Exact Sciences - Earnings Call - Q3 2014
October 27, 2014
Transcript
Operator (participant)
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Exact Sciences third quarter 2014 earnings call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will be given at that time. If anyone should require assistance while the meeting is in progress, please press star then zero on your touch-tone telephone to reach an operator. Please note today's conference is being recorded. I would now hand the conference over to Rod Heiss. Sir, please go ahead.
Rod Heiss (VP of Investor Relations)
Thank you, and thank all of you for joining us for Exact Sciences third quarter 2014 conference call. On the call today are Kevin Conroy, the company's Chairman and Chief Executive Officer; Maneesh Arora, our Chief Operating Officer; and Bill Mahoney, Senior Vice President of Finance. Exact Sciences issued a news release earlier this morning detailing our third quarter 2014 financial results. If you've not seen it, please go to our website at exactsciences.com or call 608-807-4607, and I'll send it to you. Following the safe harbor statement, Kevin will provide a summary of our third quarter financial results and provide an update on our corporate priorities. We will be happy to answer your questions following Kevin's remarks. Please take note of the safe harbor paragraph that appears at the end of this morning's news release that covered the company's financial results.
This paragraph states that any forward-looking statements that we make: one, speak only as of the date made; two, are subject to inherent risks and uncertainties, including those described in our most recently filed annual report on Form 10-K and our subsequently filed quarterly reports on Form 10-Q; and three, should not be unduly relied upon. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein or elsewhere to reflect any change in our expectations with regard thereto, or any change in events, conditions, or circumstances on which any such statement is based. It is now my pleasure to introduce the company's Chairman and CEO, Kevin Conroy.
Kevin Conroy (Chairman and CEO)
Thank you, Rod, and good morning, everyone.
Our mission at Exact Sciences is to help eradicate colorectal cancer, the second leading cancer killer in the United States. Each year, there are 50,000 deaths and 137,000 new cases of colon cancer. Colon cancer is one of the most preventable cancers, but it is one of the least prevented of all cancers. Sixty percent of colon cancers are detected in stage three or four when outcomes are poor. By detecting early, we may be able to prevent cancer and save lives. Cologuard, which a large clinical trial data showed detected 92% of cancers and 69% of the most advanced precancers, can change that. It offers people 50 years and older who are at average risk for colon cancer an easy-to-use screening method. It's more than a test because it's part of a service that our lab provides to patients and physicians that actively helps people get screened.
In the U.S. alone, the screening population of average risk patients is more than 80 million. Colorectal cancer screening is a multi-billion dollar opportunity in the U.S. and abroad. Our field sales team is working actively with primary care physicians to educate them about Cologuard to make it a routine part of their patient care. Let's discuss our third quarter highlights and financial results. The third quarter was a transformational quarter for Exact. Cologuard won FDA approval on August 11. CMS made its final national coverage decision on October 9, and Cologuard is covered for all Medicare beneficiaries as of that day. CMS also announced its preliminary reimbursement amount the same day. We launched our test with a 120-person sales team. The feedback that we've been receiving from physicians has been excellent.
Cologuard has broad appeal across the range of primary care physicians and well beyond the appeal it has to the highest FIT and FOBT prescribers. Primary care physicians see colorectal cancer screening as a pain point in their practice because many of their patients will not undergo regular screening. They love the accuracy of Cologuard and its ease of use as they order it and patients use it. Simply put, Cologuard makes everyone's life easier. Our lab and customer support center are fully operational, processing physician orders and patient samples. Our ability to provide 24/7 support and follow-up is one of the most important ways we make Cologuard so easy to order and use. It's a significant part of Cologuard's value proposition. We will describe each of these highlights in more detail in just a moment. First, I'd like to discuss how we will recognize revenue.
For Medicare patients, we plan to recognize revenue on an accrual basis. For tests billed to commercial payers and individuals, we expect to recognize revenue on a cash basis until we have contracts in place and some amount of history to demonstrate collectibility. Accordingly, because CMS did not issue its final national coverage decision until October 9, we have not recognized revenue for the third quarter. Operating expense for the quarter was $32.2 million. Cash utilization for the quarter was $23.7 million, and we ended the quarter with a cash balance of $211 million. Let's turn now to the FDA and CMS actions. The FDA approved Cologuard on August 11. CMS announced simultaneously that it proposed to cover Cologuard. It was the first time the two agencies made such a joint announcement.
The announcement was the outcome of the FDA-CMS parallel review program, which the agencies launched three years ago to shorten the time it takes to bring innovative, new medical products to patients. We believe this is a very valuable program that we may seek to use in the future as we develop our pipeline. We are very pleased with the broad label that FDA provided for Cologuard's use in average risk patients between the ages of 50 and 84. We will spend most of today's call providing an update on the progress we've made bringing Cologuard to patients and physicians. Before I do, let's discuss CMS's recent decision on coverage and pricing. We are very pleased that on October 9, the CMS coverage and analysis group issued a final national coverage decision on Cologuard.
Medicare Part B will cover Cologuard one time every three years for its beneficiaries aged 50 to 85 who are at average risk for colon cancer. Medicare patients represent 43% of the screening population. Launching a new diagnostic test with 43% of covered lives is unusual and positions us for success. Also, on October 9, CMS's hospital and ambulatory policy group proposed that Cologuard be reimbursed based on a crosswalk methodology relying on three existing codes. Crosswalking is the linking of existing codes to a new test to establish payment for it. The codes in CMS's preliminary payment decision are consistent with those proposed by the company in July. They add up to $502. CMS also created a specific G-code for Cologuard, which we will use to bill for Medicare covered tests. We expect a final decision on pricing by the end of the year.
