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Edited Transcript of EXAS earnings conference call or presentation 29-Oct-19 9:00pm GMT

Q3 2019 Exact Sciences Corp Earnings Call

MADISON Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Exact Sciences Corp earnings conference call or presentation Tuesday, October 29, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey T. Elliott

Exact Sciences Corporation - CFO

* Kevin T. Conroy

Exact Sciences Corporation - Chairman of the Board, President & CEO

* Mark Stenhouse

Exact Sciences Corporation - President of Cologuard

* Megan Jones

Exact Sciences Corporation - Associate Manager of IR

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Conference Call Participants

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* Brandon Couillard

Jefferies LLC, Research Division - Equity Analyst

* Brian David Weinstein

William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst

* Catherine Walden Ramsey Schulte

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Daniel Gregory Brennan

UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences

* Derik De Bruin

BofA Merrill Lynch, Research Division - MD of Equity Research

* Doug Schenkel

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Mark Anthony Massaro

Canaccord Genuity Corp., Research Division - Senior Analyst

* Puneet Souda

SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Exact Sciences third quarter earnings call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would like to hand the conference over to your speaker today, Megan Jones. Thank you. Please go ahead, madam.

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Megan Jones, Exact Sciences Corporation - Associate Manager of IR [2]

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Thank you, Bonita, and thanks, all of you for joining us for Exact Sciences' Third Quarter 2019 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. This news release and today's presentation are available on our website at exactsciences.com.

During today's call, we will make forward-looking statements based on current expectations. Our actual results may be materially different 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.

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [3]

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Thank you for joining us this afternoon.

The Exact Sciences team delivered another strong quarter and made significant progress enhancing our internal infrastructure, positioning us for long-term sustainable growth. We screened 456,000 people with Cologuard in the third quarter and more than 3 million people over the last 5 years.

During the quarter, the team delivered $219 million in revenue. We also implemented Epic's best-in-class electronic health record system as the foundation of our IT infrastructure, began processing Cologuard samples at our lab and prepared for the Genomic Health combination. We made meaningful progress on our pipeline with an expanded label for Cologuard to include people aged 45 through 49 and new data for Cologuard 2.0 and our liver cancer test.

Exact Sciences is positioned to be the cancer diagnostics leader for years to come. The strong foundation we've built for Cologuard and the capabilities being added by the Genomic Health team will help us capture a significant portion of our combined $20 billion total addressable market and deliver more innovative diagnostic test to people in need.

Today, we will review our third quarter financial performance and full year guidance and discuss progress on our 2019 priorities. Our CFO, Jeff Elliott, will now review our financial results.

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Jeffrey T. Elliott, Exact Sciences Corporation - CFO [4]

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Thanks, Kevin, and good afternoon, everyone.

Third quarter revenue increased 85% to $219 million on strong Cologuard volume growth. Average Cologuard revenue per test was $479, in line with the second quarter. We expect revenue per test in the $480 range during the fourth quarter.

Third quarter Cologuard cost of sales improved $10 to $114 per completed test. Lab and operational efficiencies helped offset additional costs from the opening of our new lab. We expect fourth quarter cost per test to be in the low to mid $120 range as we'll have a full quarter impact of the new lab. Over time, we'll work to offset the new lab costs through volume leverage and operational efficiencies, and we continue to see a clear path to Cologuard cost per test of $100 or better.

Third quarter gross margin was 76%, an increase of 130 basis points. Third quarter operating expense totaled $202 million, up 56%, which was 29 points lower than revenue growth.

Total selling and marketing expense of $86 million was better than expected due to the timing of certain marketing programs. Selling and marketing included the Pfizer service fee of $16 million, which was about $2 million more than we had assumed in guidance.

G&A expense of $81 million included $7 million in transaction-related costs for the planned Genomic Health combination as well as $2 million in integration-related costs, neither of which were factored into guidance.

We also invested in our IT infrastructure with the launch of Epic and an upgrade to our SAP ERP system.

R&D expense was $35 million. We invested in sample collection activities and studies to support our pipeline, including expanding Cologuard's label to age 45, Cologuard 2.0 and our liver cancer test.

In the fourth quarter, we expect operating expense to increase about $10 million sequentially due primarily to additional selling and marketing efforts. We expect G&A to be relatively flat, excluding any fourth quarter Genomic Health costs. We expect R&D to be relatively flat from the third quarter.

Total third quarter CapEx was $41 million. For the full year, we expect CapEx of approximately $185 million. Third quarter cash use totaled $79 million, including $43 million paid to Pfizer for service fees incurred from the beginning of the partnership through the end of June. We ended the quarter with cash and securities of $1.2 billion.

Turning to our guidance. We expect revenue of $802 million to $810 million and Cologuard volume of 1.67 million to 1.68 million tests. With just 2 months left in the year and a major holiday still in front of us, you should focus on the guidance range as the most likely view of how we see results playing out. For the fourth quarter, we expect revenue of $221 million to $229 million.

I will now turn the call back to Kevin.

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [5]

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Thanks, Jeff.

The Exact Sciences team is focused on 3 priorities in 2019: One, powering our partnership with Pfizer; two, enhancing Cologuard; and 3, advancing our pipeline of blood-based cancer diagnostic tests.

