Exact Sciences - Earnings Call - Q2 2017
July 25, 2017
Transcript
Operator (participant)
Good afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Exact Sciences Corporation's second quarter 2017 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question-and-answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Megan Rice, Investor Relations Analyst, you may begin your conference.
Megan Rice (Investor Relations Analyst)
Thank you, Christine, and thank all of you for joining us for Exact Sciences' second quarter 2017 conference call. On the call today are Kevin Conroy, the company's Chairman and CEO; Maneesh Arora, our Chief Operating Officer; and Jeff Elliott, our Chief Financial Officer. Exact Sciences issued a news release earlier this afternoon detailing our second quarter financial results. If you have not seen it, please go to our website at exactsciences.com. We intend to release results and host our quarterly conference calls after the market closes going forward. Following the Safe Harbor statement, Kevin will provide an overview of the company's second quarter performance. Next, Jeff will provide a summary of our second quarter 2017 financial results. Then, Kevin will provide an update on our corporate priorities. During today's call, we will make forward-looking statements based on current expectations. Our actual results may differ materially from such statements.
Descriptions of the risks and uncertainties associated with Exact Sciences are included in our SEC filings, which can be accessed through our website. It is now my pleasure to introduce the company's Chairman and CEO, Kevin Conroy.
Kevin Conroy (CEO)
Thank you for joining us this afternoon. Exact Sciences delivered another strong quarter with $57.6 million in revenue, 135,000 completed Cologuard tests, and 11,000 new ordering physicians and other healthcare providers. There are three key takeaways from today's discussion. Cologuard's strong momentum continues. Cologuard is 2% penetrated into a large 80 million person market. We're making investments into the business to ensure long-term sustainable growth. The entire Exact Sciences team has been working diligently to enable growth. In the second quarter, the reimbursement team secured key coverage in in-network contracts for Cologuard. Our sales and marketing teams have continued to drive increasing order volumes, and the lab, manufacturing, and customer care teams are scaling efficiently to handle volume growth. We recognize that reaching our goal of eradicating colorectal cancer will take time and require further investments, hard work, and intense focus from the entire team.
Our CFO, Jeff Elliott, will now review our second quarter financial results.
Jeff Elliott (CFO)
Thank you, Kevin, and good afternoon, everyone. Second quarter results exceeded expectations with revenue of $57.6 million, up 19% sequentially, and completed Cologuard test volume of 135,000 tests, up 35% sequentially. Cologuard's compliance rate at the end of the second quarter was 66%. This slight decline compared to the last few quarters is consistent with our expectations and primarily due to an increased mix of commercial volumes. Second quarter average recognized revenue per test was $428. After adjusting for the one-time impact of the first quarter accrual shift, the $14 sequential decline was due to payer mix and normal volatility in patient cash collections. Second quarter cost of sales totaled $133 per completed test, down from $170 in the first quarter and significantly better than we expected.
During the quarter, we saw volume leverage and efficiencies in our lab and manufacturing operations and benefited from the previously disclosed royalty buyout agreement. We believe the underlying improvement in cost of sales per test is sustainable over the long term. However, we expect scale-up investment in infrastructure and personnel will lead to a temporary increase in cost per test starting in the third quarter. In the second quarter, decreased cost per test lifted gross margin to 69%, up 400 basis points sequentially. Based on these strong results and our optimism for the future, we're raising our long-term gross margin target by five points to at least 75%. Second quarter operating expense totaled $71.1 million, an increase of $4.2 million sequentially, slightly below our expectations. Second quarter cash utilization totaled $43.9 million, including $15 million paid to MDX Health as previously announced.
Excluding the MDX payments, cash use improved by about $7.5 million compared to the first quarter, driven by better-than-expected operating results. We ended the quarter with cash and marketable securities of $484 million, which includes net proceeds from our June equity offering. Turning to our guidance, as Kevin mentioned, we had a strong second quarter, and we are pleased to raise our full-year revenue guidance. We now expect revenue of $230-$240 million and Cologuard volume of at least 550,000 completed tests. For the third quarter, we expect Cologuard volume of at least 150,000 completed tests. I will now turn the call back to Kevin.
Kevin Conroy (CEO)
Thanks, Jeff. Cologuard represents a significant advancement in colon cancer screening. Cologuard has captured about a 2% share of the more than 80 million average-risk Americans in the addressable colon cancer screening market. We believe Cologuard will continue to grow its share of this market over a long period as we steadily increase the number of ordering primary care physicians and as those physicians order Cologuard more frequently. New data from the quarter show that 51% of Cologuard users reported never before being screened for colorectal cancer. Our last published survey results from 2015 showed 42% of Cologuard users having never been previously screened. These more recent data demonstrate that we are converting unscreened people at a faster pace. We know that many of these Cologuard users are in their early 50s, and we have an opportunity to keep them as Cologuard users every three years for three decades.
