the year was $140 million. We ended the year with cash and cash equivalents of $311 million.

Turning to our guidance, we are optimistic about the future of Cologuard in our pipeline. This year we expect revenue of $170 million to $180 million and Cologuard volume of at least 415,000 completed tests. For the first quarter, we expect Cologuard volume of at least 88,000 completed tests.

We expect first quarter to represent a greater portion of the full-year volume amount than last year. Recall that first quarter of last year did not benefit from a national TV advertising campaign. I will now turn the call back over to Kevin..

Thank you, Jeff. Our business is strong and we are particularly happy about the impact that Cologuard is having on people across the country. We estimate that Cologuard detected cancer in approximately 1,500 people last year. Of those, an estimated 1,100 were early stage curable cancers.

Early detection is critical because 9 out of 10 people survive when diagnosed with colon cancer in the early stages while only 1 out of 10 people survive when diagnosed in the later stage. Cologuard is more than an advanced test.

It also includes a differentiated compliance service that aims to get people screened effectively with a high level of satisfaction. Cologuard's compliance service combines excellent customer care and state-of-the-art technology to encourage patients to complete the test. The compliance rate we are achieving is encouraging.

As a reference, colonoscopy compliance within a given year is less than 40% and compliance with FIT testing over three years is approximately 14%. Cologuard's compliance rate at the end of 2016 was 67%.

As the mix of Cologuard users continues to shift to commercially insured patients, we expect the compliance rate will trend toward the lower 60s during 2017 before increasing over time.

Last year, the compliance rate for Cologuard held stable at approximately 70% to 75% for those covered by Medicare and approximately 55% to 60% for the commercially insured. Medicare beneficiaries accounted for 69% of the completed Cologuard tests.

During 2016, commercial insurance coverage of Cologuard expanded by 62 million covered lives or 67% with 37 insurance companies announcing positive coverage decisions during the second half of last year and another 14 so far this year. Approximately 171 million people now participate in health plans that cover Cologuard.

72% of Cologuard's addressable market, average-risk people between the ages of 50 and 84, are now in plans that cover our test. We're very pleased that a growing number of patients have access to Cologuard. It typically takes 9 to 12 months to enter into a payer contract following a positive coverage decision.

Until then, the typical covering payer treats Exact Sciences' laboratories as an out-of-network service. As such, those payers often pay only a portion of the Exact Sciences' bill and we bill the balance to the patient. We are focused on the process of converting covering payers to contracted payers.

We expect commercial insurance coverage to continue to grow during 2017. This is driven by strong physician and patient demand, data demonstrating Cologuard's outstanding performance and Cologuard's inclusion in key guidelines and quality measures.

The strong data supporting Cologuard recently led the Blue Cross Blue Shield Association's Center for Clinical Effectiveness to release a positive review of Cologuard. The center's reviews are widely followed both within the Blue Cross Blue Shield Association and by other insurers.

The association is a national federation of 36 Blue Cross Blue Shield companies that insure one in three Americans. Insurers also follow the decisions of the leading clinical guidelines. And Cologuard is now part of the major screening guidelines for colon cancer. This includes the U.S.

Preventive Services Task Force, the American Cancer Society and the National Comprehensive Cancer Network. Cologuard's inclusion and quality measures also will promote long-term sustainable growth. Quality measures are the basis of financial incentives to both providers and payers. Last October, Cologuard was added to the HEDIS quality measures.

Earlier this month, CMS proposed including Cologuard in its Star Rating program. Inclusion in these ratings would allow Medicare Advantage plans and the providers who prescribe Cologuard to Medicare Advantage patients to increase the quality rating when patients complete our test.

Our 2016 results demonstrate that our sales and marketing strategies are working. In the middle of last year, we made an investment in expanding our internal and external sales forces. This exceptional team is delivering a powerful message to physicians about Cologuard and our comprehensive patient compliance service.

As our 2016 results demonstrate, the work of our team is driving an increased appetite with physicians for this innovative test and service model. Our goals for the national television campaign are to grow the number of physicians who order Cologuard for the first time and to increase the reorder rate of existing prescribers.

We achieved these goals and will continue the television campaign this year. We are building our pipeline on the same technology platform as Cologuard. As with Cologuard, these tests are being developed the Mayo Clinic. We are working to bring accurate cancer diagnostics to physicians and patients at a cost-effective price point.

