Megan Reiss - IR Analyst Kevin Conroy - Chairman and CEO Maneesh Arora - COO Jeff Elliott - CFO.

Brian Weinstein - William Blair Doug Schenkel - Cowen Anne Edelstein - Bank of America Merrill Lynch Puneet Souda - Leerink Partners Catherine Schulte - Robert Baird Brandon Couillard - Jefferies Mark Massaro - Canaccord Genuity Isaac Ro - Goldman Sachs Raymond Myers - Benchmark Kevin Ellich - Craig-Hallum Bruce Jackson - Lake Street Capital Chris Lewis - Roth Capital Partners.

Good afternoon, my name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Exact Sciences Corporation's Second Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

[Operator Instructions] Thank you. Megan Reiss, Investor Relations Analyst, you may begin your conference..

Thank you, Christine. And thank all of you for joining us for Exact Sciences second quarter 2017 conference call. On the call today are Kevin Conroy, the Company's Chairman and CEO, Maneesh Arora, our Chief Operating Officer, and Jeff Elliott, our Chief Financial Officer.

Exact Sciences issued a news release earlier this afternoon detailing our second quarter financial results. If you have not seen it, please go to our website at exactsciences.com. We intend to release results and host our quarterly conference calls after the market closing going forward.

Following the Safe Harbor statement, Kevin will provide an overview of the company's second quarter performance. Next, Jeff will provide a summary of our second quarter 2017 financial results, then Kevin will provide an update on our corporate priorities. During today's call, we will make forward-looking statements based on current expectations.

Our actual results may differ materially from such statements. Discussions of the risks and uncertainties associated with Exact Sciences are included in our SEC filings which can be accessed through our website. It is now my pleasure to introduce the Company's Chairman and CEO, Kevin Conroy..

Thank you for joining us this afternoon. Exact Sciences delivered another strong quarter with 57.6 million in revenue, 135,000 completed Cologuard tests and 11,000 new ordering physicians and other health care providers.

There are three key takeaways from today's discussion, Cologuard strong momentum continues, Cologuard is 2% penetrated into a large 80 million person market. We're making investments into the business to ensure long-term sustainable growth. The entire Exact Sciences team has been working diligently to enable growth.

In the second quarter, the reimbursement team secured key coverage in in-network contracts for Cologuard. Our sales and marketing teams have continued to drive increasing order volumes into lab, manufacturing and customer care teams are scaling efficiently to handle volume growth.

We recognized that reaching our goal of eradicating colorectal cancer will take time and require further investments, hard work and intense focus from the entire team. Our CFO Jeff Elliott will now review our second quarter financial results..

Thank you Kevin and good afternoon everyone. Second quarter results exceeded expectations with revenue of 57.6 million, up 19% sequentially and completed Cologuard test volumes of 135,000 tests, up 35% sequentially. Cologuard compliance rate at the end of the second quarter was 66%.

This slight decline compared to the last few quarters is consistent with our expectations and primarily due to an increased mix of commercial volumes. Second quarter average recognize revenue per test was $428.

After adjusting for the one-time impact of the first quarter accrual shift, the $14 sequential decline was due to payer mix and normal volatility in patient cash collections. Second quarter cost of sales totaled $133 per completed test, down from a $170 in the first quarter and significantly better than we expected.

During the quarter, we saw volume leverage and efficiencies in our lab and manufacturing operations and benefited from the previously disclosed royalty buyout agreement. We believe the underlying improvement in cost of sales per test is sustainable over the long term.

However, we expect scale-up investment in infrastructure and personnel will lead to a temporary increase in cost per test starting in the third quarter. In the second quarter, decreased cost per test lifted gross margin to 69%, up 400 basis points sequentially.

Based on these strong results and our optimism for the future, we're raising our long-term gross margin target by 5 points to at least 75%. Second quarter operating expense, totaled $71.1 million, an increase of $4.2 million, slightly below our expectations.