Let's turn now to our Cologuard marketing efforts. Our Cologuard launch strategy is to create demand among physicians, promote awareness among patients, and secure payment from both Medicare and private payers. The strategy includes PR activities, advocacy, Cologuard marketing campaigns, and a strong presence on the web. Our 120-person sales team has been our biggest commercial investment to date. We have three sales regions: West, Central, and East, each headed by a director. Our field sales team consists of approximately 120 people, including 10 reps who call on large systems and group practices. There are 80 reps who call on primary care physicians and 10 area managers. We have six clinical liaisons who are responsible for medical education. The balance is our sales management and support. This is a deep and talented team. Our team began meeting with physicians and health system officials immediately after FDA approval.
We also have an experienced implementation team that works collaboratively with each healthcare system to support their electronic medical record integration, physician and staff education, and patient education initiatives. We have an active physician marketing program aimed at educating appropriate health professionals about Cologuard. The goals of this strategic program are to increase physician awareness, support the sales team's efforts to drive physician adoption, and differentiate Cologuard from other screening options. Our physician outreach includes a digital ad campaign that's focused on primary care physicians, GIs, physician's assistants, nurses, and other medical professionals. The campaign uses highly targeted digital ads and emails, generating more than 6.5 million impressions to date. The campaign also includes materials that our sales team can use and leave behind during office visits. We also have an active presence at medical conferences. Our medical education program is an important component of these efforts.
This program provides physician speakers to groups of other health professionals to educate them about Cologuard, helping to raise awareness and adoption. By the end of the year, we expect to have completed 50 meetings during which physicians present on Cologuard direct to their peers in locations throughout the United States. As a result of all of these initiatives, Cologuard was the third most searched term on Medscape during the month of September. Medscape is the leading online medical information and educational tool most used by physicians and other health professionals. Let's look at what physicians' reactions have been to Cologuard. Our research indicated that over 90% of primary care physicians found Cologuard compelling. Our actual experience is consistent with this research. PCPs know that there is an acute need for a new and different way to screen for colorectal cancer.
They see far too many of their patients being diagnosed with colon cancer, many who chose not to undergo colonoscopy as a frontline screening test. Most physicians are frustrated with the number of their patients who do not undergo colonoscopy even after repeated requests. Many also find that the non-invasive tests available before Cologuard's launch, the FIT and FOBT tests, are simply not accurate enough, and that too many patients take home those tests and never return them. Physicians love the fact that Cologuard is an at-home, patient-friendly screening method that is highly accurate. They are also won over by the data. 92% cancer detection established in a well-designed 10,000-patient clinical trial, the results of which were published in the New England Journal of Medicine. This has simply been highly impactful.
Physicians also appreciate the service that we offer them and their patients, backed up with a 24/7 call center aimed at getting their patients to follow up on the Cologuard test. They love that we are removing the burden of colorectal cancer screening from the doctor and making it easy for their patients to get screened. Now, let's take a closer look at our robust directed consumer digital advertising campaign. Our digital advertising campaign is highly focused on creating a strong digital presence for Cologuard, exposing people to the Cologuard message on high-profile news and healthcare sites like The New York Times and WebMD. Clicking on these ads sends you to cologuardtest.com, which I'll show you in a moment. We also have customized our digital advertising so that it reaches physicians and patients who match our target profiles for each.
Finally, we are maximizing a patient's ability to find Cologuard through paid search that puts Cologuard at the top of the results for certain search terms. Since the campaign began, there have been more than 90 million impressions through digital ads and search. Let me briefly show you cologuardtest.com. This is a screenshot of cologuardtest.com, our consumer website. Here, a patient can find detailed information about colorectal cancer, Cologuard, and getting screened with our test. It also has a unique feature that we are very excited about. If you look in the lower left-hand corner, you can see a link that says, "Talk to your doctor." If you click on it, you can do two things. First, you can download a discussion guide that you can take with you to the doctor to see if screening with Cologuard is right for you.
An average of 50 discussion guidelines are downloaded each day. Second, you can chat live with a healthcare professional about Cologuard. Since approval, we've had nearly 500,000 visits to the website. Public relations also is a major component of our effort to raise awareness about Cologuard. Our PR efforts to raise Cologuard's profile with patients and physicians have generated more than 3 billion impressions since we launched Cologuard. Cologuard has been featured in more than 1,000 unique news outlets. Top-tier media outlets have run stories about our tests, including The Wall Street Journal and The New York Times. Cologuard also was featured on the national TV program, The Doctors. Just this morning, Cologuard was featured on The Today Show, the second time it has been featured there. We also have a focused strategy aimed at educating commercial insurers about Cologuard.
Our strategy is aimed at securing coverage of Cologuard by the top national plans. Medicare covers 43% of the population, and another 40% is covered by commercial insurance. The largest commercial insurance plans represent the vast majority of this segment. We have a team actively engaged with these health plans to obtain coverage. We believe our strategy will help secure coverage from among the largest payers in the country. Securing that coverage takes time, however, and our expectations are reasonable in the near term. Medical practice guidelines also play an important role in coverage and adoption of Cologuard. As of 2008, the American Cancer Society recommends stool DNA testing in its screening guidelines. Stool DNA also is included in guidelines developed by the American College of Gastroenterology, with a testing interval recommendation of three years.
Presently, the U.S. Preventive Services Task Force is conducting a review of its colorectal cancer screening guidelines. We anticipate that they will complete that review towards the end of 2015 or beginning of 2016. If stool-based DNA testing is included and gets an A or B rating, the Affordable Care Act requires all commercial payers to cover the test without copay, coinsurance, or deductible. Now, let's turn our attention to the results of our sales and marketing efforts today. We have been very pleased with the interest level of our target physician, primary care doctors, and their staffs. In the short time since FDA approval, thousands of doctors have signed up to be able to order Cologuard. With the official launch following the national coverage decision on October 9, test orders have accelerated. We are extremely pleased with the number of physicians ordering Cologuard.
