Exact Sciences - Q2 2023

Transcript

Operator (participant)

Good day, and welcome to the Exact Sciences' second quarter 2023 earnings call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad. If you would like to remove yourself from the queue, that is star one again. We do ask that you please limit yourself to one question. I would now like to turn the conference over to Megan Jones, Vice President of Investor Relations. Please go ahead.

Megan Jones (VP of Investor Relations)

Thanks, Lisa. Thank you for joining us for Exact Sciences' second quarter 2023 conference call. On the call today are Kevin Conroy, the company's chairman and CEO, and Jeff Elliott, our chief financial officer. Everett Cunningham, our Chief Commercial Officer, will also be available for questions. Exact Sciences issued a news release earlier this afternoon detailing our second quarter financial results. This news release and today's presentation are available on our website at exactsciences.com. During today's call, we will make forward-looking statements based on current expectations. Our actual results may be materially different from such statements. Discussions of non-GAAP figures and reconciliations to GAAP figures are available in our earnings press release, and descriptions of the risks and uncertainties associated with Exact Sciences are included in our SEC filings. Both can be accessed through our website. I'll now turn the call over to Kevin.

Kevin Conroy (Chairman and CEO)

Exact Sciences' world-class team is the driving force behind the most innovative growth engine in cancer diagnostics. Our scientists are using advanced technologies to harness the power of DNA, RNA, and proteins. They are intensely focused on enhancing our current tests and developing new tests that can help transform cancer care. The scale of Exact Sciences labs, IT infrastructure, commercial teams, and our depth of payer relationships will help those tests impact millions of patients while providing profitable growth for years to come. We made significant progress toward our mission to eradicate cancer during the second quarter, including being a Great Place to Work certified for the fifth consecutive year, delivering more than 1 billion test results to patients, generating core revenue of $617 million, an improvement of $119 million year-over-year, with an 18% decline in sales and marketing expense.

Producing $66 million of free cash flow, a $190 million improvement. Announcing positive top-line results from our BLUE-C study, in which our next generation Cologuard test exceeded our expectations for improved sensitivity and specificity. Securing reimbursement for the Oncotype DX test in Japan, and initiating collaborations with the Broad Institute to support our molecular residual disease test platform and Baylor Scott & White to support our multi-cancer early detection program. As a result of the outstanding results in the second quarter, we're raising our full year guidance for revenue by $54 million and Adjusted EBITDA by $63 million. The second quarter results show our team's commitment to developing and enhancing tests that impact decision making and supporting them with the highest quality evidence. Surrounded by a 2,000 person commercial and customer care organization, we'll provide the best customer experience for patients and their healthcare providers globally.

This creates a flywheel that will power a unique combination of long-term double-digit growth and significant profitability. Jeff will now review our second quarter results.

Jeff Elliott (CFO)

Thanks, Kevin. Second quarter revenue grew 19% to $622 million. Core revenue of $617 million grew 24%, excluding COVID testing, the sale of our prostate business, and foreign exchange. Screening revenue of $463 million increased 31%. We continue to see broad-based momentum in Cologuard adoption and traction within health systems. Since the beginning of the year, we've implemented about 40 new electronic connections with large U.S. health systems, bringing the total to nearly 300. These connections allow healthcare professionals to order and view results seamlessly while giving patients access to results in Epic MyChart. They also enable electronic billing and reimbursement, and in the future, automated pre-authorizations, improving the efficiency of our teams and systems for Cologuard and our whole suite of tests.

More than 9,000 new healthcare professionals ordered Cologuard during the quarter, and more than 321,000 have ordered since launch. About 75% of all U.S. primary care physicians have ordered Cologuard, so we don't plan to provide the number of new physicians each quarter starting next year. Precision oncology revenue grew 2% to $157 million. Growth was 7%, excluding the prostate business sale and foreign exchange. COVID testing revenue decreased 84% to $2 million. Second quarter GAAP gross margin was 71%. Non-GAAP gross margin, excluding the amortization of acquired intangibles, was 75%. Gross margin benefited from better cash collections due to improvements made to our billing systems. GAAP net loss was $81 million. Adjusted EBITDA was $67 million, an improvement of $113 million, driven by better-than-expected revenue, gross margin, and operating expense discipline.

Cash provided by operating activities was $100 million. Free cash flow was $66 million, an improvement of $190 million. We ended the quarter with cash and securities of $776 million. Turning to guidance, we expect total revenue between $605 million and $620 million during the third quarter and $2.441 billion and $2.466 billion for the year. This assumes screening revenue between $455 million and $465 million for the third quarter, and between $1.82 billion and $1.835 billion for the year.

Precision Oncology revenue between $150 million and $155 million for the third quarter, and between $615 million and $625 million for the year, and COVID revenue of $6 million for the year. Note that we discontinued COVID testing in July. For the year, guidance implies 22% core revenue growth, with 28% growth in screening and 6% growth in Precision Oncology. We're increasing our Adjusted EBITDA guidance for the year to between $170 million and $180 million, up $163 million from the start of the year. The Exact Sciences platform was built to drive double-digit revenue growth and margin improvement for years. Second quarter shows this engine's earning potential. Back to you, Kevin.

