Exact Sciences - Earnings Call - Q2 2016
July 26, 2016
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Exact Sciences Corporation second Quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance at any time, please press star, then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to JP Fielder, Senior Director of Corporate Communications. You may begin.
JP Fielder (Senior Director of Corporate Communications)
Thank you, Sean, and thank you all for joining us for Exact Sciences second quarter 2016 conference call. On the call today are Kevin Conroy, the company's Chairman and CEO; Maneesh Arora, our Chief Operating Officer; and John Bakewell, our Chief Financial Officer. Exact Sciences issued a news release earlier this morning detailing our second quarter financial results. If you've not seen it, please go to our website, exactsciences.com. Following the Safe Harbor Statement, Kevin will provide an overview of today's call. Next, John will provide a summary of our second quarter 2016 financial results. Kevin will provide an update on our corporate priorities. During today's call, we'll make forward-looking statements based on our 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 also can be accessed through our website.
It's now my pleasure to introduce the company's Chairman and CEO, Kevin Conroy.
Kevin Conroy (Chairman and CEO)
Thanks, JP, and thanks, everyone, for joining us. During the second quarter, we saw strong physician and patient demand for Cologuard. Our sales force continues to help drive this demand, and their efforts have been complemented by an effective direct-to-consumer marketing effort, which includes our national television campaign. Solid commercial execution generated strong quarterly financial performance that included 161% year-over-year growth in revenue. Our ongoing attention to efficiency and expense control during the quarter resulted in meaningful improvements to our cost per completed test and cash utilization. In June, the U.S. Preventive Services Task Force included Cologuard in its recommendation statement, which is another step towards Cologuard becoming a standard of care in colon cancer screening. USPSTF's recent recommendations, coupled with Cologuard's inclusion in American Cancer Society, AGA, and NCCN guidelines, are all consistent with each other and will help fuel future growth.
In addition, the National Committee for Quality Assurance proposed broadening the HEDIS quality measures for colon cancer screening to include Cologuard. This would allow health plan systems and physicians to earn quality credit for using Cologuard this year. We will discuss these and other topics during this morning's call. It's now my pleasure to introduce John Bakewell, Exact Sciences' Chief Financial Officer, for our second quarter financial review. John?
John Bakewell (CFO)
Thanks, Kevin, and good morning. We're quite pleased all around with our financial performance this quarter, and here are the highlights. Second quarter revenue results nicely exceeded our expectations. Completed Cologuard test volume totaled approximately 54,000 generating revenue of $21.2 million for the quarter for an increase of 161% compared with the second quarter of last year and sequential growth of 43% over Q1 of this year. Average recognized revenue per test increased to $391 for the second quarter, bringing our ASP performance year to date right in line with our goals for the full year. We are delighted with our cost of sales results this quarter. Second quarter cost of sales totaled $186 per completed test, sequentially improved by $41 per test from Q1's result of $227.
As you'll recall, Q1 cost of sales included incremental scale-up investments needed to prepare our manufacturing and our lab facilities for heightened future volume. The combination of careful cost control, along with increased test volume during the second quarter, drove significant per-unit COGS improvement. This improvement brings to light the underlying scale and leverage potential that's resident within our manufacturing and lab operations platforms. Altogether, our COGS performance and ASP improvement combined to deliver gross margin of 52% for the second quarter. Second quarter operating expenses totaled $56.2 million, a sequential increase of $2.5 million from Q1 of 2016. Second quarter cash utilization totaled $38.5 million, considerably below both our Q1 2016 cash utilization of $44.3 million and the low end of our previously communicated range of $45-$49 million for the second quarter, primarily the result of our revenue performance combined with our ongoing cost containment efforts.
We ended the second quarter of 2016 with cash and cash equivalents of $224.1 million. I'll now turn the call back to Kevin.
Kevin Conroy (Chairman and CEO)
Thanks, John. The efforts of our sales force, complemented by our direct-to-consumer marketing efforts, drove significant commercial progress during the second quarter. We expect this to continue throughout the year. As John noted, we completed 54,000 Cologuard tests during the quarter. The number of physicians ordering Cologuard for the first time accelerated during the second quarter, increasing by 9,000 to 41,000 physicians since launch. This compares to an increase of 5,000 physicians in the first quarter of 2016. Our compliance rate is now 68%. The 1% decline was caused by a higher mix of commercially insured patients who comply at a lower rate than Medicare patients. We believe that broader commercial insurance coverage will drive higher patient compliance rates over time. We expect that 65,000 or more Cologuard tests will be completed during the third quarter.
