Exact Sciences - Earnings Call - Q4 2014
February 24, 2015
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Exact Sciences fourth quarter 2014 earnings call. At this time, all participants are in a listen-only mode. Later, we will 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 like to hand the conference over to Rod Heiss. Please go ahead.
Rod Hise (Head of Investor Relations)
Thank you for joining us for Exact Sciences fourth quarter 2014 conference call. On the call today are Kevin Conroy, the company's President and Chief Executive Officer, in addition to Chairman; Maneesh Arora, our Chief Operating Officer; and Will Mahan, Senior Vice President of Finance. Exact Sciences issued a news release earlier this morning detailing our fourth 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 an update on our corporate priorities. Will will provide a summary of our fourth quarter financial results. Before we get underway, I'd ask everyone to take note of the safe harbor paragraph that appears at the end of the news release issued this morning covering the company's financial results.
This paragraph states that any forward-looking statements that we make, one, speak only as of the date made, two, are subject to inherent risks and uncertainties, including those described in our most recently filed annual report on Form 10-K and our subsequently filed quarterly reports on Form 10-Q, and three, should not be unduly relied upon. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein or elsewhere to reflect any change in our expectations with regard thereto, to 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 (President and CEO)
Thank you, Rod, and good morning, everyone. First, I'd like to provide some context for our discussion by outlining Exact Sciences' strategy. Exact Sciences has a unique combination of competencies. First, we have the proven ability to develop and obtain regulatory approval for complex, innovative cancer diagnostics that can positively impact millions of patients. Second, we have built a clear lab and sophisticated technology platform that actively engages both physicians and patients and provides powerful analytical tools that power our business. Third, we have a growing commercial organization focused on reaching a broad base of physicians. Cologuard is our cornerstone with broad appeal to the 280,000 primary care physicians practicing today. In addition to Cologuard, we are developing a pipeline of valuable cancer diagnostics in collaboration with Mayo Clinic, including tests for the early detection of pancreatic, esophageal, and other cancers.
We know that detecting cancer early is the key to better patient outcomes. This combination of competencies is unique and will enable us to continue to focus on creating value now and over the long run. With this as background, let's review our 2014 milestones. At this time last year, we outlined a number of ambitious milestones. This included publication of our clinical trial results in a peer-reviewed publication, FDA approval of Cologuard, the first DNA-based at-home colon cancer screening test, and coverage and reimbursement by Medicare. We delivered on each of these milestones, securing publication in the New England Journal of Medicine last March, FDA approval for Cologuard in August, a final coverage decision from CMS in October, and final pricing from CMS in November. The American Cancer Society included Cologuard in its new guidelines as well. Our goals for 2015 are equally ambitious.
We have three key priorities for the year ahead. One, expanding our Cologuard business. Two, continuing to provide world-class service to physicians and patients through our compliance engine. Three, developing our pipeline of products beyond Cologuard. Let's review our key fourth quarter metrics. We are pleased with the launch trajectory of Cologuard during the fourth quarter. In the short time since FDA approval, and particularly following the Medicare coverage determination, our sales and marketing efforts generated strong interest in Cologuard from both physicians and patients. By the end of the year, more than 4,000 physicians ordered at least one Cologuard test. Over 40% of those physicians ordered two or more tests. Also, by the end of the year, more than 4,000 Cologuard results were reported by the lab. During the fourth quarter, we achieved a patient compliance rate of 75%. We generated revenue during the quarter of $1.5 million.
Let's take a look at the reach of the sales force. Today, our sales team has reached approximately 16,000 primary care physicians, or about 6% of the roughly 280,000 primary care physicians in the U.S. Our goal is to increase the reach of the sales force. Due to this limited reach and the strong interest of physicians, we are expanding our sales force. At launch, we had 80 sales professionals. By next week, we will have 140, all directly employed by Exact Sciences. By the end of this year, we expect to add 50-60 new sales professionals for a total of approximately 200. These additions will increase the reach of our sales force and allow us to better capitalize on the growing awareness of Cologuard in the medical community by visiting with targeted physicians more frequently. Let's look at the breakdown of patients using the Cologuard test.
As you can see on the right side of this chart, about half of the patients screened with Cologuard never had a colonoscopy. This demonstrates that we are increasing the number of people getting screened and reaffirms the importance of our compliance engine. It's important to note that one of the largest problems in the battle against colon cancer is that about half of people that should be regularly screened aren't. This early evidence proves that Cologuard is expanding the screening population. Our compliance engine is important because it solves a major problem for physicians in getting patients to follow through with colon cancer screening. Our team actively engages with patients and physicians to answer their questions and contacts patients proactively, encouraging them to return their Cologuard test. As a result of our team's efforts, the lab reported more than 4,000 Cologuard tests by the end of last year.
The real value of this team is clear when you review its ability to increase patient compliance. During the fourth quarter, as noted in the gold graph, 31% of people who received a Cologuard kit returned it within eight days without a follow-up call. With each successive call from our compliance team, you see that rate increase to more than 70%, which is our goal. As this demonstrates, our compliance engine is an important part of solving the problem of colon cancer screening. We continue to work to secure coverage and reimbursement of Cologuard. Medicare patients represent 43% of the target market of people in the average risk population over the age of 50. We have a team that's negotiating with commercial payers and educating them about clinical utility and cost-effectiveness. We have a handful of commercial insurers covering Cologuard today.
