EXACT SCIENCES CORP Q2 FY2024 Earnings Call

Thank you for your patience. I would like to welcome everyone to today's Exact Sciences Second Quarter 2024 Earnings Call. All lines are muted to avoid background noise. Following the speakers' comments, there will be a question-and-answer session. I now turn the call over to Erik, Manager of Investor Relations. Erik, please proceed.

Thanks, operator. Thank you for joining us for Exact Sciences' Second Quarter 2024 conference call. On the call today are Kevin Conroy, the company's Chairman and CEO, and Aaron Bloomer, our Chief Financial Officer. 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.

Thanks, Erik. Our second quarter results show the power of Exact Science's platform and the dedication of our world-class team. For the first time, we screened over 1 million people in a quarter with Cologuard for colon cancer, the second deadliest cancer in the U.S. We tested more patients globally with Oncotype DX than ever before. Expanding and leveraging our platform led to record customer engagement. During the second quarter, more than 190,000 healthcare providers ordered our preeminent cancer tests. Over 350 health systems and oncology centers utilized Exact Nexus, our proprietary technology platform. We made significant progress toward launching Cologuard Plus, our next-generation Cologuard test, and Oncodetect, our molecular residual disease test. Our team also advanced several other key pipeline programs, including our blood-based colon cancer screening test and multi-cancer screening tests. The strength of our infrastructure, commercial reach, payer relationships, and Exact Nexus allows us to offer these tests to millions of people around the world. We delivered year-over-year core revenue growth of 13% with a slight decline in operating expenses, leading to a record adjusted EBITDA of $110 million. Other highlights from the second quarter include producing $71 million of free cash flow, a $5 million improvement, being recognized as a Great Place to Work for the sixth consecutive year, and securing an exclusive license with rights to sub-license TwinStrand patented sequencing technologies. These achievements reflect our dedication to helping eradicate cancer, and we're well-positioned to achieve our goals for the year. Aaron will now review our second quarter results.

Thanks, Kevin, and good afternoon, everyone. Second quarter results highlight strong operational execution, and we're pleased with the progress we made. Second quarter revenue of $699 million grew 12% year-over-year or 13% on a core basis, excluding COVID testing, foreign exchange, and mergers & acquisitions. Growth was led by momentum and increased penetration of Cologuard, along with accelerated Oncotype DX growth internationally. Adjusted EBITDA margin expanded 500 basis points to a record 15.7%, and we generated $71 million in free cash flow. Screening revenue increased 15% to $532 million. We continue to see Cologuard orders consistently grow as health systems, healthcare professionals, and payers increasingly embed the test into their practices. We're proud of our sales and marketing teams and the work they are doing to drive adoption, especially within rescreens and care gap programs. Care gap programs generated more revenue in the first half of 2024 than all of 2023. Precision Oncology revenue grew 7% to $168 million, or 6% on a core basis. Growth was led by Oncotype DX, which expanded 31% internationally. Our team has done significant work driving leverage and operational execution across the P&L. We generated $110 million in adjusted EBITDA, an increase of $43 million year-over-year, or 65% growth. Adjusted EBITDA margin expansion was driven by volume growth, productivity, and expense controls, especially within General & Administrative, and we are pleased with this progress. This more than offset a decline in non-GAAP gross margin of about 190 basis points. Recall, gross margin in the second quarter of 2023 benefited from better cash collections due to improvements made to our billing systems that allowed us to correct claims from prior periods. To simplify modeling and increase clarity, we introduced a new reconciliation within our press release that presents operating income or loss on a GAAP and adjusted basis. Using both methodologies, total operating expenses declined slightly year-over-year during the second quarter. We continue to see opportunities to optimize costs and increase operational efficiency, creating the capacity to reinvest back into growth areas while still expanding margins. For example, during the second quarter, we reinvested some of our cost savings back into high-growth initiatives, including within sales and marketing. Free cash flow was $71 million, an increase of $5 million year-over-year and up $191 million sequentially. We ended the quarter with cash and securities of $947 million. Our strong balance sheet and positive free cash flow outlook allowed us to repay the full $50 million outstanding balance of our accounts receivable securitization facility and secure an exclusive license with TwinStrand Biosciences. Turning to guidance. We're maintaining our full-year revenue guidance and raising our adjusted EBITDA guidance. We continue to expect full-year revenue between $2.81 billion and $2.85 billion and now expect adjusted EBITDA between $335 million and $355 million, or a 12.2% margin rate at midpoint. During the third quarter, we expect total revenue between $705 million and $725 million, or year-over-year growth of 14% at midpoint. This assumes screening revenue between $545 million and $555 million or growth of 17% at midpoint, and Precision Oncology revenue between $160 million and $170 million, or growth of 6% at midpoint. Guidance implies 17% revenue growth year-over-year at midpoint in the second half of 2024, with 21% growth in screening and 6% growth in Precision Oncology. We expect second-half screening revenue to be about 54% of full-year revenue, consistent with the historical average. Several key factors give us confidence in achieving guidance. First, the number of people eligible for the next Cologuard test grows by more than 10% sequentially, and our re-screen success rate continues to improve. We're making progress by sending patients digital reminders and educating providers about the option to order Cologuard in advance of a patient's three-year Cologuard anniversary. Once a re-screen test is ordered, more than 80% of second-time Cologuard users and 90% of third-time users go on to complete the test again, demonstrating a high level of patient preference and satisfaction. Second, we have more than 100 opportunities with payers and health systems to close care gaps with Cologuard through large organized screening programs. We also expect recent sales and marketing investments will support growth in the second half of the year, with a greater impact expected in the fourth quarter and in the coming years. Back to you, Kevin.

