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Edited Transcript of EXAS earnings conference call or presentation 21-Feb-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Exact Sciences Corp Earnings Call

MADISON Feb 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Exact Sciences Corp earnings conference call or presentation Tuesday, February 21, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* JP Fielder

Exact Sciences Corporation - Senior Director of Corporate Communications

* Kevin Conroy

Exact Sciences Corporation - Chairman & CEO

* Jeff Elliott

Exact Sciences Corporation - CFO

* Maneesh Arora

Exact Sciences Corporation - COO

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Conference Call Participants

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* Brian Weinstein

William Blair & Company - Analyst

* Katherine Schoen

Robert W. Baird & Co. - Analyst

* Bill Bonello

Craig-Hallum Capital Group - Analyst

* Brandon Couillard

Jefferies LLC - Analyst

* Mark Massaro

Canaccord Genuity - Analyst

* Bruce Jackson

Lake Street Capital - Analyst

* Isaac Ro

Goldman Sachs - Analyst

* Chris Lewis

ROTH Capital Partners - Analyst

* Raymond Myers

Benchmark Capital - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Lindsay and I will be your conference operator today. At this time, I would like to welcome everyone to the Exact Sciences Corporation fourth-quarter 2016 earnings conference call.

(Operator Instructions)

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

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JP Fielder, Exact Sciences Corporation - Senior Director of Corporate Communications [2]

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Thank you, Lindsay, and thank you for joining us for Exact Sciences' fourth-quarter and full-year of 2016 conference call. On the call today are Kevin Conroy, the Company's Chairman and CEO, Maneesh Arora, our Chief Operating Officer, and Jeff Elliott, our Chief Financial Officer. Exact Sciences issued a news release earlier this morning detailing our fourth-quarter financial results. If you've not seen the release, please go to our website, exactsciences.com.

Following the Safe Harbor Statement, Kevin will provide an overview of our 2016 performance. Next, Jeff will provide a summary of our fourth-quarter and full-year 2016 financial results, and then Kevin will provide an update on our corporate priorities.

During today's call, we 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 our Chairman and CEO, Kevin Conroy.

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Kevin Conroy, Exact Sciences Corporation - Chairman & CEO [3]

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

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

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

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

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Jeff Elliott, Exact Sciences Corporation - CFO [4]

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

Relative to our fourth-quarter revenue guidance, about 75% of the upside came from higher than expected ASP and about 25% came from higher than expected volumes. We saw strength throughout the quarter in reorder rates and new provider additions, which average nearly 750 a week. The commercial team did an outstanding job executing during the slower holiday period.

For the full year, revenue of $99.4 million grew 152% and came in at the high end of our original expectations. Cologuard volumes were 244,000 for the year, exceeding our original guidance of at least 240,000 tests. Fourth-quarter ASP increased to $432 per test, up 5% sequentially, primarily due to improved cash collections. ASP for the full year was $408.

We continue to expect quarter-to-quarter variability in our ASP due to payer mix changes and normal timing variations in cash collections. The scale and leverage potential of our manufacturing and lab operations were evident again this quarter.

Fourth-quarter cost of sales totaled $170 per completed test and improved by $8 sequentially. During the quarter, we experienced the favorable effects of careful cost control and increased test volume. The fourth-quarter improvement in ASP and cost per test lifted gross margin to 61% up 400 basis points sequentially.

For the full year, gross margin was 55%, up 1,700 basis points compared to 2015. We remain comfortable with our long-term margin trajectory. We expect scaled investments to moderate the pace of gross margin expansion this year relative to last year. Fourth-quarter operating expense totaled $59.1 million, higher sequentially by $4.9 million, primarily due to the higher level of national TV advertising described on our third-quarter call.

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

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

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

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

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Kevin Conroy, Exact Sciences Corporation - Chairman & CEO [5]

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Thank you, Jeff. Our business is strong and we are particularly happy about the impact that Cologuard is having on people across the country. We estimate that Cologuard detected cancer in approximately 1,500 people last year. Of those, an estimated 1,100 were early stage curable cancers. Early detection is critical because 9 out of 10 people survive when diagnosed with colon cancer in the early stages, while only 1 out of 10 people survive when diagnosed in the later stage.

Cologuard is more than an advanced test. It also includes a differentiated compliance service that aims to get people screened effectively with high level of satisfaction. Cologuard's compliance service combines excellent customer care and state-of-the-art technology to encourage patients to complete the test.