We continue to anticipate completing more than 240,000 Cologuard tests during 2016, generating revenue of $90-$100 million. Let's turn now to our sales and direct-to-consumer marketing efforts. There are several key observations. First, we have experienced field and inside sales teams calling on primary care physicians' offices. The teams have strengthened and become more seasoned. Our sales team has become adept at leveraging physician relationships built last year and delivering our message about the comprehensive service supporting each Cologuard test. Third, because of the tenure and increased skill of our sales team, we are increasing both reach and frequency across a growing customer base. Our digital advertising campaign also continues to build awareness of Cologuard among both physicians and patients. This campaign engages patients in particular through digital social media and print advertising.
Our direct-to-physician digital campaign is focused on ensuring that physicians see the results of our 10,000-patient clinical trial published in the New England Journal of Medicine. Our digital advertising campaign has been complemented by our national television campaign. During the second quarter, visits to our website, cologuardtest.com, and downloads of key documents such as patient discussion guides and physician order forms are up significantly. Let's review our national television campaign. Our goals for this campaign are cost-effectively to increase total orders, generate growth in the number of new physicians who order Cologuard for the first time, and increase the rate at which physicians reorder. The focus of this television campaign remains on reaching those in Cologuard's target population and generating value by supporting our efforts to secure new physician customers and obtain new test orders. The campaign has helped fuel a strong demand during the second quarter.
We have reinitiated the campaign and expect to be on and off the air strategically for the rest of 2016. There was great progress during the quarter on a number of fronts that directly affect our long-term growth outlook. The first is the publication of the final colorectal cancer screening recommendations by the USPSTF, which made two points very clear. First, the task force found convincing evidence that screening for colorectal cancer provides substantial benefits and assigned an A grade for screening average risk individuals between 50 and 75. Second, Cologuard is listed among the seven recommended colon cancer screening methods. The task force made it clear that tests are not presented in any preferred or ranked order. The goal is to maximize the total number of persons who are screened.
The task force also provided modeling data that demonstrate Cologuard being used every three years offers the best ratio of benefits to harms among the recommended screening strategies. We believe the final recommendations will position Cologuard to receive the benefits of an A-rated preventive service under applicable laws. Cologuard's inclusion in the final recommendations has several important implications. As we have said, commercial insurers typically cover and pay for preventive services that are included in USPSTF recommendations. In addition, the Affordable Care Act mandates coverage with outpatient cost sharing for services that are graded A or B by USPSTF after a grace period of just over one year. Our conclusion that commercial insurers will be required to cover Cologuard without cost sharing is supported by precedent established by federal regulators in the interpretation and implementation of the guidelines for tobacco cessation and contraceptive use under the same statutory provision.
In mid-July, NCQA, the National Committee for Quality Assurance, proposed to broaden the HEDIS quality measures for colon cancer screening to include Cologuard for three years of quality credit. Inclusion in these quality measures is another important step toward Cologuard becoming a standard of care for colon cancer screening. Primary care physicians and health plans are increasingly financially incentivized to demonstrate improvements in quality as measured by data, such as colon cancer screening rates. More than 90% of the country's health plans measure their quality based on HEDIS. The CMS STAR ratings, which guide quality measures for Medicare Advantage plans, are directly impacted by HEDIS. The proposal to broaden the colon cancer screening measure is subject to a 30-day public comment period, which ends on August 10th. The updated measure is expected to be released on or about October 1st.
NCQA has a policy of developing quality measures for colon cancer screening methods graded A or B by USPSTF. If Cologuard is included in this October's update, health plans, systems, and physicians can receive quality measure credit for any patients who used Cologuard this year or in the past two years. Now, we'd be happy to answer your questions.
Operator (participant)
Ladies and gentlemen, if you have a question at this time, please press star then one on your touchstone telephone. Our first question comes from the line of Brian Weinstein of William Blair. Sir, your line is now open.
Brian Weinstein (Managing Director)
Hey, guys. Thanks for taking the question. First, kind of the obvious one with respect to guidance. You're obviously calling for a pretty big step up in the fourth quarter. Can you talk about your confidence in the fourth quarter? What are you seeing? What are the programs that you have in place in order to ensure that that bump up in Q4 is attainable given the seasonality that we saw last year in the fourth quarter?
JP Fielder (Senior Director of Corporate Communications)
Yeah, sure. Thanks, Brian. We believe, as we have said, that the back half of the year would be a strong part of our commercial performance. We see the key drivers being, again, new physician adoption, which is up significantly since the start of the television campaign, and then also increased utilization by those same physicians. The thing that we really track is the reorder rate of a growing base of physicians. We believe that the television campaign, which we're extending throughout the end of this year, will continue to have a positive impact on increasing the number of new physicians and also the reorder rate of the growing base of physicians. We also believe that we'll see some impact in the back half of the year based upon the potential for inclusion in the quality measures, which drive performance.
We are excited about the opportunity for the back half of the year. Obviously, there is a clear path forward to achieve our guidance of 240,000 tests.
Brian Weinstein (Managing Director)
Got it. With respect to PAMA, as things are clarified there, can you talk about the potential impact of PAMA on your business and potentially what type of ASPs that you guys should be thinking about going forward?