We are focused on the top cancers in the United States by mortality including lung, liver and pancreatic cancers among others. We are pleased with the initial cancer detection data that we have seen from blood and other samples.

Exact Sciences will present data from a nearly 400-patient lung cancer study at the American Association of Cancer Research's annual meeting this April. We believe this study will provide a strong indication of the potential performance of this test.

We're excited for the opportunity to build on the Cologuard platform and to talk about those plans as the year progresses. So now we're happy to take any of your questions..

[Operating Instructions] And your first question comes from the line of Brian Weinstein with William Blair. Your line is now open..

Hey, guys. Good morning. Thanks for taking the question. So talking about and thinking about doc adds this year, it seems like you guys are pretty comfortable here that you can maintain the current pace.

But do you think that you need to do anything incremental in terms of sales and marketing like adding any kind of new reps or increasing the TV spend in any way to maintain this pace? And I know that we're only part of the way through kind of where you guys think you can be.

But how long do you think you can keep up this kind of like 600 to 800 docs per week add that you've talked about?.

So, Brian, this is Maneesh. I think it's really important to remember that of the 60,000 – now more than 60,000 physicians that have ordered to date, we're still pretty early in that runway. There are over 200,000 primary care physicians that are potential that someday we believe will be ordering Cologuard. So we think there's a really long runway.

The good news about our model is that we're able to see and monitor the pace of adoption and course-correct our investments. So I think it's too soon to tell and we'll look forward to sharing more information as the quarter and as the year unfolds about when and how we make modifications to the commercial spending mix.

I think Jeff just alluded to the fact that we know that the TV is working and we plan to continue that for the rest of the year. I think we will carefully monitor the level of investment in sales to make sure that we can continue to take advantage of this opportunity in front of us..

Okay. And then relative to sort of the implied ASP for the 2017 period, it looks like you guys are calling it to be roughly flat to the fourth quarter. I would think that that has some room to go higher.

Can you talk about how you thought about – what your kind of assumptions are kind of in how you get to that to the level that you guys have implicitly guided to? Thanks..

Sure. Thanks for the question, Brian. Look, we're pleased with the fourth quarter results. As you mentioned, the fourth quarter ASP came in at about $432. And we continue to think that over time, long term, there's a clear path for that ASP level to move higher.

But as we've said on prior calls, things like payer mix and timing of cash collections can lead to some quarter-to-quarter variability. So for the full year for 2017, what I'd really point you to is what's implied in guidance about $410 to $433.

And keep in mind that for the full year of 2016, as I had mentioned in my remarks, the full-year ASP for 2016 was $408. So long term, we see room for that to go higher quarter-to-quarter, you can have some variability.

The thing to keep in mind is as we continue to see a growing mix of commercial volumes in our business, that does put some temporary downward pressure on the ASP. Over time though, we do remain confident that the ASP will continue to move its way higher..

Okay, great, and last one for me. When you were talking about the long-term gross margin trajectory, you talked about some scale and expansion that's going on right now and that may have limited some of the upside. Can you be more specific about the scale and the expansion effort that you guys are spending on this year? Thanks..

Sure. Yeah, so fourth quarter, again, we felt very good about the level of cost per test, about $170. And as I look forward, I'd say for the first quarter, that's probably about the same range you should be expecting, around $170.

But given the strength of the business that we've all talked about here, given the size of this market, we think it's prudent just to continue to make investments to allow us to scale the business, so things like head count and the equipment needed to grow the business. So I look forward to sharing more of the details as the year progresses.

But for the first quarter, I think about $170 of cost per test is what to be thinking about..

All right. Thanks, guys..

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

Hey, guys, thanks for the questions. First from me is you've talked about the improvements you've seen in the reorder rate since turning on the TV ad campaign.

Are your assumptions for 2017 that that rate stays steady where it is now or do you assume that will continue to slowly tick up?.

So, Catherine, if you take a look at calendar 2016, we saw after we turned on the TV modest growth and good growth to the reorder rate, one of the things that made it so efficient. We'll look at it. But we don't have expectations, and we'll monitor it, that that's going to necessarily need to change.

We're pleased with where it was in 2016 and it doesn't need to increase to change and achieve what we're guiding for..

Okay, perfect. So any improvement there would be upside.

And then moving on to pipeline, as you get closer to potentially launching the long as an LDT, what kind of investment will it take from a lab perspective to be ready to start receiving and running those samples?.

