EXACT SCIENCES CORP Q2 FY2023 Earnings Call

Good day and welcome to the Exact Sciences Second Quarter 2023 Earnings Call. Today's call is being recorded. All lines have been muted to avoid background noise. After the speaker’s remarks, there will be a question-and-answer session. I would now like to turn the conference over to Megan Jones, Vice President of Investor Relations. Please go ahead.

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.

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 Great Place to Work certified for the fifth consecutive year, delivering more than one million 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 2000 person commercial and customer care organization, we will 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.

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 will help 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 prior 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 million and $2.466 billion for the year. This assumes screening revenue between $455 million and $465 million for the third quarter and between $1.820 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. The second quarter shows this engine's earning potential. Back to you, Kevin.

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 and 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 diagnostics, 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, will move from whole exome to whole genome sequencing and from looking at 50 to 100 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 will 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.

We'll take our first question from Derik de Bruin with Bank of America.

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

Jeff here. I’ll address the first question regarding OpEx. For the year, our assumptions remain unchanged, indicating an overall increase in the mid-single digits. This growth will mainly result from effective management by Everett and his team. We anticipate a decline in sales and marketing for the year overall, while R&D should also see mid-single digit growth. As for G&A, we previously mentioned some factors, particularly related to the Thrive earn-out, which is significantly contributing to this year's growth. Excluding this non-cash element, which will impact future payouts, and some unique one-time items, the growth in that area is also expected to be in the mid-single digits. This suggests we will see an increase in the second half compared to the first half. During our last call, we discussed accelerating investments in MRD due to the rapid progress in that market and our confidence in our technology. Also, due to our growth, we will be increasing hiring in the second half to support ongoing growth. With that, I will hand it over to Everett for the second question.

Yeah. Thanks, Jeff. And 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 are 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. So we know which physicians that are out there that had the objection of, hey, the false positive rate is an objection. So 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 used to go to the right targets with the right message and the commercial team is excited to get Cologuard 2.0 in the bay.

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

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. So 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 and would love any examples you can give there?

Yeah. Thanks for that question. We're not complacent at all with that number. We have 10% penetration with Cologuard. So we know that along with the 60 million Americans that have average risk that right now are not up-to-date to screening. So 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. And 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 because we know that there is more work to do to get our customers out there to write more Cologuard and get more people screened.

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

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 revenues on a dollar basis really don't change a whole lot. I think the guide implies like $70 million-ish of EBITDA for the back half. Maybe talk about your incremental margins, incremental leverage here. 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.

Thanks, Vijay. A lot there. I think we feel really good about the state of the 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 in. That foundation allowed us to pull into profitability late last year and accelerate time to free cash flow positivity this quarter. So 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-on-year in adjusted EBITDA that, 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 raise, specifically, the midpoint of adjusted EBITDA, is coming up by more at $63 million to the midpoint of revenue. So we are driving that leverage. To your question around G&A. In the quarter, there were a couple of one-timers. A legal settlement of $17 million that's in the press release and also I mentioned before, the Thrive acquisition earn-out against the non-cash accretion line that can flip back-and-forth between a gain and an expense quarter-to-quarter. If you strip those two things out, G&A grew 2% in the quarter. So 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 with this foundation we have in place, we expect that number to come down as a percent of revenue nicely over time.

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

Thank you for taking the questions. Congratulations. I would like to know more about Cologuard, specifically about the notable drivers such as the rescreening in the 45 to 49 age group. Did the three-year look-back considering the COVID quarter three years ago affect the rescreening? I'm curious about how these two factors influenced the quarter. Additionally, you mentioned only a 10% penetration, but there has been strong momentum in clearing the backlog of colonoscopies and improving electronic orders in health systems. Can you provide insights into how these key drivers performed in the quarter and what is expected for the second half of the year? Thank you.