81,000 healthcare providers have ordered Cologuard, with more than 800 per week placing their initial order during the second quarter. The national television campaign has been remarkably effective in creating patient demand and driving new physician adoption at a consistent pace. Approximately 50,000 primary care physicians of the more than 200,000 we are targeting in the United States have ordered a Cologuard test. There are still many physicians and people ages 50 to 85 for us to reach. We believe that Cologuard's estimated 86% insurance coverage will help increase adoption and reorder rates among physicians. The number of total lives covered by insurers for Cologuard increased to 235 million as of today, from 197 million as of our first quarter earnings call. Our market access team has been focusing on contracting to allow patients access to Cologuard as an in-network benefit.
We are pleased with the new commercial contracts in place with two of the nation's top health insurers, UnitedHealth and Aetna. We continue to emphasize that it can take time to progress from a positive coverage decision to a contract and subsequently to educate physicians and patients that Cologuard is an in-network benefit with zero cost share. Looking to Cologuard's future, we are investing in our people, in our physical and IT infrastructure to support our continuing growth. We are working to expand our current lab and manufacturing capacity to at least 2 million tests per year. We plan to break ground on a second new lab facility later this year. We are also working with our supply chain partners to ensure their ability to efficiently grow with us.
We will establish additional space for our customer care team and other functions in addition to the investments being made in both the field and inside sales forces. Our IT and data infrastructure are the backbone of our service capabilities. This infrastructure can be used to enhance compliance and adherence during an individual's lifetime, which can lead to improved quality scores, outcomes, and reporting for physicians and payers. We are allocating additional resources to further develop and improve the asset. Let's now turn to our promising pipeline. Globally, cancer afflicts more than 14 million people every year, killing nearly 9 million people. More than 10% of cancer diagnoses are in the United States. Cancer incidence will increase by 70% over the next two decades. Most cancers are diagnosed in late stages, resulting in lower chances for long-term survival.
Exact Sciences' vision is to help win the war against cancer through early detection. This vision can be achieved through the unique attributes that position Exact Sciences to change the paradigm in cancer detection. We are one of the few companies in cancer diagnostics to possess the human and financial resources to make a major impact while creating significant long-term shareholder value. Few companies collaborate with a more elite clinical partner like Mayo Clinic. Together, we have spent more than eight years methodically discovering and seeking IP protection on highly accurate cancer biomarkers. Exact Sciences uses a differentiated, low-cost, highly accurate, proprietary platform. This platform, coupled with our capabilities, will enable us to bring advanced, accurate tests to people who need them in a cost-effective way, providing a long-term sustainable advantage.
The next step toward achieving our vision is to advance a test that addresses the pressing need and opportunity to differentiate between benign lung nodules and lung cancer. We believe more than 1.5 million lung nodules are discovered annually in the United States, typically incidentally on a CT scan. The current diagnostic options are invasive, expensive, and sometimes harmful, and the potential opportunity for a blood-based biomarker test is significant. We look forward to sharing an update related to our lung nodule test in the coming quarters. We're now happy to take your questions.
Operator (participant)
Thank you. At this time, I would like to remind everyone in order to ask a question, please press star and the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Brian Weinstein from William Blair. Your line is open.
Brian Weinstein (Managing Director)
Guys, thanks for taking the question. Just starting out, you talked about some of the contracting in the quarter. Can you just say if you're comfortable saying that you have not signed commercial contracts below the Medicare rate?
Maneesh Arora (COO)
Brian, this is Maneesh, and that's what we've stated, and we remain committed to not signing any contracts that are going to ever impact the Medicare rate in the future.
Brian Weinstein (Managing Director)
Great. Secondly, talking about the ASPs, the guidance at least appears to call for flat to maybe even down a touch as we think about ASPs in the back half of the year. Is this conservatism there, or are there factors we should be considering regarding pricing and revenue recognition? I would have thought that with the contracts being signed, that potentially you'd be able to increase the amount that you're accruing for some of these newer contracts.
Jeff Elliott (CFO)
Yeah, thanks, Brian. Just a quick note on the term ASP. We're going to use the wording average revenue per test going forward rather than average selling price or ASP. Really, ASP is a misnomer for us as we aren't selling at $428 a test. We're really selling at a price much above that. The $428 in the quarter, that is the amount of revenue recognized in the quarter divided by the number of tests completed in the quarter. As we said previously, the results in a given quarter can be affected by payer mix and the timing of cash collections, and that's what's happened in the second quarter, and the guidance does reflect some continued impact from mix shift. Long term, we do continue to see a path to at least $500 a test.