Thanks, Aaron. Over the past decade, Cologuard has revolutionized colon cancer screening, and momentum continues to build. According to the CDC, Cologuard is the primary reason colon cancer screening rates have increased by 13 percentage points. We've delivered more than 16 million Cologuard test results to patients, and we're just getting started. For example, we've screened more than 1.5 million people ages 45 to 49 since the screening age was lowered three years ago. Keeping these people screened until they're 85 provides up to 20 million Cologuard testing opportunities. Cologuard has become an embedded standard-of-care among patients, healthcare providers, health systems, and payers. We're using our unparalleled commercial capabilities and powerful Exact Nexus platform to engage patients through personalized experiences. This is resulting in more patients completing Cologuard every three years, helping us achieve our goal of making screening routine. It's also playing a key role in our new approach to closing the screening gap. Let me give you an example. One of our customers, a major payer, asked us to help screen 90,000 of their members with a goal of providing better care and improving their quality measure scores. Exact Science's state-of-the-art patient engagement tools and Exact Nexus guided and supported patients throughout the screening process, promoting adherence. Our customer was thrilled with the outcome, and we're already in discussions with them and many others about future care gap programs. Our Precision Oncology team is doing an outstanding job expanding the impact of Oncotype DX internationally. We still have a major opportunity to provide important answers to eligible patients outside the U.S. because about 70% aren't currently being tested. Healthcare professionals, hospitals, and health systems trust Oncotype DX because it's supported by unmatched evidence. Oncotype DX is globally recognized as standard-of-care and included in all major guidelines. Thanks to our team's commitment, we've increased Oncotype DX adoption internationally by about 10 percentage points over the past year. We're making strong progress internationally, and our goal is to make sure all people eligible for Oncotype DX have access around the world. Expanding our presence globally also provides opportunities across our portfolio, which we're working towards. The second quarter was a hallmark period for our pipeline as we advanced our most impactful programs, colon cancer screening, molecular residual disease testing, and multi-cancer screening. We plan to share performance data from each of these programs by the end of the year. Cologuard Plus will be the most efficient non-invasive way to screen for colon cancer, and we anticipate FDA approval in the coming months. Cologuard Plus sets a new performance standard with 94% overall cancer sensitivity, 43% sensitivity for advanced precancerous lesions, 91% specificity when including patients with small polyps and other incidental findings, and 93% specificity with no findings on colonoscopy. This means the test achieved a 30% lower false positive rate relative to current Cologuard, with cancer and pre-cancerous lesion detection improving as well. Cologuard Plus could save the healthcare system billions of dollars for two reasons. First, Cologuard Plus presents an opportunity to further reduce colon cancer incidents and mortality, moving us one step closer to helping eradicate this disease. Second, fewer patients will be sent to unnecessary follow-up colonoscopies. We recently ran our blood-based colon cancer screening test on more than 3,000 samples. The study consisted of 2,900 prospectively collected samples from healthy individuals, 90 advanced adenomas, the majority of which were collected prospectively, and 60 retrospectively collected cancer samples. The results give us confidence our test will be at least comparable to others and will meet the Medicare requirements. We plan on presenting these data before sharing topline results from our pivotal BLUE-C study in the fourth quarter of 2024. Our blood-based colon cancer screening test will have an unrivaled cost profile. Once available, it will be supported by our commercial infrastructure, patient navigation engine, and Exact Nexus technology platform, making ordering and resulting seamless for more than 350 health systems and available to our broad and deep customer base of healthcare providers. Oncodetect, our molecular residual disease test, will significantly impact decision-making, and we're supporting it with high-quality clinical evidence. Our team recently generated impressive study results, demonstrating Oncodetect as highly accurate at detecting residual disease in colon cancer patients. These findings will be published in a scientific journal later this year, and we're on track to launch with reimbursement next year, 2025. We also strengthened our patent portfolio by signing an exclusive license to TwinStrand's cell-free nucleic acid sequencing technologies. This license provides near and long-term opportunities across multiple areas of cancer diagnostics while complementing our existing IP, including Thrive's Safe-seq and SaferSeqS technologies. Our multi-cancer screening test was recently authorized by the FDA to be used within a real-world evidence study, providing an opportunity to test 25,000 people over the next three years. Generating real-world evidence in a clinical setting will help optimize clinical workflows and support discussions with regulatory agencies, payers, and guideline groups. Our data presentation at the AACR meeting in April showed our multi-cancer screening test detected 51% of cancers at 98.5% specificity across 21 types of cancer in a large well-designed study. 16 of those cancer types have no standard-of-care screening option available today. Next, we plan to present improved performance data at a scientific conference later this year, highlighting the benefits of combining this approach with Thrive's technology. Our focus on helping eradicate cancer powers the Exact Sciences team, creating momentum within our business and allowing us to extend our platform. Continued execution, our growing portfolio of tests, and a leading presence in cancer screening and Precision Oncology put us in a prime position to achieve our purpose. We're now happy to take your questions.

