Exact Sciences - Earnings Call - Q2 2014
July 22, 2014
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Exact Sciences Second Quarter 2014 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we'll conduct a Q&A session, and instructions will follow that time. If anyone should require assistance during the conference, please press star then zero on your touchtone phone. As a reminder, this conference is being recorded. Now, I would like to turn the call over to Rod Hise. Mr. Hise, you may begin.
Rod Hise (Director of Investor Relations)
Thank you for joining us for Exact Sciences Secon Quarter 2014 Conference Call. On the call today are Kevin Conroy, the Company's Chairman, President, and Chief Executive Officer; Maneesh Arora, our Chief Operating Officer; and Bill Megan, Senior Vice President of Finance. Exact Sciences issued a news release earlier this morning detailing our second quarter 2014 financial results. If you've not seen it, please go to our website at exactsciences.com or call 608-807-4607, and I'll send it to you. Following the safe harbor statement, Bill will provide a summary of our second quarter financial results. Next, Kevin will provide an update on our corporate priorities. Before we get underway, I'd ask everyone to take note of the safe harbor paragraph that appears at the end of the news release issued this morning covering the company's financial results.
This paragraph states that any forward-looking statements that we make, one, speak only as of the date made, two, are subject to inherent risks and uncertainties, including those described in our most recently filed annual report on Form 10-K and our subsequently filed quarterly reports on Form 10-Q, and three, should not be unduly relied upon. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein or elsewhere to reflect any change in our expectations with regard thereto, or to any change in events, conditions, or circumstances on which any such statement is based. It is now my pleasure to introduce our Senior Vice President of Finance, Bill Megan.
Bill Megan (SVP of Finance)
Thank you, Rod, and good morning, everyone. I will provide just a brief update on our cash utilization, and then Kevin will describe the progress we have made in our regulatory and commercialization efforts. For the quarter, we used $18.9 million in cash, up from $17.2 million in the first quarter, with increased spending in sales and marketing, as well as G&A, reflecting our intensifying preparation for launch. In April, we raised $138 million in cash from a follow-on equity offering, and so we ended the quarter with $234.8 million in cash. Capital expenditures were $2.4 million for the quarter, about half of the investment we made in the first quarter, reflecting the progress we have made in equipping our lab and our IT systems. At quarter end, our staff count was 199, and last week, we brought in our direct sales force, adding 80 more staff to our headcount.
Kevin will elaborate on our launch preparation.
Kevin Conroy (Chairman, President, and CEO)
Thanks, Bill, and good morning, everyone. Thanks for joining the call. I'm pleased to report this morning that we have taken critical additional steps towards FDA approval, made our reimbursement proposal to CMS, and hired and trained our field sales force. I'd like to give a brief update on our FDA progress. I'm pleased to report that our FDA facility inspection was completed on July 11. The inspection was successful. The inspectors spent the week on site and found no deficiencies and no observations. Preparing for and working through this important step in the FDA process was another example of the outstanding team we have here at Exact. I want to congratulate everyone involved. We also are working with the agency on the final decision of the post-approval study. We expect final approval within 30-45 days.
I want to thank the FDA staff for their work on our application. Let's turn now to CMS and reimbursement. Last Monday, we presented our crosswalk analysis and proposed reimbursement level at CMS's Annual Clinical Laboratory Public Meeting. We'll review the analysis we presented at that meeting in a moment. Outside of the pricing meeting, we continue to work with CMS through the parallel review process on the national coverage decision. We expect a preliminary national coverage decision to be issued upon or shortly after FDA approval. There is a 30-day public comment period, after which CMS has 60 days to issue a national coverage decision. As a result, we expect a final Medicare coverage decision in the fourth quarter. We also are continuing to build the resources we need to actively pursue reimbursement from private payers after FDA approval. Now, let's review our crosswalk analysis.
Most diagnostic tests have a code that corresponds to a reimbursement rate. When a code does not exist for a new test like Cologuard, a new code can be crosswalked or linked to existing codes to establish payment for a new test. Through extensive consultation with CMS, we decided to use the crosswalk approach. We were invited to present our crosswalk reimbursement proposal to CMS's Hospital and Ambulatory Policy Group, or HAPG, at its annual reimbursement review last week. Our crosswalk proposal is based on codes in the 2014 Clinical Laboratory Fee Schedule. Shown here are the three tier-one codes that we presented in our crosswalk analysis. These include a code that corresponds directly to our KRAS mutation markers and another that corresponds directly to our fecal hemoglobin test. Our DNA methylation markers are crosswalked to an assay with a workflow similar to ours.
These codes total to a proposed reimbursement for Cologuard of $502. CMS does not provide feedback on these proposals at these meetings. The next step is a preliminary pricing decision by HAPG, which will be publicly announced in either late August or September, followed by a public comment period and a final decision in November. Let's now turn to Cologuard launch readiness. Let me first describe the makeup of our sales force. We have three regions: west, central, and east, each headed by a director. In the last few weeks, we have completed the hiring of our approximately 120-member sales force, including 10 reps who call on large systems and group practice, who call directly on primary care physicians, and 10 area managers who oversee these reps. We have six clinical liaisons who are responsible for medical education. Last week, we held our national sales meeting.