We believe our team's efforts will trigger more commercial insurers to cover Cologuard during the course of 2015, and we look forward to making announcements about those decisions. In addition to our discussions with large national and regional insurers, we are focused on health plans affiliated with health systems and states where coverage of colorectal cancer screening is mandated. Let's turn now to our launch progress during the first quarter. By the end of 2014, there were nearly 10,000 physicians registered to order Cologuard with the Exact Sciences lab. Both enrollment and the percentage of physicians ordering Cologuard continued to grow. By mid-February, 2,000 additional physicians had enrolled to order Cologuard, and the percentage of enrolled physicians who are ordering increased 10 percentage points to 52%. We achieved these positive results with just 80 sales professionals. Let's look at this progress in more detail.
More than 6,300 physicians have ordered Cologuard at least once since FDA approval. Tests completed are growing. The Exact Sciences lab has generated more than 5,200 valid test results in the first seven weeks of the first quarter. We anticipate that more than 10,000 tests will be completed by the end of the quarter. This compares with approximately 4,000 tests completed during the full fourth quarter of 2014. Let's take a look at the key factors that will drive Cologuard's success. First, we're providing our sales team reach and frequency with providers. Second, we are continuing to invest in medical education, engaging physicians, and teaching them about Cologuard's value. Third, we are continuing to secure coverage and reimbursement of Cologuard from private payers.
Finally, we're expecting the USPSTF, or the United States Preventive Services Task Force, to issue its final guidance sometime towards the end of this year, possibly in early 2016. This will have two effects. Positive USPSTF ratings drive inclusion in HEDIS quality measures, which large systems are incentivized by payers to follow. Under the Affordable Care Act, if Cologuard is included in the USPSTF guidelines, in time, all US payers will have to cover it. Will Mahan, our Senior Vice President of Finance, will now provide more detail on financial results. Will.
Will Megan (SVP of Finance)
Thank you, Kevin. Our financial results include recognized revenue of $1.5 million on 4,024 completed tests. Our recognized revenue is based primarily on those completed tests covered by Medicare. We are in the early stages of establishing commercial relationships with private payers and have begun submitting claims and supporting documentation to them to obtain payment. Operating expense for the quarter was $30.7 million, roughly in line with the prior quarter. Sales and marketing grew with the expansion of the sales team and investment in our marketing program. G&A grew with the expansion of our customer support and compliance team, billing, and other core functions. These were offset by lower R&D spending as more costs were reported to cost of sales with the shift to commercialization in the fourth quarter, and we did not incur the milestone payment that we reported in Q3 when we achieved FDA approval.
We used $33.9 million in cash in the quarter, offset by the proceeds of our follow-on equity offering in December. Our end-of-year cash balance was $283 million. Also, with respect to financing, as announced yesterday, the state of Wisconsin will provide refundable tax credits of up to $9 million to Exact Sciences as part of the state's economic development initiative. The credits can be earned through a combination of hiring and spending in the state through 2020. We are grateful that the state of Wisconsin is partnering with us to grow our business and further our mission. We are now happy to answer your questions.
Operator (participant)
Thank you. 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. Again, if you do have a question, please press star and then one at this time. Our first question comes from the line of Jeff Elliott from Robert W. Baird & Co.
Jeff Elliott (Analyst)
Good morning, guys. Thanks for the question and thanks for all the data, especially the Q1 data that is helpful. I'm wondering, can you provide additional data on the order pacing that you've seen during the quarter? Have you seen kind of week-on-week growing? And then do you have any data on, I guess, on like a same store or kind of a same doc reorder rate? Any data there you could share?
Kevin Conroy (President and CEO)
Yeah. To answer your first question, Jeff, we have seen week-over-week increase, as you would expect, as we continue to penetrate the physicians with our field force. Except for the weeks in which there were holidays and we had one or two fewer days, we have continued to see week-over-week increasing. That's good. We're pleased with that. Your second question was regarding.
Jeff Elliott (Analyst)
If you have any kind of reorder data or kind of like a same story.
Kevin Conroy (President and CEO)
Yeah.
Jeff Elliott (Analyst)
You can go back and look at the docs that signed up early on, kind of what their trends are, their order trends are.
Kevin Conroy (President and CEO)
What you can see from the data that we showed, we have a greater percentage of physicians that are ordering more than one. That continues with physicians who we track whether they've ordered more than five, more than ten, and more than twenty. In each of those categories, you see an increasing absolute percentage of physicians in each of those categories. We're pleased with that. We know, though, Jeff, that we can increase this in a more meaningful way with continued medical education, as we referred to earlier, that the investment that we make in peer-to-peer marketing is an important one.
Jeff Elliott (Analyst)
Great. Yeah, I think that makes a lot of sense. Then shifting over to the, I guess, the coverage side, can you give us an update on some of the commercial payer discussions? I guess you do not have any of the major contracts in place, but when you do have a test that is billed to them, are you getting paid? If so, how much are you getting paid?