Thank you. It looks like our first question today comes from Patrick Donnelly with Citi. Patrick, please go ahead.

Hey, thanks guys. Thanks for taking the questions. Kevin, maybe on the cost side, obviously last quarter, the increase in rep hires got a lot of attention, alluding to nice profitability here, and nice to see the EBITDA move higher. Can you just talk through the key drivers there? And if anything has changed here on your confidence in the long-term expectations, just that trend line on the profitability piece? And then second, certainly appreciate the update on your internal blood program. That market continues to get a lot of attention given the FDA approval last week for a competitor. Just how you think about your approach there on the cost commercialization side? It sounds like you're confident your data stacks up with anything out there. And the TwinStrand agreement, it doesn't seem like it changed anything on that front. I guess that's just related. Just want to confirm that. Thank you, guys.

Yes. Why don't I start with the first one and I'm really excited about the growth that we're seeing, 15% screening growth, record 16% adjusted EBITDA margins; thrilled across the board with what the team is doing to grow screening, to grow Precision Oncology, that is leading to tremendous growth in EBITDA, and we expect that to continue. Looking at the driver of growth, really focusing in on the screening, there are three things: the increasing brand awareness of Cologuard that it's the best non-invasive approach to screening. It is now at parity with colonoscopy in terms of consumer awareness, really remarkable. And we're pleased to see that our commercial engine is doing great work. We expect even better performance in the back half of the year, moving into next year. Our deepening relationship with health systems, primary-care physicians, payers just across the board strength there. And also we're extending and leveraging our Exact Nexus platform. That platform allows us to reach electronically 350 health systems in the U.S., making ordering easier. That will continue to grow and deepen over the years. As we add our portfolio to that platform, that allows us to deliver even greater cost economics as we grow. Aaron, you probably have a more in-depth analysis there.