Our strategy of focusing on large group practices that employ about half of PCPs in the U.S. is also paying off. We have announced four systems to date that have begun to offer Cologuard to patients. These systems employ more than 1,000 primary care physicians. To date, we have had one commercial health plan cover Cologuard, and we are in the contracting process with others. Our clinical laboratory is an important part of the value that we provide to physicians and patients. Our operational capabilities are a strategic advantage for us. We built a state-of-the-art, CLIA-certified lab and customer support center capable of processing 1 million patient samples per year. We have achieved both College of American Pathology certification and New York State approval for our lab.
We have invested in manufacturing capacity and built significant inventory, and we have hired and trained staff so that we are prepared to process the return tests. One of the unique operational advantages we have built is our IT system architecture. This intelligent business system ties together our entire business, enabling us to provide a very high level of customer service. It also enables us to track our business growth in real time and make strategic decisions rapidly. Let's now turn to our pipeline. We've developed a technology platform that is applicable to the screening and diagnosis of other cancers. We are developing novel, clinically important diagnostic screening tests for GI tract cancers through a highly productive collaboration with the Mayo Clinic. We have a focused R&D effort underway both in collaboration with the Mayo Clinic and independently.
In the near term, we expect to provide more clarity on what we believe to be this valuable asset of Exact Sciences. To reiterate what I said at the start of the call, this past quarter was a great one for Exact Sciences. It is very gratifying to see five years of focused work culminate with the broad launch of Cologuard across the United States. As is always the case at Exact Sciences, it was a team effort. Cologuard could not have been launched without everyone in the company, starting with our product development team and now including those who are selling, marketing, and seeking reimbursement for Cologuard. All of us are totally focused on our mission of helping to eradicate colorectal cancer. We are now happy to answer your questions.
Ladies and gentlemen, if you have a question at this time, please press star followed by the number one key on your touch-tone telephone. If your question has been answered or if you'd like to remove your line from the queue, you may press the pound key. Our first question comes to the line of Brian Weinstein from William Blair.
Matt Larue (Analyst)
Hi, good morning. This is Matt Larue in for Brian. Thanks for taking my question. Kevin, you mentioned that sort of several thousand of docs have signed up, and I just wanted to maybe hone in specifically on the 2,500 high-prescribing FIT and FOBT physicians you've spoken about. I just wonder, based on the obviously early feedback here, what sort of progression you expect towards that 2,500 and what the feedback has been on those high-prescribing docs?
Kevin Conroy (Chairman and CEO)
Sure. Thanks, Matt, for the question.
There were early reports by people who logged onto our website and started looking up the number of physicians who have been enrolled. I think the early numbers were around 1,300. Let me say that we have exceeded the 5,000 number, and the trajectory of enrollment continues to go. Physicians want this test. It is more than just high-prescribing FIT and FOBT physicians. It is all the physicians that we have been able to connect with. They see the value of Cologuard. Another thing that is important to note is that our research indicated that although FIT and FOBT high-prescribers were great targets because there was a very concentrated number of them, their willingness to order Cologuard—there was no difference in the research between high-prescribers and people who did not believe in using the FIT and FOBT test.
With all of that said, we are very happy with the conversion of those very targeted FIT and FOBT physicians. We do not want to provide that specific breakdown and create a whole new set of information for others to track, but we are very pleased with the conversion of those top FIT and FOBT physicians. They see the value of Cologuard.
Matt Larue (Analyst)
Okay. Thanks for that detail, Kevin. And then just on the USPSTF process, could you just review for us how you expect that they will evaluate Cologuard and what, if any, information you think might be available to the public throughout that process?
Kevin Conroy (Chairman and CEO)
The USPSTF outlined in January of this year the process that they would undergo to update their colon cancer screening guidelines. They look at a lot of different factors.
The main thing that they tend to look at—and you can see this from their A ratings for colonoscopy and high-sensitivity occult blood tests—is that they look at the sensitivity of the test, the positive predictive value, the negative predictive value. They also take a look at the adverse events associated with screening. Those are the most important things. It's obviously important to USPSTF the quality of the evidence that is used to generate those data. We believe that the study published in The New England Journal of Medicine is among the highest quality studies in colon cancer screening and believe that that will be sufficient for the USPSTF to review Cologuard. In terms of the timing, again, we expect it to be 2015 or early 2016. We understand that this time the USPSTF may make their findings public and available for public comment.
We have not received confirmation of that, but we believe that may occur.
Matt Larue (Analyst)
Okay. Thanks for the comments and congrats on the milestones in the quarter.
Kevin Conroy (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Jeff Elliott from Robert W. Baird.
Jeff Elliott (Analyst)
Good morning, guys, and congrats on all the progress on rolling out this test. My first question is on the conversations with commercial payers. Obviously, you're making some good progress there, but I'm curious, how have those conversations changed after you got the preliminary reimbursement figure from CMS? I would assume at $502, the room for premium-level reimbursement is a bit lower than had CMS come in at 300. But I guess I'm curious, how have those conversations changed and how should we think about the absolute level of reimbursement from the commercial payers?
Maneesh Arora (COO)
Hey, Jeff, it's Maneesh. So the interest has always been high.
We know from reviewing the commercial payers' calendars, they've been doing and keeping an active eye on this product. Until two weeks ago, they didn't—there is a distinct process for coverage and then coding and payment. While there is definite interest, we have had great conversations around the clinical utilization. We are just now at the very first beginning stages of having the payment and contracting discussions. We're initiating those with some payers, as Kevin alluded to. We think that's a situation that's going to play out here, but it is going to take time with the larger payers. The coverage decisions are the initial conversations we're having with the medical directors, and those are proceeding very, very nicely with the October 9 decision by Medicare that's going to influence the future conversations that we're having.
Jeff Elliott (Analyst)
Got it.
If I look at the coverage policies for a lot of these top payers, the timing of their updates and the policies are available online, you can see that they're updated on a rolling basis. Should we be thinking that you could get coverage before kind of the annual update from these payers, or should we just say, "Hey, at some point during the year next year is when these policies would be updated"?