Kevin Conroy (Chairman and CEO)

Thanks, Jeff. Cologuard is helping to screen more Americans and reduce the suffering from colon cancer. Next generation Cologuard will raise the performance bar in non-invasive screening and accelerate its positive impact. Next generation Cologuard achieved a 30% improvement in specificity, a measure of the false positive rate, while improving sensitivity for the cancer and pre-cancer detection rates. This is a result of advanced technology, deep scientific insights, and more than a decade of collaboration between our R&D team and Mayo Clinic. We are proud of our teams for their efforts to bring next generation Cologuard to patients. We're finalizing the FDA submission, we're working to get it in patients' hands in early 2025. Once next generation Cologuard is FDA approved, it will be supported by the best commercial team in diagnostics and the most dedicated frontline team members.

This team has worked tirelessly to build relationships with healthcare professionals, connections to hospitals, and a strong brand. This is a big opportunity to have an impact on this disease because 60 million people are not up-to-date with colon cancer screening in the U.S. With our team's commitment to getting more people screened and a more accurate test, Cologuard will help improve colon cancer outcomes and continue to fuel our growth. Our precision oncology team secured reimbursement for the Oncotype DX breast test in Japan, where 90,000 women are diagnosed with breast cancer every year. About half of them are eligible for Oncotype DX, making Japan the biggest opportunity outside the U.S. With reimbursement now in place, Oncotype DX can provide important answers to women who aren't currently being tested.

Our team in Japan will work to educate doctors, hospitals, and communities about the value of genomic testing with Oncotype DX, so more women and their physicians can make better, personalized treatment decisions. A special thanks to the international team who is bringing this important innovation to patients in Japan. Our pipeline teams are focused on two of the biggest opportunities in cancer diagnosis: molecular residual disease and multi-cancer early detection. We're working with the Broad Institute to enhance and extend our molecular residual disease platform called Oncodetect. With an exclusive license to technology developed at the Broad, we'll move from whole exome to whole genome sequencing, and from looking at fifty to a hundred mutations in a patient's blood to hundreds, if not thousands, of mutations. This will provide best-in-class performance at a very reasonable cost point, allowing us to reach cancer patients at scale.

Our multi-cancer early detection team is working to complete the ASCEND-2 trial, which will validate our multi-marker class approach in a large case control study, including 21 cancer types. We expect to have partial results from the ASCEND-2 study this fall, with a full readout early next year. We're generating additional data to support discussions with regulatory agencies, guideline bodies, and payers, helping secure access to this life-changing innovation for all patients. Our focus on eradicating cancer fuels the Exact Sciences team and is driving our financial results. We'll continue to invest in our people, reaching more patients with our current tests and developing new cancer diagnostic tests. Our scale platform will accelerate adoption of our tests while sustaining double-digit revenue growth, improving operating leverage, and meaningful cash flow for years. This is a rare opportunity to reduce the suffering cancer causes while delivering value to our shareholders.

We're just getting started. We're now happy to answer your questions.

Operator (participant)

Thank you. As a reminder, everyone, that is star one to ask a question, and we do ask that you limit yourself to one question. We'll take our first question from Derik de Bruin with Bank of America.

Derik de Bruin (Managing Director of Life Sciences Tools and Diagnostics Analyst)

Hi, good afternoon, thanks for letting me get the first question. Appreciate it. I'm going to do two. One financial question: Jeff, how should we think about OpEx trending in the back half of the year? The other one, just, you know, how do you think Cologuard 2.0 will be a tailwind, or how much of a tailwind do you think will be once FDA approved? I mean, are there docs now that we're more likely to use 2.0, that we're not using 1.0? Just sort of your thoughts on how that rolls off and how that impacts the business. Thank you.

Jeff Elliott (CFO)

Derik, this is Jeff. I'll take the first one on OpEx. Look, for the year, no change to the assumptions there, which is an overall increase in the mid-single-digit range. The way you get there is really continued good management by Everett and team. We expect a, a sales and marketing decline for the year in total. R&D, probably in the mid-single-digit range. G&A, as you, as you remember back in the start of the year, we talked there, there were some kind of moving pieces here related to primarily the Thrive earn-out. That is driving a big part of the growth this year. If you strip out that, which is non-cash now, obviously the payout would be several years into the future.

If you strip out that and some other kind of unique one-time items, the growth there is also in the, in the mid-single digits. What that implies here for the back half is, is a, a bit of an increase in the second half versus the first half. As you recall, last call, last quarter, we talked about accelerating some investments in MRD, given how quickly that market is moving forward and, and given our confidence in our, our technology and our approach there. You know, with the growth that we've had, hiring is gonna pick up in the back half of the year really to help support that continued growth. I think there was two questions there. I'll turn it over to Everett for the, the second one.

Everett Cunningham (Chief Commercial Officer)

Yeah. Thank, thanks, Jeff. You talked about the strategy of Cologuard 2.0. Our first focus will be continuing to grow Cologuard until Cologuard 2.0 gets FDA approved. The great thing about our field force is we're driven by data and analytics, and we use that daily in which we make our sales calls, and we take notes on our sales calls. We know which physicians that are out there that have the objection of, "Hey, the false positive rate," is an objection.