At the meeting, we conducted intensive training on Cologuard, and I have had the opportunity to meet our new sales force. I can say without reservation, after meeting the sales force, that this is an outstanding, driven group that's passionate about our mission of eradicating colorectal cancer. Our team was chosen from nearly 10,000 applicants. They have deep experience in pharma, device, and diagnostics in the hospital system, primary care, and specialty settings, an average of approximately 10 years of experience in selling healthcare. Let's discuss other components of our launch readiness. We also are ready to create brand awareness for Cologuard among our indicated patient population through a marketing program that includes public relations, print ads, and targeted digital efforts.
Our mission is to motivate patients who are not getting screened today to have a conversation with their doctor while we spread the word that Cologuard is a new non-invasive screening option. We have a 20-member marketing and managed care team to do just that. Just as our sales and marketing teams are ready, we know that our lab and customer support center are ready too. We are nearing completion of an observational study whose aim is to assess our readiness through the entire order, test, and result delivery process, both internally and externally with providers and patients who participated. All of our systems, including our physician ordering and lab information management systems, ran smoothly, and our customer support center took calls from patients and made reminder calls to encourage compliance, a key component of our long-term mission to increase screening dramatically. Let's turn now to our product pipeline.
We have developed a technology platform that is applicable to the screening and diagnosis of other cancers. We intend to develop novel, clinically important diagnostic screening tests for GI tract cancers. We have a broad, exclusive collaboration with Mayo Clinic on GI tract cancers. The collaboration is unique, and together, we're developing two new kinds of tests. As a reminder, GI cancers comprise 25% of all cancer deaths in the U.S. First, we're working together on tests that can screen general, asymptomatic populations for precancers and cancer across the entire GI tract. Second, we're developing new applied diagnostic tests for specific GI cancers that would potentially be used with high-risk and symptomatic patients. Within those two general kinds of tests, we're focusing on colorectal, pancreatic, esophageal, and stomach cancers.
At DDW, or Digestive Disease Week, in May, some very interesting data was presented that resulted from our collaboration with the Mayo Clinic. Our technology platform demonstrated 88% sensitivity for pancreatic cancer by testing pancreatic juice for certain DNA mutations and methylations. The technology also demonstrated 100% sensitivity for detecting Barrett's esophagus, the precursor to the vast majority of esophageal cancers. We are continuing to make progress with our pipeline and look forward to updating you on the pipeline by early next year. In conclusion, we are in a strong financial position to launch Cologuard. After FDA's inspection of our facility, we expect an approval decision within 30-45 days. We recently presented our reimbursement proposal to CMS and remain on track with our reimbursement timelines. Our sales team is in place, was trained at our recent national sales meeting, and is ready for launch.
In addition, our lab and customer support center are ready for launch. We are pleased with the progress we're making with our product pipeline, particularly with pancreatic and esophageal cancers. We're now happy to take your questions.
Operator (participant)
Ladies and gentlemen, if you have a question at this time, please press star then one, and you can touch-phone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Jeff Elliott of Wilson Baird. The line's now open.
Jeff Elliott (Senior Research Analyst)
Good morning. Thanks for the question and congrats on all the progress. Now, can you give us a little clarity on what steps do you have left to do to get FDA approval and CMS coverage? Now, is everything in those agencies' hands, or do you need to do anything else?
Kevin Conroy (Chairman, President, and CEO)
Sure. The first thing that has to occur is the inspector, as we understand it, has completed the report that he prepares, and his supervisors have to sign off on that report. Afterwards, that goes from the Minneapolis district to the office of In Vitro Diagnostics that will take the final steps to issue an approval. During that time, we are working to finalize the post-approval study with the office of In Vitro Diagnostics. As a result, that whole time period is about 30-45 days from today, we would estimate, to FDA approval. We have general agreement on the design of the post-approval study, and we really just have a few details to work through, including the final language of the intended use of the test. The passage insert is also being finalized.
That will all come together again in about 30 to 45 days, Jeff.
Jeff Elliott (Senior Research Analyst)
The post-approval study, is that similar to what you presented back at the panel, or has there been major changes to it?
Kevin Conroy (Chairman, President, and CEO)
There have not been major changes to it, so it's very similar to what we proposed at the panel. The goal of the post-approval study is to shed light on the efficacy of Cologuard with a three-year interval. We expect the study to be a three to five-year study from start to completion and publication, and that data will, again, shed some light on the efficacy of Cologuard being used in patients every three years.
Jeff Elliott (Senior Research Analyst)
Got it. I think this is a timeframe where a lot of the sell side will update their models for the next few quarters. I do not know if you want to give guidance now, but I think it would be helpful, given the timeframes that we know, if you could provide some commentary on when you expect revenue to actually start, both from CMS and from the commercial payers, because I think there is a lot of logistics around getting the product into the market in order to get samples back, there are revenue recognition policies. I just want to make sure that we have all that into consideration in our model. Is there any commentary you can give on when we should start thinking about additional revenue coming in?
Kevin Conroy (Chairman, President, and CEO)
Sure. First of all, let me say, as we've said before, we don't intend to provide guidance until we have more visibility into the launch trajectory. As we said, we don't expect a national coverage decision to occur until the fourth quarter, and that will be pinned off the timing of the preliminary coverage decision, which we expect to occur around the time of FDA approval. There is a 60-90 day period following the preliminary coverage decision until that becomes final.
Jeff Elliott (Senior Research Analyst)
Okay. Thank you.