Second quarter cash utilization totaled $43.9 million, including $15 million paid to MDxHealth as previously announced. Excluding the MDx payment, cash used improved by about $7.5 million compared to the first quarter, driven by better than expected operating results.

We ended the quarter with cash and marketable securities of $484 million which includes net proceeds from our June equity offering. Turning to our guidance, as Kevin mentioned, we had a strong second quarter and we are pleased to raise our full-year revenue guidance.

We now expect revenue of $230 million to $240 million and Cologuard volume of at least 550,000 completed tests. For the third quarter, we expect Cologuard volume of at least 150,000 completed test. I will now turn the call back to Kevin..

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

We believe Cologuard will continue to grow its share of this market over a very long period as we steadily increase the number of ordering primary care physicians and as those physicians order Cologuard more frequent. New data from the quarter show that 51% of Cologuard users reported never before being screened for colorectal cancer.

Our last published survey results from 2015 showed 42% of Cologuard users having never been previously screened. These more recent data demonstrate that we are converting unscreened people at a faster pace.

We know that many of these Cologuard users are in their early 50s and we have an opportunity to keep them as Cologuard users every three years for three decades. 81,000 health care providers have ordered Cologuard, with more than 800 per week placing their initial order during the second quarter.

The national television campaign has been remarkably effective in creating patient demand and driving new physician adoption at a consistent pace. Approximately 50,000 primary care physicians of the more than 200,000 we are targeting in the United States have ordered a Cologuard test.

There are still many physicians and people ages 50 to 85 for us to reach. We believe that Cologuard’s estimated 86% insurance coverage will help increase adoption and reorder rates among physicians. The number of total lives covered by insurers for Cologuard increased to 235 million as of today from 197 million as of our first quarter earnings call.

Our market access team has been focusing on contracting to allow patients access to Cologuardas an in network benefit. We are pleased with the new commercial contracts in place with two of the nation's top health insurers, United Health and Aetna.

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

Looking to Cologuard’s future, we are investing in our people, in our physical, in IT infrastructure to support our continuing growth. We are working to expand our current lab and the manufacturing capacity to at least 2 million tests per year. We plan to break ground on a second new lab facility later this year.

We are also working with our supply chain partners to ensure their ability to efficiently grow with us. We will establish additional space for our customer care team and other functions in addition to the investments being made in both the field and inside sales forces. Our IT and data infrastructure are the backbone of our service capabilities.

This infrastructure can be used to enhance compliance and adherence during an individual’s lifetime which can lead to improved quality scores, outcomes and reporting for physicians and payers. We are allocating additional resources to further develop and improve these assets. Let's now turn to our promising pipeline.

Globally, cancer affects more than 40 million people every year, killing nearly 9 million people. More than 10% of cancer diagnosis are in the United States. Cancer incidents will increase by 70% over the next two decades, most cancers are diagnosed in late stages resulting in lower chances for long-term survival.

Exact Sciences’ vision is to help win the war against cancer through early detection. This vision can be achieved through the unique attributes that position Exact Sciences to change the paradigm in cancer detection.

We are one of the few companies in cancer diagnostics to possess the human and financial resources to make a major impact, while creating significant long-term shareholder value. Few companies collaborate with a more elite clinical partner like Mayo Clinic.

Together we have spent more than eight years methodically discovering and seeking IP protection on highly accurate cancer biomarkers. Exact Sciences uses a differentiated low cost highly accurate proprietary platform.

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

The next step toward achieving our vision is to advance a test that addresses the pressing need and opportunity to differentiate between benign lung nodules and lung cancer. We believe more than 1.5 million lung nodules are discovered annually in the United States, typically incidentally on a CT scan.

The current diagnostic options are invasive, expensive and sometimes harmful. And the potential opportunity for a blood based biomarker test is significant. We look forward to sharing an update related to our lung nodule test in the coming quarters. We're now happy to take your questions..

[Operator Instructions] Your first question comes from the line of Brian Weinstein from William Blair. Your line is open..

Just starting out, you talked about some of the contracting in the quarter, can you just say if you're comfortable saying that you have not signed commercial contracts below the Medicare rate..