Once we do launch Cologuard 2.0, we will focus on going to those physicians first, and that's just the power of our commercial organization, the data and analytics that we use to go to the right targets with the right message, and the commercial team is excited to get Cologuard 2.0 in their bag.

Operator (participant)

We'll take our next question from Catherine Schulte with Baird.

Catherine Schulte (Senior Research Analyst)

Hey, guys. Thanks for the question. I guess maybe, Everett, another one for you. Jeff mentioned that about 75% of primary care doctors in the U.S. have ordered Cologuard. I guess just how does your strategy change now that the primary focus will be on really deepening the penetration within accounts rather than adding new orders? Would love any examples you could give there.

Everett Cunningham (Chief Commercial Officer)

Yeah, thank, thanks for that question. We're, we're not complacent at all with that, with that number. You know, we have 10% penetration with Cologuard, so we know that along with there's 60 million Americans of average risk, that right now are not up-to-date to screening. Our commercial organization goes out every day knowing that there's opportunities that are out there to continue to grow Cologuard. That's our focus. Like I said before, we use data and analytics to not just concentrate on the reach of the physician, but we need to concentrate on the frequency and making sure that we get the message out there consistently. We know that there's more work to do to get our customers out there to write more Cologuard and get more people screened.

Operator (participant)

We'll take our next question from Vijay Kumar with Evercore ISI.

Vijay Kumar (Senior Managing Director)

Hey, guys. Thanks for taking my question. Jeff, maybe I'll just limit one to the profitability question. You did Adjusted EBITDA of $130 million in the first half. Your second half revenue is on a dollar basis, really, don't change a whole lot. I think the guide implies like $70-ish of EBITDA for the back half. Maybe talk about your incremental margins, incremental leverage here. You know, you did mention G&A had some noise on earn-outs. When can we actually see G&A leverage similar to what we're seeing on the sales and marketing side? Thank you.

Jeff Elliott (CFO)

Thanks, Vijay. A lot there. Yeah, I think we feel really good about the state of this business, especially the foundation we've talked so much about. The foundation was built to scale, built to scale the top line and drive margin improvement and cash flow improvement for years to come. You know, that foundation allowed us to pull into profitability late last year and accelerate time to free cash flow positivity this quarter. We feel good about the long-term prospects there. Take a step back here. What we're guiding to for the year now is a $320 million rough improvement year-over-year in Adjusted EBITDA. That. You know, when you compare that to the level of growth, it implies very strong Adjusted EBITDA margins that we feel good about.

When you look at the guidance rate, specifically, the midpoint of Adjusted EBITDA is coming up by more, at $63 million than the midpoint of revenue. We are driving that, that leverage. To your question around G&A, in the quarter, there were a couple of one-timers, you know, a legal settlement of $17 million, that's in the press release, and also, I mentioned before the, the Thrive acquisition earn-out. Again, it's a non-cash, accretion line that, that can flip back and forth between a gain and, and expense quarter to quarter. If you strip those two things out, G&A grew 2% on the quarter. I think the team did a good job managing that relative to the 19% year-on-year growth in revenue.

Still some work to be done in G&A, but, you know, with this foundation we have in place, we expect that number to come down as a percent of revenue nicely over time.

Operator (participant)

We'll take our next question from Dan Brennan with TD Cowen.

Dan Brennan (Senior Equity Research Analyst and Managing Director)

Great. Thanks for thanks for taking the questions, guys. Congrats. Maybe just on Cologuard. I guess, could you walk through some color on some of the notable drivers there, the rescreen and the 45-49? Kind of did you see any impact from that three-year look back where you had the COVID quarter three years ago on the rescreen? Just wondering how those two played out in the quarter. Then as well, obviously, you've talked about, you know, only 10% penetration, but, you know, momentum's been really strong on clearing the backlog of colonoscopies and kind of the health systems electronic orders. Just get a little flavor for how a lot of those key drivers played out in the quarter and kind of what to assume for the back half of the year. Thank you.

Jeff Elliott (CFO)

Hey, Dan, this is Jeff. I'll start, then Everett can jump in with some, some color. You know, the, the beauty of this business is that there's a broad-based set of drivers here, so there's not just one or two. It, it is broad. You know, rescreens is a big one we've talked about. Rescreens are going nicely. You know, we, we do have that headwind the team is managing through, and the headwind here is because Cologuard is recommended by the guidelines to be done every three years. Three years ago, obviously, was the, the onset of, of COVID, and Cologuard orders were negatively impacted, especially in the early days of COVID. You think back to April, May, June of 2020, Cologuard orders were actually down. They did recover nicely.

What that means now, three years later, when people are coming up to that rescreen, there is an impact on the business. The, the total number of patients eligible for rescreening this year, that three-year repeat, is $1.2 million. That's the same as last year. The good news is when you look ahead to next year, it jumps to $1.6 million. This is a temporary slowdown in that, that rescreen growth. Again, the team is doing a good job of managing through it, so, so we are driving growth here. Just to think about the size of the headwind, for the year, it's over $50 million of revenue. Again, the headwind, it is temporary. A big part of that hits in, in Q3. Again, team driving through that.