Kevin Conroy (President and CEO)
Yeah. I'll take both of those questions. One, the question about our conversations, and two, whether we're getting paid. We are focused on large national payers and regional payers. We're seeing more uptake from the regional payers. We have a handful right now. We have not announced all of the ones that we have under contract, but altogether, we have between five and ten payers that we have contracted with. Some of them are Medicare Advantage payers. The large payers, we think, are going to take more time. We are in conversations with them because all of them have large Medicare Advantage plans. As you're probably aware, Medicare Advantage plans are required to provide Cologuard, and we're in discussions with the right people. I just want investors to know that this is something that takes time.
Even once you get agreement on price, you still have to go through a one to two-month credentialing process, and then the actual contracting process sometimes can take one to two months as well. We would like to see this move along faster, and we have a team internally that's focused on it. In terms of the payment, we are obviously billing commercial payers. It's not a huge end at this point, but we are billing commercial payers, and we are seeing commercial payers, including some of those with positive coverage or negative coverage decisions, actually paying for Cologuard. We expect this trend to continue, and we'll recognize the revenue as we receive payments from those payers.
Jeff Elliott (Analyst)
Got it. Okay. One last quick one from me. When you add up the 43% of lines covered from Medicare, the states where coverage is mandated, when you add up all this and the other contracts you have, where would you estimate that your current percent of target market is from a coverage standpoint? I guess what percentage is currently uncovered?
Kevin Conroy (President and CEO)
If you refer to the slide we had up earlier, you see Medicare is 43%, commercial insurance is 40%. The remaining 10% uninsured, 2% military, 4% Medicaid are, unfortunately, not a huge part of the screening population. Medicare, you can look at it as around half of the real target market. When you include the states where, because of Cologuard's inclusion in the American Cancer Society guidelines, there are eight states that then trigger mandatory coverage, you're at at least 50%, maybe slightly higher, of the overall population. I want to caution that in those eight states, we do not have contracts with those payers, and we are now starting to engage with them, let them know about the obligation on their part to cover Cologuard, and we expect to be able to announce more good news on that front as the year progresses.
Jeff Elliott (Analyst)
Got it. Okay. So over 50%, even though you're just a few months into launch, I think that's a pretty good start, so. Great. Thanks for all the data, and congrats, guys.
Kevin Conroy (President and CEO)
Thanks. Jeff, and that does speak to the point that we are in a unique position with the diagnostic launch in that because we receive Medicare coverage around the same time as FDA approval, that puts us in a really, really strong position to continue to invest in the launch.
Jeff Elliott (Analyst)
Yep. Thank you.
Kevin Conroy (President and CEO)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Brian Weinstein from William Blair.
Brian Weinstein (Analyst)
Hi. Thanks for taking the question. Excuse me. I think you guys said that you expected 10,000 tests in the first quarter. Can you characterize how that is relative to your own internal expectations? What they were prior to the launch?
Kevin Conroy (President and CEO)
Brian, we haven't given any type of guidance as to where we expect to be, and I don't want to start that now. I appreciate the question, but we're pleased that the launch continues, that patients want this test and doctors want to order the test. That's really clear. The reason that patients want it and doctors want it is because it's an option for colon cancer screening, an accurate test that's non-invasive, and you can do it in the confines of your home. The reason that docs don't order the test when they don't order the test is by far and away a lack of commercial insurance coverage. You'll see over time, as we get more commercial payers and we focus in those regions, you'll see an increase in test ordering. We're only seven weeks into the year.
We'll have a better idea of where we expect to end up the year as we're further into the year.
Brian Weinstein (Analyst)
Got it. I do not think he answered the—I do not know if Jeff's question really hit this part, but in the ACS states that are mandating the coverage, how do you think about pricing there? Will that be a proxy for how you think pricing could roll out if you get a positive review from USPSTF? Also, how does ordering look in those eight states that mandate coverage due to the ACS inclusion versus the rest of the country?
Kevin Conroy (President and CEO)
Yeah. There are eight states: Illinois, Georgia, Missouri, Maryland, Kentucky, Maine, Rhode Island, Arkansas. Altogether, we think it's less than 10 million of the 80 million in the screening population. They're probably, I would guess, in the 6-8 million range. We think that our list price is $599, Medicare is $483, that we're going to end up in a good place with commercial insurers. Obviously, the goal is to be at a premium to Medicare, which we think is the right result. In terms of the ordering patterns for these states, it's too early to tell. We just really kicked off this program at the beginning of the year with an increased number of primary care physician reps in those states, and we'll be in a much better position to talk about the results of this initiative on the next quarter's call.
Brian Weinstein (Analyst)
Great. Last question for me. As you mentioned at a recent conference that there's a third study that you expect to be published soon with some data. Can you talk about what the study is and where we're going to see the data? Is this going to be published in a journal, or is it going to be presented somewhere like DDW? Thanks.
Kevin Conroy (President and CEO)
Yes. Interim results from this study were presented at DDW in our part of an abstract from last year. Last year's DDW, it's reference SU1213. This was a study in which Dr. Alquist from the Mayo Clinic was a lead investigator, and it's of the Alaska Native population, which has a high rate of colon cancer. What we saw there was adenoma detection rate very similar to the DeeP-C study with specificity also similar, actually slightly better than in the DeeP-C study. The final readout of that is being submitted now for peer review publication, and we would expect that it would be published before the end of the year. This confirms the DeeP-C study. The DeeP-C study was a very large study, so we believe it was powered accurately.