So Brian, this is Maneesh and that's what we've stated and we remain committed to not signing any contracts that are going to ever impact the Medicare rate in the future..

And then secondly talking about the ASPs, the guidance at least appears to call for flat to maybe even down a touch as we think about ASPs in the back half of the year.

Is this conservatism there or other factors we should be considering regarding pricing and revenue recognition? I would have thought that you know with the contracts being signed that potentially you'd be able to increase the amount that you're occurring for some of these newer contracts..

So just a quick note on the term ASP. We are going to use the word in average revenue per test going forward rather than average selling price or ASP. Really ASP is a misnomer for us as we aren't selling at $428 a test, we’re really selling at a price much above that.

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

And as we said previously, the results in any given quarter can be affected by payer mix and the timing of cash collections and that’s what happened in the second quarter and the guidance does reflect some continued impact from mix shift. But long term we do continue to see a path to at least $500 a test.

But one thing I would point you to in the Q and into our Ks is that since all Cologuard payers are now on an accrual basis, we do expect our average revenue per test to approximate our time lagged average collection and this time lagged average collection is the number we've been including in our SEC filings.

We defined that figure as the average amount of cash received per test completed on a rolling 12-month basis and lagged by six months to allow us time to collect. Now if you look at that time lag basis, it doesn’t move kind of timing differences in quarter to quarter fluctuations.

Our average collections on a time lag basis were $423 at the end of the second quarter that is up $5 from the end of the first quarter. That number has shown nice improvement over the past year. During the second quarter, we saw improvement from traditional Medicare, Medicare Advantage and commercials.

And as I mentioned long term, we do see a path of $500. In the near term, there can be things like fluctuations in cash collections and payer mix and that's what's reflected in the annual guidance..

Okay that was very thorough and very helpful thank you for that. My last question is just relative to kind of where we started the year and where the guidance is looking at for the full-year on a test volume basis.

Can you just talk about where the upside specifically is coming, obviously the number of physicians that are signing up continues to be very strong, but are you seeing just greater utilization from docs who had been ordering regularly, is there anything, any kind of a bulk order situation that's going on in the first half of the year, just anything else that we should be aware of or just thoughts about why you guys are doing as well as you are at this point, what are the factors?.

Well Brian, it’s Maneesh. And what you see is the really consistent additions week in week out of the new providers. So what we're seeing is just the commercial execution of the integrated efforts of the sales in the marketing really working to drive an increase in utilization of the existing base.

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

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

My first question is on guidance, it seems like your guidance for Q3 volumes assumes that there's no material change in Q3 orders per practice or the rate of physician additions at least relative to what you did in Q2. And I say this because you can get to those volume numbers with those assumptions.

So is that right and if so, is this just a function of conservatism along the lines of what Brian just asked or are there other factors that we should be considering as we update our models?.

Yes, thanks Doug. First of all we're very proud of the results the team just put up. But you shouldn't expect that same increase that 35,000 increase we saw in the second quarter, you shouldn’t expect that same sequential increase going forward really for a few reasons. Second quarter is seasonally our strongest quarter.

Third quarter has the negative impact of Memorial Day, remember there's about a 35-day lag between orders and completed tests. And Memorial Day actually affects the third quarter, also the Fourth of July in summer vacations all affect the third quarter.

And lastly, as we previously talked about we are making investments in our sales and marketing teams. And that should help us more as we get into 2018. But as you change around sales territories and add - bring new people on board that potentially could cause near-term disruption.

Again, this is the right thing to do for the long term, but those are things we considered as we prepared guidance for the third quarter..

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

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

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

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

So Doug, its Maneesh. So the biggest metric we look at is the one you alluded to and that is how many physicians of the new physicians that come in have been called on by a sales person. And of the 800, we are still seeing a very consistent rate of about 80% being ordering without ever having been called on by a salesperson.