Kevin Conroy (Chairman, President, and CEO)
The Medicare populations cannot be processed until Medicare, the final national coverage decision, occurs. That is in the fourth quarter. The time period between FDA approval and the national coverage decision, the focus will be on the segments of the market, including commercial pay patients and also cash pay patients. The first part of the launch will really be focused there. In terms of revenue expectations, I think your model is a model others should probably look to. Again, I do not want to provide guidance, but this year, the revenue trajectory should be considered to be modest, and the focus on Medicare patients will occur very late towards the end of this year. Does that answer your question, Jeff?
Jeff Elliott (Senior Research Analyst)
It does. That's very helpful. I think I'm at about $1 million worth of revenue this year, so pretty modest there. Just so we're clear, though, on the commercial payer side, correct me if I'm wrong, but that'll be on a cash pay basis, correct? So there could be some delay in terms of RevRec and then the CMS side. Will that be on accrual or cash basis?
Kevin Conroy (Chairman, President, and CEO)
I'll let Bill answer that question.
Bill Megan (SVP of Finance)
You're absolutely right, Jeff. On the private pay side and commercial pay side, it will be cash rec. Cash received, we recognize the revenue. For CMS, we'll be working with our audit team to determine what the communication is from CMS as to when we can recognize that revenue. That's still to be determined.
Jeff Elliott (Senior Research Analyst)
Okay. At this point, do you think you'll be able to recognize CMS revenue this year? Or if I'm not mistaken, I think that the reimbursement rate won't go into effect until January 1 of 2015. So can you recognize CMS revenue this year? Will you have to wait until next year?
Bill Megan (SVP of Finance)
I think that's the operative question. Is it retroactive to the final coverage decision, and can we use that as the basis for accrual? That's still to be determined.
Jeff Elliott (Senior Research Analyst)
Got it. Okay. All right. Thanks much.
Kevin Conroy (Chairman, President, and CEO)
Yeah. I think that your question there deserves a little bit of explanation, so it's perfectly clear. Under the CMS pricing process, there's an open meeting that occurred last week, followed by a preliminary pricing in late August or September, followed by a 30-day public comment period, and in November, a final price being listed on the CMS website. It's not until January 1 that payments would be made. Under CMS rules, those payments would be retroactive back to the date of the national coverage decision, as we understand it. The question becomes, from an accounting standpoint, would that revenue for tests that are performed between, let's say, if November was the date of the national coverage decision, would the revenue be recognized in November and December for the tests run or not until the first quarter once cash is received?
That is the common question that would have to be answered at a later point in time, and then that will be clarified in the future.
Jeff Elliott (Senior Research Analyst)
Okay. Thank you.
Operator (participant)
Thank you. Our next question comes from Brian Weinstein of William Blair. Your line's now open.
Brian Weinstein (Managing Director)
The questions. Perhaps we can dig a little bit deeper into the initial uptake. Can you guys talk at all about productivity per rep expectations at launch versus steady state? I know you've given some numbers in public meetings about kind of what type of productivity you expect at steady state, but how does that sort of ramp up? Also, how should we think about the primary care physician versus the group practice and health systems approach? I mean, where do you expect to see kind of initial volume coming from between those two? Thanks.
Kevin Conroy (Chairman, President, and CEO)
Sure. Brian, as I said earlier, we do not want to provide guidance until we have greater visibility, and we also do not want to provide our expected productivity by rep in any clearer fashion than we already have until we have greater visibility. Your second question relating to where do we expect to see more uptake with the large systems or the primary care physicians? I think time will tell that answer. Initially, we think that primary care physicians will be the initial greatest drivers of Cologuard utilization. However, we do have a number of large primary care physicians that have expressed interest in Cologuard. Obviously, this test has been publicized, and we have had conversations with large systems in response to their questions about it.
We think that there's going to be demand there, but that will typically take more time to get those systems up and running and the vast majority of their physicians educated. Let me make note of the fact that about 50% of primary care physicians in the U.S. work for a group practice, be it small, medium, or large. More and more primary care physicians, their groups are being acquired by larger groups, and those groups typically provide incentives to primary care physicians for quality scores. They also set guidelines from the top down, not uniformly, but many of them are really focused on quality, and they have guidelines for how they expect primary care physicians to screen patients, not only for colon cancer, but for other things.
We think there is a huge opportunity to convert the market away from the FIT and FOBT tests and away from doing nothing at all to Cologuard. That we think will take a little bit more time than going after the primary care physicians who we know today use non-invasive approaches to screening for colon cancer.
Brian Weinstein (Managing Director)
Great. Thanks for that. Another question on expenses, specifically related to sales and marketing, with the kind of broad set of people you've brought on and the efforts around brand awareness. How should we be thinking about spending levels as we look towards the initial parts of the launch? Thanks.
Bill Megan (SVP of Finance)
Brian, this is Bill. If you look at sales and marketing expense, we ramped up in the quarter from $4.5 million in Q1 to a little more than $6 million in Q2, and we expect that spending to continue to ramp as we head into commercial launch. Consistent with the comments we made following Q1 and repeated today, we talk about a sales force of 120 at launch, and that includes the 80 sales reps calling on the high-prescribing FIT/FOBT primary care physicians. It includes the key account executives, the sales support, the sales management team. Plus, if you add the 20 staff in marketing at launch, we will have 140 staff. We have 140 staff in sales and marketing, so we're ready with that. We also said that we would hire 20 additional direct sales force by the end of the year.