Yes, thank you, Kevin. First of all, I am very pleased with the progress that the team made in the second quarter. As Kevin mentioned, we achieved record levels of adjusted EBITDA, both in dollar terms and with a 16% margin. Breaking that down a bit, it starts with significant growth, showing double-digit revenue growth with 15% growth from screening, paired with exceptional operational execution, particularly within G&A. This performance also informs our full-year guidance and long-term outlook, allowing us to increase our adjusted EBITDA guidance for the full year. This indicates about a 500 basis-point margin expansion in the latter half of the year, with most of that leverage coming from G&A. The exciting aspect of this is that it creates the opportunity for us to reinvest in our highest return on investment areas, especially MRD and marketing in the latter half of 2024. We feel very positive and believe we are well-positioned to exceed our 2027 adjusted EBITDA target of over 20%.

Patrick, I will also address the CRC blood question. As you know, our test, Cologuard Plus, establishes a new standard of care beyond Cologuard. Cologuard Plus has 94% sensitivity for CRC, 93% category six specificity, and 43% adenoma sensitivity. It's an outstanding test. We believe blood tests encounter significant challenges, particularly in performance. When evaluating sensitivity and specificity, consider the life years gained. Comparing Cologuard to our blood test performance, as shown in one of the publications presented at DDW, blood tests show 30% fewer life years gained compared to Cologuard or Cologuard Plus, which represents a substantial decline in screening and is inferior to a $25 FIT test. Therefore, we believe there are significant hurdles. One issue is integrating into guidelines, which seems possible no earlier than late 2026 and more likely in 2027. The next guideline update will not include HEDIS measures, among other limitations stemming from performance disparities. This is significant when it involves people's lives and screening practices. At Exact Sciences, we consider that the appropriate use for a blood test is for individuals who refuse colonoscopy, Cologuard, or even a FIT test. We don’t think an expensive blood test, blind to pre-cancerous polyps, will gain widespread acceptance from guideline groups, payers, and primary-care physicians. Our blood test, as previously mentioned, is based on a 3,000-patient study that we are pleased with. This study has helped us establish the final algorithm for processing BLUE-C samples to be submitted to the FDA. The algorithm’s importance lies in running it across numerous samples to minimize performance variability in the pivotal study. While we cannot predict the results with certainty, this extensive study provides confidence as we approach the fourth quarter for pivotal study results. We will share the findings from this recent study before releasing the pivotal study results. Lastly, regarding your third question, I know someone else might ask about TwinStrand. TwinStrand's intellectual property enhances our portfolio by covering duplex sequencing and reducing error rates in next-generation sequencing for cell-free DNA. It bolsters our portfolio and we are excited to have acquired it.

Thanks, Patrick, for the question. And our next question comes from the line of Tycho Peterson with Jefferies. Tycho, please go ahead.

Thank you. I have a few questions regarding Cologuard Plus, Kevin. Can you explain the phasing process and how you plan to manage the transition? When do you expect to be fully transitioned? Practically speaking, how does the process work? Do doctors offer patients one test based on coverage and another based on different coverage? Also, have you gathered any feedback on pricing compared to the 25% increase you've discussed after your recent conversations? Are you still considering a crosswalk? Additionally, you mentioned needing to add around 100 to 150 representatives for MRD. Can you clarify why that is the case, especially since Genomic Health primarily provided guidance? Lastly, regarding blood, why are you waiting to release the study results until later this fall? Can you also discuss the drawbacks of using a PCR-based test compared to sequencing? There is a perspective that sequencing may improve over time with better algorithms. Thank you.