Hey. Dan. This is Jeff. I'll start, then Everett can jump in with some color. The beauty of this business is that there is a broad-based set of drivers here. So there's not just one or two, it is broad. Rescreens are a big one we've talked about. Rescreens are growing nicely. 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 onset of COVID and Cologuard orders were negatively impacted, especially in the early days of COVID. So 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 total number of patients eligible for rescreen 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. So this is a temporary slowdown in that rescreen growth. And the team is doing a good job managing through it. So we are driving growth here. Just to think about the size of the headwinds, over the year, it's over $50 million of revenue. Again, the headwind, it is temporary. A big part of that is in Q3. So again, team driving through that. Other drivers, 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, adding 20 million more people. 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 there's a broad set of drivers here that we expect to continue for many years to come.

Yeah. Thanks, Jeff. I will touch on rescreen in 45 to 49 and health systems. This is just a great example of the way our commercial team is working together and they treat it as a team sport, from our marketing messages specific to 45 to 49 and rescreen, our customer experience around those growth drivers of rescreen in 45 to 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 to, to grow these two type of growth levers has been tremendous and I've been out in the field and it 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. And we're developing broader partnerships around those people of average risk that need to get screening and then have a colonoscopy backlog, they're coming to us for help around getting those patient screened. And then 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.

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

Thanks. Jeff, two for you. The Oncotype approval in Japan. Will that be material incremental revenue contributor in the back half or is that more a ’24 dynamic? And then the improved cash collections, is that a material benefit to screening revenue growth of 31% in the quarter? And if so, can you call that out.

Sure, Brandon. This is Jeff. Regarding the Oncotype test, I am very proud of what the team accomplished in securing reimbursement and access for this test, which will benefit a significant number of women in Japan. Considering the size of this market, it has the potential to become our largest one outside the U.S. In the first full year, we anticipate the revenue run rate to be between $25 million and $30 million. Given the timing of its launch this year, we expect to see around 25% of that revenue. While it will be a small contributor this year, it is expected to be significant over time and, most importantly, it represents a great benefit for patients. On the topic of ASP revenue per test, as you know, there are several factors involved in calculating ASP. There is the actual run rate that we account for quarterly, which serves as our go-forward rate. The team has successfully worked to increase that rate over time and we plan to keep driving it higher. I believe Cologuard offers excellent value, and we want to ensure we are compensated fairly for it. During the quarter, we focused on tests that had previously been denied payment and worked to secure payment for them, as we had already performed the tests. The revenue from these adjustments was not significant in this quarter, but I mentioned it because it is a nice addition, even if not a major factor. In the first half of the year, it accounted for over $10 million in revenue, while for the second half, we expect a contribution of about $5 million. Thus, there is a dynamic between the first and second halves of the year, but again, it's not a major factor for Q2.

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

Hey guys, thanks for taking the questions. Jeff, maybe one just on kind of the seasonality and pacing of the year. I think the guidance for 3Q assumes screening 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 you maybe just refresh us in terms of the typical pacing? Obviously, 4Q, you get the holidays into 1Q, but just feels a little conservative in terms of that 3Q guides. Maybe just talk us through that and how we should think about the year. Thank you.

Let me begin by outlining the expected seasonality, and then we'll discuss this year specifically. In a typical year, primary care trends usually start off slowly as people return from the holidays. Early January sees a few individuals seeking primary care, as they are often busy with work and life after the holidays. However, during the first quarter, activity tends to increase until Memorial Day, as people begin to resume their care-seeking and preventive health behaviors. After Memorial Day, families often go on vacation as children are out of school, leading to softer trends during the summer. By mid to late August, activities pick up again with the return to school and the end of vacations, resulting in a steep increase in primary care trends through November. After Thanksgiving, the pace slows down again as the holidays approach. For Cologuard, it's important to note that there is approximately a 30-day period from the time a test is ordered to when we receive the sample, process it, and recognize the revenue. Therefore, we experience a similar trend to primary care with a 30-day delay. This year, there is the added complexity of the COVID-related headwind affecting our three-year rescreen business, which I previously mentioned amounts to about $50 million for the year. The most significant quarter for this is Q3, with Q2 and Q4 also expecting some growth, but Q3 is the largest. Earlier in the year, we had a strong start, benefiting from an average selling price increase of over $10 million in the first half, but this is likely to decrease to around $5 million in the second half, which will influence seasonal trends this year. Overall, when looking at the guidance for the year, we anticipate $400 million in incremental growth for Cologuard, marking our biggest year yet, with 28% growth at the midpoint. This signifies very strong growth for our screening business throughout the year.