Maneesh Arora (COO)
That's exactly what we're working on, Jeff. There are some payers that we suspect, based on conversations, may deviate from their annual review cycles. That's what our active engagement is with them, is to pull those decisions forward if possible. We are hopeful that we can do that. At a minimum, we know we are engaged on their current annual review cycle. Got it.
Jeff Elliott (Analyst)
Just in order to the CMS side, obviously, you got the coverage decision and the preliminary pricing. Now, I'm curious, does that apply to everybody who's covered by Medicare, or is that only people who are covered by the traditional fee-for-service plan?
Kevin Conroy (Chairman and CEO)
Jeff, Kevin, the Medicare National Coverage decision applies to both traditional Medicare patients—that's about 70% of the Medicare population—and also to the Medicare Advantage patients that represent the remaining 30%.
Jeff Elliott (Analyst)
With the $502 pricing, would that apply to both as well? Yes, it does.
Kevin Conroy (Chairman and CEO)
Initially, our advisors tell us that for the Medicare Advantage patients, most likely throughout 2015, those patients' Cologuard tests would actually be reimbursed by the regional MAC that will pay for all of the patients.
Once those Medicare Advantage plans have an opportunity to put Cologuard into their budgets starting in 2016, we would be reimbursed directly by those Medicare Advantage plans.
Jeff Elliott (Analyst)
Excellent. I'll jump back in queue. Thanks.
Thank you. Our next question comes from the line of Isaac Rowe from Goldman Sachs.
Isaac Rowe (Analyst)
Good morning, guys. Thanks. Wanted to start off with a quick question about just the ramp for volume and revenue rec for 2015. You guys touched on a bunch of items, but maybe a specific one for me would be how we should think about your expectations for the ability to recognize revenue from private payers between now and when you think the guidelines are actually obtained down the road. Is there any rule of thumb you can help us kind of model in?
Kevin Conroy (Chairman and CEO)
Thanks, Isaac.
I think it's too early to tell the timing of those coverage decisions. You can see the timing of the largest plans on their websites where they make it known to the public. We would expect that most of the major payers would cover Cologuard. Because of the stage of the conversations that we're having with them, it's hard for us to say in 2015 how many of them will cover Cologuard and at what point in the year we will be under contract. This is important to note. It's a two-step process. It's a coverage decision, and then it takes up to 90 days to have a contract with those payers. We won't expect to recognize revenue on an accrual basis until both of those things are completed.
Isaac Rowe (Analyst)
Got it.
Just to be clear, you guys will be running tests for patients under those plans between now and then, and so it'll be more of a question of timing as to when you get paid for those tests. Is that how we should think about the actual process?
Kevin Conroy (Chairman and CEO)
No. For commercially covered patients, we will collect $50 from the patient before sending the collection kit out. And we will get an assignment of benefits from the patient so that we're able to have a conversation and negotiate directly with the insurer. We expect that many of those payers will pay. It may take some time, however, to collect.
Isaac Rowe (Analyst)
Got it. Understood. Okay. Thanks so much.
Operator (participant)
Thank you. Our next question comes from the line of, excuse me, from Brian Colard from Jefferies. Your line is open.
Kate Chandler (Analyst)
Hi, this is Kate in for Brandon, actually. Thanks for taking the question.
I was just wondering, if possible, can you share some additional detail on how these large systems, such as Mayo, are adopting Cologuard? Specifically, are they continuing to offer FIT and FOBT testing, and are they educating the doctors about the tests?
Kevin Conroy (Chairman and CEO)
First of all, the systems that are coming online are actively educating their physicians. We are also helping to support that effort. That is really important. Just offering Cologuard through their lab test ordering systems is not sufficient. You really have to educate the primary care physicians about this great breakthrough colon cancer screening test. It is also important to integrate our lab ordering system with their Electronic Medical Record system so that you make it really easy for the physicians to order. Today, we are not aware of any system that has totally ceased ordering FIT and FOBT tests.
We do believe that, given the data around Cologuard, that Cologuard will be the dominant way of colon cancer screening within those systems over time. The data is just too strong. Okay. Great. Thanks. Is there anything, any updates on the international efforts? Do you still expect the 1Q 2015 introduction to those markets? Yes. I just got back from the UEG conference, which is the big gastro conference in Europe last week. Met with the European team. Again, the idea is to launch in Germany, Switzerland, Austria, Italy, and the U.K. on a cash basis.
We do not have significant expectations around volumes and revenues, but it is very important for us to be in those markets and to start to run additional studies in those markets to help make Cologuard to be a compelling colon cancer screening method in Europe like we expect it to be in the U.S.
Kate Chandler (Analyst)
Okay. Great. Thank you.
Kevin Conroy (Chairman and CEO)
Thanks, Kate.
Operator (participant)
Thank you. Our next question comes from the line of Mark Massaro from Canaccord Genuity.
Mark Massaro (Analyst)
Hey, guys. Thanks for taking the question and congrats on your progress to date. Wanted to maybe just discuss your first health plan that you obtained coverage on in Wisconsin, obviously a regional plan. Could you comment on some of the terms that you negotiated with them from a pricing perspective? And would it be fair to draw any conclusions on pricing to other plans based on that one?
Kevin Conroy (Chairman and CEO)
Thanks, Mark, for the question.
We will not be providing detail on a plan-by-plan basis regarding price or any of those terms. Let me say, though, that Cologuard is a highly valuable test. It is a very cost-effective way of screening for colon cancer. We have invested, as you know, a significant amount of money to bring Cologuard to market. And we believe that the price that we are offering Cologuard at is a very fair and reasonable one. So we have no incentive to lower price, and we will continue to strive to maintain that fair and reasonable price as we go forward.
Mark Massaro (Analyst)
Great. And just as a follow-up, our second question, of the items in your pipeline, is there one or two that may have a higher priority over the others? And when would you feel more comfortable providing additional data or information on your pipeline? Thanks.