That's really, really important because we see that rate of new ads being consistent and we see the underlying order rate go up. So we know that the television is affecting both the acquisition of new docs, but it's really efficient across now the over 80,000 physicians that have been ordering.

So, with the spend being under a million about $900,000 a week, we expect to continue to do that. It is one of the most efficient things we do and we'll continue to monitor it regularly so that we know we're making prudent investments. .

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

But keeping in mind that you do have some openings and you've exceeded most Street expectations for volumes over the last several quarters, could you just provide an update on your current annual capacity for test in advance of an expansion?.

Sure. So, we want to always make sure that our ability to fulfill an order will never impact what we do. So the things that you see in terms of job postings and our expansion to a third shift, we just think it's prudent operating management to get in front of the volumes that we see in the trajectory that we see.

So we do have ample capacity to be able to run a million tests a year. We're expanding that capacity such that in the next six months we will be at 1.5.

And then you'll notice in the Q that was filed that we are – excuse me, in the K that was filed we were going to be in the ground as Kevin said on the call, with a new lab facility, so we're staying six to 12 months ahead of any potential volumes taking into consideration anything that could come at us..

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

My first question I guess on the sequential growth in Q3 and Q4. I'm just wondering why you expect volume growth to be accelerate in Q4 versus Q3 given that that's typically your best quarter. And that's the implied Q4 volume based on the updated item..

Really the implied shows basically consistent number of completed tests to the balance of the year. As I mentioned earlier there's different puts and takes during the third quarter in terms of holidays and summer vacations. But overall the guidance is implying consistency and completed tests over the next couple of quarters..

And then I guess maybe one on the COG side, I noticed that your personnel expenses fell something like 30% quarter-over-quarter even as test orders were up 35% quarter-over-quarter. So can you just - I understand that you’ going to be investing some more be it at the back half of the year in personnel. But why did those fall quarter-over-quarter..

As I said in the prepared remarks, we saw a very nice volume leverage and efficiency gains in the quarter. When I look ahead to the third quarter, we expect cost per test to increase to the mid 140s range as we invest in additional personnel and infrastructure to scale the business.

What you’ll see from time to time is we’ll add additional automation that will help the existing personnel get more efficient, but there's not a big shift in the base of personnel that is already there. Let me take that opportunity to kind of walk through some other P&L metrics for the third quarter.

When you look at operating expense for the third quarter, we expect a $10 million to $12 million total increase across the three main areas. The things we're looking for headcount additions inside of marketing, primary there we've talked before about the added sales reps. In R&D we’re making some pipeline related investments.

And then within G&A we are investing in IT and customer care team. When I think about CapEx, we do expect a total CapEx in the third quarter of $15 million to $20 million. We do expect some larger one-time items as we scale up the business.

The main areas of focus for third quarter CapEx are increasing the lab and manufacturing capacity, some additional office space that we alluded to. Our supply chain, really the goal here is to make sure we have a rock solid supply chain in our IT infrastructure..

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

So maybe just help me understand, I mean, I think the questions around the third and fourth quarter and the seasonality and the difference are already been asked. So maybe let me ask around, you have 81,000 physicians right now, there’s still a limited penetration.

Is there any sense of a threshold at which you get and penetration starts to move away from sort of a linear grow to maybe an accelerated growth? Help us understand that and are you sort of accounting for that. It seems like you're already building the capabilities for facilities looking ahead to that..

Sure. So, it's really, really difficult to forecast a dramatic change. What we've seen is really consistent growth both of new physician additions as well as a pretty nice increase in the reorder rate. But the real thing I think to focus on is the fact that we're still 2% penetrated into an enormous market.

So rather than think about a hockey stick, it really is important to think of a long extended year's period of steady and consistent growth that is going to be strong. We want to make sure we're ready for the upticks in demand, which is why we are making the investments that we are to stay ahead of it.

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

And just briefly, as the patients that are coming back after the two-year repeat, I suppose you are accounting for those two, is there a different strategy for reaching out or reminders for those patients or is that also accounted in your full-year guidance with the current test?.

