Megan Jones - EXACT Sciences Corp Kevin T. Conroy - EXACT Sciences Corp. Jeffrey T. Elliott - EXACT Sciences Corp. Mark Stenhouse - EXACT Sciences Corp..

Brian David Weinstein - William Blair & Co. LLC Doug Schenkel - Cowen & Co. LLC Derik de Bruin - Bank of America Merrill Lynch Brandon Couillard - Jefferies LLC Catherine Ramsey Schulte - Robert W. Baird & Co., Inc. Daniel Gregory Brennan - UBS Securities LLC Patrick Donnelly - Goldman Sachs & Co.

LLC Puneet Souda - Leerink Partners LLC Mark Anthony Massaro - Canaccord Genuity, Inc. Bruce D. Jackson - The Benchmark Co. LLC Per Ostlund - Craig-Hallum Capital Group LLC.

Good afternoon. My name is Shontelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Exact Sciences Corp. Third Quarter 2018 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.

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

Thank you, Shontelle, and thank all of you for joining us for Exact Sciences' third quarter 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 third 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. During the third quarter, Exact Sciences made significant progress in our three annual priorities and in the fight against colon cancer. Highlights for the quarter include 63% revenue growth, accelerating physician demand, 75% gross margin and efficient capital deployment.

Most importantly, we screened an additional 241,000 people with Cologuard. Based on these strong results, we're raising our revenue guidance for the year as Jeff will touch on shortly. In early October, we successfully trained Pfizer's primary care sales, marketing and health system teams.

The launch meeting reinforce that Pfizer is the ideal partner to help us achieve our long-term goals. Their team is incredibly experienced, talented and enthusiastic and we look forward to the fight against colon cancer with them. Our CFO, Jeff Elliott will now review our third quarter financial results and updated guidance..

Thanks, Kevin, and good afternoon, everyone. When discussing financial results, I'll refer to changes compared to the third quarter of 2017, unless otherwise stated. Third quarter revenue increased 63% to $118 million. Cologuard volume grew 49% to 241,000 completed tests.

During the quarter, growth was driven by increased physician demands, our class of 100 new sales reps we hired this summer, operational improvements within our sales force, and market access improvements and messaging around insurance coverage. Third quarter average recognized revenue per test improved 9% to $492 on market access gains.

We now expect full-year revenue per test of about $480. On a time-lag basis, our average recognized revenue per test was $470, an increase of $42. Third quarter cost of sales totaled $125 per completed test, a 3% improvement. Cost per test came in slightly better than expected due to volume leverage and operating efficiencies.

We expect fourth quarter cost per test of about $130 as lab capacity investments, temporarily offset continued productivity gains. Third quarter gross margin improved 320 basis points to 75% and better than expected revenue and cost per test. Third quarter operating expenses totaled $129 million in line with our guidance.

Selling and marketing increased primarily due to our sales force expansion and a test of network TV ads, in addition to our ongoing cable TV ads. G&A investments included personnel and IT to support our expansion. R&D increased primarily for clinical studies to support our pipeline and medical affairs.

We expect operating expense to step up about $20 million in the fourth quarter. This includes increased selling and marketing to support the Pfizer partnership and the full quarter impact of our sales force expansion earlier this year. G&A is expected to increase due to IT investments and general hiring.

R&D is increasing to support additional trials for our pipeline. Total third quarter CapEx was $53.6 million. We expect CapEx of around $175 million for the full-year. Third quarter cash used totaled $36.9 million. We ended the quarter with cash and securities of $1.2 billion. Turning to our guidance.

Based on our year-to-date performance, we're raising our full-year outlook to $435 million to $440 million of revenue from our prior range of $420 million to $430 million. This assumes 910,000 completed Cologuard tests. I will now turn the call back to Kevin..

Thanks, Jeff. Our first priority for 2018 is to command the core Cologuard business. We expect that the Pfizer partnership will accelerate Cologuard's growth trajectory and help us accomplish our mission of eradicating colon cancer.

The Exact Sciences and Pfizer teams work diligently to develop a comprehensive training program to educate the Pfizer team about Cologuard and our patient compliance services.

During the kick-off meeting, as the Pfizer team was deeply engaged and had the opportunity to learn from our sales trainers, the entire team came away with a better understanding and appreciation for the importance of our mission.

The Exact Sciences and Pfizer marketing teams are closely aligned to ensure operational excellence and to deploy promotional spending efficiently. Most importantly, we want to maintain Cologuard's exceptional service levels as adoption among patients and physicians increases.

Comprehensive insurance coverage for Cologuard and broad awareness are instrumental to physician adoption and patient compliance. We have in-network contracts with all five top commercial health plans. In 2018 alone, we have signed contracts for Cologuard with nearly 30 health plans covering about 72 million lives.