So the first point, we have not made a decision to launch this test as a LDT. I think our inclination is to look at any future test in the same way that we looked at Cologuard, which is you need to go out and get the evidence.

And then if you're getting the real meaningful evidence, going to the FDA and potentially looking at parallel review is probably a leading option. But again, I would emphasize we still have a lot of work to do as we think through these things. And then in terms of the additional investments that need to be made, I'll turn that over to Jeff..

Sure. And thanks for the question, Catherine. So if you look at the first quarter, the total OpEx that we're thinking about for the first quarter would be about an $8 million to $10 million increase versus the fourth quarter level. Really that's driven by selling and marketing and R&D with G&A more or less flat.

Within the selling and marketing and R&D, the things we're looking at are some minor head count expansion, the national sales meeting – during the first quarter, that's about $2 million – some additional pipeline R&D both in terms of the samples and trials there. So I think from a quarterly standpoint, $8 million to $10 million.

And then over time, as we work to refine the priority and the pathway, we can share more details on the spending required over time..

All right. Thanks, guys..

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

Hey, just a follow-up to a couple of those questions. Just in general, the cash burn has been much lower than we have expected. You talked about some of the near-term puts in terms of where you'd look for cost per test in Q1 and the comment you just made on CapEx spending.

But can you give us a sense more broadly about some of the other near-term and midterm puts and takes on the burn?.

Yes, thanks for the question, Bill. I think we've walked through a lot of the components to get you to a Q1 cash use number. So for example, we gave you the volume number of 88,000 or at least 88,000. We gave you an ASP range for the year, which I think you should think about something within that range.

Cost per test, around $170, so consistent with the fourth quarter number. OpEx of $8 million to $10 million incremental versus the fourth quarter. So I think that that goes a long ways towards getting you to the cash burn.

From a CapEx standpoint, I would expect that number to jump up a few million versus the fourth quarter primarily for things like software development and facilities..

Right. So I was trying to say that we got the short term.

But sort of thinking as we progress through the year, how we should be thinking about things?.

Yeah. I think as Maneesh referred to it, yeah, we'll continue to monitor the commercial organization and kind of things like the reorder rates and the number of providers added and make refinements as needed to the spend.

But as of now, I think I gave you the first quarter numbers and we look forward to sharing more about the second, third and fourth quarter as the year unfolds..

Okay. And then just curious on the reorder rate. You said you don't necessarily need to see an improvement in the reorder rate to get to your numbers for the year.

What kind of opportunity is there in terms of the reorder rate? Do you have any sense of sort of what's being ordered versus the potential that you think your average doc could be ordering?.

So, Bill, I think going back to the earlier answer on the size of the market, there are 80 million Americans over the age of 50. That's one of the things that we find so attractive and as exciting about the opportunity. I would say that we are in the very early innings of that.

But I would also point out the fact that it's really, really hard to change the practice of healthcare. It's really hard to change behavior. We believe that we are making good progress. We think that the market opportunity is really, really large.

And we're going to continue to monitor it to make sure we stay on track and spend what we need to but prudently and not step over our skis. But we feel pretty good about the trajectory we're on and the opportunity is significant..

Okay, and then just one last one as a follow-up to that.

What are you hearing about the way the test is being ordered as of today? Or do you think docs are mainly ordering it for patients who they know have refused or not complied with colonoscopy? Or are you seeing it presented as more of a sort of frontline screening option at this point?.

With a mix in the 60,000 physicians who have ordered Cologuard, you see it being used across the spectrum in terms of people in a proportionate representation of how the population today is screened. So you see about 50% of people screened regularly with colonoscopy, about 10% with the fecal hemoglobin test and about 40% not screened.

And that's almost an exact representation of how Cologuard is being used among patients. I think it's fair to say though that over time, there is an opportunity – and this is our goal – over time to make Cologuard the screening test not a screening test. And we feel strongly that it's the right test for the broad population.

And you could see this from the work the USPSTF did. Cologuard was seen as the test with the highest benefit to adverse event rate of any of the other screening modalities. And so that's the opportunity over the long haul.

Clearly as Maneesh said, we are in the early innings of this and it is incumbent upon us as our commercial organization to make Cologuard the first test that physicians think about. We're not close to that yet. We have a long way to go and we're optimistic about our likelihood of success..

Great, thanks..