Well, two different questions. I would say that it is accounted for in the guidance and we act -- we do have active plans to outreach to everyone that has taken Cologuard both to the patient and to the ordering physician.

So -- and it's very similar to our compliance program where we've built a system to outreach systematically to the patient, we are doing the same thing at the three year interval, first, with a mailer, with a postcard outreach and then a call outreach.

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

Okay. Thanks for that. And then just one last one, any change in the assumptions for compliance rate over the next few months, now that you have adoption at maybe a faster clip and United coverage also that's in place and getting activated on July 1st. So help me just understand any change in view on the compliance rate here..

Yes. Thanks for the question. So we've been saying for the last couple of quarters, don't be surprised to see a modest decline in the compliance and really this is because of mix shift, we're seeing faster growth in the commercial side of our business. The commercial side, at least historically, has carried a lower compliance rate.

We've reported before something in the upper-50s range for commercial compliance compared to the low-70s on the Medicare side. So that mix shift has been bringing the overall rates down, but long term, we're still very optimistic on the overall compliance rate ticking back up. Longer term, we do see a pathway to get that back above 70%..

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

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

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

Sure, Catherine. So I think one of the things that Jeff alluded to was that we're in the process of making those ads and we expect them to happen here in the third quarter. And just historically, what we've seen is it takes some time to get new ads productive. It takes usually, we would say, about six months to get them fully up and running.

So we expect these additions, as Jeff said in his prepared remarks, to be really helpful for us in calendar ’18, but the vast majority of the additions will be made in Q3..

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

So one of the things that we've always wanted to be really careful about is program orders, partially because our goal is to really change behavior and make Cologuard the standard of care as an A-rated screening test. So the emphasis for us has not been on program orders and I think that was a question that was asked earlier.

Our results do not reflect any bulk or program orders. This reflects ongoing strength in the business on a day-to-day basis. But the first part of your question is an important one and we have seen increased interest from systems and have invested in that as overtime, we are now included in the second quarter in the stars and the quality metrics.

So we are having increased dialog at systems, those lead times, those sales cycles are longer. So we don't expect them to drive material results this year, but are going to be critical for the long term trajectory in 2018, 19 and beyond. But we have invested or investing in system sales staff and we have seen increased interest from systems..

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

Quick one for Maneesh.

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

Yes. So when we started off, it was 95% fax and we've been chipping away at it. The team has done a really, really nice job. So today, we're just about a quarter of orders that are electronic and so it's been modest moves every quarter.

We continue to invest in it and we expect it to continue to tick up a little bit at a time, but it's right now about a quarter Brandon..

And then two housekeeping ones for you Jeff.

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

Yes. Just on MDx, we can’t get into the details of what the effect was. I would say the primary drivers of the cost per test improvement were operating leverage and the efficiency gains in our lab and manufacturing operations. We previously had broken out the size of the royalty in our filings, but we can't get into what the impact was in the quarter.

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

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

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

Going back in time, I think you had 4000 tests completed in Q4 of 2014. So it seems like you have almost like a pilot opportunity in Q4 this year for the initial reorders. You cited the 100,000 that ordered in 2015 that are eligible to reorder in 2018.

Can you talk about what your internal forecast is on the percentage of those 100,000 you think you can convert and do you think that the conversion will be potentially more successful from an outreach to the patient or to the ordering physician?.

So, I think it's way too early to project that. I would say, we obviously have our own expectations and it's incorporated into our guidance. But it's too early to comment on that. I think we'll know a whole lot more as we start to roll these programs out and we’ll be able to provide better visibility to it.

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

Got it. And maybe a question for Kevin, can you speak to maybe some of the milestones we can think about in terms of the R&D development with liquid biopsies. Should we be thinking of potentially an ROU [ph] launch in 2018 for lung nodules and can you maybe rank order what could be behind lung nodules assuming that is the first test..

Well, I think the -- taking a step back, we are focused along with the Mayo Clinic on developing a breakthrough approach to diagnosing cancer early through typically blood draws, but other liquid biopsies, for example pancreatic. And where we are today focused is in lung nodules and then potentially a lung cancer screening test.