This includes Cigna, Anthem and nearly a dozen other Blues plans. As a result, we estimate that approximately 92% of patients who completed Cologuard tests will have no out-of-pocket costs.

Our marketing and sales teams are working with Pfizer to inform physicians and patients of the significant progress made in securing Cologuard coverage with no out-of-pocket costs. We're focusing our sales effort on the primary care providers with the highest potential to order Cologuard.

Our data show a direct relationship between the number of times our sales rep calls on a provider and the number of times that provider orders Cologuard. Focusing on the highest potential providers, allows our sales team to reach them more frequently and increase ordering.

We're currently working with Pfizer to further optimize physician target list and increase sales productivity. Moving to our second priority, preparing for future demand, we are progressing on schedule with our capacity expansion projects giving us confidence in our ability to meet rapidly growing Cologuard demand.

All building renovations at our current lab are complete and annual capacity is now 2.5 million Cologuard tests. We are in the process of adding equipment to increase capacity to 3 million tests by the end of this year. The teams have performed exceptionally to scale this quickly, while maintaining high levels of patient care.

At our new lab site, we continue to achieve major milestones. We plan to open the new lab with a 2 million annual Cologuard test capacity by the end of next year, for a total lab capacity of 5 million tests. We have the ability to significantly expand capacity beyond 2 million tests at our new lab site, ensuring we'll be prepared for future demand.

A robust IT infrastructure is crucial to preparing for future demand. Today, we're pleased to announce a partnership with Epic Systems to implement its best-in-class award winning electronic health record software. Epic is the class number one ranked healthcare software suite and the EHR system of choice for all Top 20 U.S. hospital systems.

Epic will become a core component of our IT system from order entry all the way through revenue cycle and customer care. In the U.S., more than 230 million people will have a current Epic electronic health record. Epic software will help us deepen our connection with customers of Cologuard and other future tests we plan to offer.

Exact Sciences will be the first diagnostic company on Epic's platform providing us with a key competitive advantage and more powerful IT backbone. We're excited to begin implementing Epic to improve process efficiencies and enhance our customer experience. Moving to our third priority, advancing the pipeline.

Expanding Cologuard's label to the 45 to 49 year old age group, would represent a 40% increase in the unscreened population and a significant increase in the immediately addressable opportunity for Cologuard.

The American Cancer Society updated its guidelines to recommend that screening start at age 45, as colon cancer incidence increased 51% among adults younger than age 55 between 1994 and 2014.

Respondents to a survey we conducted of 500 individuals, ages 45 to 49 indicated that they are three times more comfortable taking an at-home stool test than they are in having a colonoscopy.

We have a team dedicated to compiling evidence, preparing for discussions with the FDA, obtaining insurance coverage and preparing marketing materials to ensure the 21 million Americans in this age group have access to Cologuard.

We look forward to engaging with the FDA in the coming months to discuss our evidence plan and establish the path forward for label expansion. Liver cancer is the second leading cause of cancer death globally. Similar to colon cancer, patient outcomes can be improved dramatically through early detection; but testing rates are low.

There are more than 3 million patients in the U.S., who should be tested for liver cancer every 6 months to 12 months. Unfortunately, less than 30% are up-to-date with guideline recommendations and the current options of alpha-fetoprotein and ultrasound are less than 65% sensitive for early stage cancer.

This leads to more than half of people being diagnosed late stage, and more than 30,000 Americans dying of liver cancer each year. A more accurate and convenient blood test could increase testing rates and help reduce the burden of liver cancer in the U.S.

We are currently enrolling patients to further develop our liver cancer test, after presenting data earlier this year, showing approximately 90% sensitivity and specificity. While test development continues, we're advancing our plans for a successful commercial launch.

Our early research suggests primary care physicians help manage patients with liver disease. Many of the physicians who are already calling on for Cologuard could be regular orders of a liver cancer test. We look forward to providing updates on our progress in the coming quarters.

Exact Sciences recently acquired Biomatrica, a San Diego-based leading developer, manufacturer and provider of best-in-class DNA preservation technologies.

Biomatrica's sample collection tubes, which contain proprietary samples stabilizing chemistry, ensure quality preservation of circulating tumor DNA, cells and other biomarkers in biological specimens throughout shipment and storage. Established in 2005, Biomatrica holds 9 U.S.

patents and 36 foreign patents pertaining to technologies to stabilize biological materials. Biomatrica supplies collection tubes to a range of companies delivering cancer diagnostics, prenatal, HIV and other infectious disease tests, and to the consumer genomics market.

Sensitivity of liquid biopsy test is dependent in part and how well the DNA is preserved. Based on our in-depth studies, Biomatrica's LBgard tubes performed better than other liquid biopsy blood tubes with greater consistency and improved stabilization of rare tumor DNA.