Starting with our first priority, we're confident that we can capture at least 40% of the U.S. colorectal cancer screening market from about 5% today. Our talented sales teams, partnership with Pfizer, innovative marketing campaign and deep payer relationships provide a powerful commercial organization to support Cologuard's growth. The Pfizer partnership has been valuable in driving Cologuard's adoption, and the teams are working well together.

Partnering with gastroenterologists will help Cologuard reach more people. In July, we launched a new GI sales team to call on these important influencers in colon cancer screening.

During the third quarter, we accomplished 2 major milestones in building a robust infrastructure to support Cologuard's growth. We began processing tests at our new lab in Madison, increasing our total lab capacity to 7 million tests per year.

We also successfully implemented Epic's powerful health IT platform. Epic's EHR system will provide an enhanced experience for Cologuard users, physicians and our employees. In the future, Epic will enable electronic ordering for a greater share of our customers. It will also allow powerful analysis and enhance our understanding of the entire Cologuard experience, improving our patient compliance and rescreening efforts.

Our second priority is enhancing Cologuard. There are 2 main components of this goal for 2019: Expanding Cologuard's label to include ages 45 to 49 and laying the foundation for an improved version of Cologuard.

Expanding Cologuard's label is an important opportunity for growth and for detecting colorectal cancer earlier. Last month, the FDA approved our label expansion, providing access to Cologuard for the 19 million average-risk unscreened Americans ages 45 to 49 and increasing its total addressable market by $3 billion to $18 billion.

Over the last 25 years, colorectal cancer incidents has increased more than 50% in people under the age of 50. It's incredibly important to screen younger people earlier. I mean Cologuard is a convenient, effective option that fits well into this younger age group's busy lifestyle.

Insurance coverage is essential to broad adoption in health care. Several national and regional payers have lowered their coverage screening age for Cologuard to 45, following the American Cancer Society guideline update last year, including Aetna, CareFirst and Blue Shield of California. This is encouraging progress and our team is engaging with other payers, educating our sales force and developing new marketing plans to help increase awareness for the importance of screening in this age group.

Cologuard 2.0 has the potential to lift Cologuard's clinical and economic value proposition even higher and further differentiate it as a frontline screening test. Our primary goal is to increase Cologuard's specificity while maintaining a high level of sensitivity. Higher specificity further enhances the overall health economic performance of Cologuard in the screening setting.

Today, we presented data at the American College of Gastroenterology Scientific Meeting demonstrating that we have identified markers with the potential to achieve our performance goals. At 92% specificity, the new markers were 92% sensitive for cancers and 65% sensitive for precancerous polyps. We are pleased with these strong results as we saw a 5 point increase in specificity while maintaining a similar level of sensitivity.

It's important to note, the precancerous polyps tested in this study were typically larger in size than we saw in our large prospective trial for Cologuard and therefore likely easier to detect. We may see some precancerous sensitivity improvement with Cologuard 2.0 from the current markers. However, the size of the precancerous polyps, stage of cancer, timing of sample collection relative to colonoscopy and many other factors can enhance performance in case-control studies.

Based on these strong results, we're initiating BLUE-C, a prospective pivotal trial to validate the performance of this new enhanced version of Cologuard and prepare for an FDA submission. We plan to enroll our first patient in BLUE-C next month. This is an exciting step towards setting an even higher bar in the early accurate detection of colorectal cancer.

Real-world evidence is critical to supporting continued Cologuard adoption over time. Working with Mayo Clinic, we recently initiated Voyage, a 150,000-patient prospective observational study of individuals using Cologuard for routine screening. This 7-year study will follow individuals to evaluate the real-world impact of Cologuard on screening, incidents and mortality rates.

Our third priority is advancing our blood-based cancer diagnostics program. We are uniquely positioned to be the leading cancer diagnostics company for years to come. Our collaboration with Mayo Clinic and the success of Cologuard provide a platform for future advancement.

The combination with Genomic Health will build on our success, creating an even stronger growth platform for Cologuard, Oncotype DX and our pipeline. We're bringing together some of the greatest minds in cancer diagnostics to form a best-in-class research, development, clinical and commercial organization. Together, we'll have the global infrastructure and a stronger financial profile to accelerate the availability of -- and growth of new innovative tests to patients in need.

Liver cancer is the #2 cancer killer globally, and patients with advanced liver disease need more accurate and convenient testing options. We're presenting data at the American Association for the Study of Liver Diseases meeting next month, demonstrating superior performance of our liver test compared to the alpha-fetoprotein test. We'll provide more details about these data after they are presented at AASLD and no longer under embargo. We're also enrolling additional patients to finalize test development and plan to make the test available in the second half of next year.

Our goal is to generate real-world evidence to support guideline inclusion, broad reimbursement and adoption over time. We believe tests that can accurately detect precancer and early-stage colorectal cancer like Cologuard and colonoscopy will lead the U.S. screening market, while a blood-based test could provide another option for some people. To support validation of our blood-based colorectal cancer screening test and create significant cost and time efficiencies, we plan to collect blood and stool in our BLUE-C study beginning in the coming weeks.

Our years of work with Mayo Clinic, combined with our low-cost, accurate testing platform and extensive clinical trial, regulatory and commercial capabilities, position us as the leader in this space.