We will take our next question from Dan Arias with Stifel.

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 Q4. 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? And the reason I ask the question is just really to sort of understand whether ASCO GI can see having someone that can speak to be an early user or at least being made aware the assay to your point the market is just evolving so quickly. I'm just thinking about clinician feedback and data points around early use.

Yeah. 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. And then it's going to 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 to apply for a MolDX local coverage decision, and then it typically takes about six months to get that. So in terms of being able to offer our Oncodetect test to patients covered by Medicare, that will take about a year. And also, as you know, our commercial payers today aren't broadly covering MRD. So this is an opportunity that is going to take a little bit of time to play out. We're bringing to patients and to physicians the very best test possible with the right evidence.

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

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

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?

Submitting for FDA PMA.

We expect to submit the last module before the end of this year, and you can anticipate a timeframe of about nine to 12 months for approval.

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

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

This is Jeff. First on gross margin. Previously, we had guided to about 73% for the year. Based on the strength in the first half and the outlook for the rest of the year, I believe something in the 73.5% to 74% range is now more likely. I'm feeling good about that. This platform was built to scale. For those who visited Madison back in June, you witnessed the lab, the quality of our team, and the quality of our automation. We expect gross margin improvement for years ahead, so I'm optimistic about that. Regarding the second half, I want to mention that in the first half, we benefited from the ASP dynamics I discussed earlier, as well as our care gap business. I’ll turn it over to Everett to elaborate on that. The care gap business has a slightly lower gross margin, but it contributes positively to EBITDA dollars and is an important part of our business strategy. We anticipate that this business will grow in the second half compared to the first, which may slightly impact gross margins overall. As for your second question about the cost of goods for Cologuard 2, we now expect the cost per test to be at least 5% lower than Cologuard 1. This improvement is due to over ten years of work our team has dedicated to identifying more accurate markers and implementing efficiencies directly in Cologuard 2. This will help reduce the cost of goods and, significantly, it will lower the false positive rate by 30%, providing great value for patients. Perhaps Everett can share more about the importance of the care gap program.

Thanks, Jeff. We're prioritizing the care gap program because it targets patients who are difficult to screen. These patients have been especially resistant to getting screened. Additionally, health systems and payers are approaching us for assistance, which enhances our partnerships with them. The patients we’re focusing on tend to be over 50, which is helping us increase our market share in that age group. Furthermore, our customers have expressed that we are a much better option compared to others. They appreciate the three-year interval and our wraparound services, which ultimately boosts their screening rates efficiently and effectively.

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

Hi, guys. Good afternoon, and 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 more connections? And can you just sort of talk about the utilization difference that you see amongst that group versus those who have not implemented those connections? Thanks.

Hi, Andrew. This is Jeff. I'll go first and then Everett can elaborate on some of the commercial initiatives we have to increase the electronic ordering rate. Currently, about 65% of Cologuard orders are made electronically. This is significant because simplifying the ordering process and ensuring timely results for both physicians and patients not only enhances the experience but also encourages physicians to place more orders—over 30% more, in fact. This strong foundation allows us the potential to introduce additional tests over time. We envision a scenario where the same electronic system supports various billion-dollar products, be it multi-cancer tests, MRD, or Cologuard. The infrastructure we are developing between our lab and health systems can also be utilized for other tests, presenting a significant opportunity for us. However, we still have work to do to further increase that rate. Everett, could you discuss how we are progressing in that area?

Yeah, absolutely. Again, I go back to data and analytics. And as Kevin and Jeff said at the beginning, we've electronically connected about 40 large health systems so far this year. In the second half, we probably have about another 60 that we're going to 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 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 appointment to really talk to the patient. This is one way that we're making it easier. Our partnering with Epic and the way in which we're getting at our targets will serve as a growth lever moving forward.