With a second peer review publication this year, we think it really drives home the point that Cologuard is a very effective colon cancer screening tool.
Operator (participant)
Thank you. Our next question comes from the line of Brandon Colyard from Jefferies.
Hey, good morning. This is actually Kate in for Brandon. Thanks for the questions. First, Kevin, of the 5,000 high-volume FIT and focused docs you've previously discussed, how many would you estimate are in the 6,000 docs that your salesforce has contacted to date? If possible, could you give an estimate of how many are ordering or have ordered one test?
Kevin Conroy (President and CEO)
We've contacted our salesforce has reached 16,000 primary care physicians. Maneesh, why don't you finish? Yeah. A little over half of those that we've contacted are the high prescribing FIT and focused docs of the 5,000 that we've talked to, just because of the geographies that they're in. We do see a strong percentage of those. As we alluded to on our prior call, we do see that strategy working, that the high FIT and focused physicians are ordering more than the non-high FIT and focused. We've reached of the 5,000, we've reached a little over half of them.
Okay. Great. Will, will you remind us how you're treating or accruing for the Medicare Advantage volumes? How do you expect this mix to look over the coming quarters, specifically because our checks suggest docs are not heavily ordering for patients with private pay yet?
Will Megan (SVP of Finance)
Yes. So we've talked about rep rec in this context. For Medicare traditional, we would recognize it at the rate that Kevin gave, the $483. For Medicare Advantage, because of Medicare Advantage rules that limit the patient participation rate to no more than 50%, we're recognizing revenue at 50% of that $483. For commercial payers, $493. For commercial payers, it is on a cash basis until we have a contract and some history of collectibility. In terms of mix, it's probably majority Medicare. Is that the easiest way to think about it right now?
Okay. Great. Thanks.
Kevin Conroy (President and CEO)
Let me correct one thing. I think Will and I both misspoke and said 483 is 493.
Understood.
Operator (participant)
Thank you. Our next question comes from the line of Isaac Rowe from Goldman Sachs.
Isaac Rowe (Analyst)
Good morning, guys. Thank you. Just want to ask a question regarding compliance rates. You guys talked a little bit about your goal there of 70%, and I was curious if you could put a little more color around the complexion of current compliance rates. How many of the samples you're seeing require one callback, one follow-up call versus two, that kind of thing?
Kevin Conroy (President and CEO)
Yep. So we're right around 70% today as we increase the number of what we call bulk orders or program orders where a physician practice will order a multitude of Cologuard tests for their patients, for a group of their patients. As we move towards shipping to Medicare patients without first contacting them, what we see is a slight decrease in the compliance rate. On the flip side, I think we're also getting better at the engagement with patients and getting them to follow up. We'll see how that pans out. It's something that we track, and it's really important company-wide to keep that rate at or above 70%.
Isaac Rowe (Analyst)
Great. And then just to follow up on USPSTF, you guys reiterated your prior views on how you expected it to play out regarding A and B rating. There has been obviously some debate about how USPSTF evaluates these ratings. If you could maybe remind us kind of how you guys arrived at your conclusions as to what was required to get those ratings and how you expect them to evaluate it. Any color there would be great.
Kevin Conroy (President and CEO)
Yeah. Sure. I think it's worth taking a little bit of time here and explaining the process. USPSTF is a group of volunteers that are mainly academic-oriented thought leaders in primary care. They currently are in their five-year review of colon cancer screening guidelines, which means that they take the time to look at all of the evidence that has accrued to date for all of the various colon cancer screening modalities. Cologuard is explicitly part of the review, which started in January of 2013. There are two things that USPSTF looks at. First is the test performance at a point in time. The DeeP-C study provided a point-in-time look at Cologuard, looking at sensitivity and specificity in one usage. The second thing that USPSTF looks at is assessing how the test would impact both incidence and mortality.
AHRQ recommends that virtual studies or modeling studies be utilized to look at how that point-in-time data translates into reducing incidence and mortality given differing screening intervals. That is an explicit part about how or the explicit approach that USPSTF takes. If you had to wait for outcome studies, you'd have to wait 20 years. It is only the gFOBT test that has solid long-term clinical studies empirically confirming a decrease in colon cancer incidence and mortality. Even the FIT test doesn't have that data. Where does that leave us? We have done modeling using one of the models that is considered a well-constructed model. What you see there is if you use colonoscopy every 10 years, there's a 73% decrease in mortality, which Cologuard is similar to if Cologuard were used every year.
Cologuard used every three years, the modeled mortality decrease drops into the high 60%, which is virtually identical to the FIT test every year. Let me repeat that. Cologuard every three years modeled is virtually identical to the FIT test performed every year. The challenge with the FIT test is it rarely achieves the goal of annual performance because it's hard to get anybody to do something every single year. We think that Cologuard is in a really good position given that its sensitivity is better than the FIT test. Its specificity every three years is similar to the FIT test every year. We think that USPSTF will issue draft guidance this summer and final guidance towards the end of this year, maybe the beginning of next year, which then triggers good things for Cologuard and Exact Sciences.
Isaac Rowe (Analyst)
Got it. Thanks so much. Appreciate the color.
Kevin Conroy (President and CEO)
Thanks, Isaac.