We're now happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Brian Weinstein with William Blair.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [2]

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Wanted to start out just on a broad question on the Cologuard franchise right now. It sounds like things are going okay relative to your expectations, but I mean, you do have a lot of things going on with Epic and the GI sales force and some other things that I think you guys mentioned. So Kevin, can you just talk a little bit about any kind of an impact that those things might have right now relative to the Cologuard franchise in total?

And then as part of that, also just how you're seeing the sales force working with Pfizer? Are we seeing the kind of full efficiency between the sales force as of this time? Or is there still more to go as those 2 groups get together?

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [3]

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Thanks, Brian. What we see is a continued strong progress towards our goal of reaching 40% penetration or market share of what today stands at about 106 million-person market opportunity. And all of the signals that we see and the work that we're doing is preparing for that long-term.

There are always some minor disruptions at any time. We did implement Epic during the quarter. Really proud of the work that the team did there to make a major IT transformation during the middle of a quarter and still achieve record results. We also saw some of our very best reps move into new roles with -- in the GI sales force.

And as it relates to Pfizer, the partnership there is stronger than ever. The teams are really jelling. The marketing, the sales, the health system sales are -- we're seeing significant progress, and we have high expectations for next year.

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Jeffrey T. Elliott, Exact Sciences Corporation - CFO [4]

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And Brian, this is Jeff. Just to add to what Kevin said, when I look across the key leading indicators in the business, I see very strong momentum. So for example, when I look at our sales force, I can look at the productivity of each cohort of reps that we've hired over time. Recall, we specifically hired a new cohort every year. Every cohort of reps continues to get most productive, so even the reps from 5 years ago continue to get most -- more productive each year.

On top of that, when I look at the physicians that have ordered Cologuard, right, so over 180,000 total providers that have ordered, every cohort of providers, based on when they first ordered, when I look at different quarters of first order, they continue to get more productive. So we're seeing very good incremental productivity across our reps and across our -- across the physician base. So I see very strong momentum across the business.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [5]

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Okay. And I'll let someone, I think, follow-up on some of that. But just on the blood stuff, can you give us just an update where you guys are as far as collection of data? Internally, you've doubled the number of blood samples, I think, you were getting out of one clinical trial or if there's just an enrollment of trying to get samples. Now you're collecting, in 2.0, some blood samples. So can you give us an idea just where you think you are in development here and when we could get an update on something more formal as far as time frames to see some data from you guys?

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [6]

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Brian, we've recently completed a case-control data or case-control study demonstrating strong performance with the blood-based colorectal cancer test. Let me take a step back here. The way that we see the opportunity is that colonoscopy penetration had leveled off at -- for about the 10-year period prior to Cologuard being FDA-approved. And with colonoscopy, you have a highly accurate but a low patient-friendly test, and with Cologuard, you have high accuracy and high patient friendliness. And what you've seen is significant adoption among people who've never been screened before with Cologuard. The FIT test, you see the opposite. You see lower performance yet high ease of use on the patient's part. And what we're seeing now overall is Cologuard taking share from colonoscopy in the screening setting and the FIT test and, importantly, expanding the overall population.

A blood test has -- any of the data that we have seen has lower performance than even the FIT test in terms of precancer detection, which is really important as models -- as the data then feeds these models, and similar performance for cancer detection at a similar specificity. So we believe, as a result of that, that a blood test has to be priced appropriately and that it has more of a niche because of its performance characteristics is likely to model out as an annual test. It's unlikely to model as an every 3-year test, putting pretty significant pressure on pricing.

The other thing to know about a blood-based program is we don't anticipate having this study done completed until after it's too late to be in the next USPSTF guidelines. That's true, we think, of any other entrants in this space. So the first time a blood-based test would potentially be in the USPSTF guidelines would be in the 2026 to 2027 time frame. During that time, we intend to continue to grow the market penetration of Cologuard and to continue to enhance, like we referenced with the Voyage study and Cologuard 2.0, to continue to raise the standard -- the bar and the standard -- enhance our standard of care position in the guidelines.

So that's how we see the overall opportunity with the blood-based test. We're pleased with our performance and we have not yet decided when we will make that performance available publicly.

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Operator [7]

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Your next question comes the line of Brandon Couillard with Jefferies.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [8]

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Kevin, just to come back to the third quarter, to what extent do you think Genomic Health was a distraction at all in the period? I know you also pulled the reps out for some period of time to go through training for Cologuard 45. You think either of those 2 dynamics had an impact on the third quarter?

And then, Jeff, as we look at the fourth quarter guide, it seems to imply about -- a sequential increase of about 15,000 tests, which would suggest that utilization per doc might actually decline sequentially. Can you help us think through some of the moving parts and factors that kind of informed your guidance on the fourth quarter?

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Jeffrey T. Elliott, Exact Sciences Corporation - CFO [9]

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Brandon, this is Jeff. First question on the third quarter Genomic Health and the GI transition, the team has done a very good job of working through all those things. And like I said before, we have very broad momentum throughout the Cologuard business. I always go back to the size of this market, 106 million people. Long-term, we're headed to at least 40% share. We have 5% today. Nothing has changed about this business. It is very strong.