The compliance rate we are achieving is encouraging. As a reference, colonoscopy compliance within a given year is less than 40% in compliance with [FIT] testing over three years is approximately 14%. Cologuard's compliance rate at the end of 2016 was 67%. As the mix of Cologuard users continues to shift to commercially insured patients, we expect the compliance rate will trend toward the lower 60s during 2017 before increasing over time.

Last year, the compliance rate for Cologuard held stable at approximately 70% to 75% for those covered by Medicare and approximately 55% to 60% for the commercially insured. Medicare beneficiaries accounted for 69% of completed Cologuard tests. During 2016, commercial insurance coverage of Cologuard expanded by 62 million covered lives or 67%, with 37 insurance companies announcing positive coverage decisions during the second half of last year, and another 14, so far, this year.

Approximately 171 million people now participate in health plans that cover Cologuard. 72% of Cologuard's addressable market, average risk people between the ages of 50 and 84, are now in plans that cover our test. We very pleased that a growing number of patients have access to Cologuard.

It typically takes 9 to 12 months to enter into a payer contract following a positive coverage decision. Until then, the typical covering payer treats Exact Sciences Laboratories as an out-of-network service. As such, those payers often pay only a portion of the Exact Sciences bill, and we bill the balance to the patient. We are focused on the process of converting covering payers to contracted payers.

We expect commercial insurance coverage to continue to grow during 2017; this is driven by strong physician and patient demand, data demonstrating Cologuard's outstanding performance, and Cologuard's inclusion in key guidelines and quality measures. The strong data supporting Cologuard recently led the Blue Cross Blue Shield Association's center for clinical effectiveness to release a positive review of Cologuard. The center's reviews are widely followed both within the Blue Cross Blue Shield Association and by other insurers.

The Association is a national federation of 36 Blue Cross Blue Shield companies that insure one in three Americans. Insurers also follow the decisions of the leading clinical guidelines, and Cologuard is now part of the major screening guidelines for colon cancer. This includes the US Preventive Services Task Force, The American Cancer Society, and The National Conference of Cancer Network.

Cologuard's inclusion in quality measures also will promote long-term sustainable growth. Quality measures are the basis of financial incentives to both providers and payers. Last October, Cologuard was added to the HEDIS quality measures. Earlier this month, CMS proposed including Cologuard in its Star Ratings program. Inclusion in these ratings would allow Medicare Advantage plans and the providers who prescribe Cologuard to Medicare Advantage patients, to increase the quality rating when patients complete our test.

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

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

We are building our pipeline on the same technology platform as Cologuard. As with Cologuard, these tests are being developed with the Mayo Clinic. We are working to bring accurate cancer diagnostics to physicians and patients at a cost-effective price point. We are focused on the top cancers in the United States by mortality including lung, liver, and pancreatic cancers, among others.

We are pleased with the initial cancer detection data that we have seen from blood and other samples. Exact Sciences will present data from a nearly 400 patient lung cancer study at the American Association of Cancer Research's Annual Meeting this April. We believe this study will provide a strong indication of the potential performance of this test.

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

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Questions and Answers

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Kevin Conroy, Exact Sciences Corporation - Chairman & CEO [1]

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(Operator Instructions).

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Operator [2]

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Brian Weinstein, William Blair.

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Brian Weinstein, William Blair & Company - Analyst [3]

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Hey, guys, good morning. Thanks for taking the question. So talking about and thinking about doc adds this year, seems like you guys are pretty comfortable here that you can maintain the current pace but do you think that you need to do anything incremental in terms of sales and marketing like adding any kind of new reps or increasing the TV spend in any way to maintain this pace? And I know we are pretty -- we're only part of the way through where you guys think you can be, but how long do you think you can keep up this 600 to 800 docs per week add that you've talked about?

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Maneesh Arora, Exact Sciences Corporation - COO [4]

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So Brian, this is Maneesh. I think it is really important to remember that of the 60,000-- now more than 60,000 physicians that have ordered to date, we are still pretty early in that runway, there are over 200,000 primary care physicians that are potential that someday we believe will be ordering Cologuard, so we think there's a really long runway. The good news about our model is that we are able to see and monitor the pace of adoption and course correct our investment.