If you take that number and average it out across the back half of the year, you're looking at 150 people. If we use an average compensation all up of $200,000, that would give us a quarterly expense of about $7.5 million. That's a pretty clean way to think about this. On the non-comp side in marketing, the content development, executing the advertising campaign, building awareness, if you use a one-to-one ratio, that is probably a fair way to think about all up sales and marketing expense. Does that help?
Brian Weinstein (Managing Director)
Yeah. So you're thinking $15 million a quarter is your run rate as you get into 2015?
Bill Megan (SVP of Finance)
That's a good estimate. If I may, just to round out the expense side, on DNA, we increased spending to just over $6 million in Q2, and that first is about $4.5 million in the first quarter, again, reflecting the ramp as we build towards commercialization. Remember, in G&A, we have all the expenses that are foundational to the commercialization, including the IT, the customer support for the compliance engine we've talked about. We are doing our own billing, so we're building a billing team. As we expand our overall team, we're expanding HR, and of course, we have the leadership team. A way to think about G&A is we expect to continue to ramp at about the same pace for the rest of the year as we ramp from Q1 to Q2.
With R&D, a good way to think about that is we invested about $28 million in all of last year, and we have every intention of continuing to invest in R&D. We don't intend to cut it back. In fact, it might increase just modestly in 2014. We're investing to support Cologuard. We're incurring costs through the first half of the year as we're preparing the analysis, contributing to our FDA review of Cologuard. As Kevin went through in the preparatory marks, we're supporting all of our pipeline activities. R&D, roughly in line with or a little bit trend up with where we were in 2013. Does that help?
Brian Weinstein (Managing Director)
Yep. Great. That's very helpful. Thank you.
Operator (participant)
Thank you. Our next question comes from Isaac Ro of Goldman Sachs. Your line's now open.
Isaac Ro (Senior Analyst])
Good morning, guys. Thanks for taking the question. Just Kevin, first off, wondering if you could talk a little bit about when we might see your publication of cost-benefit analyses for the purposes of driving commercial adoption.
Kevin Conroy (Chairman, President, and CEO)
Did you say cost-benefits, so health economics?
Isaac Ro (Senior Analyst])
Yeah. Yeah. Exactly.
Kevin Conroy (Chairman, President, and CEO)
Right. We would expect that publication to occur sometime in the next six to nine months, following CMS decisions and as we get into the process of talking with commercial payers, that that full-blown analysis would be published. There are really two components of that. The first component is looking at Cologuard on an interval of between every year to every five years and over a range of prices. The second component is looking at a comparison using a differential analysis, comparing Cologuard and the FIT tests and other types of screening tests. There will be multiple publications that ensue over time. We do not expect that to happen within the next six months.
Isaac Ro (Senior Analyst])
Okay. That's helpful. Maybe just a general question on commercialization. Can you just walk us through conceptually your biggest area of focus here going forward over the next three to four months, where you see the most potential risk and how you're managing for that?
Kevin Conroy (Chairman, President, and CEO)
Yeah. Clearly, the most potential risk to date has been around FDA, CMS, the test performance itself. Moving forward, the risk profile is around execution, commercial execution. I'd actually like to refer this to Maneesh, who will be running the whole sales and marketing organization in the U.S., to provide a little bit more color.
Maneesh Arora (COO)
Sure. Thanks, Kevin. As Kevin said, the risk is going to be execution, and the overarching comment is, "This is what we've been told. We've done a lot of market research with all segments: physicians, payers, systems, patients." The risk is going to be the fact that this is a disruptive technology. The price is terrific, but the real focus and emphasis needs to be on us successfully getting out and educating physicians, making sure patients are aware that there is another option, educating physicians that this is an easy test for them to order, an easy test for patients to perform, and educating the payers that this is something that makes a lot of sense because we clearly know, and this is one of the key reasons we believe that Medicare has been so supportive.
We know that Medicare represents somewhere between 40% and 45% of all patients for this product. Medicare asks the taxpayer to pay $14 billion going to $17 billion for colon cancer in this country. The best expense that anyone could invest in is early screening and diagnostics. We think that's why Medicare has been supportive and that we will get coverage. The real risk, I think, is around us getting that message out because this is a change to the way people practice medicine, and doing that is not the easiest. It's going to be challenging. We think we're making the right investments and are continuing to focus, and we'll focus continuously on what's working. Will additional sales rep make sense? That's why we have the plan for adding to that sales force later this year. Hopefully, that's more color for you.
Isaac Ro (Senior Analyst])
Yeah. That's great. Thanks so much, guys.
Operator (participant)
Our next question comes from Brandon Couillard of Jefferies. Your line's now open.
Brandon Couillard (SVP)
Thanks. Good morning. Kevin, with respect to your comment that you expected a preliminary price from CMS in the August/September timeframe, under what circumstances would that change between the initial pricing indication and the final coverage decision?
Kevin Conroy (Chairman, President, and CEO)
At the public meeting last week, the HAPG group said they would expect to announce the pricing decisions in late August. This is a process that they follow on an annual basis. I don't think that there is immense risk to the August/September timeframe because there were a lot of other tests. I think around 100 tests that pricing was requested for at that meeting. We're pretty confident in that timeline. It's not just about Cologuard. It's about a lot of other tests as well.