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 congratulations on your progress to date. Just for clarification, is the 5,200 tests in Q1, these are tests that you have completed so far in Q1, which obviously compares to the so in other words, you're already greater than the sum that you've reported in Q4. Is that correct?
Kevin Conroy (President and CEO)
Yes. That's the number through last Friday. Yes, we're ahead of where we were for the fourth quarter of 2014.
Mark Massaro (Analyst)
Excellent. Maybe as a follow-on to the last question, with respect to the task force, do you think there may be a scenario where the volunteers on the task force request your model? Can you just kind of walk us through this was a model I think you may have had help with? In some respect, can you walk us through to what extent this model was internally developed versus validated by a third party? Do you think the task force would want to see this model or potentially see another type of model?
Kevin Conroy (President and CEO)
No. The task force engages AHRQ, which then engages with other models. The models they have used in the past, and you can see this from their 2008 review, included the MISCAN model and also the SIM CRC model. Those models are very similar to the model that we use, which was the Archimedes model. You are going to get to pretty similar results because those models look at the well-characterized evolution of the disease, the biological evolution of the disease, and they do not end up in dramatically different places. I do not know which models they are using. We do know that they are using models as they have in the past.
Mark Massaro (Analyst)
Great. Maybe a follow-on for me, do you still anticipate potentially signing on commercial payers sometime in 2015 before a task force decision? Do you still believe you can derive appropriate value for your test from commercial payers?
Kevin Conroy (President and CEO)
The answer to that question is yes. We expect to see a continued increase in the number of payers that cover. We have a pipeline right now of payers that are in process. The payers that are the early adopters of Cologuard look at the importance of increasing their colon cancer screening rates by providing them an additional option. They also recognize the economic value that Cologuard provides because it is because of two things. It is priced in a fair way relative to other screening methods. Also, by detecting cancer at stage one, stage two, which we know is what you do when you screen patients, 75% of them are going to be early cancers. They reduce their back-end costs in treating colon cancer. We have seen payers adopt for these two reasons. Better for patients. It is better financially for them.
That is a message that we just need to keep driving home. The team internally is highly engaged in doing so. We are positive about where this can go. We do not expect a tidal wave in the near term, but we do expect progress throughout the year.
Mark Massaro (Analyst)
Great. Thanks very much.
Operator (participant)
Thank you. Our next question comes from the line of Peter Lawson from Mizuho Securities.
Peter Lawson (Analyst)
Hey, Kevin. Just thinking through 2015, what worries you the most? Is it reimbursement? Is it covered lives? Just if you could elaborate around that.
Kevin Conroy (President and CEO)
Thank you. Let me tell you, I've never been—and I think the team can say this too—we've never been more enthused and engaged. As you know, for the last four or five years, we've had these milestones that were kind of up or down, black or white. Now we have a test that physicians want and patients want and a sales force that is working. You can see the results immediately when you put a sales rep into a new territory. Doctors start ordering the test. We are excited about all of those things. Clearly, the largest challenge is launching with only about 50% or thereabouts coverage from an insurance standpoint. We are even positive over time to see those other payers start to come on board and then, importantly, the impact of USPSTF on their requirement to cover Cologuard under the Affordable Care Act.
That's the biggest challenge as you look out over the year is commercial insurance coverage, and we're attacking that squarely with a focused effort.
Peter Lawson (Analyst)
I may have missed this. Did you actually break out the number of private lives covered?
Kevin Conroy (President and CEO)
No, we haven't done that yet. The private life coverage is pretty small right now.
Peter Lawson (Analyst)
Finally, for Will, could you just walk through the OpEx for the year, the timing, and how we should think about R&D and SG&A?
Will Megan (SVP of Finance)
Yes. Happy to, Peter. As we said, operating expense was just shy of $31 million in the fourth quarter. Let me walk you through the parts of that and what we anticipate into the first quarter of 2015. Starting with sales and marketing expense, continued to ramp to just over $15 million in the fourth quarter, about $2 million more. As we talked about and Kevin alluded to in prepared remarks, this additional investment is in sales and marketing that we've launched with the sales force of 120, including 80 reps calling on doctors and their staff, but then also the key account executives, the sales support staff, sales management, and then another 20 people in marketing. The number that we've used is about 140. We ended the year adding 20 more reps, and that was in the neighborhood of 150.
The math we've done is we've suggested applying about $200,000 as an average all-up cost for that sales staff. We used a ratio in 2014 of about 1 to 1 between the compensation expense and the marketing content and campaign spending. That would yield roughly $7.5 million in comp, $7.5 million in marketing. That is just about where we finished in Q4. As Kevin described, we intend to make additional investment in 2015. We are going to add another 100 sales professionals, professional medical representatives, and we are going to augment the corresponding sales support and marketing staff. We are going to hire 10 people in the sales force in Europe. In total, we are going to effectively double. Our plan is to double the total sales and marketing staff in 2015.
If you do the same kind of math, the $200,000 per person as an approximation, we'll be adding about $2 million a quarter to sales and marketing. The marketing spend here, the ratio will change a little bit. I think, Peter, that the content creation and campaigns will stay in the range of about $6 million a quarter. That's sort of how we're thinking about it. If that helps on sales and marketing. On R&D, expense was $5 million in Q4, and that compared to $9 million in the prior quarter. Part of that is due to we had $2 million in one-time expense in Q3 that related to milestone payments that we made when we achieved FDA approval, and we didn't repeat those.