You had a comment then about the fourth quarter guide. I would say, for the fourth quarter, keep in mind when you look over the 5 years now of history, in all those years but one, we did see a small downtick in the fourth quarter in terms of test per doctor. The simple reason is seasonality. When you head into the fourth quarter, you have seasonal headwinds from the holidays. Patients don't go out to see their doctors as much around the holidays, and that impacts our business temporarily. Over long-term, we expect continued momentum. When we look ahead to next year, there's a significant number of drivers in, and Mark can add to this, but we have a lot of new drivers coming on next year and the following year. So we are very optimistic about the state of Cologuard.

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Mark Stenhouse, Exact Sciences Corporation - President of Cologuard [10]

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Yes. Thanks, Jeff. This is Mark. There are so many positive drivers. The first that Jeff highlighted, I think, is the size of the market, over 100 million Americans, and our share position, which gives you a sense of the possibility going forward. A big part of that is Cologuard 45 and the 19 million Americans that need to be screened. It's our moral obligation to screen that population. The incidence rate of increase is over 50%. And we've seen, obviously, the label change and very good training. That training was done quickly in an expedited format. We're now communicating to doctors about that.

The other piece about the business I'm really excited about is the fact that 96% of our patient population is able to receive Cologuard without any cost share, a $0 co-pay, for almost the entire available market. You take that, you add on the rescreen business, the 3-year interval, and all the patients has start to come back to us next year; you add the fact that health systems, we're starting to see an increase in electronic ordering out of our health systems, which is a by-product of the strong collaboration with Pfizer, I really think it gives you a sense that what's in front of us is a really, really strong business model.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [11]

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That's helpful. Mark, maybe sticking with you, one follow-up. Do you still plan for the Veeva CRM rollout in the fourth quarter? And what impact do you think that has on productivity and how quickly that can begin to sort of boost the productivity of the sales force? Is this something that would happen fairly soon? Or is it more measured over a period of time as they get more familiar with the platform?

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Mark Stenhouse, Exact Sciences Corporation - President of Cologuard [12]

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Yes, we are launching Veeva the first week in December. Yes, I think it makes us more productive over time. I don't think you see immediate productivity in part because of the timing of the year we're launching the tool. It enables the representatives to better manage their business, their doctor engagements. We will also be putting our marketing content on the Veeva platform through their iPad, which will enable them to have a better conversation with their physicians, but I think you'll really see the productivity in next year.

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Operator [13]

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

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [14]

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So I'm just curious. The pro forma deal model that you put out there basically implies stand-alone -- growth to the stand-alone Exact on a year-over basis about 40%. Are you comfortable with that number as it's out there right now? Can you help me with that?

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Jeffrey T. Elliott, Exact Sciences Corporation - CFO [15]

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Derik, this is Jeff. We plan to issue 2020 guidance on our fourth quarter call, which is when we typically give it. I'm not sure which model you're referring to, but always said about next year is what we said in the last call of $1.6 billion of revenue at $1.2 billion of gross profit. We haven't commented beyond that.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [16]

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This is basically doing the math on the pro forma number for the company and the stand-alone and Genomic Health in terms of the doc -- the filing and just sort of backing into a 40% growth rate on Exact that way, that's what I was getting to. Anyhow, just can you talk about progress in getting rescreening, given that there's a number of people that were coming up for retesting?

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Mark Stenhouse, Exact Sciences Corporation - President of Cologuard [17]

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Yes, Derik. This is Mark. The rescreen business is obviously a growing opportunity for us and is sizable next year. We've continued to outreach to patients and see not only a better compliance when a patient actually has a rescreen test ordered. They return it at a higher compliance rate than our rest of patients, the new screen patients.

We continue to look for productivity gains. I would say we've not completely solved this yet, but we have made measured performance. We continue to try ways to better engage patients, both digitally and through written communication, to get them to activate and come back to us. I will say that once we get more embedded electronically, both with Epic and into the electronic medical record, we'll continue to see leverage in this opportunity.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [18]

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Great. And what was the compliance rate for the quarter?

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Jeffrey T. Elliott, Exact Sciences Corporation - CFO [19]

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67%. And then when I look ahead to next quarter, I expect it to be at least 66%. There's always a bit of a seasonal impact, again, similar to what we said about the holidays from a completed test standpoint. Around the holidays, patients complied to studies at a slower rate, so expect it to be down a little bit in the fourth quarter.

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Operator [20]

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Your next question is from the line of Doug Schenkel with Cowen.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [21]

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So both Brian and Brandon asked about Q3 performance and what's implied in guidance for Q4. I apologize, but I don't think we got out of you what we were looking for, so I'm going take another shot.

I think almost all of us on this call know about the market opportunity. It's huge and we're excited about your positioning to get more people screened for what's a very treatable cancer. That said, while we appreciate that, I know you appreciate part of our job is also understand -- to understand how well you're executing to plan and underlying trends in the business. So again, maybe to take another angle on this, in the third quarter, while orders per doc improved 0.07 in Q3 relative to Q2, this was actually a moderation relative to the average we've seen in terms of sequential growth in that metric over the past 6 quarters. Were there transitory dynamics in the quarter? Several of them have been listed already. Were there transitory dynamics in the quarter that impacted productivity as measured by that metric that you don't expect to continue in the long term? That's the first question.

The second question, again, going to guidance, is you talked about a seasonal moderation, Jeff, but I don't think that, that was true last year. And if we think about things like the fact that the Pfizer reps as well as the reps that you hired in the back half of last year just hitting their stride, spending on advertising is not only increasing, but increasingly going through Pfizer, which is supposed to actually increase the efficiency of spend. Why wouldn't those things, especially given, as you said, how early the stage of market penetration is, why wouldn't those things overpower any seasonality in the business?