Brandon Couillard (SVP)
Okay. Would you perceive any risk in that change in between then and the final coverage decision actually following?
Kevin Conroy (Chairman, President, and CEO)
I think there are always changes that can occur, and that is entirely up to the HAPG group. Our involvement to date has been to have multiple meetings with the HAPG group face-to-face. We've been able to educate HAPG over time about the value of the test, the clinical function of the test, and purpose of the test, as well as deep conversations around our approach to the crosswalk analysis. We got a lot of feedback from the HAPG group. We're pretty confident that the approach we're taking is correct. I think one of the interesting things that came up at the meeting is that other groups requesting crosswalk for codes kind of meandered off into the gap-fill territory, asking for certain amounts that were not directly crosswalked to another code. We made sure that we did not take that approach.
Instead, we did what HAPG asked us to do, which is a simple crosswalk analysis. So we're pretty confident in the approach that we're taking, but HAPG gets the final say.
Brandon Couillard (SVP)
Super. Then I just want to make sure I'm clear if I understand your commentary right. Will the sales reps begin calling on primary care and the large networks upon FDA approval, or will you substantially hold off that effort until the final NCD is in place?
Maneesh Arora (COO)
No, Brandon. We have brought the sales team aboard and have them trained to go out and begin that effort calling on primary care docs at FDA approval.
Brandon Couillard (SVP)
Okay. Super. Last one, has there been any incremental progress on your international efforts that you're willing to share today?
Kevin Conroy (Chairman, President, and CEO)
Yes. First, let me address as a follow-up to Maneesh's comment that early focus is going to be on patients who either pay out of pocket or are covered by commercial insurance. Initially, those payers will not have a coverage decision in place. We will be billing those payers out of network. We will be collecting a modest amount from the patients upfront. That process will take time to get those payers to issue coverage decisions and to bring us into their networks. You can expect that it will take some time to actually collect on the tests that are initially run. Our group that is focused on those commercial payers will be focused on getting those coverage decisions.
We're focusing on the largest payers and regional payers first with a very experienced, capable team with an awfully powerful message that here is a relatively inexpensive way to screen for colon cancer with a highly sensitive test. Make sure that as you think about this, there is going to be a time period between running a test for a commercial patient and actually collecting revenue from that patient. In terms of international expansion, we have hired a very experienced head of Europe who's been on board now for a couple of quarters. We have a plan in place. We are working on CE marking and, most importantly, our strategy for entering Europe. We would start in a modest way, focused on cash pay patients in Germany, Switzerland, Austria, potentially the U.K. as well.
We would expect to begin to offer those tests in the first quarter of 2015. We are really pleased with the quality of the team that is being developed in Europe. We are a little bit further behind in Asia, and the regulatory hurdles will be higher in Asia. We are focused too on addressing that market. Both of those markets are very large markets with together the potential to equal the U.S. market.
Brandon Couillard (SVP)
Super. Thank you.
Kevin Conroy (Chairman, President, and CEO)
Thank you.
Operator (participant)
Thank you. Next question comes from Peter Lawson of Mizuho Securities. Your line's now open.
Peter Lawson (Executive Director and Senior Equity Analyst)
The modest delay in the FDA approval, is that driven by kind of a backlog from the FDA or them requiring more details from you?
Kevin Conroy (Chairman, President, and CEO)
Let me first preface this by saying the FDA has done a great job all along. The inspection took a little bit longer to get scheduled than we originally anticipated. The FDA is awfully busy with a lot on their plate and resources that are not as extensive as maybe they should be. That is probably why we are looking at FDA approval within 30-45 days. We still think that there is a lot that can be done this year to make up for that.
Peter Lawson (Executive Director and Senior Equity Analyst)
Thank you. Has the post-approval study led to any delays for the FDA or CMS decisions?
Kevin Conroy (Chairman, President, and CEO)
No. We've had very good discussions with the Office of In Vitro Diagnostics regarding the post-approval study, and we think we've ended up in a good place in a timely way.
Peter Lawson (Executive Director and Senior Equity Analyst)
Gotcha. Could that potentially come before final CMS pricing? Or do you think that really requires that healthcare economic study?
Kevin Conroy (Chairman, President, and CEO)
No, we don't think it requires the published healthcare economic study. Payers have very sophisticated groups. They're already reading the New England Journal of Medicine Paper. The first question they ask is a clinical question. They do ask the question of how would the adoption or the coverage of Cologuard affect their budgets. They do budget impact modeling first and foremost. They secondarily look at the cost-effectiveness. You have to understand these payers by and large don't pay for the cost of treating colon cancer, although it is a factor in their consideration. There are 3,000 payers of the world. A very small percentage of them account for about 80% of all patients in the U.S. That's the group that we'll be focused on. It will take some time.
Now, remember, Peter, that under the Affordable Care Act, we would expect that with a positive coverage decision by the United States Preventive Services Task Force, that Cologuard would be mandatorily covered by all payers in the U.S. We would expect USPSTF to rule on or to come out with their revised colon cancer screening guidelines. We would also expect Cologuard to be included in them as either A or B rated by the end of 2015. After the next six quarters, we would expect that all payers would, under the Affordable Care Act, be obligated to cover Cologuard.