The other half of the difference reflects the shift to commercialization in costs that were newly categorized as cost of sale in the main. To a lesser extent, we moved some costs into G&A. All up for the year, R&D costs were $29 million in 2014, as Kevin talked about. We have a very active research pipeline, and we intend to continue to invest in it. We're going to continue to invest to support Cologuard as we look to improve elements of our processes. We are going to fund our post-approval study as well as additional studies for new indications. To enable this plan, we're going to invest in our product development staff and our clinical affairs staff. One other thing is we announced two weeks ago, we extended our relationship with the Mayo Clinic.
One of the components of that agreement is we make milestone payments to Mayo as well as agree to research funding on an ongoing basis. That will all be reported to R&D. In the end, we expect investment in R&D to be somewhat above our total spend in 2014, so above the $29 million. Lastly, in G&A, it was $106 million compared with $9 million in Q3. We expect our G&A team to continue to grow. It is a key component of how we do customer support, how we do our internal support functions. We expect it to grow at about the same pace we saw from Q3 to Q4 into Q1, so about $1.5 million a quarter. Does that help?
Peter Lawson (Analyst)
Yes. Thank you so much.
Operator (participant)
Thank you. Our next question comes from the line of Raymond Myers from Alere Financial Partners.
Raymond Myers (Analyst)
Thanks for taking the questions. Kevin, I was hoping you might run through some of the sales force metrics that you expect in terms of the number of physician visits per sales force representative and help us understand what happens when you basically double the sales force this year. What does that do to the number of visits they can make per physician as well as the increased reach per physician? Explain why you're making these decisions.
Maneesh Arora (COO)
Ray, this is Maneesh. I'll get into that right away by saying we know that the sales force is effective. What we saw early on was we started targeting 200, and we realized that was too many. We narrowed the focus to 75 as key targets. We're seeing strong success with reach and frequency and responsiveness. When you put a PMR in a territory with a target of 75, they can be very effective. What we know is that by increasing and essentially doubling the size of the sales force, that gets you to, with 75 targets each, about 5,000 high prescribing targets.
That is still a relatively small number, but we also know if you go back to our prior comments, if you look at the non-invasive testing market, a small number of physicians drive a huge number of the colon cancer screening events non-invasively. We believe that by doubling the size of the sales force and getting to those 5,000 high prescribers, we can drive material increase in volume. It is not, "Hey, let's get the shotgun." It is taking a very focused rifle approach to be efficient with this investment.
Raymond Myers (Analyst)
Help us to think about how to think about the number of physicians that are ordering versus the number that are signed up, and then the third tier, which is the number that are ordering on a repeat basis. If more than 40% of the 4,000 physician orders were on a repeat basis, that means that over 50% of the tests are single orders where physicians are not ordering on a repeat basis. It would seem like there is a tremendous opportunity to increase that. Help us understand how that is being done.
Maneesh Arora (COO)
Sure, Ray. Let me walk you through why we're so bullish, why I'm bullish and optimistic. Over the last four weeks, somewhere between 300-450 new physicians have ordered Cologuard for the first time. Of the 6,000 docs that are ordering, 50% of them have ordered more than one. We are seeing a lot of new docs come in. What we see as a dynamic is a lot of the first orders qualitatively are sometimes on the physicians are ordering for themselves. What they want to do is they want to try this experience. That takes about a month, realistically. What we see is, as Kevin alluded to earlier, more physicians trying and more physicians repeating, which for the long haul has really positive implications. Our goal is to get more physicians trying and the repeat rates up.
Yes, we have a large bolus that have tried just once, but that's what it is. It's trial or it's a patient going in saying, "Hey, I want this." By increasing our investment, we know that we can start to convert that, and that is opportunity for us to get those increasing rates up.
Raymond Myers (Analyst)
In the half of the.
Maneesh Arora (COO)
Thank you, Ray. One of the things that you see is that when physicians talk to their fellow physicians about the value of Cologuard and tell them the stories about a patient who is identified with a precancerous polyp because of Cologuard, that starts to increase the frequency with which physicians who have tried Cologuard once or twice order it more and more. We see that. That is why we are making the investment in the peer-to-peer marketing, the medical education, the continuing medical education, because that is where you are going to get the biggest increase from the physicians who have already tried Cologuard.
Raymond Myers (Analyst)
Thanks for the color. I've just got one final question on this subject. Of the roughly half of the physicians that have ordered once, but not more than once, in your opinion, is it mostly an issue of this is too new and too short a time between their first order and any potential second order? Is there any other reason, for example, maybe the first time that they ordered the test, they ran into reimbursement problems and therefore aren't making a second order? Do you have any speculation as to why physicians order once, but not twice?
Maneesh Arora (COO)
You know, Ray, we think that it's too early. I think part of it is just the time of getting that experience and then getting a reorder. Just to remind everyone that we are seeing that percentage rate go up. Part of it is just time and experience, but I think it's still too early seven weeks into the year and just a couple of months into the launch to be able to give a definitive answer on that. We know it's something we're actively looking at. Yeah. To drive that home, back in November, the percentage of physicians who had ordered, of those that had signed up, was about 20%. By the end of December, it was 40%, and now it's 52%. That's pretty meaningful because the absolute number of physicians kept increasing during that time period.