JP Fielder (Senior Director of Corporate Communications)
Sure, Brian. PAMA is the Protecting Access to Medicare Act. Last month, CMS issued final regulations regarding both the implementation and application of that statute's provisions. PAMA requires labs to report private payer rates for all lab tests. These rates are used to derive a weighted median that becomes Medicare's reimbursement rate. Although we're still assessing those final rules, our preliminary assessment based upon the claims data for January 1 of this year through June 30 of this year showed that we expect certainty under PAMA that our Medicare rate will not materially change through 2020. PAMA is good news for the business. It provides a level of certainty for the next several years looking forward. That's important as we plan for growth over that period of time.
Brian Weinstein (Managing Director)
Great. For the clarification, one last one, if I could sneak it in on COGS. You guys had talked about getting to under $190 kind of by the end of the year. You're already below that. Not well below, but you're below that today. How should we think about the trend line for that going out through the end of the year? What type of improvements should we be seeing? Is volume what's going to be driving this the most at this point? Thanks.
John Bakewell (CFO)
Hi, Brian. This is John. I'll take that question. When we look at cost of sales, obviously, we ought to look at it on a completed test basis. The $186 that we reported for Q2, that was a very nice improvement over Q1. I want to just remind everybody that that Q1 result was impacted by investments that we had made in staffing and capacity in order to support volume. They dampened that Q1 result, but at the same time, they enabled this performance here in the second quarter. We did experience some very good favorable absorption during Q2, along with just some good cost center spending control within lab operations and manufacturing. Now, when we look into the rest of the year, those cost containment initiatives should continue to positively influence our COGS per test.
We do not expect that the second half of the year COGS per test will be as low as Q2 levels, but we do anticipate them to be in the mid to lower $190 range. Ultimately, it is volume, which is absorption, that ends up being the most significant determining factor of COGS and consequently gross margin. Looking over time, the improvement trend is not probably always going to be linear because we do have to make those incremental investments from time to time, but we do expect a continued trend of reduction on a per-test basis as we move forward. For the remainder of this year, you can think the low $190s is a realistic achievable place for us.
Operator (participant)
Thank you. Our next question comes from the line of Katherine Ramsey of Robert W. Baird. Your line is now open.
Catherine Ramsey (Senior Research Analyst)
Hey, guys. Congrats on a great quarter. Just starting out, I was wondering if you could talk about any trends you saw during the quarter from doc additions per week, reorder rates, orders per doc kind of month to month. I know you started the ad campaign in mid-April. If you do a month lag between an order and a completed test, that's about a month and a half benefit from the ad campaign. Just trying to figure out how we should think about what a full benefit would be for a quarter.
Maneesh Arora (COO)
Sure, Katherine. This is Maneesh. As you know, when we initiated the pilot, what we saw was really a strong increase in both the number of physicians and the reorder rate. What was really encouraging was that, coupled with the execution of the salesforce, we saw continuation of that trend and that trajectory. What we have seen very directly is that increase in both new physicians and the reorder rate. We see that stabilized to increasing. That leverage is what gives us confidence, not just in Q3 and Q4, but for what Kevin spoke to, which was the long-term stability. If you think about the size of this market and the fact that there are over 200,000 primary care physicians that actively would be targets for us, there is a really long way to go.
We see an ability to sustain the levels of both dock additions and continued increase in reorder rates in the back half of this year, but really over the next several years.
Catherine Ramsey (Senior Research Analyst)
Okay. That's helpful. Any color on progress with commercial coverage? What are you hearing from payers following the USPSTF update? I saw a news clip saying that Walmart is now covering Cologuard. Is that correct as well?
Maneesh Arora (COO)
Yes. What this has done, what the USPSTF clarity has brought is really robust conversations with essentially all payers. It has reset that conversation. Yes, we did get recently Walmart—excuse me—Walmart to give us a positive coverage decision. The thing to keep in mind when you think about our private payer conversations is that these things just take time. Most payers typically review their coverage policies on any measure, not just colon cancer screening, once a year. While it feels like an eternity, the last month and a half that we have experienced since USPSTF became final, from a private payer perspective, it is almost like it happened yesterday. We see a positive tone and a trend to the conversations, but we know that it is something that is going to take time. Overall, it has been very positive.
Catherine Ramsey (Senior Research Analyst)
All right. Great. Thanks, guys.
Maneesh Arora (COO)
Thanks, Katherine.
Operator (participant)
Thank you. Our next question comes from the line of Brandon Couillard of Jefferies. Your line is now open.
Brandon Couillard (SVP)
Thanks. Good morning. Kevin, back on the TV campaign, can you give us any numbers around the ROI that you saw from the national campaign relative to the test market? Would it be reasonable to assume that the return or the relative impact is, let's say, flat lines in the second half of the year sort of relative to the initial bump that you would have seen from the national effort?