One thing I would point you to in the Q and into our Ks is that since all Cologuard payers are now on an accrual basis, we do expect our average revenue per test to approximate our time-lagged average collections. This time-lagged average collection is a number we've been including in our SEC filings. We define that figure as the average amount of cash received per test calculated on a rolling 12-month basis and lagged by six months to allow us time to collect. Now, if you look at that time-lagged basis, it does remove kind of timing differences and quarter-to-quarter fluctuations. Our average collections on a time-lagged basis were $423 at the end of the second quarter. That is up $5 from the end of the first quarter. That number has shown nice improvements over the past year.
During the second quarter, we saw improvement from traditional Medicare, Medicare Advantage, and commercials. As I mentioned, long term, we do see a path to $500. In the near term, there can be things like fluctuations in cash collections and payer mix, and that's what's reflected in the annual guidance.
Brian Weinstein (Managing Director)
Okay, that was very thorough and very helpful. Thank you for that. My last question is just relative to kind of where we started the year and where the guidance is looking at for the full year on a test volume basis. Can you just talk about where the upside specifically is coming? Obviously, the number of physicians that are signing up continues to be very strong, but are you seeing just greater utilization from docs who had been ordering regularly? Is there anything, any kind of a bulk order situation that's going on in the first half of the year? Just anything else that we should be aware of or just thoughts about why you guys are doing as well as you are at this point? What are the factors?
Maneesh Arora (COO)
Brian, it's Maneesh. What you see is the really consistent additions week in, week out of the new providers. What we're seeing is just the commercial execution and the integrated efforts of the sales and the marketing really working to drive an increase in utilization of the existing base. It really just speaks to the need to continue those efforts, which we're doing.
Brian Weinstein (Managing Director)
Thank you, guys.
Operator (participant)
Your next question comes from the line of Doug Schenkel from Cowen. Your line is open.
Doug Schenkel (Managing Director and Senior Analyst)
Hi, good afternoon. My first question is on guidance. It seems like your guidance for Q3 volumes assumes that there's no material change in Q3 orders per practice or the rate of physician additions, at least relative to what you did in Q2. I say this because you can get to those volume numbers with those assumptions. Is that right? If so, is this just a function of conservatism along the lines of what Brian just asked, or are there other factors that we should be considering as we update our models?
Jeff Elliott (CFO)
Yeah, thanks, Doug. First of all, we're very proud of the results the team just put up, but you shouldn't expect that same increase, that 35,000 increase we saw in the second quarter. You shouldn't expect that same sequential increase going forward, really for a few reasons. Second quarter is seasonally our strongest quarter. Third quarter has the negative impact of Memorial Day. Remember, there's about a 35-day lag between orders and completed tests. So Memorial Day actually affects the third quarter. Also, the 4th of July and summer vacations all affect the third quarter. Lastly, as we previously talked about, we are making investments in our sales and marketing teams, and that should help us more as we get into 2018. As you change around sales territories and bring new people on board, that potentially could cause near-term disruption.
Again, this is the right thing to do for the long term, but those are things we considered as we prepared guidance for the third quarter.
Brian Weinstein (Managing Director)
Okay, that is helpful. Last quarter, you shared some metrics that demonstrated the success of your television advertising campaign, and I think that was important in a lot of our minds because it demonstrated the operating leverage that you may be able to get moving forward out of continued spend on those ad campaigns without the requirement to materially scale your direct efforts. Specifically, I think you talked about a high percentage of tests ordered in Q1 by physicians that did not interact with a direct Exact rep. Could you provide any updates on that metric and plans for advertising campaigns moving forward?
Maneesh Arora (COO)
Sure, Doug. It's Maneesh. The biggest metric we look at is the one you alluded to, and that is how many physicians of the new physicians that come in have been called on by a salesperson. Of the 800, we are still seeing a very consistent rate of about 80% being ordering without ever having been called on by a salesperson. That's really, really important because we see that rate of new ads being consistent, and we see the underlying order rate go up. We know that the television is affecting both the acquisition of new docs, but it's really efficient across now the over 80,000 physicians that have been ordering. With the spend being under $1 million, about $900,000 a week, we expect to continue to do that.
It is one of the most efficient things we do, and we'll continue to monitor it regularly so that we know we're making prudent investments.
Doug Schenkel (Managing Director and Senior Analyst)
Okay, and one last one. We've seen postings for a number of third-shift openings at Exact. You talked about plans to expand capacity late this year, but keeping in mind that you do have some openings and you've exceeded most street expectations for volumes over the last several quarters, could you just provide an update on your current annual capacity for tests in advance of an expansion?