So I think it is too soon to tell and we will look forward to sharing more information as the quarter, and as the year unfolds, about when and how we make modifications to the commercial spending mix. I think Jeff just alluded to the fact that we know that the TV is working and we plan to continue that for the rest of the year. I think we will carefully monitor the level of investment in sales to make sure that we can continue to take advantage of this opportunity in front of us.

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Brian Weinstein, William Blair & Company - Analyst [5]

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Okay, and then relative to the implied ASP for the 2017 period, looks like you guys are calling it to be roughly flat to the fourth quarter. I would think that has some room to go higher. Can you talk about how you thought about -- what your assumptions are and how you get to that, to the level that you guys have implicitly guided to? Thanks.

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Maneesh Arora, Exact Sciences Corporation - COO [6]

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Sure, thanks for the question, Brian. We are pleased with the fourth-quarter results as you mentioned the fourth-quarter ASP came in about $432, and we continue to think that over time long-term, there is a clear path for that ASP level to move higher. But as we said on prior calls, things like payer mix and the timing of cash collections can lead to some quarter-to-quarter variability.

So for the full year for 2017, what it really points you to is what's implied in guidance, about 410 to 433. Keep in mind that for the full year of 2016, as a mentioned in my remarks, the full-year ASP for 2016 was $408, so long-term there's room for that to go higher quarter to quarter, you can have some variability. The thing to keep in mind as we continue to see a growing mix of commercial volumes in our business, that does put some temporary downward pressure on the ASP overtime though we do remain confident that ASP will continue to move its way higher.

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Brian Weinstein, William Blair & Company - Analyst [7]

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

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Maneesh Arora, Exact Sciences Corporation - COO [8]

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Sure. [CS'] fourth quarter again, we felt very good about the level of cost per test about $170, and as I look forward, I'd say for the first quarter, that is probably about the same range you should be expecting, around $170. But given the strength of the business that we've all talked about here, given the size of this market, we think it is prudent to continue to make investments to allow us to scale the business, so things like headcount and the equipment needed to grow the business. So I look forward to sharing more details as the year progresses but for the first quarter I think about $170 for cost per test is what to be thinking about.

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Brian Weinstein, William Blair & Company - Analyst [9]

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Right, thanks, guys.

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Operator [10]

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Katherine Schoen, Robert W Baird.

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Katherine Schoen, Robert W. Baird & Co. - Analyst [11]

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Hey, guys. Thanks for the questions. First, for me is, you've talked about the improvements you've seen in the reorder rate since turning on TV ad campaign. Your assumptions for 2017 that, that rate stayed steady where it is now, or do you assume that will continue to slowly tick up?

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Maneesh Arora, Exact Sciences Corporation - COO [12]

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Katherine, we -- if you take a look at calendar 2016 we saw, after we turned on the TV, modest growth and good growth to the reorder rate. One of the things that made it so efficient, we do not -- we will look at it but we don't have expectations, and we will monitor it but that's going to necessarily need to change. We see -- we are pleased with where it was in 2016 and that's not needed to -- doesn't need to increase to change and achieve what we are guiding for.

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Katherine Schoen, Robert W. Baird & Co. - Analyst [13]

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Okay, perfect. So any improvement there would be upside. Then moving to pipeline. As you get closer to potentially launching the [long LDT] -- what kind of investment will it take from the lab perspective to be ready to start receiving and running those samples?

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Kevin Conroy, Exact Sciences Corporation - Chairman & CEO [14]

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The first point, the test we have not made a decision to launch this test as an LDT. I think our inclination is to look at any future test in the same we way we looked at Cologuard, which is we need to get the evidence and then if you are getting the real meaningful evidence going to the FDA and potentially looking at parallel review is probably a leading option, but again I would emphasize we still have of a lot of work to do as we think through these things and then in terms of the additional investment that need to be made, I will turn it over to Jeff.

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Jeff Elliott, Exact Sciences Corporation - CFO [15]

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Sure. Thanks for the question, Katherine. If you look at the first quarter the total OpEx that we are thinking about for the first quarter would be about $8 million to $10 million increase versus the fourth-quarter level. Really, that's driven by selling and marketing and R&D with G&A more or less flat. Within the selling and marketing R&D the things we're looking at are some minor headcount expansion, the national sales meeting during the first quarter, that's about $2 million, some additional pipeline R&D both in terms of the samples and trials there, so I think from a quarterly standpoint $8 million to $10 million. And then, over time, as we work to refine the priority and the pathway we can share more details on the spending required over time.