Kevin Conroy (Chairman and CEO)
Mark, we're doing a great deal of work on the prioritization process right now. It's incredible the number of opportunities that we have to improve the early detection of other GI cancers and potentially other cancers outside the GI tract. We are acutely aware that our success has been borne by focus. It's important for us to make that decision in the near term and focus on one or two key tests as we go forward, at least in the near term. We have not made that decision yet. We hope to make that decision before the end of the year, that prioritization decision, and then have an investor day in the first half of next year where we talk about, among other things, the pipeline.
Mark Massaro (Analyst)
Great. Thanks very much.
Kevin Conroy (Chairman and CEO)
Thank you, Mark.
Operator (participant)
Thank you. Our next question comes from the line of Peter Lawson from Mizuho.
Peter Lawson (Analyst)
Kevin, is there any kind of—you can give around volume that you've seen in 3Q above or below expectations? Any early issues you're seeing?
Kevin Conroy (Chairman and CEO)
In terms of the number of physicians that have enrolled, we have exceeded our expectations for this year to date. We're very pleased with where that is going. In terms of test orders, we're also really pleased with the trajectories. Because we got FDA approval and a proposed Medicare coverage decision at the same time, most physicians wanted to wait to order Cologuard until the national coverage decision became final, which occurred at the beginning of the fourth quarter. What we saw was, in the weeks before the national coverage decision—there were seven weeks between FDA approval and the national coverage decision—there were about 1,000 orders. In the two weeks since the national coverage decision, there have been about 1,150 orders.
We've more than doubled. Just on a week-to-week basis, we've gone from, in the last three weeks, from 300 tests to 450 tests to 715 tests last week. We don't know where this is going to go. We can do some math and make a rough guess at where this leads to. We're very pleased with the initial trajectory. I want to caution, it's only the first two weeks since we've had a national coverage decision. That's really what we always considered our official launch. We expect this to continue to accelerate. We can talk about this more, but we will add resources to help make sure that this accelerates. Our goal is not to stop at 5,000 primary care physicians.
Our goal is to eventually exceed 100,000 primary care physicians or even 200,000 primary care physicians that have signed up and are part of our network of physicians in our lab IT system. We think that that is achievable. I want to keep people focused on the long-term value creation opportunity here. From the start, it looks like with just a couple of months that we've had since launch that we will get to a very significant number of physicians. That also, by itself, having a huge number of primary care physicians in your network is a strategic asset as we look at our pipeline and look at other tests that these same physicians may order. Hopefully, that provides more color. We want to keep people focused in the long term here on the number of tests ordered and revenue.
We're pleased with the start, but we have a lot of work to do.
Peter Lawson (Analyst)
Great. Thank you so much. The other question, I wonder if you'd help us around the amount of history you need for payers to start recognizing revenue on an accrual basis versus cash.
Bill Mahoney (SVP of Finance)
Yeah. Hi. This is Bill. What we said is that under accounting rules, revenue recognition will follow demonstrated relationships and history. It is very simple, Peter. Until we have a contract and then some demonstrated history of collectibility, we'll be on a cash basis. Once we have that, we'll go to accrual. It will depend upon the payer. If it is prompt and it is in line with the contract, it will be very quickly. We won't need to see months and months. We just need to demonstrate collectibility and compliance with the contract.
Peter Lawson (Analyst)
You're thinking some of these you can essentially get it within one quarter, and then others it may be four quarters. Yes. Yes. Perfect. Thank you so much.
Kevin Conroy (Chairman and CEO)
Peter, let me come back to one thing that I want to make clear. I don't want to set an expectation that we are going to provide the number of physicians that are enrolled every quarter. I want to make sure that investors are focused on what we think are the most important things, and that is the test being ordered and the revenue being generated on an ongoing basis.
Peter Lawson (Analyst)
Gotcha. Perfect.
Operator (participant)
Thank you. Thank you. Our next question comes from the line of Jan Wald from Benchmark.
Jan Wald (Analyst)
Good morning, everyone. And congratulations. It looks like you've really met the milestones you said you would. I have a couple of questions.
I realize this is early, and I'm asking probably ahead of when I should. Just in case I can—are you willing to say something? In terms of adoption, it sounds to me as if what you're saying to us is that CMS is going to come on pretty quickly, and you'll have that full of patients and opportunity-covered lives. The private payers, you expect to come on fairly quickly as well. Where other companies would expect health insurance coverage to come over, let's say, three to five years, you're expecting something to happen earlier than later in that more typical process. Am I right about that?
Kevin Conroy (Chairman and CEO)
I think that's a fair characterization. The question is, does that occur fully, or do you achieve 90% penetration of the commercial health plans in 18 months, two years, two and a half years? We don't know.
We'll have a better idea of that over the next quarter or two. We do believe that the Medicare decision to cover this test and a decision by USPSTF will provide big motivations for the commercial payers to cover Cologuard. The other thing to note is that Cologuard is reasonably priced, and it is a highly effective way to screen for colon cancer with some real advantages over the current methods. This isn't a real hard sell, and it's not a really high-priced test.
Jan Wald (Analyst)
I guess just in terms of the doctors who are ordering the test now, or I guess the doctors who are ordering the test now, they are expecting reimbursement. They're probably ordering it for their Medicare patients. Is that a presumption?
Kevin Conroy (Chairman and CEO)
They're actually ordering it for both their Medicare patients and their commercially insured patients in a similar fashion.
Jan Wald (Analyst)
How do they expect to be paid by the commercial payer until they make a one-time basis?
Kevin Conroy (Chairman and CEO)
What we tell the primary care physician is that we will bill their patient $50, collect $50 from their patient before shipping out a collection kit, and that we will work with—we will bill the payer directly, appeal the claims if the claims are rejected, and work very hard to collect the balance on the patient's behalf. We also are upfront with the patient that they may be on the hook for the balance. We, however, will exhaust the appeal process before asking the patient to pay the remaining balance. So far, many physicians are comfortable with that, and they've seen this happen before. As a result, we're seeing many, many patients with commercial insurance being willing to pay $50 upfront. We're really happy with the way this is progressing.