JP Fielder (Senior Director of Corporate Communications)
We're not giving actual percentage increases, but you can think about it roughly this way. Historically, the average weekly addition of physicians prior to the national campaign was around 500 physicians per week. That has increased to around 700 per week. It kind of is between 600-800 in that range. That has continued despite the growing base of physicians who have ordered Cologuard at least one time. Over time, we think this campaign will continue to drive new additions. Importantly, over time, it will also have the impact of creating awareness among patients who then go and talk to their doctor about Cologuard frequently with a download in their hand of a patient discussion guide, things to talk to their physician about Cologuard.
When they're talking to a current customer of Exact Sciences, it just is a great reminder to that physician to think about using Cologuard not only for that patient, but other patients that come in that day or that week. Also, for patients or customers who have never used Cologuard, as physicians who have never ordered Cologuard before, it's a great prompt of a conversation. We follow up with our inside sales team calling those physicians and educating them and their office staff about Cologuard. It is really a long-term driver. In terms of quantifying the ROI at this point in time, we can start to estimate that. It's really hard to estimate where that will be a year from now. We do see the financial payback as being within one year, Brandon.
Over time, that could increase or that time duration could shorten as you have a larger number of physicians who are ordering Cologuard. You get these other important prerequisites for robust ordering, including broad insurance coverage and HEDIS measures. That is the overall dynamic. It is really hard to say what the ROI will be six months from now or a year from now or two years from now. We do know that the television advertising campaign is a wise financial investment.
Brandon Couillard (SVP)
It's helpful. Then a two-part question for John. First, in terms of the realized ASP you saw in the second quarter, was there something unique about the revenue mix there that would suggest that's not a run rate that's reasonable for the second half? Then secondly, any update you can give us in terms of the cash burn or OpEx outlook for the back half of the year would be helpful. Thank you.
John Bakewell (CFO)
Sure. With respect to ASP, as we've pointed this out in the past, our ASP is subject to a certain amount of variability quarter to quarter. There are a lot of factors that influence that, including the timing of our cash basis revenue and changes in payer mix and what happens with our accrual and reserve activity from period to period. We had an ASP of $372 in Q1. That was a number that was probably lower than our anticipated baseline for the year. $391, I won't call out anything specific in that number other than just to point to that variability. Really, what we should do is look forward. If you recall, we've pointed to a full-year ASP of around $377 as being a reasonable proxy for the full year. We are indeed seeing some improvement in our cash collections.
As a result of that, we're comfortable with moving off of that a little bit in an upward direction. We're thinking that for the remainder of the year, ASP pretty confidently will be in a realm of $380 or so. That is really what you should focus on for Q3 and Q4 is something in that $380 range. I think that represents a good baseline for now with an expectation that over the course of time, as cash collections improve, we will see that number continue to rise. With respect to operating expenses and cash burn, let me just focus on the line items within op expenses and our Q2 performance. Our sales and marketing expense went up by $4.6 million from Q1 levels.
That reflects our first quarter of our second quarter national advertising and then a little bit of further expansion in our sales and marketing headcount, primarily in direct and indirect sales and in support and leadership functions. Despite those increases, that line ran nearly $4 million lower than we had previously anticipated. The reason for that was just further optimization of our program costs and the spending around those and lower field sales support costs in the form of travel and entertainment and some things like that. Within the other operating expense lines, if you look at R&D and G&A, they were sequentially lower than Q1 by about $1.5 million for R&D and about $500,000 for G&A. Again, in comparison with our previously communicated guidance, the G&A expense for Q2 was right in line.
R&D was just a little bit lower than planned, about $500,000 lower. That is all just the result of general expense control across the function. When we look forward with respect to R&D, we'd expect Q3 spending to be right in line with Q2. G&A, we expect a sequential increase of about $1 million-$2 million, which reflects primarily an increase in our IT infrastructure development. There is going to be some increased IT development costs during the quarter. With respect to sales and marketing, we'd expect spending that is about $2 million lower than Q2 levels. This reflects a modestly lighter television ad budget for Q3, as well as some continued progress with our cost containment initiatives. If you break that down, we'd expect this will bring our program cost spending down to roughly $15 million for the quarter.
The headcount-related costs should remain consistent with Q2 levels at right around $13 million per quarter. Then bridging that into cash utilization, we would expect in Q3 that our cash utilization will be in a range of about $38-$42 million. This reflects what we'll expect to be improved P&L performance from Q2 to Q3, offset a little bit by the timing of some CapEx spending and also some heavier working capital requirements during the third quarter. Hopefully that helps.
Brandon Couillard (SVP)
Super. Very helpful. Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Mark Massaro of Canaccord Genuity. Your line is now open.
Mark Massaro (Managing Director and Senior Equity Research Analyst)
Great. Thanks for taking the question. Congrats on an excellent quarter.