We joined forces with Biomatrica, because their innovative team develop the best liquid biopsy collection and circulating tumor DNA preservation technologies available today. Our research and development team is leveraging Biomatrica's proprietary technology to support ongoing and future development of cancer detection tests in our pipeline.

Biomatrica will operate as a wholly-owned subsidiary of Exact Sciences and continue to supply other companies, helping them become successful in the liquid biopsy field and bring needed test to patients faster. We're now happy to answer your questions..

Your first question comes from Brian Weinstein with William Blair. Your line is open..

Hey, guys. Thanks for taking the question. Let's start with – on the Pfizer relationship.

Can you talk about where you expect the impact to be felt first? Is it on new physicians signing up, is it on utilization? And can you talk a little bit more about how you see the overlap of the two organizations in terms of the physicians that might be different that Pfizer would be calling on than what you guys are calling on?.

Let me first say Brian that, there's been a lot of accomplished in a short period of time with Pfizer and they are a tremendous team, their marketing depth, their sales depth, the leadership. Nick Lagunowich has really done a remarkable job getting the whole Pfizer team organized, focused and you couldn't ask for a more collaborative partner.

So, the foundation is being laid right now, training has occurred and the teams are now out in the field collaborating. I'd ask Mark Stenhouse to comment on his observations of how those teams are working together..

Hi, Brian. Thanks for the question. I would suggest, there's really two core issues here. One is the enthusiasm by which the two teams are quickly working together, collaborating to call on their shared targets and their independent targets that they have.

What I see is, they're really enthused, Pfizer partner and an Exact employee I think they're both working very smartly together. The qualitative feedback we're getting from doctors and from our employees is just really positive and underscores the opportunity..

Brian, in terms of what is going to be the larger driver, new physician adds or driving volume, I think that it's just important to note, this is a partnership that is a three-year partnership. We expect this to play out over time.

The near-term impact we think will be modest and we do expect obviously to see both increased number of new physicians ordering Cologuard and we expect to continue to drive the same physician reorder rate..

Understood. Thank you. And then on the results from the quarter, you guys talked about the tests increasing due to some improvements with the market access, obviously some messaging and a new class that came on the 100 new reps. Can you just talk about kind of where we are in the benefit from those different categories.

In other words, have we seen things completely reverse from the messaging that you guys talked about and how far along are we in the efficiency of those 100 reps and so forth?.

Let me start there by saying, we obviously saw real strength in the third quarter.

We think that a big part of that strength was the team's focus on a different message around reimbursement, fueled by the success that we have had there in increasing the number of covered lives and contracted lives, so that – and also at that point in time delivering a message that 85% of people who got a Cologuard test would have no out-of-pocket cost, so that really helped us, make an impact in Q3 relative to Q2.

I'd ask Mark to provide any additional color..

Yeah, I don't think it's possible at this point for us to independently associate the exact benefit as each of those things that Jeff reviewed and Kevin just highlighted. I think it's the combination of market opportunity, in terms of the 85% not getting a bill.

It's a benefit of incremental reps, it's a benefit of being more efficient with the reps making calls to doctors. The cumulative effect of those things would drove performance in the quarter..

Okay.

Then last one for me is, as we start thinking about 2019, you guys did offer guidance previously and is there any reason to think that the way you're thinking about 2019 is any different than when you guys gave some numbers, when the Pfizer deal was signed?.

Yeah. Yeah, thanks for the question, Brian. So, as of today, we still continue to anticipate roughly $700 million of revenue next year. So, no change..

Perfect. Thanks and good luck this weekend, Kevin..

Thank you, Brian..

Your next question comes from Doug Schenkel with Cowen and Company. Your line is open..

Hey, good afternoon, guys. Jeff, maybe just to start with the guidance question, your Q4 guidance seems to imply that orders per physician increases to around 3.2 in the quarter and that completed orders per physician approximate 1.88 to 1.9. I just want to make sure, I'm in the right neighborhood with the math.

And somewhat relatedly, what does your guidance assume for contributions from Pfizer and also for reorders from patients that used Cologuard three years ago and tested negative in the guide for the quarter?.

Sure. So on the numbers, I think you've got those numbers about right Doug. As far as these Pfizer impact as Kevin said, we expect a modest amount, remember that the Pfizer team really just got trained this month. So, our long-term expectations are extremely high for Pfizer, but this partnership is really just getting going.

So, we expect a modest amount in the fourth quarter. And as far as three-year rescreen, there I think we've made some progress, there's still is a way to go to improve the capture of those three-year rescreen patients..

Okay. That's helpful. Thank you for that. And then, I'm not sure if this is better for Mark or for Kevin. The pace of first-time ordering physicians actually picked up a bit in the quarter, which is great.