Peter Lawson (Executive Director and Senior Equity Analyst)
Right. And then just finally, around the preliminary pricing decision from CMS, will that just be a yes or a no for payment coverage? We won't get a price point at all.
Kevin Conroy (Chairman, President, and CEO)
The pricing group actually will issue a proposed price, and we would expect that to occur in August or September. The Coverage and Analysis Group, CAG, we would expect would issue their preliminary coverage decision around the time of FDA approval.
Peter Lawson (Executive Director and Senior Equity Analyst)
Gotcha. Thank you so much.
Kevin Conroy (Chairman, President, and CEO)
Which is around the same timeframe, Peter.
Operator (participant)
Thank you. Our next question comes from Mark Massaro of Canaccord. Your line's now open.
Mark Massaro (Managing Director and Senior Equity Analyst)
Hi. Good morning. Thanks for taking the question.
First question, not to split hairs. The 30-45 days, is that after the date the FDA completed its inspection, or is that from today?
Kevin Conroy (Chairman, President, and CEO)
That's from today.
Mark Massaro (Managing Director and Senior Equity Analyst)
Okay. Great. Second question, if you could just, Kevin, maybe elaborate a little bit on the progress in your dialogue with commercial payers. How are those conversations progressing? One thing that you mentioned about cost-effectiveness, do you anticipate commercial payers looking at potentially the cost of a colonoscopy in their cost analysis?
Kevin Conroy (Chairman, President, and CEO)
Let me first start by saying the work that we've done to date with commercial payers is to do a lot of research, interviews, focus groups, quantitative and qualitative research to help us understand their willingness to adopt Cologuard and the thought process and business processes that they undergo to adopt a new screening test. In terms of the factors that they consider, they will consider all of their current screening costs, including colonoscopy, as they look at Cologuard. They have both medical people; their Chief Medical Officer looks at that. They have their cost-effectiveness people and their budget people looking at those analyses. Everybody does it a little bit differently. We are prepared now and expect to have meetings with these payers upon FDA approval. We are not doing the face-to-face meetings until we have FDA approval.
We continue to do some research, but face-to-face meetings with those payers would occur after FDA approval. We will start with a very small list. We have a team partially that we have contracted with and partially internally to get out there and intensively meet with the larger payers first.
Mark Massaro (Managing Director and Senior Equity Analyst)
Great. Thanks. Maybe just final question. Of the 90 sites enrolled in the pivotal trial, can you walk me through your expectation for initial adoption from these enrollment sites and kind of help us understand adoption from these sites versus PCPs?
Kevin Conroy (Chairman, President, and CEO)
We don't want to provide that level of color, Mark. Suffice it to say, those 90 sites really know Cologuard. The GIs there know Cologuard, and there are a lot of champions within those sites. They feel that they did something of import, and they want to see Cologuard adopted within their systems. I think I've provided a fair amount of color on the PCP versus system approach and where you're going to see more uptake. We will see as time goes on how that plays out. Let me say that may change, and we may see some systems really drive Cologuard because systematically, and this is an important point, Cologuard now provides systems the opportunity to go out and screen an entire population quickly. That's hard to do with any other screening test. UPF delivers a kit to people who today haven't been screened.
You can find those patients and get them screened. We will see whether it is the systems that generate more Cologuard demand or it is the primary care docs or a combination of the two. We look forward to having those conversations as time goes on.
Mark Massaro (Managing Director and Senior Equity Analyst)
Great. Thank you.
Kevin Conroy (Chairman, President, and CEO)
Thanks, Mark.
Operator (participant)
Thank you. Our next question comes from Zarak Khurshid. Your line's now open.
Zarak Khurshid (SVP)
Good morning. Thanks for taking the questions. In terms of the payer conversations, are you aggressively looking to ink in-network contracts right out of the gate, or would you maybe give up a little bit on price? Or how are you thinking about kind of just operating maybe out of network for a while and feeling things out before going in-network?
Maneesh Arora (COO)
Zerak, this is Maneesh. At the end of the day, our goal is to have everybody in-network eventually over time. We know, and Kevin alluded to this earlier, that our expectation is with a positive A or B rating at the United States Preventive Services Task Force, that will mandate coverage. From launch to getting to those contracts, we think it is going to be out of network initially, and it's going to take time. The one thing we don't want to do is we've invested, and we think developed something that's innovative. We want to make sure that whatever we do, Cologuard gets priced fairly. We expect to hold to that.
Our expectation today is not to go in to try to get secure massive discounts or we do have an effective plan in place to go drive to these contracts, but not at any price.
Zarak Khurshid (SVP)
Great. Thanks for that. I had a question on the compliance engine. It sounds like most of that will be sort of a calling approach initially. When do you plan to implement some of the other bells and whistles like the text messaging, reminders, and other features?
Maneesh Arora (COO)
Zarak, we've built all of that into the system now, and those are things that we have been testing. If you are a patient, when you enroll after that first interaction where you verify your shipping address, after our first interaction with you, you can tell us how you want us to communicate, whether it's email, whether it's text, whether it's phone. We can do that right now. That's what we've been testing.
Zarak Khurshid (SVP)
Understood. Thanks.
Operator (participant)
Thank you. Our next question comes from Raymond Myers of Alere. The line's now open.
Raymond Myers (Director of Research)
Thank you for taking the questions.