JP Fielder (Senior Director of Corporate Communications)
Thanks, Mark.
Mark Massaro (Managing Director and Senior Equity Research Analyst)
My first question is around commercial health plans. I understand that commercial health plans are all on different periods to review something, a new test, for instance. Can you, Kevin, share your expectations around how investors should be thinking about health plans coming on now that Cologuard is included in the USPSTF guidelines? Is it possible to think we may see a larger payer come on before the end of 2016?
JP Fielder (Senior Director of Corporate Communications)
Yeah. Thanks, Mark. I would refer back to Maneesh's comments here that most plans evaluate each of their policies on an annual basis. Every plan has a different plan time in the year that they do that. We aren't prepared to provide guidance as to whether a large payer will come on board in the back half of the year. We do expect to see additional payers sign contracts with us and bringing Cologuard in network in the back half of this year. Many of those payers look to USPSTF as a kind of target or guidance for whether they cover a particular new screening test. It just takes some time. I think Maneesh said it best. This just happened yesterday in their world. It takes time.
Then on top of that, and I think it's really important to understand the progress of first, there's a coverage decision. Then there is a certification of the laboratory. Then there is a contract typically entered into. Even after that contract is entered into, it does take time to educate physicians and patients that Cologuard is a covered service within their plans. I think this is something that will play out over time. The trajectory is a strong one that will help drive our long-term fundamentals from a financial perspective.
Mark Massaro (Managing Director and Senior Equity Research Analyst)
Okay. Great. Secondly, do you expect any material change to your sales and marketing team? Related to that, any update on Ironwood?
JP Fielder (Senior Director of Corporate Communications)
First of all, I would just like to compliment the strong effort by the sales and marketing team. The performance this quarter is the result of a lot of work that has been done over the last two or three years. This is not just one quarter's worth of performance. This is really the work done by an entire team over the last two to three years. I will let Maneesh answer the rest of that question.
Maneesh Arora (COO)
Before I answer the Ironwood part, I would specifically call out the sales team and thank them for their efforts because the sales team is what delivered this result. It's not just I know we spend a lot of time talking about the TV campaign, which is important, but the sales team has really executed. So my hats off to them. As far as the Ironwood, Ironwood has just been a fantastic partner since the launch. And our sales team and our commercial execution that we have been able to just drive has, over time, really made the Ironwood contribution relatively smaller. And it has gotten smaller and smaller over time. So they have been a great partner. And we have a continued relationship.
We are working with them to figure out what makes sense on a go-forward basis with our execution of our team and our commercial strategy, both sales and marketing. It has really made the Ironwood contribution much smaller. That is something we still need to figure out. We still are having active dialogue with them. We will provide an update once we come to that conclusion. The Ironwood team has just been fantastic to work with.
Mark Massaro (Managing Director and Senior Equity Research Analyst)
Great. If I can, I would love to hear your comments, Kevin or Maneesh, about how you expect potential inclusion in HEDIS to possibly accelerate the rate of physician adoption. Any other commentary around how you think health plans might receive the inclusion in HEDIS would be helpful. Thank you.
Maneesh Arora (COO)
Yes. HEDIS has very quietly become, and the HEDIS measures have become, an incredibly important part of driving the practice of medicine, especially around some fundamental areas that primary care physicians are involved in. For example, blood pressure screening is a really important HEDIS measure. We know that if you take certain steps from a preventive care standpoint, you can improve outcomes and decrease costs, which is an important goal of policymakers who have implemented at the Medicare Advantage level a financial incentive that is driving behavior. For example, CMS assigns a star rating system to Medicare Advantage plans consisting of one to five stars, five stars being great, very few plans achieve five stars, four stars achieving a bonus, which is about 5%.
To put this in perspective, a typical MA member would CMS would pay about $10,000 to the Medicare Advantage plan to cover that member for a year. A 5% bonus is $500. For UnitedHealth alone, that was a $1.4 billion bonus last year. These amount to significant dollars. It is a bell curve that establishes the cutoffs for the one to five-star ratings. There are multiple different quality measures that go into these ratings. Just a 10% improvement in colon cancer screening rates would increase the star rating for the colon cancer measure for 244 Medicare Advantage plans. Again, remember that the four-star rating qualifies you for a bonus. There are 73 of those 244 plans that are currently rated 3.5 for the colon cancer-specific measure.
That would cause these plans to be focused on their colon cancer screening rates, which is one of the measures where there's still a lot of room for improvement. It's not only Medicare Advantage that relies on the HEDIS system. Increasingly, commercial plans are entering into contracts with large provider groups that are very similar in structure to the Medicare star rating financial incentives. If you're a practicing physician today, particularly in the primary care space, you are watching your star ratings very closely. That becomes increasingly true in the back half of the year when there is a greater focus on performance.