You're close to 50% – 55% to 60% penetrated by our math as a percentage of PCPs, and GIs that are out there in the U.S., recognizing you got a lot going on commercially with the sales force expansion in the Pfizer collaboration.

Are you getting close to the point where it would make sense to start to get more aggressive in an adjacent channel like the OB-GYN channel?.

Let me first thank you Doug for the question. And address the question around the penetration of the primary care healthcare providers.

So, we look at roughly about 350,000 primary care healthcare providers that's 200,000 to 250,000 primary care physicians and another 100,000 or so physician assistants and nurse practitioners, who are all able to order Cologuard and do. So, we are nowhere near 50% to 60% penetrated. We're above 50% penetrated among GIs.

So, as you know we don't call on today. So, that is – we have a long way to go in primary care and the Pfizer team reaches physicians that we simply don't and that's a pretty significant number of physicians. And we expect over time that they will bring those physicians on as active customers.

So, in terms of thinking about entering the GI space and also the OB-GYN space, those are areas of potential partnership with Pfizer. Certainly, those conversations will start to occur now that we have done the launch.

We are committed, in any case, though of hiring our own GI sales force, so that we can deliver a message to those GIs and start to have conversations with them about the value of Cologuard in their practice and beyond their practice to primary care physicians. And then I'd ask Mark, if you have any other color you'd like to add there..

Right. I think you hit it correctly. I think the thing that I always go back to is that we have an 85 million patient opportunity. We have a relatively low share in the primary care space. We have a very low penetration of the providers writing and we have a huge opportunity continue to grow that.

So, while I think adjacencies are important, our core prescribing base is the primary care doctor and our primary focus with our Pfizer partner is on that..

Okay. That's helpful. And yeah, I was just counting the physicians, so clearly, what you articulated gets us to a much – get much different and favorable denominator. So, thanks for that and also for the color on the adjacent market opportunity, I'll get back in the queue. Thank you..

Thanks, Doug..

Your next question comes from Derik de Bruin with Bank of America. Your line is open..

Hi. Good afternoon..

Hi, Derik..

Hey. Just curious, I mean, you said you're going to continue Biomatrica as a subsidiary.

What's the revenue that Biomatrica currently has?.

Yeah, thanks for the question, Derik. So, we're not going to break it out, but it is not material to the overall Exact Sciences business..

Okay. And I guess, can you sort of expansion question I guess on the last one – or last two questions.

But going into the healthcare systems, I mean have you formulated the better, a plan in terms of getting of how you and Pfizer are going to go in there, I'm just curious in terms of what your strategy is there?.

So, thanks for the question, Doug, it's Mark. So, a couple of things, yes, we're working on a plan, both the marketing plan and a health system plan with Pfizer. As you can imagine, the first priority was launching our joint primary care effort together.

And we've done that now in October and we've also built the Q4 spending plan with Pfizer and we're working on the 2019 marketing plan. And a core subset of that marketing plan is the health system opportunity, of which Pfizer brings great depth and skill.

Then, I think we're going to learn a lot about how we not only build a business plan, but then setup the appropriate KPIs to show both our organizations and the market how we're progressing..

Great. And then just one final one. I got a number of questions in the quarter on the competitive landscape. There was some incremental data that came out.

I guess anything new on the competitive horizon, particularly on the – the blood-based liquid biopsy that caught your attention during the quarter?.

We keep a very close eye on this space, and we obviously have our own development program. The challenge that we've seen – and we've seen this over the last decade is two-fold. Number one, low sensitivity for early stage cancers. We don't know if it's a biological barrier problem, hard to detect the biomarkers in Stage I and II cancers.

And then also a high false positive rate typically around 10% to 15%. And think about this, if this is a blood-based test, the goal and you want to screen somebody annually, you can't really live with the test with below a 95% specificity. Otherwise, you're just going to refer far too many patients to colonoscopy.

And in fact, in many models, you end up having more colonoscopies using a blood-based test than you would if you just had every 10 year colonoscopy. So, we haven't seen anything yet that is really impressive. We continue to work really hard at developing our own test and hope someday we're able to achieve that.

And what's important to know and we're really happy about is, we built a large commercial infrastructure, which would be a great home for a test, whether we develop it or somebody else develop that we don't care. We want to make sure that we achieve our long-term mission of eradicating colon cancer..

Thank you very much..

Thanks, Derik..

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

Thanks. Good afternoon..

Hi, Brandon..

Kevin, on the Epic – on the Epic deal that you spoke to.

Could you elaborate a little bit how fast you can integrate with that system and the timeline that you expect and perhaps what percent of existing docs are Epic users?.