Other drivers, you know, things like, Cologuard 45, this new age group that is now part of the guidelines. A couple of years ago, the guidelines lowered, from 50 down to age 45. They added 20 million more people. That, you know, that age group is approaching 20% of all Cologuard revenue, so a huge driver there. Everett can talk more about health systems, but, the good news here is that there's a, a, a broad set of drivers here that we expect to continue for many years to come.

Everett Cunningham (Chief Commercial Officer)

Yeah. Thanks, Jeff. I, I will touch on rescreening 45-49 and health systems. This is just a great example of the way our commercial team is working together, and they treat it as, as a team sport from, our marketing messages specific to 45-49 and rescreen, our customer experience around those drove drivers of rescreen in 45-49, and our training. We continue to hone our message around this. The data and analytics that we're using at the territory level in terms of the targets to go through to grow these two type of growth levers has been tremendous, and I've been out in the field, and just gets better every quarter.

As far as health systems, we're seeing a trend of health systems coming to us to help them with getting people screened for colorectal cancer screening. They're getting measured by it, and they know that they can't do it alone with colonoscopy only. We're developing broader partnerships around those people of average risk that need to get screening and that have a colonoscopy backlog. They're coming to us for help around getting those patients screened. Lastly, I'll just say our brand, not just around Cologuard, but around Oncotype DX, around our rare diseases and prevention genetics, our brand is solid, and they know that they can come to us for help.

Operator (participant)

We'll take our next question from Brandon Couillard with Jefferies.

Brandon Couillard (SVP)

Thanks. Jeff, two for you. The Oncotype approval in Japan, will that be a material incremental revenue contributor in the back half, or is that more a 2024 dynamic? Then, the pre-cash collections, is that a material benefit to screening revenue growth of 31% in the quarter? If so, can you call that out?

Jeff Elliott (CFO)

Sure, Brandon, this is Jeff. On the first one, on Oncotype, I'm really proud of what the, the, the team did to make sure we got reimbursement and access to this test to help out, as Kevin talked about, a significant number of women in Japan, which really, when you look at the size of this market, it, it could be our largest market outside the U.S. In the first full year, you know, the revenue run-rate could be in the $25 million-$30 million range. You know, obviously, with the time this is coming on this year, we'd expect maybe a quarter of that, you know, given when this is going to launch. Small contributor this year, but a very nice contributor over time, and importantly, a big win for patients.

Second one on, on the ASP, really revenue per test. As you know, Brandon, there's a lot of moving pieces when it comes to calculating an ASP. There's the true run-rate, that you accrue for on a quarter. Think of this as your go-forward rate. The team has done a really nice job driving that rate higher over time, and will continue to do so. You know, I think Cologuard provides really good value, and we want to make sure that we're getting paid fairly for that. What happened in the quarter was, in part, going back on, on tests that were previously denied payment on, and, and, making sure that we could get paid on that because obviously, we had done the work. Pulling some revenue from, from past quarters, it wasn't material in the quarter.

I did call it out because it's a nice contributor, but not a material driver. It was in the first half of the year, it's over $10 million of revenue. When you compare that to the back half of the year, expect maybe $5 million of contribution. First half, second half, there is a dynamic there, but again, not material to Q2.

Operator (participant)

We'll take our next question from Patrick Donnelly with Citi.

Patrick Donnelly (Managing Director)

Hey, guys. Thanks for taking the questions. Jeff, maybe one just on kind of the seasonality and pacing of the year. You know, I think the guidance for 3Q assumes screening is, is kind of flat, maybe even slightly down. It's been a weird couple of years with COVID in terms of seasonality of the business. Can, can you maybe just refresh us in terms of, you know, the typical pacing? Obviously, 4Q, you get the holidays then into 1Q, but, just, you know, feels a little conservative in terms of that 3Q guides. Maybe just talk us through that and, and how we should think about the year? Thank you.

Jeff Elliott (CFO)

Let me start with overall kind of what the seasonal seasonality should look like. We'll get into this year specifically. In a normal year, and this is a trend that's really general to primary care, not necessarily Cologuard specifically. Primary care trends typically start the year slow as people come back from the holidays. Early January, few people go out and seek primary care. They're typically busy with work and their lives after the holidays. Throughout that first quarter, things pick up all the way through Memorial Day. People start to normalize care-seeking behavior and really preventative care through that first part of the year. When Memorial Day hits, kids often get off of school and, you know, families take vacations.

Even people without kids often go on vacation, so trends typically are a little bit softer. Think of flattish trends throughout the summer. About mid-August, maybe end of August, things pick back up, as kids come back to school, and vacations start to wind down. Growth in primary care trends typically picks back up then and ramps steeply through November, and then with Thanksgiving, things slow down and are, are fairly quiet into the holidays. For Cologuard now, remember, there's a...