Raymond Myers (Analyst)
Yeah. That's an increase of 12 percentage points in like a seven-week time, right?
Maneesh Arora (COO)
Correct.
Brian Weinstein (Analyst)
Yeah. Okay. Thank you very much. It sounds like a good trend.
Kevin Conroy (President and CEO)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Bruce Jackson from Lake Street Capital.
Bruce Jackson (Analyst)
Hi. Thank you for taking my question. Can you remind us what the payer mix was on the reported results in Q4? So how many tests were commercial payers, and then what was the Medicare breakout?
Kevin Conroy (President and CEO)
Yeah. We have said that it's a majority Medicare. We haven't provided that specific breakout because that's going to change from month to month and over time. I think the only thing that we've said is that Medicare Advantage is about 20% of all the Medicare patients.
Bruce Jackson (Analyst)
Okay. Medicare Advantage is about 20% of Medicare, and Medicare is the majority of the units.
Kevin Conroy (President and CEO)
Correct.
Bruce Jackson (Analyst)
Okay. When we look at what you've done so far during the first quarter, would you say that that mix is the same, or has it changed any?
Kevin Conroy (President and CEO)
It's been pretty consistent over time so far. It'll start to change, and obviously, Medicare will go down as a percentage of overall volume as we see more commercial insurers come on board.
Bruce Jackson (Analyst)
That's over time. And then would you say Medicare has gone up during the first quarter?
Kevin Conroy (President and CEO)
No.
Bruce Jackson (Analyst)
Okay. Then the second question I've got is just I know you're out talking to the commercial payers, and then it's a process that takes some time, but what is their reaction to the $599 price? A lot of these, especially the larger payers, because they control so many units, will demand kind of a bulk discount from different people. What is the reaction to the $599 price, and what's their incentive to pay that?
Kevin Conroy (President and CEO)
Yeah. Let's start with their incentive to pay it. Remember that $599 relative to another screening approach is a lot less expensive. In terms of how their response to that has been, the reality is that large payers are used to getting paid at a discount to the Medicare fee schedule. That world is going to change pretty rapidly here with the recent PAMA legislation that Medicare is going to price its fee schedule based off of the volume-weighted average of what commercial payers pay. I think you're going to see a sea change here in the way commercial payers and labs interact. We have something that's unique. Cologuard is a really unique differentiated test that nobody else offers. There's no reason for us to offer Cologuard at a discount to the Medicare fee schedule.
Under the PAMA legislation starting in January of 2017, the Cologuard Medicare rate will be a volume-weighted average of what commercial payers are paying. There can be an increase or a decrease, not to exceed 10% in any given year. We have no incentive to take this really valuable colon cancer screening method that costs less than another valuable method and provide it at a discount to Medicare. That just does not really make sense to us.
Bruce Jackson (Analyst)
All right. That was very helpful. Thank you.
Kevin Conroy (President and CEO)
Thank you, Bruce.
Operator (participant)
Thank you. Our next question comes from the line of Jan Wald from The Benchmark Company.
Jan Wald (Analyst)
Hi. It sounds like things are going pretty well. Most of my questions, in fact, just about all of them have been answered, but I just wanted to talk or ask a question about the sales force. My understanding had been that you were working with another group in terms of getting the sales team together. Today, you mentioned that you're directly hiring the salespeople. Has there been a change in strategy or not? If there has been, does it reflect anything in SG&A?
Kevin Conroy (President and CEO)
Yes, we went to market because we had to ramp up really quickly with a contract field force that was dedicated to Cologuard. They were managed by our area managers. We have converted the majority of those sales professionals to direct employees as we had planned all along. Now with this next group of sales, the increase in the sales team, we have been able to do that directly because we had time to plan for that and bring those people on through recruiters and bring them on directly. There is a real benefit to it. Look, we know that our sales team really wanted to participate as employees of Exact Sciences and be part of the culture of Exact Sciences and get equity. We are really pleased with the fact that everybody is now a full-time Exact employee.
Jan Wald (Analyst)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Zerad Krusheid from Wedbush Securities.
Zerad Krusheid (Analyst)
Hey, good morning, everybody. Thanks for taking the questions. What does your percent penetration look like within the mail system?
Kevin Conroy (President and CEO)
I think the way we can characterize, we probably don't want to characterize any individual customer in any great detail, but we would say we are incredibly pleased with the relationship with Mayo and how widely they have educated their physicians about Cologuard and the uptake. We expect over time for other systems to take the same approach because this is such a powerful tool to get more people screened with an accurate method. We're really pleased with the approach, but I don't want to give a specific breakdown of the penetration. There's a lot of room to grow, even though they're doing well to start with. There are 600 primary care physicians employed by Mayo just in the Midwest region, but there are also two other regions that we expect to see greater adoption in Arizona and Florida.
Zerad Krusheid (Analyst)
Understood. Thanks for the color there. Just curious on the GI channel, what sort of interest are you seeing there?