So, it's about 12 months to 18 months to do a full blown Epic integration. There – they have the majority share in the U.S. of docs, who are employed in health systems. So, they have – depending on how you calculate their share probably 70% market share in the large health systems that employ about half of the docs.

So, Epic-and their market share continues to grow. So, we expect over time, most physicians, primary care physicians in the U.S.

will be on an Epic platform and that makes our life – a heck of lot easier as we think about sharing data, between our lab and their physician office and potentially providing the ability to order electronically through the Epic system that will not be a near-term benefit, but longer-term we expect that it will.

And then the important thing to think about Epic is, we're building a big IT infrastructure today and it's custom.

And you can't argue that the Epic system, which is world-class is anything but better than the system that we can develop on our own and more efficient because obviously their R&D efforts are leveraged over hundreds and hundreds of customers, where we keep developing it for one. And we are a healthcare provider.

So, when you think about – we're a healthcare provider. We don't provide a broad range of services today. We do though have north of 2 million patient records in our system and we have now over 130,000 ordering physicians.

So that requires a really robust IT infrastructure, and we can leverage the investments that Epic has made and continues to make, so that we can scale our IT systems as we grow as a business. And also Epic will provide greater ability to do data analysis.

So, the benefits of going on Epic are tremendous, there will be 12 months to 18 months before we're fully implemented on Epic..

Very good. And then two part question for Jeff.

First, could you remind us how much of the CapEx increase in the fourth quarter is specifically tied to Pfizer and perhaps some of the marketing minimums that you're committed to? And then secondly, in terms of the ASP assumption, the step down in the fourth quarter, just curious why that would necessarily be the case, given the addition of Cigna recently? Thank you..

Yeah. So, the first question on the OpEx, if you take the $20 million, it's a pretty equal distribution across the three buckets; selling and marketing, R&D and G&A. So, that'll get you pretty close to what the step-up is. As far as the ASP, for the year now what we guided to is about $480.

For the fourth quarter that – that implies a range, it's called $460 to $480. And the reason why I point to $470 as the midpoint, if that's right, where the time lagged revenue per test is.

We think that's always a good number to point back to, because that number strips out all the kind of short-term, puts and takes that can affect our revenue per test..

Very good. Thank you..

Your next question comes from Catherine Schulte with Baird. Your line is open..

Hey, guys, thanks for the question. I thought it was interesting that your revenue from Medicare patients grew about 40% this quarter versus last year, but commercial and other more than doubled.

How should we be thinking about those two groups when it comes to driving Cologuard growth going forward?.

Yeah. Thanks, Catherine. When you look at the size of this market 85 million Americans today and our market share is only 3.4%. So that implies a long ways to grow in both the Medicare and commercial population. We have seen, over the past year, a growing mix of commercial volumes. Our Medicare mix went down to 55% this quarter.

That's some 3 points in one quarter. I think what's really happening there is, we've talked about this on the call, we've seen a growing mix of insured lives today with about 92% of our patients having zero out-of-pocket. That's a really compelling message that will help us grow the commercial side of our business.

Long-term, this is significant runway on both Medicare and commercial..

Great. And then thinking about year-end seasonality and based on your commentary last quarter on turnaround time having shortened over the last year.

Should we expect an even bigger impact in terms of holiday returns this year, just curious to get what your assumptions are there?.

Yeah. So, as far as seasonality, I think we have the benefit of looking back to last year of what has happened at every holiday. And I think we've taken steps to prepare for it. Last year, I think there was one – new ones last year with the flu. The flu last year was historically severe.

So, that's something we've also taken steps to prepare for, both the seasonality and the flu..

Great. Thank you..

Your next question comes from Daniel Brennan with UBS. Your line is open..

Hey, thanks for the question.

First one was just, what was the patient compliance rate in the quarter?.

66%. Now remember that compliance rate is defined as looking back 12 months to 18 months. So, you look at the kits we shipped out 12 months to 18 months ago and calculate how many of those will come back and all the way through a completed test.

As you think ahead to the compliance rate in the fourth quarter, we'll still be looking back at that period, where we had the $649 messaging in place. So, the fourth quarter, I would expect that compliance rate to dip down to about 64%.

As of today, though, I think we've eliminated the headwind from the $649 messaging, so I think we have seen some more near-term compliance rate improvements, but given how we report the compliance rate number, you won't see that in the public number for a few quarters..

Okay. And then related to the Pfizer productivity and I know Kevin made, I think, a mention, three-year contract, which you guys are very excited about the near-term impact might be modest.

Can you guys discuss the productivity how long it takes for say a Pfizer rep to get productive versus an Exact rep, I would think Pfizer reps having the experience and the tenure and the relationships with the doctors likely would be able to ramp a lot more quickly than say a new naïve Exact sales rep?.