Maneesh Arora (COO)
Sure. We want to always make sure that our ability to fulfill an order will never impact what we do. The things that you see in terms of job postings and our expansion to a third shift, we just think is prudent operating management to get in front of the volumes that we see and the trajectory that we see. We do have ample capacity to be able to run a million tests a year. We are expanding that capacity such that in the next six months, we will be at 1.5. You will notice in the Q that was filed that we are, excuse me, in the K that was filed, we were going to be in the ground, as Kevin said earlier on the call, with a new lab facility.
We're staying 6-12 months ahead of any potential volumes, taking into consideration anything that could come at us.
Doug Schenkel (Managing Director and Senior Analyst)
Okay, that's great. Thank you.
Operator (participant)
Your next question comes from the line of Anne Edelstein from Bank of America Merill Lynch. Your line is open.
Anne Edelstein (VP and Equity Research Analyst)
Nice. I like that one. Hey, guys. Nice quarter. First, a question, I guess, on the sequential growth in Q3 and Q4. Just wondering why you expect volume growth to re-accelerate in Q4 over Q3, given that that is typically your weakest quarter. That is the implied Q4 volume based on the updated guidance.
Jeff Elliott (CFO)
Yeah, thanks. Really, the implied shows basically a consistent number of completed tests through the balance of the year. As I mentioned earlier, there are different puts and takes during the third quarter in terms of holidays and summer vacations, but overall, the guidance is implying consistency in completed tests over the next couple of quarters.
Anne Edelstein (VP and Equity Research Analyst)
Okay. I guess maybe one on the COG side. I noticed that your personnel expenses fell something like 30% quarter-over-quarter, even as test orders were up at 35% quarter-over-quarter. Can you just—I understand that you're going to be investing some more maybe the back half of the year in personnel, but why did those fall quarter-over-quarter?
Jeff Elliott (CFO)
As I said in the prepared remarks, we saw very nice volume leverage and efficiency gains in the quarter. When I look ahead to the third quarter, we expect cost per test to increase to the mid-$140s range as we invest in additional personnel and infrastructure to scale the business. What you'll see from time to time is we'll add additional automation that will help the existing personnel get more efficient, but there's not a big shift in the base of personnel that's already there. Let me take the opportunity to kind of walk through some other P&L metrics for the third quarter. When I look at operating expense for the third quarter, we expect a $10-$12 million total increase across the three main areas. The things we're looking for are headcount additions and selling and marketing. Primarily there, we've talked before about the added sales reps.
In R&D, we're making some pipeline-related investments. Then within G&A, we are investing in IT and our customer care team. When I think about CapEx, we do expect a total CapEx in the third quarter of $15 million-$20 million. We do expect some larger one-time items as we scale up the business. The main areas of focus for third quarter CapEx are increasing the lab and manufacturing capacity, some additional office space that we alluded to, our supply chain. Really, the goal here is to make sure we have a rock-solid supply chain and our IT infrastructure.
Brian Weinstein (Managing Director)
Thanks. I'll jump back in too.
Jeff Elliott (CFO)
Thanks, Anne.
Operator (participant)
Your next question comes from the line of Puneet Souda from Leerink Partners. Your line is open.
Puneet Souda (Senior Research Analyst)
Thanks. Congrats on a great quarter, and thanks for taking my question. Maybe just help me understand. I mean, I think the questions around the third and fourth quarter and the seasonality and the difference are already being asked. Maybe let me ask around that. You have 81,000 physicians right now. It's still a limited penetration. Is there any sense of a threshold at which you get in, the penetration starts to move away from sort of a linear growth to maybe an accelerated growth? Help us understand that. Are you sort of accounting for that? It seems like you're already building the capabilities for facilities looking ahead to that.
Maneesh Arora (COO)
Sure. So it's really, really difficult to forecast a dramatic change. What we've seen is really consistent growth, both of new physician additions as well as a pretty nice increase in the reorder rate. The real thing I think to focus on is the fact that we're still 2% penetrated into an enormous market. Rather than think about a hockey stick, it really is important to think of a long extended years period of steady and consistent growth that is going to be strong. We want to make sure we're ready for the upticks in demand, which is why we are making the investments that we are to stay ahead of it. What we see is 2% penetrated into a market that has an opportunity to grow for a really, really long time.
Puneet Souda (Senior Research Analyst)
Okay. Thanks for that. Just briefly, the patients that are coming back after the three-year repeat, I suppose you are accounting for those too. Is there a different strategy of reaching out or reminders for those patients, or is that also accounted in your full-year guidance with the current tests?