Thanks, Bill..

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

Thanks. Good morning. One for Kevin, just wanted to get a sense of whether or not another co-promote deal is necessarily a priority for you in 2017 and whether you're perhaps any closer to identifying something to perhaps add to the bag or another partnership on that front today than perhaps where you were coming out of the end of last year..

We were fairly close to a co-promote deal at the end of last year and ultimately decided not to go down that path. And so our plan for this year is to make additional investments in our own infrastructure. And we continue to look at additional products to add to the bag over time.

I don't think anything is imminent in terms of adding something to the bag. But we continue to look at opportunities and will be prudent in what we eventually choose to put into the bag..

Thanks, and then one for Maneesh. You've talked about wanting to focus on improving the customer experience this year.

What are the gating factors to enabling you to shift more of the ordering volume over – I guess away from fax and more toward electronic?.

Brandon, that's going to be a really important focus for us. And it's one of the key headwinds that we have seen is physicians would rather order electronically. And so getting systems first off to say, yes, we want to do this and offer it. And that's starting to happen. But then getting in the queue of their respective IT systems is – it's in process.

It's happening. But we understand that it's a long game and it takes time to do that. We expect over the course of the year to continue to make progress. It's one of our key priorities for our entire organization to get more orders electronically.

And so that's not just investments on our side, but it's partnering with health systems in their IT investments. And that's going to be the key focus for us..

Super, thanks..

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

Hey, guys. Thanks for the question and congrats on an excellent quarter. The first question is for Kevin. And, Kevin, Grail is looking to raise about $1 billion in their Series B round. And so obviously, that's a lot of money, essentially unprecedented in this industry.

Can you speak to how some of the other players that are pursuing a liquid biopsy may or may not influence your decision as it relates to anywhere from how you bring a test to the market to the types of investments that you eventually will look to spend to pursue these?.

Yeah. Thanks, Mark. Where Exact Sciences is focused in terms of our pipeline is addressing targeted needs where we recognize that current clinical practice is significantly deficient in the ability to get an answer for a physician treating a patient.

Then these tests will be earlier in the cancer treatment paradigm whether it's screening and aid in the early detection or recurrence.

That's where we are focused and we're coming at this with our technology which can really change the game in terms of where these diagnostic tests are priced and thus access, in our view, larger markets, helping to effect positive outcomes in more patients.

And we talked about this with a lung nodule test where we think there's an opportunity to answer a question that will be raised 1.5 million to 3 million times a year in patients who present with a lung nodule.

But you could also take this out to recurrence, whether it's potentially for breast cancer recurrence or correctly diagnosing pancreatic cancer from pancreatic cyst fluid. This same technology could potentially be used in screening applications like even breast cancer screening or prostate cancer screening and lung cancer screening.

Those are larger investments where you have to look at them in a really prudent way. We are very hopeful that Grail is successful in what they are pursuing, which is a pan-cancer screening test. Their approach seems to be really sound and it's a long-term investment. And we're frankly glad that that investment is being made in diagnostics.

It reflects the truth, which is if you can detect early, the odds of treating cancer are significantly higher than the current paradigm where most cancers are still detected late stage. We think that long term, if Grail is successful at that, there's going to be a huge opportunity for us.

And I think, and this is important, that the technologies that we bring to bear, our collaboration with Mayo Clinic, the strong team that we have that knows how to bring tests to market at a very attractive price point. We have the ability to be the leader in cancer diagnostics a decade from now and that's our goal..

Excellent. And as it relates to the lung data coming out in, I believe it's early April, can you just clarify the sample type on lung? And I think my understanding is about 370 samples.

Related to that, how many samples do you think you would need to – in order to rollout a lung test, how many samples do you think you'd need to get done?.

Okay. So the sample is blood. So patients who present with – this particular study is blood draws from patients with cancer and without cancer. The study that would establish efficacy for a lung nodule test should need to do those blood draws from patients who present with a nodule and then follow that patient along.

Some percentage of them will have cancer and some percentage of them ultimately will be diagnosed without cancer. That is probably a two-year study, inclusive of probably a one-year follow-on period. And that is a different study than the data that we are presenting, which is proof of concept, case-control study.

Ultimately, we expect to do a prospective study like we did with Cologuard. The total numbers there are probably 1,000 to 2,000 patients. We haven't calculated what the n will be yet. But that is something that we'll talk about later in the year..