Kevin, we've seen on the call here that you're working on a stomach cancer test. And it's something we probably talked less about than some of the others. Can you describe what research you're doing on stomach cancer?
Kevin Conroy (Chairman, President, and CEO)
You are cutting in and out. In terms of stomach cancer, is that your question?
Raymond Myers (Director of Research)
Yeah. I'm asking, can you elaborate more on what your research projects are involved with stomach cancer?
Kevin Conroy (Chairman, President, and CEO)
Let me say that our order of priority is most likely going to be pancreatic and esophageal cancers, with stomach cancer being a tremendous opportunity in a limited part of the world initially. Korea is a huge stomach cancer screening program, national screening program that already exists. China's stomach cancer is a big problem. Japan's stomach cancer is a big problem. In fact, a number one cancer killer in some of those regions. Our current platform technology and markers that we've identified in our collaboration with the Mayo Clinic would potentially be utilized and readily adopted to the platform. In terms of the greater opportunity, both in the U.S. and globally, pancreatic cancer screening and diagnostic is a high priority. Esophageal screening and Barrett's esophagus screening and diagnostics is a second high priority. We'll talk a lot more about that as we go forward.
Remember that we invested millions of dollars into an automated platform and millions altogether, tens of millions of dollars in the technology platform, the chemistry platform, the DNA extraction platform, the marker development. We have not talked about that much over the last five and a half years. It is there. It is real. It is applicable to other disease states. We think we are way ahead of where other people are. We will start to talk about our plans a little bit more as time goes on. We have a dedicated team that is focused on this from marketing, project management, and most importantly, R&D and clinical being the Mayo Clinic. We think we have some exciting things to talk about, just not right now.
Raymond Myers (Director of Research)
That's great. If I could ask one follow-up question, that would be around the pancreatic cancer. You mentioned getting to 88% pancreatic cancer sensitivity from pancreatic juice. Will you need to be sampling pancreatic juice in a pancreatic diagnostic, or do you believe that the same Cologuard testing kit could be used in that?
Kevin Conroy (Chairman, President, and CEO)
When we take a look at the pancreatic market by itself, we see about a dozen potential applications for our technology and our markers. One of them happens to be in pancreatic juice, and that can help identify pancreatic cancer patients early. Today, it's very difficult to diagnose early pancreatic cancer because imaging doesn't do a very good job. Doing biopsies frequently misses, pancreas is a big organ, and frequently misses the site of the cancer. Pancreatic juice is a good representative sample of the entire pancreas. Even with the really early crude tests, we've been able to show nearly 90% sensitivity. We think that that is higher than doing a needle biopsy today, which has risks associated with it. It's higher than ultrasound. It's higher than MRI. It's higher than CT scans. That is just one example of many potential tests. We're excited about that.
I'd rather not get into too many details, but you'll see more information over time about what our strategy is and how we intend to pursue those opportunities.
Raymond Myers (Director of Research)
Okay. Thank you very much.
Operator (participant)
Thank you. We have a follow-up question from Jeff Elliott of Wilson Baird.
Jeff Elliott (Senior Research Analyst)
Thank you.
Operator (participant)
Robert Baird.
Jeff Elliott (Senior Research Analyst)
Thanks for letting me back in. Kevin, how certain are you that you'll get an NCD for Cologuard? The reason I'm asking is that there's not a tracking sheet on the CMS website. Also, Medtronic recently made a comment about their parallel review that CMS may not even give an NCD. Instead, CMS might just signal that the data is good enough for coverage.
Kevin Conroy (Chairman, President, and CEO)
Jeff, we're very confident that this parallel review process will lead to a preliminary coverage decision, and we would expect it to lead to a national coverage decision. There are no certainties in life, but the current group has spoken very positively about Cologuard publicly. There is a strong rationale for Cologuard for there to be a national coverage decision. Unlike the Medtronic product, a colon cancer screening test cannot be paid for by the maps without a national coverage decision. There has to be a national coverage decision for Cologuard to be paid for. I would believe, based on interactions today, that Cologuard will be covered by Medicare.
Jeff Elliott (Senior Research Analyst)
Okay. Thank you.
Operator (participant)
Our next question comes from Jan Wald of Benchmark Company. The line's now open.
Jan Wald (Managing Director)
Good morning. Congratulations. It looks like you're making some good progress. I just have one question. Most of my questions have really been answered. In terms of the commercialization of the product, it sounds like you have a strong message to take to prospective buyers of the screening test. How receptive do you think people are to do it? I mean, what kind of market are you walking into in the sense of whether or not you're really going to sell hard or whether you think that the market's conditioned to accept the test? What tools are you going in to really make the sale? Publications, presentations, things like that. How are you approaching the market?
Kevin Conroy (Chairman, President, and CEO)
Yeah. Let me answer the first part of the question. Maneesh will answer the second part of the question. Yesterday, I visited my primary care physician to get an annual checkup and was talking to the nurse on the way in. I was asking her a bunch of questions about how their healthcare IT system flagged colon cancer screening. She asked why I wanted to know, and I told her what we were up to. She said, "Oh, my mother heard about that test from CBS News and is putting off her colon cancer screening until your test gets FDA approved." We hear those stories all the time. The fact that Mayo Clinic has been behind the development of this test has been in fact impactful. The news coverage around the test to date over the last several years has been pretty broad.