Maneesh Arora (COO)
Two different questions. I would say that it is accounted for in the guidance, and we do have active plans to outreach to everyone that has taken Cologuard, both to the patient and to the ordering physician. Very similar to our compliance program, where we built a system to outreach systematically to the patient, we are doing the same thing at the three-year interval. First with a mailer, with a postcard outreach, and then a call outreach. We will learn a lot, but that will just be beginning in the fourth quarter of this year with 100,000 patients that we will outreach to in 2018.
Puneet Souda (Senior Research Analyst)
Okay. Thanks for that. And then just one last one. Any change in the assumptions for compliance rate over the next few months now that you have adoption that may be a faster clip and UnitedHealth coverage also that's in place and getting activated on July 1? Help me just understand any change in view on the compliance rate here.
Jeff Elliott (CFO)
Yeah. Thanks for the question. We've been saying for the last couple of quarters, do not be surprised to see a modest decline in the compliance. This is because of mixed shifts. We're seeing faster growth in the commercial side of our business. The commercial side, at least historically, has carried a lower compliance rate. We've reported before something in the upper 50% range for commercial compliance compared to the low 70% on the Medicare side. That mixed shift has been bringing the overall rate down, but long term, we're still very optimistic on the overall compliance rate ticking back up. Longer term, we do see a pathway to get that back above 70%.
Puneet Souda (Senior Research Analyst)
Okay. Thanks for taking my questions. I'll jump back in the queue.
Jeff Elliott (CFO)
Thank you.
Operator (participant)
Your next question comes from the line of Catherine Schulte from Robert Baird. Your line is open.
Catherine Schulte (Senior Research Analyst)
Hey, guys. Thanks for the questions. You talked about increasing your sales force by about 100 people this year. Could you give us an update on how that's progressing, the timeline for full build-out, and then what your productivity goals for those incremental ads are?
Maneesh Arora (COO)
Sure, Catherine. I think one of the things that Jeff alluded to was that we're in the process of making those ads, and we expect them to happen here in the third quarter. Just historically, what we've seen is it takes some time to get new ads productive. It takes usually, we would say, about six months to get them fully up and running. We expect these additions, as Jeff said in his prepared remarks, to be really helpful for us in calendar 2018, but the vast majority of the additions will be made in Q3.
Catherine Schulte (Senior Research Analyst)
Okay. That makes sense. As you've gotten broader coverage from insurers, has there been an uptick in talking with health systems or payers to strategically position Cologuard or do more program orders?
Maneesh Arora (COO)
One of the things that we've always wanted to be really careful about is program orders, partially because our goal is to really change behavior and make Cologuard the standard of care as an A-rated screening test. The emphasis for us has not been on program orders. I think that was a question that was asked earlier. Our results do not reflect any bulk or program orders. This reflects ongoing strength in the business on a day-to-day basis. The first part of your question is an important one. We have seen increased interest from systems and have invested in that as over time, we are now included in the second quarter in the stars and the quality metrics. We are having increased dialogue at systems.
Those lead times, those sell cycles are longer, so we do not expect them to drive material results this year, but are going to be critical for the long-term trajectory in 2018, 2019, and beyond. But we have invested, are investing in system sales staff, and we have seen increased interest from systems.
Catherine Schulte (Senior Research Analyst)
All right. Great. Thank you.
Operator (participant)
Your next question comes from the line of Brandon Couillard from Jefferies. Your line is open.
Brandon Couillard (Senior VP)
Thanks. Good afternoon. Quick one from Anish. Could you give us an update on your progress of shifting some of the ordering volume away from fax to electronic and what that mix looks like today?
Maneesh Arora (COO)
Yeah. When we started off, it was 95% fax, and we've been chipping away at it. The team has done a really, really nice job. Today, we are just about a quarter of orders that are electronic. It has been modest moves every quarter. We continue to invest in it, and we expect it to continue to tick up a little bit at a time. It is right now about a quarter, Brandon.
Brandon Couillard (Senior VP)
Thanks. Two housekeeping ones for you, Jeff. Could you quantify the impact of the MDX royalty going away in the second quarter? As we look into early 2018, understanding you're not in a position to really give guidance, but as new capacity comes online, should we expect the COGS per test to step up again like in the first half of 2018 relative to the back half of this year?
Jeff Elliott (CFO)
Yeah. Just on MDX, we can't get into the details of what the impact was. I would say that the primary drivers of the cost per test improvement were operating leverage and the efficiency gains in our lab and manufacturing operations. We previously had broken out the size of the royalty in our filings, but we can't get into what the impact was in the quarter. As far as the 2018, I'd rather leave that for another call, but I think it is safe to say that the gains we had, the improvements we had in cost per test, are sustainable for the long term. Temporarily, as we scale the business, we will see some impact in the third quarter in terms of slightly higher cost per test as we add people and additional capacity.