Jan Wald (Analyst)
Okay.
One last question. I realize this is very early to ask you this, but the amount of analytics you've done, you probably have something in your mind about this. The compliance rate for colonoscopies is pretty horrible. What do you think the compliance rate—or what should we kind of assume the compliance rate, reuse rate would be every three years for this test? What's a good way to get a handle on that?
Kevin Conroy (Chairman and CEO)
The way that we talk about the compliance rate is if a patient receives a collection kit, what percentage of those kits are returned and turned into a completed Cologuard test? Based upon the work that Kaiser did with an active compliance program, they were able to achieve over 70% compliance with the FIT test.
We expect with our even more robust patient-focused effort, we will exceed 70% compliance of people who receive a collection kit.
Jan Wald (Analyst)
Okay. And should we assume reuse would be at that 70% level or the second time?
Kevin Conroy (Chairman and CEO)
Kaiser is probably too early to tell, Jan, but we'll figure that out shortly. It's a pretty easy test, and you don't hear too many complaints about the ease of use. We think it's a test that we would be able to get people to do a second time.
Jan Wald (Analyst)
Okay. Thank you very much.
Kevin Conroy (Chairman and CEO)
Just as a note, we've already heard about patients who have received Cologuard, had a positive test result, went to colonoscopy, and had significant lesions found. That's really gratifying.
We think those people are going to tell their friends and family members, "Go out and get screened because it could save your life."
Jan Wald (Analyst)
Thank you very much.
Kevin Conroy (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Jose Joresco from JMP Securities.
Jose Joresco (Analyst)
Hi, guys. Good morning. Congratulations again.
Kevin Conroy (Chairman and CEO)
Good morning, Jose. Thanks.
Jose Joresco (Analyst)
Could you give us a better sense for which types of patients are getting the test? I mean, are doctors ordering it for everybody who's eligible, or are they looking at high risk? I'm just trying to understand kind of what the early adoption behavior looks like. Are there any differences between the high prescribers, the 2,500 high prescribing FIT doctors, and the ones who aren't? The other 2,500. Yeah. Cologuard is being ordered mainly for patients who are at average risk for colon cancer.
Kevin Conroy (Chairman and CEO)
We're very clear that the label is for average risk patients between the age of 50 and 85, and that excludes high-risk patients. Now, there may be some physicians who are ordering the test for high-risk patients. We're not aware of that today. I'm sorry, the second part of that question.
Jose Joresco (Analyst)
Are there any differences at all between the high prescribers and the not high prescribers?
Kevin Conroy (Chairman and CEO)
To date, we haven't noticed it. What we see is physicians, broadly speaking, like Cologuard. Let Maneesh jump in here too.
Maneesh Arora (COO)
Yeah. That's, I think, one of the biggest learnings we've had is that—I was just at AAFP, a big family practice show last week—and the big takeaway was that the product really, really resonates. It really resonated with physicians.
When you talk to physicians, whether they're high FIT users or not, they understand and recognize the problem, and all of them recognize the problem of colon cancer screening. When you explain Cologuard to them, and it's essentially like writing a prescription. It's writing the order, and that's it. They are amazed at the fact that, "Wait a minute. You're going to follow up with the patient? You're going to handle the billing? Wait a minute. This is covered by Medicare?" It becomes an unbelievably resonant—you can see the light in their eyes flash. I'm really looking forward to continuing to get the message out there because this is about getting that message across. To answer your question, this resonates with anybody that's seeing patients over 50 because this is a big problem.
Kevin Conroy (Chairman and CEO)
That's a really important point that Maneesh makes is that colon cancer screening is a real pain point for primary care physicians when they have to cajole patients to undergo colonoscopy, and the patients simply don't show up to a scheduled colonoscopy. That a patient repeatedly says no to the current colon cancer screening methods. There are a lot of those people out there, and it's the primary care physician who has to deal with it. Primary care doctors have to deal with handing a FIT test to a patient and the patient never returning it. We take away those pain points with this very valuable compliance engine that Maneesh and his team created and are delivering to physicians.
Jose Joresco (Analyst)
One of the things we often see is that physicians will try to test the waters a little bit.
They'll order one, two, or three kits and see what happens after that. Are you seeing that type of behavior? Because I would doubt that they're ordering for everybody who's over 50 of average risk. Are you seeing that type of testing the waters, and how should we think about those early first few conversion days when somebody first starts to order tests?
Maneesh Arora (COO)
As with anything, I think that's an appropriate characterization. People need to get comfortable with it. What you have is you've got a couple of different, I would say, two categories. You've got folks that see it, get it, believe right away, the early adopters. Some of them have just gone whole hog and said, "I believe in Cologuard." Then you have a huge majority that want to try this, want to try it on some patients.
That's the phase that we're in right now. It's really too early to tell. It's only been a couple of weeks, but we are pleased with the number of physicians that are ordering and the trajectory of that progression.
Jan Wald (Analyst)
Okay. Just to have a few.
Kevin Conroy (Chairman and CEO)
This is Kevin. We're also in active discussions with some provider groups that wish to order Cologuard proactively for unscreened patients that they have simply been unable to get screened. We are working with those groups to place large numbers of orders for whole groups of patients that presently are unscreened.
Jose Joresco (Analyst)
Okay. Thank you very much. Just last question, a bit of a housekeeping one. How should we think about the SG&A spend? I know you gave some color on that last quarter, but how should we think about it going forward for the next year or two?
Has your thinking on that changed at all?
Bill Mahoney (SVP of Finance)
Jose, this is Bill. Let me provide a little color on the third quarter and then talk about how we will finish the year. I think it's going to be too early to talk about 2015 and beyond. For the third quarter and how we'll finish the year, as Kevin mentioned, we had operating expenses a little over $32 million in the quarter. That included R&D expense of $9 million, G&A also about $9 million, and then sales and marketing a little over $13 million. I want to point out that also in operating expense, we included a cost of sales number of $900,000. This, despite lack of revenue, reflects cost and material we used in the quarter, but importantly, it relates to spare production capacity.