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Katherine Schoen, Robert W. Baird & Co. - Analyst [16]

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All right. Thanks, guys.

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Operator [17]

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Bill Bonello, Craig-Hallum.

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Bill Bonello, Craig-Hallum Capital Group - Analyst [18]

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

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Jeff Elliott, Exact Sciences Corporation - CFO [19]

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Yes, thanks for the question, Bill. I think we walk through a lot of the components to get you through a Q1 cash use number. So, for example, we gave you the volume number of 88,000, at least 88,000, we gave you an ASP range for the year, which I think you should think about something within that range. Cost per test around $170, so consistent with the fourth quarter number. OpEx of $8 million to $10 million incremental versus the fourth quarter, so I think that goes a long way towards getting you to the cash burn. From a CapEx standpoint, I would expect that number to jump up a few million versus the fourth quarter, primarily for things like software development and facilities.

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Bill Bonello, Craig-Hallum Capital Group - Analyst [20]

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Right. So I was trying to say that we've got the short term but thinking as we progress through the year, how we should be thinking about things.

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Jeff Elliott, Exact Sciences Corporation - CFO [21]

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I think as Maneesh referred to, we will continue to monitor the commercial organization and things like the reorder rates and the number of providers added and make refinement as needed to be the spend, but I think as of now, I give you first-quarter numbers. We look forward to sharing more about the second, third and fourth quarter as the year unfolds

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Bill Bonello, Craig-Hallum Capital Group - Analyst [22]

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Okay. Then, just curious on the reorder rate. You said you don't necessarily need to see an improvement in the reorder rate to get to your numbers for the year. What kind of opportunity is there, in terms of the reorder rate? Do you have any sense of what's being ordered versus the potential that you think your average doctor could be ordering?

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Maneesh Arora, Exact Sciences Corporation - COO [23]

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Bill, I think going back to the earlier answer on the size of the market there are 80 million Americans over the age of 50, that's one of the things that we find so attractive and exciting about the opportunity. I would say that we are in the very early innings of that, but I would also point out the fact that it is really, really hard to change the practice of healthcare. It is really hard to change behavior.

We believe that we are making good progress. We think that the market opportunity is really, really large and we're going to continue to monitor to make sure we stay on track and spend what we need to but prudently and not step over our skis but we feel pretty good about the trajectory we are on and the opportunity is significant.

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Bill Bonello, Craig-Hallum Capital Group - Analyst [24]

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Okay, and then just one last one as a follow-up to that. What are you hearing about the way the test is being ordered as of today, or do you think docs are mainly ordering it for patients who they know have refused or not complied with colonoscopy, or are you seeing it presented as more of a front-line screening option at this point?

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Kevin Conroy, Exact Sciences Corporation - Chairman & CEO [25]

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With a mix in the 60,000 physicians who have ordered Cologuard you see it being used across the spectrum in terms of people in a proportionate representation of how the population today is screened. So you see about 50% of people screened regularly with colonoscopy, about 10% with the Fecal Hemoglobin Test and about 40% not screened. That's almost an exact representation of how Cologuard is being used among patients.

I think it is fair to say though, that over time, there is an opportunity and this is our goal, over time to make Cologuard the screening test not a screening test. We feel strongly that it is the right test for the broad population and you can see this from the work that USPSTF did. Cologuard was seen as the test with the highest benefit to adverse event rate of any of the other screening modalities. That's the opportunity over the long haul, clearly as Maneesh said, we are the early innings of this and it is incumbent upon us as our commercial organization to make Cologuard the first test that physicians think about. We are not close to that yet, we have long way to go and we are optimistic about our likelihood of success.

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Bill Bonello, Craig-Hallum Capital Group - Analyst [26]

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Great, thanks.

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Operator [27]

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Brandon Couillard, Jefferies.

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Brandon Couillard, Jefferies LLC - Analyst [28]

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

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Kevin Conroy, Exact Sciences Corporation - Chairman & CEO [29]

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We were fairly close to a co-promote deal at the end of last year and ultimately decided not go down that path and so our plan for this year is to make additional investments in our own infrastructure and we continue to look at additional products to add to the bag over time. I don't think anything is imminent in terms of adding something to the bag but we continue to look at opportunities and will be prudent in what we eventually choose to put into the bag.