Brandon Couillard (Senior VP)
All righty. Thank you.
Operator (participant)
Your next question comes from the line of Mark Massaro from Canaccord Genuity. Your line is open.
Mark Massaro (Managing Director and Senior Equity Analyst)
For the questions. Going back in time, I think you had 4,000 tests completed in Q4 of 2014. It seems like you have almost like a pilot opportunity in Q4 this year for the initial reorders. You cited the 100,000 that ordered in 2015 that are eligible to reorder in 2018. Can you talk about what your internal forecast is on the percentage of those 100,000 you think you can convert? Do you think that the conversion will be potentially more successful from an outreach to the patient or to the ordering physician?
Maneesh Arora (COO)
Mark, I think it's way too early to project that. I would say we obviously have our own expectations, and it's incorporated into our guidance. It's too early to comment on that. I think we'll know a whole lot more as we start to roll these programs out, and we'll be able to provide better visibility to it. Don't get us wrong. We are going to be actively pursuing it.
Mark Massaro (Managing Director and Senior Equity Analyst)
Got it. Maybe a question for Kevin. Can you speak to maybe some of the milestones we can think about in terms of the R&D development with liquid biopsies? Should we be thinking of potentially an RUO launch in 2018 for lung nodules? Can you maybe rank order what could be behind lung nodules, assuming that is the first test?
Kevin Conroy (CEO)
I think taking a step back, we are focused, along with the Mayo Clinic, on developing a breakthrough approach to diagnosing cancer early through typically blood draws, but also liquid biopsies, for example, pancreatic use. Where we are today focused is in lung nodules and then potentially a lung cancer screening test. The technology also applies to prostate cancer, liver cancer, breast cancer, colon cancer recurrence, esophageal cancer, etc. We are focused on the top cancer killers in the U.S. What powers our ability to detect cancer early from plasma is the same technology platform and the similar class of biomarkers, DNA methylation markers primarily. We may add some other markers to the mix like we did with Cologuard, but the same markers that power Cologuard.
One of the things that's important to note about the technology platform is it's low cost relative to sequencing or arrays, etc. This gives us an opportunity to upend the pricing approach that cancer diagnostic companies relying on sequencing equipment have historically relied upon. We're doing it in partnership, a deep partnership with the Mayo Clinic that has been very productive to date, as you know, and will continue to do this. We haven't yet, Mark, to answer your question about what's coming next, laid that out. There are just more opportunities, truthfully, than one company can pursue over a short period of time.
As you know, we tend to get very focused and make sure that we hit all of our milestones, and that is going to be our approach with a lung nodule test to help discriminate between a benign nodule and cancer, and then also whatever test we announce will be next. There is a huge impact for us to make a difference, and that is the important thing.
Mark Massaro (Managing Director and Senior Equity Analyst)
Great. Thank you.
Operator (participant)
Your next question comes from Isaac Ro from Goldman Sachs. Your line is open.
Isaac Ro (Head of U.S. Medical Technology)
Good afternoon, guys. Thank you. I wanted to come back to the earlier question I think Doug had regarding the cadence of volume you guys are assuming in your guidance for the year. I think you went through all the moving parts, Jeff, for third quarter, which is great. I was hoping you could maybe do a similar exercise for fourth quarter as we think about kind of the third quarter cadence and what you expect to happen in the fourth quarter to get to your full-year guidance.
Jeff Elliott (CFO)
Yeah. What's implied by the guidance is about 15,000 incremental tests in the third quarter and then another 15,000 incremental kind of growth in the fourth quarter. I walked through the items in the third quarter. In the fourth quarter, you have some dynamic from Labor Day. You do have some dynamic from around the holidays. We've talked before about people taking vacation around Christmas and New Year's rather than being at home and returning their collection kit. There are some impacts there. Second quarter is certainly our strongest quarter of the year, but we took all those things into consideration when we thought about guidance.
Isaac Ro (Head of U.S. Medical Technology)
Okay. That's helpful. Maybe on the cost side, I was interested in how you guys are thinking through the CapEx required for the new facility. Maybe if you could help us think through the timing and magnitude relative to what you guys have done in prior years for CapEx, that would be helpful.
Jeff Elliott (CFO)
Yeah. Earlier, I mentioned the third quarter number for CapEx, somewhere in the $15 million-$20 million range. That is across a variety of things. It is IT, supply chain, it is some facilities. I would expect something kind of similar in the fourth quarter. We are still relatively early in the planning phase for some of these investments, so I would rather wait and talk more in future quarters about the longer-term items. Near term, we do expect it to step up. We are doing this from a position of strength. We are doing this because we are optimistic about the long term. We are doing this as a way to prepare for that 30%+ long-term market share target that we have set up before.