So, we appreciate the question. I think it's really too early for us to tell the productivity of each of the reps. The great news is that we look at KPIs and cohorts of calls by Pfizer representatives and Exact representatives and this is something we can appreciate over time as we steer rep effort to different sets of doctors.

But I think, it's way too early for us to give a clear answer on this..

Thank you. And then maybe one more quick one, if I can sneak in.

Is there a big difference between a Pfizer rep, in terms of the amount of times that they could actually be getting into a doctor's office just regularly, just I assume with their bag of three drugs, they probably are in there quite often versus Exact with your Cologuard test that might be more difficult to get in.

So, I know, I'm not trying to get my way back into the 8-K details. But I'm just wondering if we should expect the Pfizer rep has a lot more frequency of visits in an annual year than an Exact rep? Thank you..

I think it's safe to say that a representative including Pfizer that has multiple products targeting a primary care office has a benefit to get into that office more frequently than a Cologuard Exact rep. Now this is a hypothetical case, which frankly we've not seen play out yet.

So, I think, it makes sense from a practical perspective that we need to see that data play out over time..

Great. Thank you..

The only other color that I would add here is that remember in terms of rep productivity and comparing the two, you have to take into account that Cologuard is not being sold in position one with the Pfizer reps like it is with the Exact Sciences reps.

So, you really have to take that into account, and per our agreement with Pfizer we're positioned in typically P2 or P3..

Okay..

Your next question comes from Patrick Donnelly with Goldman Sachs. Your line is open..

Great, thanks. Maybe one for Mark Stenhouse, just on the Pfizer training.

Can you expand on what the primary call points you are emphasizing to them, while refining the message for a rep selling more than one product? And then also, can you just help us frame how many Pfizer reps are going to have Cologuard in their bag, now that you've sent out that sales force?.

Okay. So, I'll answer the second one first. We don't get into specifics about the size of the Pfizer selling force outside of what's in the contract, in terms of required number of contacts. The Pfizer training was similar and was exactly the same as we give the Exact Sciences' representative.

It was condensed into their launch meeting, so their message architecture on sensitivity, specificity, market access and compliance, that core message even in a P2 message is the same. Keep in mind that many of the Pfizer calls are being made to Pfizer-only doctors.

These are expansion into new markets that our rep hasn't been in, so you have to anchor back to the primary construct of our message that get doctors to believe in the brand and use it within the patients as frontline screening tool.

So, there's really at this point no difference in the message and that's something we'll decide over time and that needs to separate right now it's the same primary message..

Okay. Thanks.

And then Kevin, maybe just with the benefit of additional hindsight, do you have a better idea of what exactly caused the slowdown in June? I mean are you confident or it was just seasonality and I think snapped back pretty quick in July, can you just help us with the cadence? I know you typically don't, but maybe just given the slowdown that one month how things trended after that?.

Well, there's no difference than what we described on our Q2 call.

There was a kit return challenge that we think was directly tied to the messaging that had been delivered from September until I believe about May – April/May and that messaging was that the patient – every patient got a telephone call that said they were responsible for up to $649 and that had a negative impact.

Now, was that the right thing to do long-term? Yes, we were being forthright with our customer and it also we think helped drove contracting with large payers, because those payers were hearing from their members.

So, being able to now deliver a different message and that is 85% of people have no out-of-pocket won't get a bill, won't get stuck with the bill and that number now in the future will be able to deliver a message of north of 90%. So, we think the strength here is – it will start to come through as we look into 2019..

Thank you..

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

Hi, thanks for the question. So first Kevin, as I was hoping to get, early view as you go out – and as the reps go out into the physicians' offices and are giving the message of 92% out-of-pocket expense, no expense to the patient.

Just help us understand what does that turned into, any early reads on that, does it improve ordering by 50%, does it improve by two times? Anything you can provide quantitatively would just help us understand how that messaging is resonating out there?.

Mark, why don't you answer that?.

Yeah, I'll be happy to. So, I go back to the list in the third quarter that we are confident in, we believe it's associated to several things, one of which as you point out is that 92% of patients do have an out-of-pocket cost.

The other is the incremental reps during the market, and we're getting more efficient with those representatives on the cohorts of doctors that matter. Meaning, we're able to make more calls on them.

So, we don't have the association to anyone of those independent metrics that's driving our performance; but with the large market opportunity, we have 85 million, the 92% no out-of-pocket cost. And with the partnership we have we know we're going to be very successful..

Okay. Thanks for that. And then, in terms of the total reps that are reaching out to the physicians, could you elaborate? I think you've talked about reaching a select targeted group of physicians.

Are all the reps, including the Pfizer reps focused on that targeted high potential account base? And I'm just trying to understand, it seems like a significantly high number of reps targeted towards population that is maybe ordering quite a bit.