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [22]

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Hey, Doug, I'll first take this and pass it to Jeff. We appreciate the fact that you have a job to do. And I think what we're trying to say is, over time, you have seen fluctuations in the performance. What you're looking at here is a record quarter of 90% order growth. And you have to put all of this in the context that there are always puts and takes at any given time when you are moving reps around where -- when you're putting in a new IT platform, when you have a large partner with dynamics on their own. And what we're trying to say is put all of that noise aside and look at the track record of continued growth, and that growth is driven by this underlying growth in the overall number of people who are willing to get screened. And we have seen this not change much since we launched Cologuard, that 50% of people get a Cologuard test have never been screened before. With 19 million Americans in the 45 to 49 age group and about 35 million Americans in the older age group that have never been screened, this market is going to grow and it's going to continue to grow at a steep pace. So we're not going to get into all of the dynamics of a quarter that was a really strong quarter, what we will say is we're very confident as we look at next year.

Jeff, if you want to provide an additional color.

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Jeffrey T. Elliott, Exact Sciences Corporation - CFO [23]

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This is Jeff, just to comment on Q4. So when I look back over every year since launch, Q4, the completed tests per physician have been down sequentially relative to Q3. The only year where that was not the case was 2018. In 2018, keep in mind that we had just added some reps during the middle of the third quarter. And in September, we had some new coverage wins with Cigna and Anthem. And then in the start of the fourth quarter, our Pfizer partnership began. So there was a lot of unique tailwind to the fourth quarter. The more normal trend though and one that you should expect going forward is to have a slight downtick in the completed tests per physician in the fourth quarter.

That's not to say that the longer-term trends aren't clear, which Kevin talked about. Longer term, the number of completed tests per physician should go up significantly. Today, we've only captured just about 5% of the available patient per physician. There's about 300 patients on average out there today per physician that could today use Cologuard. So it's a huge market and we're just getting started.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [24]

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Okay. I appreciate you indulging on those topics again. Just a couple on BLUE-C. It looks like you reduced the age cutoff to 40. Could you just walk us through why you did that and what the broader implications are?

And then just from a performance standpoint, if I remember correctly, there was a drop-off in sensitivity when you moved from the case-control study to DeeP-C. Are there reasons you wouldn't expect the same type of a drop-off this time?

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [25]

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Sure. Thanks, Doug. Well, the reason that we included age 40-plus is to make sure that we have data should there ever be a further lowering of the age in the colon cancer screening guidelines. Most likely, we see that the guidelines is staying at age 45 for some time. It's an opportunity though for us to evaluate performance in that even lower age group.

The other key differences here between BLUE-C and DeeP-C is we're including patients with the second -- with more than 2 first-degree relatives with CRC or 1 first-degree relative with CRC before the age of 60, so people with a family history or patients with a family history of a genetically predisposition to colorectal cancer like FAP or Lynch syndrome. We also have 120 sites versus 90 sites in the DeeP-C study. And we're also doing optional blood collection. We expect to get blood -- collect blood from most patients in this study. Obviously, people are a lot more familiar with Cologuard now than they were when we initiated the DeeP-C study. So we're confident that we can meet our enrollment goals in the time frame we're looking at.

And in terms of the performance, do we expect the performance drop-off as we look from a case-control study to a prospective study? That has -- is almost always the case that you see that performance drop-off. The key thing here though is specificity. The specificity of 92%, we -- those -- we're fairly confident that we will be north of 90% specificity given that that's where we will set the cutoff in the large number of patients that we have studied, many in that prospective environment. But yes, you will always see, whether it's a blood-based test or a stool-based test, you would expect to see some performance degradation.

Yes. And one thing to note there, Doug, is we put out the data comparing Cologuard, the current version to Cologuard 2.0 to show the relative performance difference because that's -- that can give you some indication of our confidence level that Cologuard 2.0 is actually a better test.

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Operator [26]

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Your next question comes from the line of Catherine Schulte with Baird.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [27]

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First, for BLUE-C, how long do you expect that trial to take? And what do you think the all-in cost of the study will be?

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [28]

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We have not provided clarity on the former. I'll let Jeff decide whether he wants to provide clarity.

What -- here's what I'll say in the former. The Cologuard DeeP-C study took, I think, between 18 and 21 months, thereabouts. And we shouldn't be longer than that, that's for certain.

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Jeffrey T. Elliott, Exact Sciences Corporation - CFO [29]

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Yes, Catherine. This is Jeff. DeeP-C took about 18 months to enroll. And we've said before, it cost around $50 million all-in. This one -- over time, Exact has gotten even more efficient at running these big studies. We've got a lot of experience running these studies. So it's a core competency. So as Kevin mentioned, our goal would be to get this done as quickly and efficiently as possible.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [30]

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And then just so I'm clear on the blood test piece of that, if the test performs well, is your intention to use BLUE-C as the FDA pivotal trial for the blood test as well? And then off of that, I know you aren't talking about performance of that blood test, but can you just say how many patients you've included in that case-control study you mentioned, Kevin?

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [31]

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In terms of the blood case-control study?

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [32]

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Yes.