Isaac Ro (Head of U.S. Medical Technology)
Okay. Got it. Thank you.
Operator (participant)
Your next question comes from the line of Raymond Myers from Benchmark. Your line is open.
Raymond Myers (Research Analyst)
Thank you. Kevin, you note that you have reached now 86% of the market covered. Can you now start to give us more visibility to what proportion of the market has been shifted to contracted?
Kevin Conroy (CEO)
Presently, we don't plan to publicly disclose the % contracted, and our goal is to move both of those numbers to virtually 100%. The number we're comfortable disclosing at the present time is just the 86% coverage number.
Raymond Myers (Research Analyst)
Great. As contracts or as lives move from covered to contracted, are you seeing an increase in utilization, or is it too early to say?
Kevin Conroy (CEO)
I think that it is definitely too early to say the impact on the contracted and network status. We know that it is the lack of contracted commercial insurance coverage is one of the greatest pushback on the part of primary care ordering physicians. Over time, as we eliminate that barrier and, B, educate physicians to that barrier, we will see an uptake, but it is too early. Certainly, the impact of the contracted wins that we've seen so far this year probably have not had a significant impact.
Raymond Myers (Research Analyst)
Great. We look forward to hopefully it does. You now have, I believe, more cash at Exact Sciences than any time in your past, close to $500,000,000. Has your marketing support or other investment plans increased commensurate with the cash that's now available to the company?
Kevin Conroy (CEO)
As we've said to investors, we raised that capital knowing that we would be making investments for the long term, but that we expected to go cash flow positive with the capital that we had on the balance sheet at the time of that raise. We are playing the long game with Cologuard, and we think it's important to make long-term investments. The fact that we have that capital on the balance sheet has not changed our perspective on investments into the business for the future. Jeff, do you have any additional color to add?
Jeff Elliott (CFO)
Yeah. It also does not change our thoughts on timing to cash flow breakeven. We are not pushing it out because we have additional cash. That is unchanged.
Raymond Myers (Research Analyst)
Okay. Very good. Lastly, I wanted to ask you about the increase in cost per test. We had a nice decline in the cost per test here in Q2. Can you reiterate why it is you expect that cost per test might increase in Q3?
Jeff Elliott (CFO)
Sure. Yeah. I'd be happy to. Really, it's a temporary increase because what we saw in the second quarter in terms of extremely good operating leverage and efficiencies, it will take time as we scale the business. We add personnel. We add infrastructure. It will take time to then get additional leverage on the incremental investments. Temporarily, we expect that cost per test to increase while we absorb the incremental investments.
Raymond Myers (Research Analyst)
Is this related to opening or scaling up the new production facility?
Jeff Elliott (CFO)
The comments I gave on third quarter were about the expansion of the existing facility, the existing region manufacturing capacity. These were not comments on the new facility. That is something that would potentially impact future years.
Raymond Myers (Research Analyst)
Okay. Very good. Thanks for taking the questions.
Operator (participant)
Your next question comes from the line of Kevin Ellich from Craig Hallum. Your line is open.
Kevin Ellich (Analyst)
Hey, guys. A lot of my questions have been answered. Just, Jeff, hate to beat this to death horse here, but the CapEx, you guys have expanded, I think you started in maybe mid-June, expanding your lab on East Badger Road. Is that all that $15-20 million that you called out for Q3, or was that some of that for the second site that you guys are going to start building at some point?
Jeff Elliott (CFO)
Yeah. Thanks for the question, Kevin. The $15 million-$20 million, there's multiple different areas. Some of that is expansion of the existing lab. Some of it is expansion on the existing manufacturing capacity. We're also adding additional office space. We're making investments in our supply chain, and we're making some investments in our IT infrastructure. Those items all collectively sum up to $15 million-$20 million.
Kevin Ellich (Analyst)
Got it. When you guys start the construction on the next site, the second site for additional Cologuard processing and customer service, have you guys put a number to that? I mean, how should we think about that?
Jeff Elliott (CFO)
We have not yet, in part because the new lab, there are still some design elements that aren't finalized. I would say that within the $15 million-$20 million, there are several—I'll say there are multiple larger kind of one-time items that won't repeat in 2018. I'm not going to give a number for 2018 now, but the step up we're doing, this is because we see the growth coming. We've talked about the guidance. We've talked about our longer-term goals, and we want to make sure that our capacity is never a rate limiter for patients.
Kevin Ellich (Analyst)
Sounds good. Thank you.
Operator (participant)
Your next question comes from the line of Bruce Jackson from Lake Street Capital. Your line is open.
Bruce Jackson (Senior Analyst)
Hi. Nice quarter, and thanks for taking my questions. Could we get an estimate on the commercial % of the total tests performed during the quarter?