I'd like to emphasize that the significant benefit from this comes as you look out over the next several years and five years or ten years where we think because of Cologuard's high compliance rate relative to colonoscopy, relative to the FIT Test, relative to Epi proColon, relative to virtual colonoscopy, Cologuard is a quantum leap improvement in compliance. Colonoscopy compliance in any given year is only about 35-40% of patients actually take their physician's advice and get a colonoscopy versus about in the high 60s with Cologuard. This will be an important part of the overall marketing message to physicians, to payers, and to large group practices. That will take time to play out. It is a fundamental driver of the business long-term.
Brian Weinstein (Managing Director)
Terrific. Thanks, Robert W. Baird.
JP Fielder (Senior Director of Corporate Communications)
Thanks, Mark.
Operator (participant)
Thank you. Our next question comes from the line of Bill Bonello of Craig-Hallum. Your line is now open.
Bill Bonello (Senior Research Analyst)
Thanks. A couple of follow-up questions. Back to the advertising campaign, I'm just wondering if you can give us any sense without being too specific, but any sense of volume progression over the course of Q2. I'm just trying to get a sense of when the national advertising campaign really began to impact test volume.
JP Fielder (Senior Director of Corporate Communications)
The national ad campaign bill started April 11th. It more or less mimicked in terms of the impact that the test campaign did, which is a gradual impact. After that campaign started, over time, the test order impact increased. Now, that again is coupled with the Salesforce efforts. That is about halfway through the quarter from a test order to completed test perspective, which there's roughly a 35-day lag between a test order and a completed test. Obviously, that campaign will also have an impact in terms of completed tests in Q3.
Bill Bonello (Senior Research Analyst)
Okay. Right. So not necessarily a full quarter of volume impact that you could attribute to the campaign in Q2.
JP Fielder (Senior Director of Corporate Communications)
Correct.
Bill Bonello (Senior Research Analyst)
Okay. That makes a lot of sense. And then just going back to the cash burn discussion, trying to think a little bit out beyond the next quarter, if we just fast-forwarded at the projected Q3 burn, you've got about five quarters of cash on the books. Should we look for you had expected Q2 to be the high watermark, obviously, with it being a lot better than expected. That doesn't seem to be the case right now. But should we expect for cash burn to diminish meaningfully in Q4 and thereafter? Just how are you thinking about that a little longer?
JP Fielder (Senior Director of Corporate Communications)
Bill, we'll hold off on commenting on Q4 for now. We've given, I think, some pretty good insight into Q3. I will concur with your observation. We did guide to the back half of the year being lower than Q2. That comment held until we beat our Q2 guidance considerably. I think you can expect overall cash utilization in Q4 to look not a lot different than what you see in Q3. We're committed to being very cost-effective with our expense programs here at the business. We're not prepared to offer up any specific guidance into Q4 or the out year just yet.
Bill Bonello (Senior Research Analyst)
Okay. So it sounds like that, though, if I'm hearing you right on that, there's also not necessarily a commitment to trying to bring the burn down meaningfully from time soon.
JP Fielder (Senior Director of Corporate Communications)
That's very much our commitment. Over the longer term, that's absolutely correct from a directional point of view. In terms of variability from one quarter to the next, I'll hold off for now on commenting. Again, in Q3, we would expect to see a bigger contribution from P&L profitability than we saw in Q2. We have a little bit of CapEx and working capital timing that will dampen that a little bit. CapEx and working capital aside, I think what you'll see, you'll see continued downward cash utilization progress in the third quarter.
Bill Bonello (Senior Research Analyst)
Okay. Great. Excellent. Thank you very much. That's all we had.
JP Fielder (Senior Director of Corporate Communications)
Yeah. I just want to make clear here, we have a commitment to taking this business to profitability. We obviously have provided guidance just in case in the transcript, there's any question about how that question was asked. We do have a commitment over the next X period of time to move this business to profitability.
Bill Bonello (Senior Research Analyst)
That's helpful. Thank you.
JP Fielder (Senior Director of Corporate Communications)
Thanks, Bill.
Operator (participant)
Thank you. Our next question comes from the line of Isaac Rowe of Goldman Sachs. Sir, your line is now open.
Isaac Ro (Unknown)
Okay. Thank you very much. Appreciate you taking the question. Just want to ask another question along the last question regarding the progression of volume in Q2. It sounded like from your prior comments there was not necessarily a significant inflection month to month and that it was more of a steady increase following the DTC launch. Just want to confirm that was the tone that you were trying to convey or if, in fact, there was a bit of an inflection that we should think about as we look towards back half ramp.
JP Fielder (Senior Director of Corporate Communications)
Thanks, Isaac. Yes, that's correct. There was an, I wouldn't use the term inflection, there was a steady impact by both the Salesforce and the television ad campaign over the course of the quarter.