A lot of people know about this test, but our job is to drive that further. When you talk to primary care physicians, they say a lot of patients are aware of Cologuard and are asking for it. Basically, our message to those patients will be, "Come out from hiding and get screened." If you've been avoiding screening for a long time, there's a new way to get screened. I'll let Maneesh answer the second part of the question.
Maneesh Arora (COO)
Yeah. As Kevin said, we think that there is a fertile market. We've been preparing for a long time, and we've talked to lots and lots of physicians. The one message that really resonates is the fact that the test has 94% cancer detection of stage one and stage two cancers, the ones that are most likely to progress.
While it has lots of great features and statistics people have read about in the New England Journal, the one thing that we know is we need to keep the message very simple. The message that has resonated most with primary care physicians has been the extremely high sensitivity for early-stage cancer. What we have done is transformed that message into very, very specific and simple training materials that we shared with the sales team last week, a core visual aid that states clearly the messages around early cancer detection, manifestation in digital media, social media, plans to be able to communicate that to physicians, systems, and patients. It is going to be a robust and broad communication digitally as well as with in-office materials and medical education.
Just think about it as a very coordinated approach around a very simple message that was really, really impactful with our sales team and has been in our market research.
Jan Wald (Managing Director)
I guess just a follow-up to the question. In terms of you going out and doing a lot of focus groups and market analysis, are you finding a certain segment of the physician population more receptive, like younger folks versus older folks? Are you finding anything like that in your analysis?
Maneesh Arora (COO)
That's a terrific ask. Yes, the answer is yes. There are characteristics or attributes of physicians that make them more or less likely to order Cologuard. Specialty. We know that OB-GYNs are more likely. Why? Because they're very, very used to screening with women. There are a whole host of things. I don't want to go through all of the list, but yes, demographics do matter. Age does matter. What we have done is plugged that into our algorithm to make sure that we are targeting the right physician. Yes, we have looked at that, and we've spent a long time doing the analytic work.
Jan Wald (Managing Director)
Thank you very much.
Operator (participant)
Thank you. Our next question comes from Chris Lewis of Ross Capital Partners. The line's now open.
Chris Lewis (Chairman, Co-Founder, and Managing Director)
Hi guys. Thanks for taking the questions. I had two quick ones on follow-up for the task force discussion earlier. First, I may have missed it, but when do you expect those guidelines to be finalized? Second, assuming an A or B rating for Cologuard, understood there would be a coverage mandate. Can the task force also require or recommend a minimum pricing level for the test?
Kevin Conroy (Chairman, President, and CEO)
We would expect the USPSTF guidelines to come out in the back half of 2015. We would expect an A or B rating. No, USPSTF does not recommend a price.
Chris Lewis (Chairman, Co-Founder, and Managing Director)
Is there a difference in your eyes between an A or B rating, or are they basically the same?
Kevin Conroy (Chairman, President, and CEO)
Under the Affordable Care Act, no. Colonoscopy and the fecal hemoglobin tests are both rated A.
Chris Lewis (Chairman, Co-Founder, and Managing Director)
All right. Thanks.
Kevin Conroy (Chairman, President, and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Drew Jones of Stephens Inc. The line's now open.
Drew Jones (Equity Analyst)
Morning, guys. Just one quick one. You touched on interval of the test. Can you give us some color around your conversations with CMS and whether or not you have any visibility as to how they're taking that into account in their decision-making process?
Kevin Conroy (Chairman, President, and CEO)
Sure. Both in private meetings and public meetings, the conversation has focused on an interval of every three years, which is based on the cost-effectiveness data that they have. The Coverage and Analysis Group has the research done by an outside party that we funded. That indicates that three years is probably the most reasonable screening interval. That was also discussed at the panel meeting by world-renowned colon cancer screening experts who said they thought that initially, three years probably made the most sense, but the guideline committees will ultimately make that decision. CMS was in the audience for that FDA panel meeting, and that is very public that they also heard the testimony of those experts.
Drew Jones (Equity Analyst)
Thanks, guys.
Operator (participant)
Thank you. We have a follow-up question from Zarak Khurshid of Wedbush Securities. The line's now open.
Zarak Khurshid (SVP)
Hey, thanks, guys. Just had a quick one on the accounting around USPSTF. Would that predominantly shift a lot of the business to accrual? How should we think about that?
Kevin Conroy (Chairman, President, and CEO)
Eventually. If the ruling comes out at the end of 2015 and there's mandatory coverage, then over time, we would expect the accounting to go to accrual. That would not be until 2016.
Zarak Khurshid (SVP)
Got it. Thanks.
Operator (participant)
I'm not showing any further questions. Now I'd like to turn the call over to Kevin Conroy for any follow-up remarks.
Kevin Conroy (Chairman, President, and CEO)
Again, everybody, thanks. Things are really coming together, obviously, with FDA approval hopefully right around the corner, CMS coverage, pricing. We're really excited about launching Cologuard. I'd first like to thank all those investors who have been supporters of the company over the last five and a half years. Thank the analysts who have done a lot of hard work and digging and critical analysis around our plans. Last but not least, the team here at Exact that have devoted nights and weekends and the better part of their last five years to this mission. We can't wait to get started, and we look forward to talking to you again one quarter from now. Thank you.
Operator (participant)
Ladies and gentlemen, thank you for participating in today's conference. This has concluded.