The compliance engine may not be too expensive. The first two reminders from the compliance police are robo-calls. After that, a human calls. While the FIT makers do nothing to drive compliance, some medical groups do, most notably der Kaiser. I wonder what that adds to the cost, and what they save by treating earlier-stage disease.
Most medical groups do zero follow-up for any ordered tests. If the patient forgets or blows off a blood test, nobody calls to remind them. Seems like healthcare in general could benefit from compliance enforcement.
Adding the percent to get to 98% reduction in deaths is wrong.
d1 = original cervical cancer deaths.
d2 = deaths after 70% reduction
= d x (1 - 0.70)
d3 = deaths after another 28% reduction
= d2 x (1 - 0.28)
= d1 x (1 - 0.70) x (1 - 0.28)
= d1 x 0.216
= 78.4% reduction overall.
On the earnings CC, KC said they started the national TV ad campaign 3 weeks earlier, so around 4/11/2016. The test market ads ran for nine weeks during Q1, but I do not think it was stated when those ads started or stopped. The national TV ads started no less than one week and no more than five weeks after the test market ads stopped. If they had stopped the test market ads as long as four weeks prior to the end of Q1, I would think we would have heard more data regarding the long-term impact of those ads.
Starting the national ads invalidates subsequent measurements of the long-term effects on orders and physician reorder rates, following the end of the test market ads since it is then impossible to determine if the continuing effects are due to the test market ads or the national ads. The long-term effects on physician reorder rates are what really matters since the ads generate less margin than the cost of those ads.
What in my original post is speculation? What I have stated are facts from the 10-Qs and the earnings CC. If you would like, I can elaborate each point and provide the basis for each statement, but that makes for a much longer post.
I don't think my opinion on the timing of the last offering is relevant to this post, nor does the surprising USPSTF draft recommendation discount what I have said here. Given management's confidence regarding a positive USPSTF recommendation, it is only in hindsight that we can say they made the obvious correct choice in the timing of the offering.
Lots of information about pivotal changes.
Q/Q growth is slowing, even from the holidays-discounted growth of 2015Q4. The introduction of a national ad campaign will significantly increase sales, but at a cost greater than the revenue generated by that increase. Due to costs and saturation, the TV ads will stop at some point and consumer-requested sales will likely decay as a result. Success will be judged by the increase in the completed tests per ordering physician. Whether that increase will result in a long-term increase in orders per ordering physician is not easy to predict.
Difficult to predict the long-term outcome and even more difficult to predict the analyst's and short-term market reaction.
At 22:40 in the conference call:
“…About 1/3 as expensive to reach the total television rating points in a national buy vs. a test buy. “
To me, "total television rating points" means per level of exposure, and therefore does not mean that national ads cost 1/3 as much as the test market ads, in terms of absolute dollars spent.
At 19:55 in the conference call:
S&M additional spend, modest increase to headcount, increase to headcount related spend of $3MM, to $15MM. Additional marketing content and campaigns to total $19M an increase of $6MM from Q1, reflects incremental cost of the national ad campaign.
This means 2016Q2 S&M spend of $34MM, or $12MM over 2015Q4. If the national ad campaign is expected to cost $6MM, that is certainly more than the cost of the market test, and $3.3MM more than the increase in revenue realized by a 50% increase in orders expected and a 69% compliance rate. Since the TV ads will cost more than the additional revenue they are expected to generate, we better hope for a long-term increase in the ordering rate among physicians. With 32,000 ordering physicians, even one additional order from each, per quarter, would nearly double orders.
What does the national sales meeting cost? I would guess that at least half of the $4MM increase in sales & marketing expenses were due to the TV ads.
KC made a valid point that a cost-effectiveness study of the TV ads will require data on the persistence of the increase in sales, but the cost of the test market ads is still an important data point for analysts. I find it hard to believe that no analyst tried to get a solid number for the cost of the TV test market campaign.
I recall hearing that the national campaign was 1/3 the cost on a per-run or per-spot basis, not the absolute cost. Assuming an equal number of ads run, it does not make sense that nationwide would cost less total money than only five cities, especially since there are 36 cities in the US with population greater than the average population of the test market cities.
If you use 40K as the base, add the 5.3% Q/Q growth rate seen in 2016Q1, and add 2/3 (one month lag from test order to test complete) of the 50% increase in orders due to the TV ads, you get 55.4K tests complete for 2016Q2. Continuing that growth rate, but excluding the 2/3, gets 226K tests completed in 2016.
KC said a national TV ad campaign would be 1/3 as much as the test, but on a per-spot basis, not overall, correct? I'm not sure that gives much insight into the anticipated cost of a national ad campaign.
They said the $4MM increase in sales & marketing expenses includes the cost of the TV ad test & the national sales meeting. Did they say what the TV test actually cost? If not, why didn't someone ask for clarification?
I think there is plenty of food for the shorts. 40K tests in 2016Q1 is only 5.3% Q/Q growth over the 38K tests sold in 2015Q4, which was already low (11.8% Q/Q) due to the holidays. This makes the second consecutive quarter to show a decay in the Q/Q growth rate.
Operating expenses are up $6.5MM or 13.8% over 2015Q4. Best case in my models, the TV ads in the test market could not cost more than $577K in order to break even. The mid-rang of my model puts it at $277K break-even. Other possible areas of op ex include R&D, which I would like to see, or general and administrative.
I think the market reaction will depend entirely on the cost of the TV advertising the market test, and the anticipated cost of the nationwide campaign. Getting some news about the path to a test for IBD patients would also be a big deal, but that seems to have dropped off their priority list.
I think HEDIS & STARS are more important than USPSTF. The former provides more concrete incentive for physician orders.
It is true that the compliance reported today is effected by 2015Q4, which was poor due to the holidays. Not sure why those kits didn't find their way into 2016Q1.
"Our compliance rate calculated as of March 31, 2016 was 69 percent. Cologuard's patient compliance rate is derived from the number of valid tests reported divided by the number of collection kits shipped to patients during the 12-month period ending 60 days prior to March 31, 2016."
This should be an interesting earnings call. I don't expect anything remarkable with regards to 2016Q1 sales, but what management has to say about the TV advertising market test will likely make the largest impact. If the market test impact translates to the nationwide market, the nationwide market ad campaign is cost-effective and the ads result in an increase in orders per physician, then they have something. Since Exact seems to have rolled out a nationwide TV ad campaign in 2016Q2, that would suggest that the ads are at least cost-effective. The market doesn't seem to be taking sides in any big way.