Under accounting rules, the cost of that capacity, that spare capacity, is treated as a period expense and not capitalized into inventory. With that, let me get specifically to sales and marketing. That is a little more than $13 million. This reflects the conversation we had after the second quarter where we said we would launch with a sales team of about 120 and then 20 more in marketing for 140 people. We thought that it would be appropriate to use a multiplier of about $200,000 per person in annual cost recompensation. If you do that math, we would have experienced about $14 million in the quarter just past. That is about where we landed. The spending will continue to ramp, Jose, in Q4. In the second quarter, we indicated our intent to add another 20 sales staff by year-end.
If you put in the corresponding marketing, the same approach would yield about $16 million in the fourth quarter. With regard to R&D, R&D did ramp up a bit. We talked about it ramping a little over where we were in 2013. It was $9 million for the quarter. I want to point out that that includes $2 million in expense related to one-time milestone payments that we made to partner organizations owed when Exact achieved FDA approval for Cologuard. In Q4, we expect the run rate that we established in Q1 and Q2 will be more the norm. That's where we invested about $7 million a quarter in the first two quarters. It should return to that kind of run rate. On the G&A side, a big increase in G&A for the quarter, $9 million in Q3.
Just to remind you, that spending is foundational to our commercialization. It includes our sophisticated IT environment that Kevin and Maneesh have described. It includes the customer support that we've put a lot of emphasis on for our compliance engine. It includes our billing systems and billing staff, HR, and of course, the leadership team. In Q3, it did ramp up significantly. Part of that is a reflection of our decision to accelerate some of the commercialization development into Q3 that we would have previously put into Q4. For Q4, we anticipated about the same run rate. It is sort of in line, if you will. Does that help?
Jose Joresco (Analyst)
Yep. It helps. Thank you very much. Congratulations again.
Operator (participant)
Thank you. Our next question comes from the line of Chris Lewis from Roth Capital Partners. Hey, guys.
Chris Lewis (Analyst)
Thanks for taking the questions. Can you hear me all right?
We can, Chris. Great. Thanks for the color on the first few months here of the sales process. In those sales calls, can you elaborate on the feedback the reps are getting and what you're hearing about? What's really the most compelling selling point to physicians? Is it the journal publication? Is it the reimbursement, the compliance engine? Or is there really just a combination of everything at this point?
Kevin Conroy (Chairman and CEO)
Chris, it's a really powerful message. We've trained our folks to talk a lot about the clinical message. The reality is the power of that New England Journal of Medicine publication addresses a lot of those questions. The FDA approval, the CMS decision, those are very, very difficult things. When we're walking in now and having the conversations, it is far less clinical and a lot more, frankly, operational.
Their lead question, if you do your research, is going to be, "Is my patient going to get a bill?" It does come back to that managed care angle. It gives them a lot of comfort knowing that Medicare has made a decision already to nationally cover this. It is really very comforting to them to know that we will collect what we're calling the Cologuard insurance payment and follow up with the insurer. That is far and away the number one question. Secondarily, it's the operations. It is, "Okay, how will I get this into my EMR?" The logistical questions, which we're addressing as they come up. The feedback has overwhelmingly been supportive on a clinical message. They know this is the right thing to do. It's, "How do we do it?
How do we implement? That's the part that's just going to take time, but the trajectory looks very positive.
Chris Lewis (Analyst)
Okay. Thanks. As we go into 2015, how should we think about the size of the sales force? When do you think it will be necessary to add more resources to that group with a better-than-expected adoption rate you're seeing?
Kevin Conroy (Chairman and CEO)
We've previously said that we will add 20 additional salespeople by the end of this year. Then we'll evaluate the fourth quarter and make a determination for how many additional resources to add and specifically what kind of resources to add. No doubt that next year the sales force will grow beyond the number that we have at the end of this year. There's no doubt about that. The question is, by how much and what types of resources?
Jose Joresco (Analyst)
All right. Thanks for the time.
Congrats on the achievements.
Kevin Conroy (Chairman and CEO)
Thanks.
Operator (participant)
Thank you. Our next question is a follow-up from the line of Mark Massaro from Canaccord Genuity.
Mark Massaro (Analyst)
Hey, guys. Thanks. Just real quick, could you comment on some of the anecdotes you're getting from the 2,000 physicians that prescribed 20% of the testing? Is there anything that may have changed in the early goings to lead you to believe you may not reach the majority of these folks? Secondly, based on the feedback you're getting, how comfortable are you that some of these folks will refer to individuals who are not in the high-prescribing doc community?
Kevin Conroy (Chairman and CEO)
Let me try to answer it this way, Mark. I'll tell you a story of one rep who had 90 consecutive primary care conversion wins before somebody said no.
That person who said no was a high-prescribing FIT FOBT doc who did in-office FOBT and said, "This is just the way that I do it." There were 90 docs comprised both of high-prescribing FIT and FOBT docs and docs who did not believe in the FOBT or FIT test method in the first place who converted before she got to that one. We do not think that there is going to be a significant hurdle in converting most of the high-prescribing FIT and FOBT docs to Cologuard at this present time. It is very early in the process, and we will learn more as time goes on. Presently, physicians are willing to try Cologuard because they see the data is so compelling. It is right there in the New England Journal of Medicine.
Mark Massaro (Analyst)
Thanks. Maybe the likelihood that they will communicate the value to some of their peers?
Kevin Conroy (Chairman and CEO)
Yes. We think there is a network effect going on here, and we have seen it. We have seen where one physician in a small office is on our target list, and by the time our sales rep leaves their office, he or she has multiple people in the office signed up to order Cologuard. We expect that that will continue in part because of the ease of use of Cologuard.
Mark Massaro (Analyst)
Great. Thanks.