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

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 updates from the field that you've had so far? And any early feedback on the payer conversations, too? Thank you.

Regarding next-generation Cologuard, we have received initial feedback from key opinion leaders as well as payers. The reduction in the false positive rate, combined with an increase in sensitivity for both cancer and pre-cancer, is significant. Although there is still much work ahead, we are highly encouraged by the early responses. We believe that next-generation Cologuard will align well with current guidelines, including those from the USPSTF and the American Cancer Society, which are pivotal for health systems and payer quality measures. This should facilitate a straightforward transition from Cologuard to the next-generation version. We anticipate that payers will be quick to adopt and reimburse for Cologuard. Additionally, we will collaborate with the American Medical Association's CPT coding group to ensure a smooth coding process. Our team is prepared to navigate this, and we are eager to deliver next-generation Cologuard to physicians and patients, as the early indicators are very positive.

Our next question comes from Dan Leonard with Credit Suisse.

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, how much of that was from partnered revenue versus revenue from your own Onco branded products? And then 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.

So, Dan, this is Jeff. I'll respond to that. The broader Precision Oncology business is experiencing strong momentum. For instance, international sales grew by 26% in the quarter, even before Japan started contributing. We're optimistic about that. It's important to note that there is no partner revenue outside the U.S. Additionally, the global breast franchise saw double-digit growth. We're pleased with that development. We usually don't separate partner revenue and OncoExTra revenue. OncoExTra has had a positive start, but it's still early, so it's not yet a significant factor. However, it does expand our portfolio and is an important addition for our skilled sales team, which will eventually support not only OncoExTra and Oncotype DX breast but also MRD, hereditary cancer, and other products. We're encouraged by the overall momentum. Regarding seasonality, the trend I mentioned earlier with Cologuard is similar with mammography. Fewer women seek mammograms during the summer, leading to fewer breast cancer diagnoses. Oncotype is typically ordered after a diagnosis of breast cancer, so you can expect a slowdown from Q2 to Q3, followed by a stronger Q4.

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

Hey everyone, thanks for the questions and it's great to see you all in Madison. I appreciate you hosting this. I wanted to ask about MRD. I understand you plan to launch your initial tumor-informed Oncodetect MRD test for colorectal cancer, as mentioned, in Q4 2023. Can you give me an idea of where the Broad Institute fits into this? In the press release, you mentioned the MAESTRO program and its ability to detect thousands of patient-specific mutations. Given that MRD is still in its early stages, I'm curious about your confidence level in your first-generation product compared to a potential second-generation product, and whether you feel confident sticking with the tumor-informed approach or considering a shift to tumor-naive testing.

The MAESTRO technology that we exclusively licensed from the Broad Institute will be used in the next generation of MRD. So 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, an enhancement using more mutations, creating a greater sensitivity at a similar specificity. And that technology would be used in the studies that we've talked about, including the West German Study Group, WGS, and the NSABP, which is the CORRECT-II study. So you have the Triad study and the CORRECT-II studies, which would use that next-generation version of our MRD test.

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

Hey, everyone. I appreciate the question and it’s been a solid quarter. To start off, building on what Andrew asked, regarding the health system backlog, is there a point where these health systems can reduce that backlog, and how capable are they at replenishing it? Is this an ongoing situation? I remember you mentioning in the past that there's a need to get more people screened to address some of these rating trends that could vary seasonally. Can you clarify what we can expect moving forward? What occurs once they've reduced the backlog, and how does the trend look for those systems as they become more established after onboarding?

I’ll address that. I believe that when discussing backlog in health systems, it's primarily a capacity challenge. They understand they can't manage it alone. They have a screening population and specific quality metrics to achieve. Given their current number of gastrointestinal physicians and the workload, they recognize the need for assistance, which is why they turn to us. They are aware that Cologuard is an excellent initial option. We are not only offering Cologuard but also providing additional services to support compliance. Our marketing tools and proactive outreach to patients create a comprehensive approach that significantly aids in getting patients screened and helps the health systems meet their quality metrics, which is greatly advantageous for them.