Isaac Ro (Unknown)
Great. Maybe just on the spending side, you guys put a lot of detail around the preservation of capital to your earlier point towards profitability. At the same time, you're obviously investing in the ad campaign. How should we think about the incremental spend if we just isolate the ad spend in the back half versus the first half? You mentioned the 3Q dynamic. Just trying to take a more holistic view at the direction of spend, is it fair to assume, I assume, that there will be a back half increase versus first half.
JP Fielder (Senior Director of Corporate Communications)
Yeah, Isaac, it will be slightly greater in the back half of the year than it was in the front half of the year. Really, I think the way you should think about it is Q2 and Q4 are weighted pretty heavily in terms of television ad spending because the expectation is that we'll be on a majority of the weeks during Q4 and we were as well in Q2. Bear in mind, Q1 was lighter than that because we were still in a test market mode. In Q3, we're moderating our TV ad spend and we'll be on and off in select weeks during Q3. When you add it all up, we would be slightly higher in terms of total spend in the back half of the year than we were in the front.
Isaac Ro (Unknown)
Got it. Thank you very much. Appreciate the call.
Chris Lewis (Stock Analyst)
Thank you. Our next question comes from the line of Eric Criscuolo of Mizuho. Sir, your line is now open.
Eric Criscuolo (VP)
Hey, guys. Good morning. Very, very nice quarter here. Just a question on the private pay contracts. When you enter into a contract with a private payer, do you immediately start to accrue that, or do you still have to recognize it as cash on a cash basis, and then you can accrue when you get some type of established pattern going?
JP Fielder (Senior Director of Corporate Communications)
We need two things. In addition to the contract, we need some level of payment history before we can move to an accrual basis. Obviously, the vast majority is done today on a cash basis, which accounted for the variability you see in ASP. Over time, as we enter into these contracts and get both contracts and payment history, we'll expect that to stabilize.
Eric Criscuolo (VP)
Okay. Great. Thank you very much. That's all I have.
Operator (participant)
Thank you. Our next question comes from the line of Sarah Wajda of Gabelli & Company. Your line is now open.
Sarah Wajda (Unknown)
Hi. Good morning. I'm just wondering about the volumes between Q3 and Q4. It's a little bit slider going into Q3. Is that mainly because of the smaller spend on the ad campaign? I guess just going more into 2017, would we be seeing more similar sequential growth going in past this year?
JP Fielder (Senior Director of Corporate Communications)
Q3, we know we now have a full year and a half under our belt with visibility into the colon cancer screening rates, people's visits to physicians, both physician vacations, rep vacations, and testing that's performed. We see Q3 a little bit lighter. You see a little bit of variability, but still really strong growth. The biggest quarters for growth are typically going to be the Q2 timeframe as well as the blend between Q3 and Q4, that September, October, November timeframe before the holidays. That's a trend we will continue to see. The one thing that makes this difficult is just the sheer size and magnitude of this opportunity, the rapid growth in underlying ordering physicians, as well as the efficiencies we're seeing. That's really why it's difficult to measure.
I'll just go back to the long-term trajectory over not the next quarters, but 2017 and 2018 being a terrific opportunity for growth.
Sarah Wajda (Unknown)
Okay. Secondly, just in terms of your compliance rate, it has ticked down a couple percentage points on an overall basis. Do you see it being similar going forward? How do you plan to keep that a strong number?
JP Fielder (Senior Director of Corporate Communications)
Our compliance rates, we have targeted 70%. We think over time, there's an opportunity to improve beyond that. As we said, there was a 1% decline in the compliance rate that's driven mainly by an increased relative mix of commercial payers. There's still a majority of Medicare patients who are prescribed the Cologuard test. As we see broader commercial insurance coverage, we expect to see a higher compliance rate. That compliance rate will start to increase. We're already starting to see that dynamic that is also being driven by the television advertising where patients who respond to the television advertising seem to have a higher rate of compliance. We think it trends, we're not quite sure where it would end up being at a low point, probably not much below 68%.
We then expect it to start to increase and have the ability to go beyond 70%.
Sarah Wajda (Unknown)
Okay. Great. Thank you very much.
JP Fielder (Senior Director of Corporate Communications)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Chris Lewis of Roth Capital. Sir, your line is now open.
Chris Lewis (Stock Analyst)
Hey, good morning, guys. Thanks for taking the questions.
JP Fielder (Senior Director of Corporate Communications)
Good morning.
Chris Lewis (Stock Analyst)
I wanted to start on the Task Force inclusion. As those commercial payers begin to pick up coverage here, how should we think about pricing as those new commercial payers come on board relative to the CMS rate? Can you talk about your strategy and what your strategy will be heading into those conversations on pricing? Thanks.
JP Fielder (Senior Director of Corporate Communications)
Sure. Our strategy hasn't changed at all. Our strategy is that Medicare is the largest payer in the US, and they deserve the best price. We haven't entered into any contracts below the Medicare rate, and we don't expect to in the future. Other than that, we don't provide public comments about our specific contracting strategy. We do believe that Medicare is the largest payer and deserves the best rate.