The technology also applies to prostate cancer, liver cancer, breast cancer, colon cancer recurrence, esophageal cancer, et cetera. So we're focused on the top cancer killers in the US.

What powers our ability to detect cancer early from plasma is the technology, same technology platform and the similar class of biomarkers, DNA methylation markers, primarily. We may add some other markers to the mix, like we did with Cologuard. But the same markers that power Cologuard.

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

This gives us an opportunity to upend the pricing approach that cancer diagnostic companies relying on sequencing equipment have historically relied upon and we're doing it in partnership, a deep partnership with the Mayo Clinic that has been very productive to date as you know and we’ll continue to do this.

We haven't yet, Mark to answer your question about what's coming next, laid that out and we -- there is a -- there are just more opportunities truthfully than one company can pursue over a short period of time.

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

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

Your next question comes from Isaac Ro from Goldman Sachs. Your line is open..

Wanted to come back to the earlier question I think Doug had regarding the cadence of volume you guys are assuming in your guidance for the year and I think you went to all the moving parts, Jeff, for third quarter, which is great.

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

Yes. So what's implied by the guidance is about 15,000 incremental tests in the third quarter and then another 15,000 incremental kind of growth in the fourth quarter. So walk through that in the third quarter.

In the fourth quarter, you have some dynamic from Labor Day, you do have some dynamic from around the holidays, we’ve talked before about people taking vacation around Christmas and New Years rather than being at home and returning their collection kit. So there are some impacts there.

Second quarter is certainly our strongest quarter of the year, but we took all those things in to consideration when we thought about guidance..

Okay. That's helpful. And then maybe on the cost side, I was interested in how you guys are thinking through the CapEx required for the new facility and maybe if you could help us think through the timing and magnitude relative to what you guys have done in prior years for CapEx. That will be helpful..

Yes. So earlier I mentioned the third quarter number for CapEx, somewhere in the $15 million to $20 million range and that's across a variety of things, IT, supply chain at some facilities and I would expect something kind of similar in the fourth quarter.

We're still relatively early in the planning phase for some of these investments, so I'd rather wait and talk more in future quarters about the longer term guidance, but near term, we do expect it to step up. We're doing this from a position of strength.

We're doing this because we're optimistic about the long term and we’re doing this as a way to prepare for that 30% long term market share target that we had set up for..

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

Thank you. Kevin, you note that you have reached now 86% of the market covered. Can you now start to give us more visibility to what proportion of the market has been shifted to contracted..

Presently, we don't plan to publicly disclose the percent contracted and our goal is to move that, both of those numbers to virtually 100%, but the number we're comfortable disclosing at the present time is just 80%, 86% coverage number..

Okay. Great.

And as contract mix or as lives move from covered to contracted, are you seeing an increase in utilization or is it too early to say?.

I think that it is definitely too early to say the impact on the contracted and network status. We know that it is the lack of contracted commercial insurance coverage is one of the greatest pushback on the part of primary care ordering physicians over time as we, a, eliminate that barrier and, b, educate physicians to that barrier.

We will see an uptake, but it is too early certainly the impact of the contracted wins that we've seen so far this year probably have not had a significant impact..

Right. We look forward to hopefully it does. You now have, I believe, more cash at Exact Sciences than any time in your past close to $0.5 billion. Has your marketing support or other investment plans increased commensurate with the cash that's now available to the company..

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

It is -- we are playing the long game with Cologuard and we think it's important to make long-term investments, but the fact that we have that capital on the balance sheet has not changed our perspective on investments into the business for the future.

Jeff, do you have any additional color?.

Yeah. It also doesn’t change our thoughts on timing to cash flow breakeven. So we're not pushing it out because we have additional cash. That is unchanged..

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

We had a nice decline in the cost per test here in Q2, and can you reiterate why it is you expect that cost per test might increase in Q3?.