Think of about a 30-day time frame from the time a test is ordered at the during the physical, you know, we're at the doctor's office, to when then it takes us then 30 days roughly to send the kit out, collect that patient sample, get the sample back in our lab, process it, and recognize revenue. That means that we follow a similar trend of typical primary care with a 30-day lag. This year, the dynamic to think about, you know, it really comes down to that, that COVID headwind I mentioned before. COVID headwind on that three-year rescreen business that I talked about a few minutes ago, that's $50 million for the year. The biggest part of that, the single biggest quarter, is Q3.

You know, Q2 picked up some, Q4 picks up some, Q3 is the biggest. The other dynamic is that we did have a strong start to the year. I mentioned the kind of the ASP benefit, over $10 million in the first half, coming down to maybe $5 million in the second half. That's going to affect the seasonal trends this year. If you, you know, take a step back further, you look at the overall guide for the year, we're talking about, about $400 million of incremental growth for Cologuard. That's it for screening. That is the biggest year we've ever had, in terms of percentage growth. You're talking 28% growth at the midpoint, so very strong growth throughout the year for our screening business.

Operator (participant)

We'll take our next question from Dan Arias with Stifel.

Dan Arias (Managing Director)

Yeah. Hi, guys. Thanks for the questions. On MRD Oncodetect, Kevin, you had talked at the Analyst Day about an early access launch, I believe, in 4Q. At the risk of being too granular here on timing, do you see that taking place in the fall rather than closer to the holidays? The reason I ask the question is just really to just sort of understand whether, you know, ASCO GI can see you having someone that can speak to being an early user or at least being made aware of the assay. To your point, the market is just evolving so quickly. I'm just thinking about clinician feedback and, and data points around early use.

Kevin Conroy (Chairman and CEO)

Yeah, I, we expect the MRD test to be available by the end of the year, so I would think later in the fourth quarter than earlier. Then it's gonna take a little bit of time to get physician feedback, given that we don't expect until kind of mid to third quarter of next year, apply for a MolDX Local Coverage Determination, and then it typically takes about six months to get that. In terms of being able to offer this, our Oncodetect test to patients, covered by Medicare, that will take about 1 year. Also, as you know, our commercial payers today aren't broadly covering MRD. This, you know, this is an opportunity that is gonna take a little bit of time to play out.

We're, we're bringing to patients and to physicians the very best test possible with the right evidence.

Operator (participant)

We'll take our next question from Jack Meehan with Nephron Research.

Jack Meehan (Equity Research Analyst)

Thanks. Good afternoon. Wanted to follow up on next-gen Cologuard. Could you just elaborate on the next steps there? Would like to know the timing, when you think this portion of LUCY might get published in a journal and when you'll be in a position to submit for the PMA approval?

Kevin Conroy (Chairman and CEO)

On the first point, we expect to submit to a journal in the near term, focused on next generation Cologuard. I'm sorry, what was the second question?

Jack Meehan (Equity Research Analyst)

submitting for FDA PMA.

Kevin Conroy (Chairman and CEO)

We expect to have the last module submitted before the end of this year, and then it's, it's probably, you know, you can think six to nine months for, or nine to 12 months, excuse me, for approval.

Operator (participant)

We'll take our next question from Matt Sykes with Goldman Sachs.

Matt Sykes (Analyst)

Hi. Thanks for taking my questions. Jeff, just maybe, talk a little bit about the, the gross margin expectations for the balance of the year, just given the, the strong non-GAAP gross margin is 75%. How are you thinking about sort of COGS trends through the balance of the year? Then secondly, I, I know it's far off, but I know you've talked in the past about Cologuard 2.0, and, and sort of the COG savings, for that. Can you just kinda remind us what sort of the magnitude of that is versus the current version of Cologuard, and how that might impact sort of long-term view on, on gross margins? Thanks.

Jeff Elliott (CFO)

This is Jeff. First, on gross margin, you know, previously we had guided to about 73% for the year. Obviously, you know, based on the strength in the first half and the outlook for the rest of the year. I think now something in the 73.5%-74% range is more likely. Feeling good about that. Again, this platform was built to scale, and so those of you who came to Madison back in June, you saw the lab, the, you know, the quality of the people on that team, the quality of the automation, and, you know, we expect gross margin improvement for years to come. Feeling good about that.

When you think of the second half specifically here, I would just note that in the first half, we did have some benefit from that ASP dynamic I talked about earlier and also what we'd call our, our care gap business, and I'll turn it over to Everett for a second to talk about that. The care gap business does carry a slightly lower gross margin, however, it does contribute nicely to EBITDA dollars, and it is important business for us to be in. We do expect that business to be a bit bigger in the second half versus the first, and weigh a little bit on gross margins, almost equal. Just to your second question on cost of goods for Cologuard 2, there what...

You know, what we think now is that the cost per test of Cologuard two will be at least 5% lower than what it is today for Cologuard one. You know, it's because of the 10+ years of work that this team put in to identify, you know, more accurate markers and automation and efficiencies that we can build there right into Cologuard two. So it does help bring down the cost of goods, and importantly, here, it helps improve, as Kevin said, it helps reduce that false positive rate by 30%, so it does provide a lot of value for patients. Maybe Everett could talk more about the care gap program, why that's so important to us.