Terrific. And one last one if I can. Can you guys just speak a little bit about the holiday impact you may see in Q1 of this year? I know that most of Q1 is already through. Last year, you guys ran into some challenges with ordering slowing down in Q4 and then my understanding was some slowdown in collections at the end of Q4 that rolled into Q1.

So can you just speak to the dynamics and how your guidance calibrates that risk?.

So Mark, it's Maneesh. I think that we provided the guidance and I think that's what we're prepared to talk about at this point..

Okay, thank you..

We'll have a chance to talk about Q1 on the next call. And I think there is a lot to digest from Q4 and our guidance. Thanks, Mark..

Thank you..

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

Hi. Thank you for taking the question.

Getting back to the Medicare percentage of the completed tests being around 69%, would you be able to give us just a little bit of trending information on that? So has it been at that level for the past couple of quarters and where do you anticipate it might go during 2017?.

Sure. So we commented on the fact that we have seen an increase in the percent of commercial orders, commercial completed tests. And so we anticipate – I think in the past what we've said is about 1% a quarter shifting more towards commercial versus Medicare. So it's really difficult to say where that's going to end up, Bruce.

But I think that it's safe to say that we have, as we have seen additional commercial coverage, we see that percentage potentially increase. So not a wholesale shift, but a steady shift from Medicare to commercial. What we said is about 1% a quarter. We may see it a little bit higher than that..

Okay, that's helpful. And then with the operating expenses.

If we have the national sales meeting in Q1, could we see OpEx just tick down slightly Q2-over-Q1?.

Yes, thanks for the question, Bruce. So at this point, we're not prepared to talk about what could happen in 2Q and beyond. There's always puts and takes quarter to quarter. But the guidance we gave is for an $8 million to $10 million step-up in Q1. And then in April when we report Q1, we can talk about Q2 at that point..

Okay. Thank you very much..

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

Good morning, guys. Thank you. Jeff, I had a question for you around your guidance for cost per test. You guys are guiding to, I think, over 70% growth this year in volume. But your cost per test, looks like it's going to be down maybe 11%, give or take.

Can you help us think through why you wouldn't see greater fixed cost leverage just given those trends? To just put it another way, it just seems like there's a lot of opportunity to get better fixed cost leverage. I'm wondering what some of your initiatives are to optimize that..

Sure. Thanks for the question, Isaac. So we were really pleased with the cost per test reduction that we saw throughout 2016. And long term, we do continue to think we can drive that number down to about $125 a test. So we feel very good about the trajectory. What I guided to was $170 for the first quarter. I didn't give a comment for the entire year.

And the reason why we think first quarter could be somewhat consistent with the fourth quarter is really because of the growth that we're guiding to, the growth in volumes and that we need to make sure we're investing to support that growth. Longer term, we've talked about other things like finding ways to reduce royalties.

But these are things that could take time. So near term, it's investment to support the growth, which is why you could see less of an increase in the gross margin this year than we saw in 2016..

Okay, thanks a lot. Sorry for my mistake there. So just to clarify, it sounds like getting to that $125 number over time will be maybe more – a bit of a step function at some undetermined point as opposed to a gradual walk from the $170 range this quarter.

Is that right?.

I would think of it more of a gradual with some quarter-to-quarter variability over time as we make investments and as volumes fluctuate from quarter to quarter. But yeah, there is smaller step function things. But for the most part, think of this as more of a gradual trend to that $125..

Okay, got it. Thank you, guys..

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

Hey, guys. Good morning. Thanks for taking the questions. Kevin, you discussed the 9 to 12 month process from the time a positive coverage decision is made to entering into an actual contract. I was hoping you could just elaborate on what that process entails.

And then with the large amount of new positive coverage decisions that you've been able to secure over the past two to three quarters, how should we expect that process to impact your ASPs over the course of this year?.

Given that most of those coverage decisions occurred later in 2016, it's going to be some time before there is really an impact. So I wouldn't think there is a significant impact in 2017 based on all of the new coverage decisions. But the process is really a discussion with those payers around the value of Cologuard, our pricing for Cologuard.

And I guess I would ask Maneesh to provide a little bit more color on the process itself..

Yeah. So it does take time and the key reason is we have insisted on being really disciplined as to the value of Cologuard. And I think that as in any negotiation, there is a back and forth about the value of that versus what folks are paying.