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [33]

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We haven't disclosed that, but it was sufficiently powered to give us confidence in terms of the number of cancers.

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Jeffrey T. Elliott, Exact Sciences Corporation - CFO [34]

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And then, yes, Catherine, this is Jeff. We do intend to use these blood specimens collected as part of BLUE-C as towards an FDA submission.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [35]

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Okay. Great. And then last one for me. On 45 to 49, on your website, it says that 74% of Cologuard patients in that age group have had no out-of-pocket costs for screening, which seems pretty high for this early on. I guess for that $1.6 billion revenue number you've talked about for 2020, how much of an impact do you think that age group could have on results next year?

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Mark Stenhouse, Exact Sciences Corporation - President of Cologuard [36]

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Catherine, it's Mark Stenhouse. So the 74% number is a reflection of some of the positive moves we've seen from Aetna, CareFirst and Blue Shield of California that Kevin mentioned. We're in active conversations with all the other national payers. We have confidence that those conversations are progressing. I do -- I would signal that a lot of them are anchored to the USPSTF evidence review of this age cohort, which will -- we likely believe will happen in 2021. So I think we'll have to wait and see on the payer coverage, but a portion of the 45 to 49 I think will be gated by the access that's available for that patient population. As it grows, I think that business will grow with it.

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Jeffrey T. Elliott, Exact Sciences Corporation - CFO [37]

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Catherine, this is Jeff. Just to add to what Mark said, part of why we're so excited about 45 to 49 is that this 19 million-person addition to our target market includes patients that are almost all unscreened. So when you look at the number of incremental people who are available, it's about a 50% growth in people who can today use Cologuard. On top of that, in the 45 to 49-year-old patient population, Cologuard fits very well into these patients' lifestyles. So we're very optimistic that we can have a very strong start. As far as what's baked into the prelim guidance for next year, we'll give more color on that on the fourth quarter call.

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Operator [38]

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Your next question comes from the line of Dan Brennan with UBS.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [39]

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I wanted to -- just first question, just on Pfizer, maybe Kevin, Mark or Jeff. In terms of the relationship, maybe post Lyrica going off-patent, has that kind of impacted maybe the sales force, kind of where they're carrying -- where they're pushing Cologuard?

And then maybe, Mark, could you speak to kind of where we are in that productivity curve? I know typically, there's a number of visits where doctors will begin -- or sales people get more productive. With Pfizer coming on board last October, kind of have we hit that point yet? Are we part of the way in there? Just kind of walk us through that productivity on reps. And then I have a couple of follow-ups.

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [40]

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Dan, it's Kevin. Pfizer really has been an incredible partner. And there had been some moving pieces there. They are fully committed to Cologuard. Their commercial efforts have been remarkable, and we've learned a lot from them. We're obviously getting a lot of attention because -- and that was really a driving force behind partnering with Pfizer and Pfizer wanting to partner with us. We're getting a lot of their attention. Their health systems team is really kicking in. We're seeing the results of that. And we expect that to continue into next year. Mark?

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Mark Stenhouse, Exact Sciences Corporation - President of Cologuard [41]

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Dan, what I would say is, as you know, we're about a year removed from the start of the collaboration with Pfizer, and this is about the time, 6 to 12 months post removed from promoting Cologuard, that you start to see the productivity curve ramp up. Let's also remember that Pfizer is delivering most of their calls in a second or third physician. So where we see the greatest strength in the co-promotion between Pfizer and Exact Sciences is when we share focus on a single doctor. When that happens, it's where we see the most lift.

I would echo what Kevin has said. This is a very productive partnership. The teams are working collaboratively very well together. The qualitative feedback continues to be positive. And we continue to believe, with the large market that we're operating in and our share position, that we've got a great future ahead of us.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [42]

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So maybe one quick follow-up related to that. So is it fair to say that possibly that productivity impact that you expect to see, it sounds like that's largely ahead of us here?

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Mark Stenhouse, Exact Sciences Corporation - President of Cologuard [43]

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I think that's a fair statement. We're right at the point where you would see the productivity picking up. And this is the time that -- the way the organization between Pfizer and Exact of where we're focusing our call effort, we've had a year of behavior to observe where Pfizer has made calls, where Exact has made calls, where we've made them together. That allows us to optimize where we go next. It is also the time that reps naturally start to be -- become more productive.

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Jeffrey T. Elliott, Exact Sciences Corporation - CFO [44]

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And Dan, this is Jeff. To add to what Mark said, I would expect the Pfizer reps and the Exact reps to continue to get more productive every year for the foreseeable future. I mentioned earlier that the reps that we had from the time of launch, so about 5 years ago, continued to get more productive. So it's not that you get, say, 6, 12 months in and you peak out. No, you keep getting better and better at your job.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [45]

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And then maybe just on some of these other big opportunities that are ahead of you, and you've kind of alluded to maybe 2020 and beyond obviously, given you're 5% penetrated, but between the IDN and the reorder and the electronic order, those are 3 big kind of opportunities. Could you maybe just briefly touch upon kind of where we are with kind of traction on those 3?

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [46]

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IDN reorder and?

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [47]

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And electronic order.

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Mark Stenhouse, Exact Sciences Corporation - President of Cologuard [48]

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So Dan, it's Mark. I think you framed it correctly. Where we see an electronic order, we know that any time we have a system or a physician that's using electronic means to order, they order on average at least 20% more than those who are on traditional fax order. So we know that when that happens, we see growth.