Everett Cunningham (Chief Commercial Officer)

Yeah. Th-thanks, Jeff, and, and there, there's a reason why we're doing the Care Gap program. First and foremost, we're getting at really hard-to-screen patients. These are the patients that have been stubborn to get screening, and as I talked about this, the, the, this phenomenon around health systems, payers and health systems are coming to us for help. It really strengthens our relationships with the payers and the health systems. Lastly, because these patients are stubborn and hard to screen, it's usually in that 50+ cohort, and that's really helping us lift our, our, our share with the 50+. Lastly, our customers are coming back to us saying we are a better, much better option than FIT.

They like the three-year interval, they like our wraparound services, and this is a way that we're, again, improving their screening rates in a very efficient and effective way.

Operator (participant)

We'll take our next question from Andrew Brackmann with William Blair.

Andrew Brackmann (Research Analyst)

Hi, guys. Good afternoon, thanks for taking the questions. Jeff, I think you called out a total of 300 systems who have implemented some form of electronic connections with you guys. How are you sort of thinking about the runway left there for, for more connections? Can you just sort of talk about the, the utilization difference that you see amongst that group versus those who have not, implemented those connections? Thanks.

Jeff Elliott (CFO)

Hey, Andrew, this is Jeff. I'll start, and then Everett can talk more about some of the, the commercial initiatives we have to, to drive that rate higher. When you look at the overall electronic ordering rate for Cologuard, today it's about 65%, meaning 65% of Cologuard orders come in electronically. Why that's important, when you can make Cologuard easy to order, easy to get the results back to both the physician and the patient, not only is it a better experience, but also physicians order more. They order over 30% more, and over time, that's a really strong foundation for us then to layer other tests into. You can imagine a world where the same electronic foundation supports multiple billion-dollar franchises, you know, whether it's multi-cancer or MRD or Cologuard, you name it.

Those same pipes that are being placed between our lab and the health systems can be leveraged for other tests. That's a big win for us. There's still a ways to go on how far that, you know, on driving that rate higher. Everett can talk about how we're getting there.

Everett Cunningham (Chief Commercial Officer)

Yeah, absolutely. Again, I go back to data and analytics, as Kevin and Jeff said at the beginning, you know, we've, we've electronically connected about 40 large health systems so far this year. In the second half, we might have about another 60 that we're gonna connect, and it's all about having that data down to the territory level and all of our sales reps having the targets where they need to go to. The last thing I'll say is, when I'm out in the field, I often hear, hear physicians say, "You have to make it easy for me to write Cologuard, to order Cologuard, and I only have seven minutes in a healthcare, you know, appointment to really talk to the patient." This is one way that we're making it easier.

Our partner with our partnering with Epic and the way in which we're getting at our targets, will serve as a growth lever moving forward.

Operator (participant)

We'll take our next question from Puneet Souda with Leerink Partners.

Puneet Souda (Senior Research Analyst)

Hey, Kevin, Jeff, Everett, thanks for taking the questions. I know Everett gets seven minutes. I get seven seconds here, so I'll keep it short. Kevin, would love to know if you have early feedback from physicians and providers on the next-gen Cologuard data and what it means for them, and you know, updates from the field that you've had so far, and any early feedback on the payer conversations, too? Thank you.

Kevin Conroy (Chairman and CEO)

On Cologuard 2.0?

Puneet Souda (Senior Research Analyst)

The next-gen Cologuard. Yeah.

Kevin Conroy (Chairman and CEO)

Yeah. The next generation Cologuard test, we do have feedback. We have feedback from KOLs, we have some feedback from payers, and people are elated. The reduction in the false positive rate while increasing sensitivity for both cancer and pre-cancer is, is, is big. That there's a lot of work to do, but the initial feedback, we couldn't be more pleased with. What does this mean? This means that we believe, number one, that next generation Cologuard will end up fits within the current guidelines that are already recommend Cologuard on, on particularly the USPSTF guidelines and the American Cancer Society guidelines. That's important because those guidelines are the most important guidelines that implicate how health systems and payers are measured in terms of their quality measures.

We, we believe it'll be a very smooth transition from Cologuard to next generation Cologuard. We also see that payers will be receptive to very quickly getting Cologuard adopted and paid for. We'll also be working with the American Medical Association CPT coding group to, to make sure that the coding is smooth. We've been down this road before, we know how to do it, and the team is fired up to make sure that we do this in an efficient and impactful way, because patients will benefit from next generation Cologuard. All the early signs couldn't be more positive, and the team can't wait to bring this to physicians and patients.

Operator (participant)

Our next question comes from Dan Leonard with Credit Suisse.

Dan Leonard (Senior Analyst)

Thank you very much. Good afternoon. Switching to precision oncology, possibly you could frame how much of the $10 million in revenue upside from your guidance midpoint in the quarter. You know, how much of that was from partnered revenue versus revenue from your own Onco branded products? Secondly, can you speak to the second half forecast in precision oncology, which I think at the midpoint is a decline from the revenue you reported in the first half? Thank you.