Kevin Conroy (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Zeric Kruschid from Wedbush.
Zeric Kruschid (Analyst)
Hey, Kevin, Maneesh, Bill. Thanks for taking the questions. Maybe a question for Bill to start. How should we be thinking about the fixed costs of the lab on a quarterly go-forward basis?
Bill Mahoney (SVP of Finance)
It is going to be reflected basically in cost of goods sold. We have talked about a run rate number, Zeric.
At scale, we're thinking we had previously talked about numbers between $100 and $110 per test at scale. When you look at the price per test and our forecast for that now, higher based upon the preliminary payment determination from Medicare, that will change our cost of goods sold. The reason for that is that a piece of COG is the royalty payment. Part of our royalty payments are linked to revenue numbers. I think a fair way to think about COG is in the neighborhood of $115-$125 at scale. Again, probably two years or so to get to that scale number. On the way up, we are learning right now what that's going to be.
The ramp is going to be much lower margins to begin with and then into that run rate over the course of, say, the next 24 months.
Zeric Kruschid (Analyst)
Got it. Can you give us a sense just kind of what to expect on the COGs line over the next few quarters? I mean, given just the overhead that's sort of in the lab currently. I don't know if there's 10 or 20 employees, but what is sort of the carry in the near term that we could model out on the P&L?
Bill Mahoney (SVP of Finance)
Yeah. You can sort of see it in the cost of sales number that is in the third quarter, but that will continue to ramp, Zeric. A lot of that is spare capacity. As Kevin said, we designed a facility for a million test capacity. We staffed up for that.
We bought equipment and implemented equipment to meet that kind of future demand. What you saw in the quarter, which is a partial, is $900,000, which we included in the operating expense line. In the future, that'll move into COG. That gives you a sense of where it's going to start, and it'll move up from there and partly depend upon volume of demand.
Zeric Kruschid (Analyst)
Got it. Thanks for that. A question for Kevin on the compliance. Thanks for all the color there. Do you have a rough sense for what the compliance level is today? How is your compliance engine kind of driving better compliance? Do you have a sense for how many reminders it takes for someone to finally do the deed? Thanks.
Kevin Conroy (Chairman and CEO)
Yeah. Thanks, Zeric.
First of all, it takes about a month from the time a doc orders a test until you get a result. The reason being is it takes time for us to reach the patient and confirm their address. We do not want to send collection kits to incorrect addresses. That takes time. You ship the kit to the patient. The patient takes some time before they return the kit, then we process it. Right now, we do not have a good handle on that question because there just has not been a sufficient number of patients who have received kits and having those test orders completed. Within the next month, though, we will have a pretty good idea. Patients really like this call center, being able to have any of their questions answered. I suspect right now that we will exceed our 70% goal.
I want you to know and all investors to know we say that 70% goal. We also tie our own compensation to that number internally. At the end of this year, it is going to be pretty clear whether we achieve our internal metrics is in part determined on whether we exceed 70%.
Zeric Kruschid (Analyst)
Great. Thanks for that. A quick follow-up on the $50 collections. How does that actually work? Do they take the customers' or the patients' credit card information in the clinic and then bill right there? Is there some, I do not know, paperwork going back and forth between you and the customer?
Maneesh Arora (COO)
No. There is nothing that happens at the physician's office. We have tried to make this really, really easy, not just for the physician, but for the patient. It can happen a couple of different ways. The patients can self-select on a portal.
Most frequently, it's occurring during that verification of shipment address. We just need to make sure we're shipping it to the right place as part of that interaction, whether it's an electronic interaction or a voice interaction. That's where we would collect the $50.
Zeric Kruschid (Analyst)
Got it. Thanks.
Kevin Conroy (Chairman and CEO)
Upfront, Zeric, when we're talking to the patient and confirming their address, that's the junction when you're able to collect the $50.
Zeric Kruschid (Analyst)
Understood. Thank you.
Thank you. Our final question for today comes from the line of Raymond Myers from Elliott Financial.
Raymond Myers (Analyst)
Yes. Thank you for taking the question. You've gone through most of them, but I do have one more. Of the $924,000 of cost of sales recognized in the third quarter, if we had assumed full reimbursement on an accrual basis, what revenue would that have represented in the third quarter?
Bill Mahoney (SVP of Finance)
Ray, this is Bill.
It's just not a number that is worth talking about.
Raymond Myers (Analyst)
Can you tell me how many tests you did in the third quarter? How many tests were ordered in the third quarter total?
Kevin Conroy (Chairman and CEO)
Ray, at this point in time, we have provided all of the clarity that we will around the number of tests ordered. I appreciate your desire to get more information there, but that's all we're able to disclose at this point in time.
Raymond Myers (Analyst)
Okay. And then just to clarify, the $50 copayment in order to have a test sent to a patient, I assume that is not refundable if the patient does not return the test?
Kevin Conroy (Chairman and CEO)
That's correct.
Raymond Myers (Analyst)
That's a good incentive to only order it if you intend on using it. Thank you very much.
Kevin Conroy (Chairman and CEO)
Thanks, Ray.
Operator (participant)
Thank you. That concludes our question and answer session for today.
I would like to turn the conference back to Kevin Conroy, Chairman and CEO, for any closing comments.
Kevin Conroy (Chairman and CEO)
Thank you all for joining today. I just want to reiterate how excited we are to be in a position to launch Cologuard with FDA approval, a broad national coverage decision by Medicare, preliminary pricing, which we expect to become final before the end of the year, and a 120-person sales team out there educating physicians and a broad marketing program aimed at educating patients and a massive amount of public awareness created by newspapers and television segments. This has been a wonderful launch to Cologuard. We look forward to working really hard in the fourth quarter to making sure that all patients are able to have access to this and more and more primary care physicians are able to order it.
I especially want to thank the whole team at Exact Sciences who have been working nights and weekends to help deliver on this promise. We appreciate all of the support of investors over the last five years. Thank you very much.
Operator (participant)
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.