What we see in health systems in general is movement. So as we focus with Pfizer on accounts, one of the measures of productivity of that partnered effort against the account is increased electronic ordering and a bidirectional interface. We see growth in that number, number of systems using a bidirectional interface growing every quarter. We see that starting to pick up traction.

I answered the rescreen question earlier, but it is an opportunity that grows over time. We're seeing performance both in the compliance rate in terms of number of kits that come back to us in the second order of the eligible patient population. We saw tactics we're deploying to drive incremental growth of the rescreen population and the number of patients that come back to us. There's still room for improvement there. And then the last one was on...

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [49]

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I think you hit them, IDN reorder and electronic order, yes.

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Mark Stenhouse, Exact Sciences Corporation - President of Cologuard [50]

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That's it, I think.

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [51]

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I wonder if there's a...

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [52]

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Kevin, I mean, I know I'm kind of asking you a third question, but since you talked a lot about liquid biopsy kind of during your prepared remarks, I think you mentioned in the prepared remarks that your expectations are for your tests and for other tests that are working through the different levels of development that you think the best case will be similar to FIT. So basically, can you just remind us, so FIT, as I recall, 95% specificity, 74% sensitivity, is that kind of what you think the best case is kind of for your test and/or any of the other tests that are working their way through development?

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [53]

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And 24% specificity for -- I'm sorry, sensitivity for advanced adenomas. And we have built a model, a very sophisticated, enhanced version of the models that exist in colorectal cancer screening. So we have the advantage to be able to scenario play with those models in terms of if you increased the advanced adenoma sensitivity, bring down the Stage I cancer sensitivity and play with the specificity, then does that meet the USPSTF criteria for inclusion. And the challenge that you see with most of the data for those who are aspiring entrants into colorectal cancer screening with a blood-based test is low early-stage cancer sensitivity, poor specificity, relatively poor specificity relative to the FIT test, and no data on advanced adenomas. And to get advanced adenoma data, you need to run a prospective study because the adenomas are typically cut out before -- they're typically cut out by the time you have an opportunity to get a blood drop. So if you collect a blood drop before the colonoscopy, that works and you can collect those samples. What you saw on the data that we just presented with 65% advanced adenoma detection, we do not expect the ultimate Cologuard 2.0 test to deliver 65%. Those advanced adenomas were larger because they were left in, and that's how we were able to get a blood drop before colonoscopy. So when you take a look at what is required, you need to have some measure of advanced adenoma sensitivity. And that's the hardest thing to do because there's one layer of the cells that are starting to progress towards cancer and they are being shed into the colon, not into the blood supply, which is why it's really hard to find signal. That's that context here.

As a result of all of that, there's one big takeaway. A blood-based test is likely to model as an annual test. There's another takeaway from that. It's that the price is probably in the area of 1/3 of what Cologuard is priced today. That doesn't leave a lot of room for all the costs associated with DNA sequencing, which is why we are focused on a lower-cost approach so that we can bring a test to market for people who refuse both Cologuard and colonoscopy, which we think will be a small fraction of the overall opportunity.

So we have spent 10 years really digging in here. We've looked at every way that we could get to 100% screened. This is one of those ways. We don't think it's going to take share in a major way from either colonoscopy or Cologuard, especially as you project where colonoscopy and Cologuard end up a decade from now, where we think if you have 85% penetration between those 2 approaches, and probably roughly split. I know that's a long-winded -- that may be a long-winded explanation, but that's the context with which we are -- we plan to launch a blood-based test.

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Operator [54]

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Your next question is from the line of Puneet Souda with SVB Leerink.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [55]

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Mark, if I could ask on the reps. As they go out there and you get feedback from the new physicians and new docs and as well as the multiyear Cologuard prescribers, has the feedback changed from either of those 2 groups in the near-term here? Just trying to get a sense of what the Exact reps themselves and the Pfizer reps are hearing. Has that changed at all? And is it any different than Exact versus the Pfizer reps? If you could elaborate there, that will be really helpful.

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Mark Stenhouse, Exact Sciences Corporation - President of Cologuard [56]

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So there is no qualitative feedback difference between the cohort of doctors or the reps and how they call on doctors. Certainly, where we associate collaborative effort on a single doctor, so a doctor that has a large opportunity to screen patients, we see the greatest lift. So -- and that doctor, they've been convinced to use Cologuard as a more frontline option than those that have lower value or current lower writing. So the only qualitative difference there is that they are stronger believers in Cologuard as a frontline screening test by way of the frequency of the effort and their acceptance of the message. But it's -- the underlying story is still true, which is doctors are responsive to promotion and we don't see a degrade in the -- when we make more calls, in their willingness and use of this product.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [57]

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Okay. And if I could ask on DeeP-C, a number of questions have been asked here. So I mean, I appreciate that you are starting DeeP-C, a blood sub-study here. I just wanted to confirm, your confidence appears to be coming from this case-control study or internal study that you conducted here. Given the investment into this and your confidence behind this, I mean, when can we see this data?

And the second part of that question is as you start enrolling here, just I was just curious if you have, among the 120 sites that you have, do you have any enrollment concerns? Obviously, a number of colonoscopies are conducted every day, but we have a few other trials that are ramping now in the next year or 3 that I can see 10,000 patient trials. So just wanted to get a sense of is there any competitive concerns in these trials?