Chris Lewis (Stock Analyst)
Understood. You introduced the total office sales call targeting approach earlier this year. I was hoping you could just spend a minute talking about how that strategy is progressing and what type of kind of increased productivity from the reps are you seeing from that?
Maneesh Arora (COO)
Sure, Chris. We introduced it, and it has proven to be fruitful. That really is where I was calling out just the increased efficiency. Kevin mentioned we have seen an increase in efficiency and productivity in the second quarter. A lot of that is due to having reps while they're in an office call on all the docs in that office. We have seen an improvement. We haven't spoken to the specifics of how much, but we think that there is more room to go there. It dramatically increases the number of physicians we can reach with our Salesforce. It's been positive, and we think that there's continued opportunity.
Chris Lewis (Stock Analyst)
Okay. Great. And then just one more on the.
JP Fielder (Senior Director of Corporate Communications)
To further Maneesh's point, one of the additional underlying reasons for the total office strategy is that the second physician in an office orders at a higher rate than the first physician. There is an efficiency reason to do this and leverage over time.
Chris Lewis (Stock Analyst)
Understood. And then just for the remainder of the year, if you look at the second quarter, obviously a nice beat versus kind of your volume expectations. But you left the full-year volume outlook unchanged. So can you just walk us through the rationale of leaving that full-year volume outlook unchanged in light of the better-than-expected second quarter and your plans to extend the DTC campaign over the remainder of the year? Thanks.
JP Fielder (Senior Director of Corporate Communications)
Yeah, sure, Chris. If you take a look at the pace here from the first quarter, 40,000 tests to second quarter, 54,000 tests to a third quarter, 65,000 tests to a fourth quarter, that would imply 81,000 completed tests. That pace is pretty consistent and gets you to around 240,000. I don't think there is, we don't think that if you exceed 240,000, it would be by much. I really want to emphasize that there's still a lot of work to do in the back half of the year starting today. From a revenue perspective, as John may have mentioned, that implies that the $380 ASP, that you're at the lower end of that $90 million-$100 million range, not at the higher end of the range. There's still a lot of work to be done in the second half of the year.
I think it's important to note that as we think about how this year progresses.
Chris Lewis (Stock Analyst)
Okay. Great. Thanks for the time.
JP Fielder (Senior Director of Corporate Communications)
Thanks, Chris.
Operator (participant)
Thank you. Our next question comes from the line of Bruce Jackson of Lake Street Capital. Sir, your line is now open.
Bruce Jackson (Unknown)
Thank you for taking my questions. First, was there any revenue booked in Q2 from tests that were performed in prior quarters?
JP Fielder (Senior Director of Corporate Communications)
Yeah, Chris. Sorry, Bruce. We actually have a good bit of disclosure on that in our 10Q. I'll just point you to that. You can take a look at what we provide. The amount is relatively low, but there's good disclosure in our footnotes with respect to the timing of cash collections on revenue.
Bruce Jackson (Unknown)
Okay. Super. You mentioned that there was an increase in the commercial mix this quarter. Was it like a mid-single-digit increase? Can you give us just a little bit of flavor on how the mix may have shifted in the testing during the quarter?
JP Fielder (Senior Director of Corporate Communications)
Sure. We had previously indicated that it had been really steady and consistent that right around 70% of the volume was Medicare. It has not been a significant shift just because the patient population is skewed so heavily towards Medicare. We have, as you start to get more commercial patients aware of and ordering Cologuard, that is really what has done it. It has been a small shift, but an increase in the weight of commercial patients on a relative basis. It is a small number.
Bruce Jackson (Unknown)
Okay. That's it for me. Nice quarter.
JP Fielder (Senior Director of Corporate Communications)
Thanks, Chris.
Operator (participant)
Thank you. I would now like to turn the call back over to Kevin Conroy, Chief Executive Officer, for any concluding remarks.
Kevin Conroy (Chairman and CEO)
The second quarter was a solid one for the company, and we expect the growth of underlying demand for Cologuard and the outstanding execution by our team to continue. Both drove strong financial performance during the quarter with improvements to our COGS, gross margins, and cash utilization. We also made good progress during the quarter on a number of fronts that positively affect our long-term growth outlook, including inclusion of Cologuard as a recommended test in USPSTF's final recommendations and the proposed addition of Cologuard to the HEDIS quality measures. Both are anticipated to increase demand for Cologuard over time. I'd like to emphasize a special thanks to everybody on the Exact Sciences team who have continued to work incredibly hard to make Cologuard a standard of care and a potential to alter the colon cancer screening landscape. This is an important and worthy goal.
Operator (participant)
Today, I'd like to thank all of you for joining the call and look forward to talking to you again in three months.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.