And I think it's no secret in diagnostics, traditionally pre-PAMA, there was an expectation by most major payers to pay some discount to the Medicare rate. And in the world of PAMA, as you know, the world has changed. And we have been really disciplined in making sure that the biggest payer gets the best rate.

And the biggest payer in our situation is Medicare. And we have not been in a position or have no desire to change that. And so we continue to be disciplined. And I think that that process of negotiation, those conversations take time, Chris. And so we're not changing our philosophy on it.

We believe we're going to continue to make progress based on the fact that, from a payer's perspective, if you adopt Cologuard, we believe you will save money. This costs a lot less than what you're spending today for colonoscopy and a whole lot less than the cost of a colon cancer.

So those conversations and those models take time to walk through with a payer. We're making good progress..

Okay, thanks.

And can you update us on the size of the sales force now and any plans to expand that this year?.

So we've got a field force of approximately 200, an inside force of about 50. And one of the comments that we made earlier during the call was we'll continue to monitor the rate of physician adds and the reorder rate and let that dictate what we do knowing that we will be on TV for the rest of the year. And we'll be prudent.

We don't want to make sharp right or left-hand turns. But we will be prudent in making those investments based on the pace of the business..

Okay, thank you..

And our next question comes from the line of Raymond Myers with Benchmark. Your line is now open..

Yes, thank you. Kevin, first, a clarification on the compliance rate.

Was the 67% for the fourth quarter or was it an average for the entire year?.

The way that is calculated, and I'll let Jeff correct me if I'm wrong, but it's a lagging indicator starting three months prior to that time period looking back for 12 months from that point in time..

Yeah. So just to clarify, it's a 60-day lag. So....

60 days..

...12 month. We always report it as a 12-month rolling compliance rate, lag 60 days..

So the -.

So the answer to your question was it was a full-year number..

Okay. So the 67% that you reported here in this latest period is basically flat with the 67% you reported with the Q3 results.

Is that correct?.

That's correct..

Okay, very good. I just wanted to clarify that. And then kind of a broader question. You've got a proposal now to be included in the Medicare Star Ratings and you are included in the important HEDIS quality scores.

Has that affected the physician ordering patterns or the sort of the type of discussions that you're having with payers?.

So I'll answer that in two parts. I think it's really early days. On the physician side, it has opened doors to conversations. I would not characterize it as materially impacting our results to date. We believe that it is one of the significant headwinds that we had in the past that is taken away.

So I think it is prompting conversations and will help in the future. With payers, yes, I think that that also – not just the commercial patients, but specifically, the addition in the last month in the Star Ratings, that has a significant impact in how payers, who take Medicare Advantage plans, think.

And that has been again not a positive to the business to date but has been a door-opener. And we anticipate it's one of those headwinds that has gone away. It's still on us to execute.

And I want to reach out to the managed care team, our sales team and our entire commercial team that is executing unbelievably to have these conversations and look forward to that this year..

Okay. Great, thanks. And coming to the last question to wrap up.

Has there been a change in the payers' discussions with you related possibly to uncertainty in the Affordable Care Act with the change in administration, et cetera?.

No, those conversations haven't changed. I don't think that there are many people who believe that the preventive services provision will go away if indeed the Affordable Care Act is repealed. And let me just refer back to the earlier conversation. There are headwinds in this business.

And there are things that every morning when we wake up we need to – that we're focused on addressing, that will affect this year and years out unless we change including payer coverage and contracting. That's a really important thing for us to do. And we don't know how – we are firm on price. And we don't know how that's going to play out over time.

But we believe that investors invested significantly and patiently and deserve the benefit of their investment.

This ease of ordering is something that we wake up every morning trying to get better at making it easier for physicians and patients to interact with us and particularly for physicians and their office staff to place orders or their nurses and physician assistants.

And there are always going to be challenges that we need to be cognizant of as we look forward. We see strength in the business. But it is just going to take time to address some of the longer-term opportunities for improvement..

Okay. Well, thank you, gentlemen. Congratulations..

Thank you..

Well, thanks everybody for joining the call this morning. Last year's strong performance helps position Cologuard to become the standard of care for colon cancer screening. It also solidified the company's foundation for long-term sustainable growth. We are excited by the opportunities that this year presents.

We are continuing to invest in Cologuard's commercialization and the development of our pipeline which holds great promise for helping to diagnose the deadliest cancers. Thank you..

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