Sure. I’d be happy to, Ray. So really, it's a temporary increase because what we saw in the second quarter in terms of extremely good operating leverage and efficiencies, it will take time as we scale the business, we add personnel, we add infrastructure, it will take time to then get additional leverage on the incremental investment.

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

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

The comment I gave on third quarter were above the exist -- the expansion of the existing facility, the existing regional manufacturing capacity. These weren’t comments on the new facility. That's something that would potentially impact future years..

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

Jeff, hate to beat this dead horse here, but the CapEx, you guys have expanded, I think you started in maybe mid-June, expanding your lab on East Badger Road.

Is that all that 15 million to 20 million that you called out for Q3 or was that, some of that for the second site that you guys are going to start, building at some point?.

So the 15 million to 20 million, there is multiple different areas. So it is -- some of that is expansion of the existing lab, some of that is expansion on the existing manufacturing capacity. We're also adding additional office space. We're making investments in our supply chain and we're making some investments in our IT infrastructure.

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

Got it. So when you guys start the construction on the next site, the second site for additional Cologuard positive customer service, have you guys put a number to that and how should we think about that..

We have not yet, in part because the new lab, there are still some design elements that aren't finalized, but I would say that within the 15 million to 20 million, there are several, also, there are multiple larger kind of one-time items that won't repeat in 2018.

So I'm not going to give a number for 2018 now, but the step up we're doing, this is because we see the growth coming. We’ve talked about the guidance, we've talked about our longer term goals and we want to make sure that our capacity is never away from our patients..

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

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

Sure, Bruce. So the way we typically break it out is the Medicare mix and this is Medicare, all-in Medicare, was about 62% of volumes in the second quarter..

Okay. Super. And then one question for Kevin. I know that you've got a lot of moving parts on the development pipeline with the blood based platform.

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

Well, why don’t I take a step back and talk about the key elements to develop and bring to patients the new tests. First, you need to analytically validate a test and we released data recently, showing 90 plus percent sensitivity and specificity for detecting lung cancer in diagnosed patients with less than a 10% false positive rate.

The next thing that you need to do is rerun that data with the -- rerun that study with the larger end, so that you can set cutoffs heading into a pivotal clinical trial.

As part of that FDA clinical trial, we will be speaking with the FDA, so that we expect that to occur in later this year, towards the end of this year or the beginning of next year and then initiating the FDA pivotal study, which provides clinical validation of the test in patients with lung nodules and we would expect to kick off that pivotal study in the first half of next year.

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

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

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

Just a few for me. In terms of the upwardly revised gross margin long term goal of 75%, up from 70% previously. I think can you help us understand kind of the key drivers supporting that updated outlook.

I guess what's changed relative to the previous assumptions and at what level of volumes do you see that type of gross margin becoming achievable?.

Sure. Thanks for the question, Chris. So in the second quarter, we were pleasantly surprised by the ultimate cost per test. We had not expected a $37 a test sequential decline. So we were pleasantly surprised. I would say that the two main buckets were the volume leverage. So that really came from the volume upside versus our expectations.

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

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

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

Yeah. That’s a long-term number, but we were at 69% in the second quarter. So we’ve made some nice progress towards it, but it is a longer term number. I would quantify it as being at full scale..

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

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

So we're in the throes of that and we expect that to be complete in Q3, but we're really excited and I'm really excited about the sale team that has been built, the leadership with the existing team that's out there and the new folks that have recently joined..

There are no further questions at this time. Mr. Kevin Conroy, Chairman and CEO, I turn the call back over to you..

Thank you all for joining the call. First of all, thanks to the entire team at Exact Sciences for delivering a great quarter and importantly for making a big impact in the lives of people, many as you can see from this quarter have never been screened for colon cancer who are getting screened. We are changing the paradigm. We're excited about it.

We're not going to stop. We're going to keep going here until the job gets done and we're excited about that path forward. And then finally, we're also excited about what this technology can do for other cancers and we're committed along with our partner, the Mayo Clinic to deliver on the promise and the team is energized.

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

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