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Brandon Couillard, Jefferies LLC - Analyst [30]

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Thanks. And then one for Maneesh. You talked about wanting to focus on improving the customer experience this year. What are the gating factors to enabling you to shift more the ordering volume over, I guess, away from fax and more towards electronic?

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Maneesh Arora, Exact Sciences Corporation - COO [31]

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Brandon, that's going to be really important focus for us and it is one of the key headwinds that we have seen is physicians would rather order electronically. So getting systems, first off, to say yes, we want to do this and offer it and that is starting to happen. But then getting in the queue of their respective IT systems; it is in process, it is happening, but we understand that it is a long game and it takes time to do that. We expect over the course of year, to continue to make progress. It is one of our key priorities for our entire organization to get more orders electronically so that's not just investments on our side but it is partnering with health systems in their IT investments and that's going to be the key focus for us.

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Brandon Couillard, Jefferies LLC - Analyst [32]

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Super, thanks.

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Operator [33]

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Mark Massaro, Canaccord Genuity.

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Mark Massaro, Canaccord Genuity - Analyst [34]

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Hey, guys, thanks for the question and congrats on an excellent quarter. The first question is for Kevin. And Kevin, Grail is looking to raise about $1 billion in their Series B year round so, obviously, that's a lot of money essentially unprecedented in this industry. Can you speak to how some of the other players that are pursuing a liquid biopsy may or may not influence your decision as it relates to anywhere from how you bring a test to the market to the types of investments that you eventually will look to spend to pursue these?

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Kevin Conroy, Exact Sciences Corporation - Chairman & CEO [35]

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Yes. Thanks, Mark. Exact Sciences is focused, in terms of our pipeline, is addressing targeted needs where we recognize that current clinical practice is significantly deficient in the ability to get an answer for a physician treating a patient. And these tests will be earlier in the cancer treatment paradigm, whether it is screening and aid in the early detection or recurrence. That's where we are focused and we are coming at this with our technology, which can really change the game in terms of where these diagnostic tests are priced and thus access in our view, larger markets helping to affect positive outcomes in more patients.

And we talked about this with a lung nodule test, where we think there's an opportunity to answer a question that is -- will be raised a million and a half to 3 million times heard patients who present with a lung nodule. But you can also take this out to recurrence, whether it is potentially for breast cancer recurrence or diagnosing a-- correctly diagnosing pancreatic cancer from pancreatic cyst fluid. The same technology could potentially be used in screening applications like even breast cancer screening or prostate cancer screening and lung cancer screening.

Those are larger investments. We have to look at them in a really prudent way. We are very hopeful that Grail is successful in what they are pursuing, which is a pan-cancer screening test. Their approach seems to be really sound and it is a long-term investment.

And we are frankly glad that investment is being made in diagnostics. It reflects the truth, which is if you can detect early, the odds of treating cancer are significantly higher than the current paradigm where most cancers are still detected late stage. We think that long-term, if Grail is successful at that, there's going to be huge opportunity for us. And I think, and this is important, that the technologies that we bring to bear, our collaboration with Mayo Clinic, the strong team that we have that knows how to bring tests to market at a very attractive price point, we have the ability to be the leader in cancer diagnostics a decade from now and that's our goal.

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Mark Massaro, Canaccord Genuity - Analyst [36]

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Excellent, and as it relates to the lung data coming out and I believe it is early April, can you clarify the sample type on lung and I think my understanding is about 370 samples. Related to that on how many samples do you think you would need in order to roll out a lung test, how many samples do you think you need to get done?

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Kevin Conroy, Exact Sciences Corporation - Chairman & CEO [37]

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The sample is blood. So patients who present with -- this particular study is blood draws from patients with cancer and without cancer. The study that would establish efficacy for a lung nodule test, you'd need to do those blood draws from patients who present with a nodule and then follow that patient along. Some percentage of them will have cancer and some percentage of them ultimately, will be diagnosed without cancer.

That is a, probably, a two-year study inclusive of probably a one-year follow-on period. And that is a different study than the data that we are presenting which is proof of concept case-control study. Ultimately we expect to do a prospective study like we did with Cologuard. The total numbers there are probably 1000 to 2000 patients. We have not calculated what the end will be yet but that is something we will talk about later in the year.

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Mark Massaro, Canaccord Genuity - Analyst [38]

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

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Maneesh Arora, Exact Sciences Corporation - COO [39]

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

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Mark Massaro, Canaccord Genuity - Analyst [40]

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Okay. Thank you.