Jeff Elliott (CFO)
Sure, Bruce. The way we typically break it out is the Medicare mix, and this is Medicare all in Medicare, was about 62% of volumes in the second quarter.
Bruce Jackson (Senior Analyst)
Okay. Super. One question for Kevin. I know that you've got a lot of moving parts on the development pipeline with the blood-based platform. Can you give us just anything to look forward to in the next six months in terms of a data release or a publication or a presentation, something that gives us some indication that you're making progress on any of the development programs?
Kevin Conroy (CEO)
I will take a step back and talk about the key elements to develop and bring to patients a new test. First, you need to analytically validate a test, and we released data recently showing a 90% plus sensitivity and specificity for detecting lung cancer in diagnosed patients with less than a 10% false positive rate. The next thing that you need to do is rerun that data with a new—rerun that study with a larger N so that you can set cutoffs heading into a pivotal clinical trial. As part of that FDA clinical trial, we will be speaking with the FDA. We expect that to occur later this year, towards the end of this year or the beginning of next year, and then initiating the FDA pivotal study, which provides clinical validation of the test in patients with lung nodules.
We would expect to kick off that pivotal study in the first half of next year. Similarly, we're in the process of developing the economic models and working with key opinion leaders to vet that modeling and making sure that we're able to show two things at the end of the day: that a new lung nodule test will help save lives and that it will save the healthcare system money. That's the longer-term perspective, and it's really first half of next year that you will see additional data.
Bruce Jackson (Senior Analyst)
Perfect. Thank you very much.
Jeff Elliott (CFO)
Thanks, Bruce.
Operator (participant)
Your next question comes from the line of Chris Lewis from Roth Capital Partners. Your line is open.
Chris Lewis (Senior Research Analyst)
Hey, guys. Good afternoon. Thanks for taking the questions. Just a few for me. In terms of the upwardly revised gross margin long-term goal of 75% up from 70% previously, I think, can you help us understand kind of the key drivers supporting that updated outlook? I guess what's changed relative to the previous assumptions, and at what level of volumes do you see that type of gross margin goal becoming achievable?
Jeff Elliott (CFO)
Sure. Thanks for the question, Chris. In the second quarter, we were pleasantly surprised by the ultimate cost per test. We had not expected a $37 test sequential decline. We were pleasantly surprised. I would say that the two main buckets were the volume leverage. That really came from the volume upside versus our expectations. On the efficiency side, both our lab and manufacturing teams did a very nice job in the quarter at delivering improvement, which gives us increased confidence in the long-term ability of the team to get to a 75% gross margin or at least 75% rather than the prior guidance of at least 70%. It is really the results in the quarter, as well as as we look towards the incremental investments we are making for the future, that give us the confidence to raise that number.
Chris Lewis (Senior Research Analyst)
Are you quantifying kind of where you think that 75% gross margin goal is achievable in terms of volume level?
Jeff Elliott (CFO)
Yeah. That's a long-term number, but we were at 69% in the second quarter. We've made some nice progress towards it, but it is a longer-term number. I would quantify it as being at full scale.
Chris Lewis (Senior Research Analyst)
Okay. In terms of the planned Salesforce expansion this year, can you just help us understand how you're adding to your management team to kind of support that expanded direct Salesforce? Thanks.
Jeff Elliott (CFO)
Sure, Chris. One of the things that we did, and hiring new managers was really, really important to us. It was actually the first thing we did before hiring the additional reps, was bring on a really, really talented set of new managers so that they could be involved with the hiring process. We are in the throes of that, and we expect that to be complete in Q3. We are really excited, and I am really excited about the sales team that has been built, the leadership with the existing team that is out there, and the new folks that have recently joined.
Chris Lewis (Senior Research Analyst)
Okay. Thank you.
Jeff Elliott (CFO)
Thanks, Chris.
Operator (participant)
There are no further questions at this time. Mr. Kevin Conroy, Chairman and CEO, I turn the call back over to you.
Kevin Conroy (CEO)
Thank you all for joining the call. First of all, thanks to the entire team at Exact Sciences for delivering a great quarter and, importantly, for making a big impact in the lives of people. Many, as you can see from this quarter, have never been screened for colon cancer who are getting screened. We are changing the paradigm. We are excited about it. We are not going to stop. We are going to keep going here until the job gets done. We are excited about that path forward. Finally, we are also excited about what this technology can do for other cancers. We are committed, along with our partner, the Mayo Clinic, to deliver on the promise, and the team is energized. Thank you for your continued support, and we look forward to talking to you again next quarter.
Operator (participant)
Thank you. This concludes today's conference call. You may now disconnect.