So, I'm just trying to understand how that's been in your experience now versus what you've experienced in the drug world.

Maybe Mark can take that?.

Yeah. It's a great question. So, the short answer is in the overlap doctors between Pfizer and Exact, those high value targets, we have a high degree of focus, but there are independent groups of doctors that Pfizer has and Exact has that offer us the ability to reach core doctor.

So, you have a population, where you're driving incremental frequency, that's the overlap group.

And then you have this expansions group where you have the breadth of Pfizer's resources to go out to those doctors and because they have multiple products, they ask you when they build their call points, you have to make decisions for the benefit of the breadth of their products, right.

So, lot of those reach doctors are going to be strong primary care doctors that have an opportunity to use Cologuard. But they're also going to have opportunities to use the other pharma brands.

This is a business model that makes sense and it's something that frankly we can adjust over time, as we learned about the responsiveness, to each of these strategies..

Okay. And just last one from – if I could ask Jeff about COGS, just wanted to understand in terms of the improvement in cost per test that we have seen quite phenomenal through last year, just I'm trying to understand now the improvement was about 3%. Next quarter, you're expecting $130.

As the new facility ramps up, what's the expectation here longer-term? Just give us and sort of a cadence for that expectation, just give us a view, you have once the new facility is ramped up?.

Sure. So, long-term, nothing has changed. We continue to see a path towards at least 80% gross margin. And what that really implies is that a revenue per test around $500 and a cost per test around $100.

Now over the past year, you have seen significant improvement and that comes across our lab where we've gotten more automated, the people that have gotten, have done a really nice job of driving efficiencies. We've shown efficiency gains in our manufacturing. Recall, we make a lot of (44:37). So, those teams have gotten more efficient.

Over the next couple of years, as we bring onboard the expanded capacity of our existing lab and the new lab, that's where we expect to see some modest upward pressure in that cost per test, just temporarily until we can scale the new lab..

All right. Great. Thank you..

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

Hey, guys, thanks for the questions. My first one is, can you just confirm that you have removed the language in letters sent to your patients informing of a risk of an out-of-pocket cost. And I guess related to that, assuming that, that is gone.

Did you see any benefit of volumes in Q3 as a result of maybe recognizing revenue on orders that may not have been recognized as revenue in Q2 into Q3?.

Let me answer the first part of that question, Mark. We are still forthright with patients when they ask what the price of the test is, of course, we communicate that to them. Previously, this was embedded in a script, which was one of the very first things we said, to all patients, including those who were fully contracted.

So, we're able to tailor our message to those people who are at risk of having to pay for a test and we make sure as a core principal of who we are and how we treat our customers that we communicate clearly to them about important financial questions. And for the second piece, I'll let Jeff..

Sure. So, Mark, during the quarter, we did have some compliance improvements. I think we saw a normalization of kit returns; and in all cases, whenever the result is reported to the physician, that's when we recognize revenue. So, we did have some favorable benefit.

It is relatively minor though compared to the broader number of tests here that we generate in the quarter..

That's great. And then a question on the guidance certainly, you beat on basically every metric this quarter, including a beat of about 10,000 relative to our estimate on volumes. But it looks like you maintained the – or brought to the midpoint the volume guidance for 910,000.

Can you just comment why you chose to maintain the guide or so anything we should be thinking of, in Q4, as it relates to, how we should be thinking about any other dynamics other than holiday ordering?.

Sure. So, we talked about some of the highlights in the quarter as far as increase in physician demand and productivity of the new reps, and the operational improvements. As far as the guidance, we did bring up the revenue range from $435 million to $440 million.

And recall last quarter, we had pointed to the low-end of the volume range of around 900,000, now we're pointed to around 910,000. So, we did bring up both of those ranges and we're very optimistic about the long-term growth of the business..

That's great. That's fair. And then you guys have been very or I should say, you've been fairly active on the M&A front, granted a lot of these have been of the tuck-in variety. As I travel about, there are a whole host of technologies outside of DNA methylation.

So, just be curious about how committed you are to say doubling down on DNA methylation versus potentially looking at other technologies, whether to increase the sensitivity of the assets you're developing in-house or potentially to add a new technology that could expand into other disease states?.

Sure, Mark. Let me take a step back here.

The Pfizer partnership and the fuel that they bring to enable us to accelerate our growth with Cologuard over the next several years gives us great confidence that we will be able to continue to gain customers and screen more people out of these 85 million Americans in the current screening population, who need to be screened.

Coupled with this tremendous improvement in our contracting, so that 92% of people don't pay out-of-pocket, so that gives us a lot of confidence to say, let's look at the next 10 years and what can we do. We are not fixated on any particular technology, we never have been.