Jeff Elliott (CFO)

Dan, this is Jeff. I'll, I'll take that one. You know, the broader PO business has really good momentum. When you look at international, for example, international grew 26% in the quarter. That's even before Japan came online. Feeling good about that. Obviously, there's no partner revenue outside the U.S. Even when you look at the global breast franchise, grew, grew in the double-digit range, feeling good about that. You know, we typically don't break out partner revenue and OncoExTra revenue. OncoExTra is off to a good start. It is early. That's not material yet. However, that product does help broaden out our portfolio and importantly, help get another product into this really talented sales team's hands.

Over time, we'll, we'll carry not only OncoExTra and Oncotype DX Breast Recurrence Score, it'll also carry MRD and hereditary cancer and other products. Feeling good about the broader momentum there. On the seasonality question, the trend I talked about earlier with Cologuard, there's a similar trend with mammography. Fewer women seek out mammograms during the summer, which means a fewer breast cancer diagnoses. Obviously, Oncotype DX Breast Recurrence Score is typically ordered after a breast cancer diagnosis. That trend Q2 to Q3, that's kind of what you'd expect, a slowdown in Q2 to Q3, and then a stronger Q4.

Operator (participant)

We'll take our next question from Mark Massaro with BTIG.

Mark Massaro (Managing Director and Life Science and Diagnostic Tools Analyst)

Hey, guys. Thanks for the questions, and great to see everyone in Madison. Thanks for hosting that. I wanted to ask on MRD, I know that you're planning to launch your initial tumor-informed Oncodetect MRD test in colorectal cancer, like you guys said in Q4 2023. Can you give me a sense for, you know, I'm pretty sure that this is your, the test that you've been developing for some time now. I'm just curious where the Broad Institute comes in. Because, you know, in that, in that PR, you talk about the MAESTRO program, and how this can detect, thousands of patient-specific mutations.

Obviously, MRD is early, so I'm just curious if you can just give us your sense for, you know, your confidence level between your 1st-gen product and maybe the 2nd-gen product, and/or your confidence level on sticking with tumor-informed versus switching over to tumor-naive?

Everett Cunningham (Chief Commercial Officer)

The MAESTRO technology that we exclusively licensed from the Broad Institute will be used in the next-generation of MRD. The test that will be available at the end of this year is the base exact version of the technology. Think of that Broad technology as an extension and an enhancement, using more mutations, creating greater sensitivity at a similar specificity. That technology would be used in the studies that we talked about, including the West German Study Group, WGS. The NSABP, which is the CORRECT-II study. You have the Triad study and the CORRECT-II studies, which would use that next-generation version of our MRD test.

Operator (participant)

We'll take our next question from Andrew Cooper with Raymond James.

Andrew Cooper (Director)

Hey, everybody. Thanks for the question, and nice quarter for sure. I guess maybe first tagging on to one that I think Andrew, other Andrew asked, thinking about the health system backlog, you know, is there a point where these health systems have worked that down? What's their ability to sort of refill that backlog? Is it an ongoing dynamic versus, I think you've talked about in the past, a little bit of, "Oh, shoot, we need to get more folks screened for some of these, these rating dynamics that can make it a little bit seasonal."? Just help us think about, you know, the runway there. What happens once they've worked that lower, and how the trajectory goes for those that get a little bit more mature once they're onboarded?

Everett Cunningham (Chief Commercial Officer)

Yeah. I'll touch on that. To me, I, you know, if I said backlog, I think when we're talking to health systems competent, it's a capacity issue. They just know that they can't do it alone. They, they have a, they have a screening population, they have quality metrics that they need to hit, and they know with that screening population, they cannot do it alone. With the amount of GI physicians that they have and, and, and just their workload, that's why they're coming to us. They're coming to us for help. They know that Cologuard is a great first-line option. That's where we're coming in with not just Cologuard, but we're coming in with our wraparound services that help them with compliance.

We're coming in with marketing tools and efforts that proactively go out to these patients. It's like a surround sound that really helps them with, you know, with getting their patients screened and also hitting their quality metrics, which benefits that health system tremendously.

Kevin Conroy (Chairman and CEO)

Just to add on to that, the, long wait times for colonoscopy, it become a nationwide issue, and that's, driven by, part one is that 18 months ago, a little more than that now, the, USPSTF guideline group lowered the screening age to age 45. As you know, that added 15 million-20 million Americans into the screening population, all starting to need to be screened at once. That permanently increased the number of people who needed to be screened, while the, that capacity, as Everett mentioned, is fixed. The other part of it is that capacity just isn't growing. In fact, in some markets, it's shrinking because we're not seeing, you know, we're seeing retirements outpace the number of new physicians that are becoming GIs and entering the markets.

There is that dynamic that Cologuard is just gonna help address the, the sheer number of people that need to be screened for decades to come, we believe.

Operator (participant)

We'll take our next question from Kyle Mikson with Canaccord Genuity.

Kyle Mikson (Director and Senior Equity Research Analyst)

Yeah. Thanks, guys. wanting about to be financials and the model, really. Jeff, can you kind of walk through, margin implications of this $50 million COVID headwind to rescreen revenue in the second half? I guess, like, for, for context, you know, you're guiding to a mid-single digit Adjusted EBITDA margin in the second half. That makes sense given the rescreen revenue is higher margin when that headwind lifts. The first half of next year, we think that margins would bounce back, but that's kind of in line with how you talk about pushing margins higher over time. You know, you have store, other store-- studies coming up in 2024 and beyond. I guess just wrapping this up, how do we kind of think about the margin profile going forward in the context of all these moving pieces?