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Kevin Conroy, Exact Sciences Corporation - Chairman & CEO [41]

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

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Mark Massaro, Canaccord Genuity - Analyst [42]

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Thank you.

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Operator [43]

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Bruce Jackson, Lake Street Capital.

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Bruce Jackson, Lake Street Capital - Analyst [44]

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

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Maneesh Arora, Exact Sciences Corporation - COO [45]

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Sure. We have commented on the fact that we have seen an increase in the percent of commercial orders, commercial completed tests and so we anticipate, I think in the past what we've said, is about a percent of quarter shifting more towards commercial versus Medicare So it is really difficult to say that is going to end up, Bruce, but I think that it is safe to say that we have, as we have seen additional commercial coverage, we see that percentage potentially increase so not a wholesale shift, but a steady shift from Medicare to commercial. What we said is about a percent a quarter, we may see it is a little bit higher than that.

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Bruce Jackson, Lake Street Capital - Analyst [46]

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Okay, that's helpful. And then, with the operating expenses, if we have the national sales [meeting] in Q1 could receive OpEx just tick down slightly Q2 over Q1?

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Jeff Elliott, Exact Sciences Corporation - CFO [47]

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

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Bruce Jackson, Lake Street Capital - Analyst [48]

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Okay, thank you very much.

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Operator [49]

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Isaac Ro, Goldman Sachs.

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Isaac Ro, Goldman Sachs - Analyst [50]

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

Can you help us think through why you would not see greater fixed cost leverage just given those trends? Let me just put it another way, it seems like there's a lot of opportunity to get better fixed cost leverage. Wondering what the initiatives are to optimize that?

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Jeff Elliott, Exact Sciences Corporation - CFO [51]

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Sure, thanks for the question, Isaac. We were really pleased with the cost per test reduction that we saw throughout 2016 and a long-term we do continue to think we can drive that number down to about $125 a test so feel very good about the trajectory. What I guided to was $170 for the first quarter, I did not give comment for the entire year. The reason why we think first quarter could be somewhat consistent with the fourth quarter, is really because of the growth that we are guiding to, the growth in volumes and that we need to make sure we're investing support that growth.

Longer-term we talked about other things like finding ways to reduce royalties but these are things that could take time. So near-term its investment to support the growth, which is why you can see it less of a increase in the gross margin this year than we saw in 2016.

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Isaac Ro, Goldman Sachs - Analyst [52]

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

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Jeff Elliott, Exact Sciences Corporation - CFO [53]

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

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Isaac Ro, Goldman Sachs - Analyst [54]

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Got it. Thank you, guys.

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Operator [55]

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Chris Lewis, Roth Capital Partners.

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Chris Lewis, ROTH Capital Partners - Analyst [56]

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Hey, guys. Good morning. Thanks for taking the questions. Kevin you discussed the 9 to 12 month process from a time a positive coverage decision is made to entering into an actual contract. I was hoping you could elaborate on what that process entails. And then with the large amount of new positive coverage decisions that you've been able to secure over the past two to three quarters, how should we expect that process to impact your ASPs over the course of this year?

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Kevin Conroy, Exact Sciences Corporation - Chairman & CEO [57]

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Given that most of those coverage decisions occurred later in 2016, it is going to be some time before there's really an impact, so I would not think there is a significant impact in 2017 based on all of the new coverage decisions. But the process is really a discussion with those payers around the value of Cologuard, our pricing for Cologuard and, I guess, I would ask Maneesh to provide a little bit more color on the process itself.

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Maneesh Arora, Exact Sciences Corporation - COO [58]

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Yes, it does take time and the key reason is we have insisted on being really disciplined as to the value of Cologuard. I think that, as in any negotiation, there is a back and forth about the value of that versus what folks are paying, and I think it is no secret in diagnostics traditionally pre-PAMA there was an expectation by most major payers to pay some discount to the Medicare rate. And in the world of PAMA, as you know, the world has changed and we have been really disciplined in making sure that the biggest payer gets the best rate. And the biggest payer at our in our situation is Medicare and we have not been in a position or have no desire to change that.