Kevin Conroy (President and CEO)
The GI channel hasn't been an intense focus for us. We don't have a group of docs who are calling on GIs, but it's been interesting. I think somewhere between 5% and 10% of the orders are coming from GIs without an intense focus on them. Recently, we had a system of about 60 GIs adopt Cologuard because they think that it's good medicine. Again, our focus has to continue to be on the primary care physicians because that's where the frontline screening is occurring.
Zerad Krusheid (Analyst)
Great. That sounds good. A question for Will. Given your experience to date, how are you thinking about cost of goods and gross margins over the next couple of years?
Will Megan (SVP of Finance)
You can do the math on the fourth quarter. We recorded the $3.4 million in cost of sales against the roughly 4,000 tests. That gives us a cost of sales calculation of about $850 per test. Remember, that also includes all of the spare capacity. We talked about the buildout of our lab, our 30,000 sq ft plus facility, the instrumentation, the equipment to get to a million test capacity. The overhead gets applied and put into cost of sales. We have talked about a long-run target moving down. We expect over the course of 2015 that we would be able to move the per-unit cost of sale down towards about $200. Over the longer term, we anticipate that we will be able to reach our target. Longer term, we have talked about that being at scale.
To get to scale is going to take us a couple of years.
Isaac Rowe (Analyst)
Got it. Thanks for the clarity there. The last one, just on the doctors that are reordering, just curious, what fraction of them are all-in adopters, or do most of them continue to use FIT tests in some capacity?
Kevin Conroy (President and CEO)
Zerad, what we're seeing is we do have some doctors. It's a relatively small percentage that say, "Okay, I'm going to be an all-in adopter." Most physicians try it, increase their utilization, use it on certain types of patients. That's really the importance of the medical education that we're going to invest in to try and create more awareness to get a bigger share of that physician's potential patient population for screening. Right now, it's a small percentage that are all-in, but a large number of people that are using it on certain patient populations.
Isaac Rowe (Analyst)
Great. Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Chris Lewis from Roth Capital Partners.
Chris Lewis (Analyst)
Hey, guys. Thanks for fitting me in here. In terms of the revenue recognition and collectibility, I think the average revenue recognized per test in the fourth quarter was around $375. Given the different reimbursement and mixed dynamics this year, how should we expect that metric to trend in 2015 from that fourth quarter level?
Kevin Conroy (President and CEO)
In terms of the average reimbursement, is that your question?
Chris Lewis (Analyst)
I guess the average recognized revenue per completed test.
Kevin Conroy (President and CEO)
Over time, we obviously expect that to increase with the increase in the adoption rate. It is totally dependent on the adoption rate by the insurers. What you'll also see as we get paid by some of the commercial insurers that we have billed early in the year, as you progress through the year, you'll see that average increase as well.
Chris Lewis (Analyst)
Is it safe to say you expect that to increase throughout 2015?
Kevin Conroy (President and CEO)
Yes.
Chris Lewis (Analyst)
Okay. Great. At Europe, you obtained CE mark there, and you mentioned you expect to hire, I think, 10 reps. Can you just talk about the commercial strategy and expectations for the rollout there in 2015?
Kevin Conroy (President and CEO)
Yeah. Let me first say that in Europe, colon cancer is a big problem. In the U.S., we're with 50,000 deaths. In Europe, there are 160,000 deaths annually from colon cancer. Screening rates are about 20%. Colonoscopy capacity is low. Cologuard is nicely suited for Europe. The challenge is that a lot of payers don't want to pay much for screening. That is starting to change as they see the impact that you can have by actively screening a population, and especially focusing on higher-risk patients. We launched Cologuard initially in the U.K., and we have a team, a really strong team that worked together for 15 years launching FINPREP into Europe. They know the IVD market, they know the cancer screening market, and they know the important decision-makers in each of the countries. That is all positive.
We have a very measured approach to Europe because we do not want to utilize too much cash as we launch into Europe. First, we are focused on patients that will pay out of pocket. We are focused in the U.K., Germany, Switzerland, Austria, Italy, and then certain markets in the Middle East. The way that we are deploying Cologuard is with lab partners that will take the large sample down to small samples and tubes and ship them to the U.S. lab where we will process them. We want to keep a very nimble organization, and we want to make sure that the cost infrastructure is reasonable so that over time, as we get large insurers and national systems to adopt Cologuard, we are really well positioned to see a profitable business.
Chris Lewis (Analyst)
Great. Thanks, Project Coyote there.
Kevin Conroy (President and CEO)
Thanks, Chris.
Operator (participant)
Thank you. That concludes our question and answer session for today. I would now like to turn the conference back to Kevin Conroy for closing remarks.
Kevin Conroy (President and CEO)
Thanks, everybody, for joining. In summary, we achieved significant milestones during 2014, including FDA approval of Cologuard and the subsequent CMS decisions on coverage and reimbursement. Exact Sciences has a distinct combination of competencies that puts the company in a unique position to execute on our long-term strategy. We are pleased with the trajectory of Cologuard and the launch with both physicians and patients, including the continued progress we've made during the first seven weeks of this quarter. We are expanding our sales force from 100 to 200 sales professionals during 2015 to increase our reach with physicians. During the fourth quarter, our compliance engine doubled patient completion of Cologuard, and many of those patients hadn't been screened before. This is great news. We thank you for joining us, and we look forward to updating you on our progress as we move forward.
Operator (participant)
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.