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [58]

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We have no plans in the near-term to publish our internal data. There are 120 sites that are enrolling. We have tremendous confidence that we will be first to complete studies. We have the scale, we have the relationship with physicians and the commercial organization and the brand awareness and focus. So we're confident that we'll be first.

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Jeffrey T. Elliott, Exact Sciences Corporation - CFO [59]

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Puneet, this is Jeff. Just to add to what Kevin said, we have multiple prospective studies underway now. Many of these samples are being used for product development. Many of these sites in these studies we expect to convert over to the BLUE-C study. So I think we're in a very good position to enroll the 10,000 patients that we need and move very quickly with BLUE-C.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [60]

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Okay. And last one, if I could. Appreciate the fact that you could squeeze in. Just the 45 to 49 contribution in the quarter, Jeff? And what was the expectation for the contribution in the fourth quarter for the 49 -- 45 to 49-year-olds?

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Jeffrey T. Elliott, Exact Sciences Corporation - CFO [61]

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So the revenue impact of 45 to 49, given when the FDA approval happened, was not material to the quarter. We will not promote a product off-label, and that approval came so late in the quarter that it wasn't material.

And what was the second question, Puneet?

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [62]

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Just in the fourth quarter, if you could -- this is September 23, I believe, when it came through. So I just wanted to get a sense of what would be potentially here in the fourth quarter because it was marketed, I believe, on the first day. I mean it could have been marketed on the first day.

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Jeffrey T. Elliott, Exact Sciences Corporation - CFO [63]

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Look, we're very excited about the opportunity here. Again, 19 million people is a huge opportunity long term. However, keep in mind that we're just now out there training the reps, laying the foundation from a marketing perspective. So I wouldn't expect a material impact in the fourth quarter either.

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Operator [64]

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This question is from the mark -- the line of Mark Massaro with Canaccord Genuity.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [65]

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So my first question is, I guess, a 2-parter on marketing. First is do you expect to initiate the consumer-initiated pilot in Q4 or have you started that? And then the second one is when should we expect to see the age 45 change to some of these direct-to-consumer commercials on TV?

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Mark Stenhouse, Exact Sciences Corporation - President of Cologuard [66]

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So this Mark. I'll take the second question first. So one of the things we know to be true is that, as we've talked about, this is a big opportunity. We know the 19 million, the 50% increase. American Cancer Society's recommendation really triggered our FDA labeling effort. And you've heard that we've got 74% coverage, and that coverage needs to grow over time to really get leverage in this screening population that vastly remains unscreened. So we believe the most important thing to do is communicate to doctors first. So that's why our training has started and we're out communicating to doctors and, frankly, the payers. We expect to convert our TV commercial to say eligible for 45 starting early next year. So that -- and I think that trigger is appropriate because then we will have talked to our physician population first. I've also mentioned previously that we were looking at a consumer-initiated pilot this year and we're still on track to do a small pilot on capabilities this year.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [67]

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Got it. And then I did want to ask a question about the blood test initiative. Can you just clarify that this is expected to roll out in Europe or outside the U.S.? Just want to clarify that I don't believe you have plans to launch a blood-based test in the U.S. And if you do, can you please comment on that?

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [68]

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We -- this will -- the study that we're doing now, BLUE-C, would support an FDA submission in the U.S., yes, and our comments so far on this call have been aimed at the U.S. market, not the European market. The European market is an opportunity we'll look at. We'll do that in combination with the Genomic Health international team, which is about 100-people strong, and they'll help us evaluate the opportunity outside the U.S.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [69]

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Excellent. And then one last quick one. On the Epic health record system that was implemented in the third quarter, I could be wrong, but I think there may be another piece to this some time next year and I think it's related to capabilities surrounding text messages or e-mailing to drive reordering. Is that something that we can expect later next year? Or was that also implemented in Q3?

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [70]

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Mark, I think what you're recalling is that in -- towards the end of next year, we expect Epic to enable electronic ordering for virtually all physicians who use the -- any instance of Epic. And that is an important long-term driver of adoption because it enables tremendously easy ordering for physicians. And as you know, Epic has about 70% market share. So that, I think, is the question or is the thing that you're remembering.

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Jeffrey T. Elliott, Exact Sciences Corporation - CFO [71]

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Mark, this Jeff. To add to what Kevin said, today, when we look at all the providers that order electronically compared to providers that order via fax, the ones that order electronically over -- order over 60% more than the ones that order via fax. And as Mark said, when you see that conversion to electronic order, you see a pretty quick bump up in their order rates. And so we're very excited about the opportunity over time that Epic can help us with.

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Operator [72]

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And we have reached our allotted time for Q&A. I will now turn the call back over to Kevin Conroy for final remarks.

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Kevin T. Conroy, Exact Sciences Corporation - Chairman of the Board, President & CEO [73]

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Well, thank you for joining us today to review our third quarter results and the progress we made toward our 2019 priorities. The Exact Sciences team delivered another strong quarter and made significant progress enhancing our internal infrastructure and advancing our pipeline, positioning us for long-term sustainable growth.

Thank you to the entire team at Exact Sciences for your hard work and continued commitment to our mission.

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Operator [74]

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