The long wait times for colonoscopy have become a nationwide issue. This is primarily due to the guideline change by the USPSTF about 18 months ago, which lowered the screening age to 45. This adjustment added 15 million to 20 million Americans to the screening population, all requiring screening at the same time, leading to a permanent increase in the demand for screenings while the capacity remains fixed. Additionally, this capacity is not growing and is even decreasing in some areas because the rate of retirements among physicians is surpassing the number of new gastroenterologists entering the field. Given this situation, we believe that Cologuard will help address the high number of people in need of screening for many years to come.

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

Yeah. Thanks guys. I want to go back to the financials and the model really. Jeff, can you kind of walk through market implications of this $50 million COVID headwind to rescreen revenue in the second half? I guess like for context, you're guiding to a mid-single digit adjusted EBITDA margin in the second half. That makes sense given the rescreening revenue is higher margin. When that headwind lifts in the first half of next year, do you think that margins would bounce back? But that's kind of in line with how you talked about pushing margins higher over time. But you have other studies coming up in '24 and beyond. So 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?

Thank you for the question. About a month ago, we provided long-term margin guidance of at least 20% by 2027 in terms of adjusted EBITDA margins. We are confident in our ability to achieve this based on our current momentum. However, we still have work to do, as there are significant market opportunities available. You mentioned the impact of COVID rescreening, which is projected to be over $50 million this year, with a substantial portion occurring in Q3. It's important to consider our Q3 guidance, which indicates a 30% growth in screening and over $100 million in additional revenue, matching what we reported in Q2. This demonstrates strong growth, and we will ensure to make the necessary investments to continue scaling. Overall, I feel positive about our progress. As we expand, we will discuss expectations for next year in future calls, but I anticipate improvements in margins and cash flow for years ahead.

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

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 is the first mover. But you've spent so many years kind of honing the operational model with Cologuard. You've obviously had a lot of learnings. But 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 just given kind of obviously, the revisions that you've done in 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 I guess, kind of what learnings you think you can leverage from your US experience into the international market kind of where I'm getting at.

We have intensely focused on Cologuard in the U.S. Consequently, we have achieved significant scale, reach, and valuable insights. While we have not specified when Cologuard will be introduced outside the U.S., there is a clear demand. For instance, in the EU market, there is a substantial opportunity as the colon cancer mortality rate is much higher in Europe than in the U.S. Currently, only about 30% of the population is up-to-date with colorectal cancer screening, indicating a potential market. We will discuss our plans for international expansion at a later date. The knowledge and emphasis we have developed in the U.S. will certainly support our efforts to introduce Cologuard elsewhere.

And 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 managed 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. And 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 nicely profitable business, largely on one product, and as Kevin talked about, adding more and more products to that will help improve the profitability. And this is one of the core reasons why back in 2019 that we sought out to really come together with Genomic Health, is this high-quality international footprint. This sets us up for years to come to provide really a strong important leg of growth and importantly to help patients around the world.

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

Good afternoon, everyone. I would like to know the latest timelines for Cologuard blood. I've been asking this question since the Analyst Day. Given the positive Cologuard 2.0 data, why are we considering a different blood assay for colon cancer screening? Everett mentioned that doctors only have a limited time with their patients. Does adding this test risk complicating conversations, especially for primary care? Thank you.

Cologuard blood, which we refer to as our CRC blood test, has not been named yet. We expect to have data by the middle of next year. The purpose of a blood test is primarily for patients who refuse a frontline recommended screening test according to USPSTF guidelines. Some patients decline all forms of colon cancer screening. For these individuals, a blood test, while not as effective at detecting precancerous polyps or Stage 1 cancers as other frontline tests, still has a significant role and it is important to screen them. We know who those patients are; they have opted for Cologuard over colonoscopy but have not completed the test. This is a relatively small percentage of the population, but it represents a large number of individuals in the U.S., potentially in the millions. We will engage with these patients who have not completed a Cologuard test or colonoscopy, collaborate with their healthcare providers, and work with the health system to ensure they are screened. Our mission is to eradicate colon cancer, and this will be an essential tool to help achieve that goal.

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