So we continue to be disciplined, and I think that, that process of negotiation and those conversations take time, Chris. And so we are not changing our philosophy on it. We believe we are going to continue to make progress based on the fact that, from a payers perspective, if you adopt Cologuard, we believe you will save money. This costs a lot less than what you are spending today for colonoscopy and a whole lot less than the cost of a colon cancer. Those conversations and those models take time to walk through. With the payer, we are making good progress.

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Chris Lewis, ROTH Capital Partners - Analyst [59]

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Okay, thanks. And can you update us on the size of the salesforce now and any plans to expand that this year?

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Maneesh Arora, Exact Sciences Corporation - COO [60]

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We've got a field force of approximately 200,an inside force of about 50. One of the comments that we made earlier during the call was, we will continue to monitor the rate of physician adds and the reorder rate and let that dictate what we do, knowing that we will be on TV for the rest of year and we will be prudent. We don't want to make sharp right or left-hand turn turns but we will be prudent in making those investments based on the pace of the business.

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Chris Lewis, ROTH Capital Partners - Analyst [61]

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Okay, thank you.

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Operator [62]

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Raymond Myers, Benchmark.

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Raymond Myers, Benchmark Capital - Analyst [63]

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Yes, thank you. Kevin, first a clarification on the compliance rate. Was the 67% for the fourth quarter or was it an average for the entire year?

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Kevin Conroy, Exact Sciences Corporation - Chairman & CEO [64]

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

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Jeff Elliott, Exact Sciences Corporation - CFO [65]

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Just to clarify, it is a 60 day lag, 12 month we always report it as a 12 month rolling compliance [rate] like 60 days. It was the full-year number.

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Raymond Myers, Benchmark Capital - Analyst [66]

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Okay, so the 67% that you reported here in this latest period, is basically flat with the 67% you reported with the Q3 results, is that correct?

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Jeff Elliott, Exact Sciences Corporation - CFO [67]

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That's correct.

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Raymond Myers, Benchmark Capital - Analyst [68]

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Okay, very good. I just wanted to clarify that. Then, a broader question, you've got a proposal now to be included in the Medicare Star Ratings and you are included in the important HEDIS quality scores, has that affected the physician ordering patterns or the type of discussions that you are having with payers?

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Maneesh Arora, Exact Sciences Corporation - COO [69]

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

With payers, yes, I think that also, not just the commercial patients but specifically the addition in the last month in the Star ratings, that has a significant impact on how payers who take Medicare Advantage plans think, and that has been again, not a positive to the business to date, but has been a door opener and we anticipate it is one of those headwinds that has gone away. It is still on us to execute and I want to reach out to the managed-care team, our sales team, and our entire commercial team that is executing unbelievably to have these conversations and look forward to that this year.

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Raymond Myers, Benchmark Capital - Analyst [70]

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Okay, great, thanks. And the last question to wrap up, has there been a change in the payers discussions with you related possibly to uncertainty in the Affordable Care Act with the change in administration, et cetera?

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Kevin Conroy, Exact Sciences Corporation - Chairman & CEO [71]

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No, those conversations have not changed. I don't think there is -- meant there are many people who believe that the preventative services provision will go away if indeed the Affordable Care Act is repealed.

And let me refer back to the earlier conversation. There are headwinds in this business and there are things that every morning when we wake up we need to-- that we are focused on addressing that will affect this year and years out, unless we change. Including payer coverage. And contracting. That is a really important thing for us to do and we don't know how -- we are firm on price and we don't know how that is going to play out over time, but we believe that investors invested significantly and patiently and deserve the benefit of their investment.

This ease of ordering is something we wake up every morning trying to get better at making it easier for physicians and patients to interact with us and particularly for physicians and their office staff to place orders -- or their nurses and physician assistants. And there are always going to be challenges that we need to be cognizant of as we look forward. We see strength in the business but it is just going to take time to address some of the longer-term opportunities for improvement.

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Raymond Myers, Benchmark Capital - Analyst [72]

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Thank you, gentlemen. Congratulations.

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Kevin Conroy, Exact Sciences Corporation - Chairman & CEO [73]

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Thank you. Thanks everybody for joining the call this morning. Last year's strong performance helped position Cologuard to become the standard of care for colon cancer screening. It also solidified the Company's foundation for long-term sustainable growth.

We are excited by the opportunities that this year presents. We are continuing to invest in Cologuard's commercialization and the development of our pipeline, which holds great promise for helping to diagnose the deadliest cancers. Thank you.

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Operator [74]

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