DNA methylation happens to be a tremendous tool, because it's alteration in DNA, these tiny alterations that occur really early in that cancer evolution process, and so it was recognized by the team at Mayo Clinic really early that, that was a benefit.

Our goal as we go forward now is to be the recognized leader in cancer testing and that will expand as in part because of our relationship with the Mayo Clinic, where we're focused on the top 15 cancers and we're showing really tremendous progress in developing those tests.

We also will keep an active eye out for opportunities that come from outside of Exact Sciences, outside of our collaboration with the Mayo Clinic.

And over time, adding that to the strong commercial team that we have, regulatory team, manufacturing team, which we intend to be best-in-class, that – we are really at the dawn of molecular diagnostics as it pertains to cancer, and we intend to be a leader in this space for the next decade and beyond. We're excited about the ability to do that..

Very helpful. Thanks guys..

Your next question comes from the line of Bruce Jackson of Benchmark Company. Please go ahead. Your line is open..

Hi. Thank you for taking my question.

In terms of the plan for the lab expansion, do you still plan to be at 3 million units capacity at the end of this year and 5 million a year later? And what impact might that have on the cost per test as you go through that transition?.

Yes, we do 3 million by the end of this year and 5 million by the end of next year, so no change to that. We've been saying for some time Bruce that we do expect a modest temporary upward move in the cost per test related to bringing this new capacity on board.

And when you look at the fourth quarter cost per test that we're guiding to, it's in the range of $130 per test. And part of why we're expecting to step up is related to the depreciation from that additional capacity..

Okay.

And then with the earlier comment about the Medicare mix being at 55%, is that on the total tests?.

Yes, that's volume..

That's volume. Okay. Great. That's it for me. Thank you..

Thanks, Bruce..

Your next question comes from the line of Per Ostlund of Craig-Hallum. Please go ahead. Your line is open..

Thanks. Good afternoon, everybody. Two questions for you. First one, I guess, I'd just like to actually dovetail off of Mark's question on the M&A front.

You talked about the Biomatrica acquisition in your prepared remarks and I'm curious to get your thoughts on whether or not Biomatrica maybe in itself almost presents itself as kind of a side door business development opportunity, given their sample stabilization technology and the folks that might use that, that you're able to keep a better pulse on emerging technologies and emerging options in cancer diagnostics?.

That was not the goal of this acquisition.

What we saw is that some of the current tubes that are available actually don't preserve DNA very well, when you rigorously test those tubes by sending them up in airplanes and traveling around the country, expose to different temperatures, and also importantly different collection techniques where the blood is being collected.

And so we realized that, that would affect test performance and looked for the very best technology, which we found in Biomatrica. Now, we have a commitment not to only solve this big problem on our own, we want to help fuel other people to do that.

And hopefully, we do get close to those customers and potentially be able to help with commercialization of tests that they develop. Any way you look at it, we're going to have the largest, strongest, most sophisticated health care provider sales team in the space along with consumer advertising capabilities. We're learning more from Pfizer every day.

The size and scope of this organization can help us bring hopefully some of those products into the Exact Sciences family, so we can address some of these really hard problems..

That makes sense. Thanks, Kevin.

The other question I guess that I had was related to your ongoing test of network TV advertising, just curious if you can provide a little – a little bit of color there in terms of the duration that you're looking at, what the measurables might be, do you measure it differently than your cable TV advertising program?.

Yeah, a great question. So, the TV test was a 13-week test in five markets with match controls. We tested incremental spend and different placements. So to your question, we went outside of syndicated cable and went to network TV.

What the aggregate performance of the TV test told us is that there was left observed, we associated to both the incremental spend and the placement.

When we leverage the output of that test to influence our Q4 media buy, so you'll likely see Cologuard ads in network TV, Sunday football, nightly news, things like that, outside of traditional syndicated cable and it's informing as well our 2019 marketing partnership with Pfizer and how we're thinking about media acquisition..

Excellent. Thank you, Mark. Appreciate it..

There are no further questions at this time. I would like to turn the call over to Kevin Conroy for closing remarks..

Thank you all for joining us today as we reviewed our third quarter financial results and discuss progress towards our 2018 priorities. Thanks to the entire Exact Sciences team, we delivered 63% revenue growth, 75% gross margin. And importantly, an additional 241,000 people screened with Cologuard.

We also successfully trained Pfizer's primary care sales, marketing and health system teams. Our on-schedule capacity expansion projects and our new partnership with Epic help ensure that we are prepared for future demand and we are excited about the recent acquisition of Biomatrica and what it means for our pipeline development.

And a final note, I'll be running New York City Marathon next weekend, so if it's on Sunday, if anybody is lining the room don't throw anything at me, hopefully cheer me on or toss me a banana or something to eat.

I will be running with the American Cancer Society team really supporting all of the great work that they do, and thank you for your support..

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