Jeff Elliott (CFO)

Yeah, thanks for the question. Well, you know, just about a month ago, we gave long-term margin guidance of, you know, at least 20% in 2027. That's Adjusted EBITDA margins. We feel very good about our ability to get there, you know, based on the momentum we have today. Look, we've got work to do. There's huge markets out there. You talked about COVID rescreen, you know, the headwind there. Again, it's over $50 million this year. A big part of that is in Q3. I think it's important to look at the guidance for Q3. What we're guiding to is still for screening, 30% growth and over $100 million of incremental revenue, which is, that's almost exactly what it was in Q2.

There's very strong growth here, and we've got to make sure we make the right investments in this business to keep scaling. I feel good about it. You know, I do. As we scale, you know, we'll talk more about next year on a future call, as we scale, I do expect margins and cash flow to improve for, for years to come.

Operator (participant)

We'll take our next question from Lisa Garcia with UBS.

Lisa Garcia (Director)

Afternoon, guys. Thanks for squeezing me in. I guess just thinking, and I know kind of as we're moving internationally into Japan, it's a little bit different because it's Oncotype and as the first mover, but, you know, you've spent so many years, kind of honing the operational model with Cologuard, and you've obviously had a lot of learnings.

Kind of as you're thinking about internationally and kind of the best way to tackle, kind of what have your learnings been to kind of, you know, just given kind of obviously the revisions that you've done and the operational leverage you've been, like, how you're thinking about tackling internationally to be as effective as possible and kind of the margin profile to kind of get, you know, I guess kind of what learnings you've, you think you can leverage from your U.S. experience into the international market? Kind of where I'm getting at.

Kevin Conroy (Chairman and CEO)

Thank you. We have focused relentlessly on Cologuard in the U.S. As a result of that, we have developed great scale, reach, and a ton of learnings. Applying that outside the U.S., we haven't provided guidance as to when Cologuard would be brought outside the U.S. There's clearly a need, though. Just if you take a look at the EU market, it is a significant opportunity because the colon cancer mortality rate is significantly higher in Europe than it is in the U.S. Screening, maybe 30% of the population is up to date with colorectal cancer screening, so there's an opportunity there. We'll wait until, you know, some point in the future to talk about what our plans are outside the U.S.

Certainly, the learnings that we've developed in the U.S. and the focus that we've had, will help us as we, export Cologuard outside the U.S.

Jeff Elliott (CFO)

Liza, this is Jeff. Just to add to Kevin's answer here, that international foundation is strong today. To put some perspective around it, we have a team of over 200 people in our international team. Really top-notch team here. We do business in over 100 countries already. This has taken us years, in fact, probably over a decade, to build up this global footprint. What that's getting us is strong double-digit growth for years to come. The base of revenue today is already over $150 million with good margins. It is a, it is a nicely profitable business, largely on one product, and as Kevin talked about, adding more and more products to that will help improve the profitability.

You know, this is one of the core reasons why back in 2019, that we sought out to, to really come together with Genomic Health, is this, this high-quality international footprint. This sets us up for years to come to provide a really, a strong, important leg of growth, and importantly, to help patients around the world.

Operator (participant)

We'll take our next question from Alex Nowak with Craig-Hallum Capital.

Alex Nowak (Partner and Director of Healthcare Research)

Okay, great. Good afternoon, everyone. I was wondering what are the latest timelines for Cologuard blood, and this is a question I've had since the analyst day, is since the Cologuard 2.0 was so good, why pursue a different assay in blood altogether for colon cancer screening? You know, Everett mentioned docs only have a few minutes with their patients, so does adding the test, does it potentially risk making the conversations a bit confusing for primary care in particular? Thanks.

Kevin Conroy (Chairman and CEO)

Cologuard blood will be or what we call our CRC blood test. It hasn't been named yet. We expect middle of next year to have data. What is the role for a blood test? The role for a blood test, we believe, will be for patients who refuse a frontline recommended screening test per USPSTF guidelines. There are people who refuse all forms of colon cancer screening, and for those patients, a blood test, which is clearly not going to be as good as detecting precancerous polyps or stage I cancers as other frontline screening tests, there's still a role for that, and it's important to screen those individuals. We happen to know who those patients are. People have chosen Cologuard over colonoscopy and yet haven't returned a test.

It's a discrete, relatively small population on a percentage basis, but large in terms of the, the, the sheer number of people in the U.S., measuring in the millions. We'll be able to engage with those patients if they've not completed a Cologuard test, not completed a colonoscopy, work with their healthcare provider that we have a deep relationship with, work with the health system to do our best to get those patients screened. That's our mission, is to eradicate colon cancer, and that's gonna this is gonna be an important tool that we have to help achieve that mission.

Operator (participant)

Thank you. That does conclude today's question and answer session, as well as presentation. Thank you for your participation today, and you may now disconnect.