Tycho, great to have you on board. Keeping track of all the questions; I can't promise you all do that perfectly. Let me start with blood. We'll release that data; we're looking at the appropriate scientific conference to have that data and we'll release the top-line data as soon as we can. In terms of Cologuard Plus, we're still working through exactly what the commercial deployment will be. At a high level, what we're trying to achieve is to make sure that the transition in insurance coverage, which will take some time, will map to the transition in utilization. Our lab team and our commercial team are working through plans to do that. It probably takes 12 to 24 months before all of the contracts we have with payers convert from Cologuard to Cologuard Plus. The first part of that journey is setting a new rate with Medicare. There are multiple paths that we can go down to do that; one is the public process that you're seeing, which actually takes a while to play out. So I'd caution against any public information that either we released or was released by Medicare; ultimately, towards the end of this year, there is a final decision on that current path. There are other paths to pursue as well. The bottom line is Cologuard Plus delivers real value to people getting screened because of a lower false positive rate, because of our higher rate of detection of cancer and pre-cancerous polyps. It's a better test. That leads to better outcomes. It also leads to cost savings. For example, a 30% lower false positive rate leads to fewer people going to unnecessary colonoscopies while keeping sensitivity slightly higher than with Cologuard. That's the magic of the technology that this team has worked on and that's our proprietary modification, kind of a super advanced PCR technology that helps us deliver those results with just a few DNA methylation markers and a protein. So hopefully touched upon that. In terms of MRD reps, I'm not sure that I understood that question, but maybe we can come back to that later.

Okay. Thank you, Tycho. And our next question comes from the line of Andrew Brackman with William Blair. Andrew, please go ahead.

Hi guys, good afternoon. Thanks for taking the questions. Maybe just on re-screens, Aaron, you outlined the opportunity here increasing in the second half and gave some compelling compliance numbers as well. So I guess it sounds like the main hurdle is actually getting those repeat tests ordered. So can you maybe just level set us on the initiatives that you have to get those ordered by docs and anything incremental that we should expect in terms of investment through that in the second half of this year? Thanks.

Hey, Andrew, great to hear from you. Yes, so rescreens is an important part of our growth story. The number of patients eligible for rescreen grows this year from 1.2 million to 1.6 million for the full year. We saw strong growth from rescreens coming in the second quarter. As we cited, the back half of the year is actually up sequentially versus the first half of the year by roughly 10%. We're getting better and better at engaging with these patients via MyChart, our advanced ordering portal, bringing them into the Exact Nexus's platform. Once the patient orders the test, the second time it's at an 80% adherence rate, and the third time is now north of 90%. Again, we're finding new and creative ways to engage with our patients.

All right. Thanks, Andrew. And our next question comes from the line of Catherine Schulte with Baird. Catherine, please go ahead.

Hey guys, thanks for the questions. Maybe first, you mentioned care gap programs a few times. I guess what are care gap assumptions and guidance, how is that weighted between the third and fourth quarter? And then just going back to your blood program, do you have a timeline for when you expect to run those pivotal samples? Walk us through the steps that you need to complete before you run those. Thanks.

Thanks. I'll start. The care gap program is an important program. What you're seeing, and this has been a decade-long change in the way healthcare is consumed in the U.S., is a decline in office visits where many wellness visits or screenings are conducted. What we're seeing is health systems and payers are coming to us and saying, hey, can you help us with this dynamic and can we get colon cancer screening done remotely in the privacy of people's home? That what we call care gap programs drives quality measures, which are really important to help large health systems and payers across the country. What we're doing here to help them is to engage with them to deliver directly to their members, to their patients the Cologuard test in the privacy of their own home, so that it can be completed. Our Exact Nexus platform, our customer care capability, and our digital capabilities are allowing us to serve these patients as they consume healthcare in a very different way. We're seeing strong growth. An interesting dynamic is that the growth tends to occur significantly from the early part of the year towards the end of the year. One of the drivers is that health systems and payers see a sneak preview of their quality measure scores in the middle of the year, driving a lot of activity to improve their scores by the end of the year, and that’s an awfully busy time for us in care gap programs. We expect the step-up to be in Q3, a real step-up from Q2, and Q4 the biggest step-up. That’s what we saw last year. Aaron?

Yes. No, you hit on it. It's going to be more Q4 weighted consistent with what we saw in 2023. I would just reiterate, we have a lot of confidence and visibility into the pipeline. We've already done more revenue in the first half of 2024 than we did in all of 2023.

Then you asked the question about what do we need to do before running the pivotal samples. You have to do a lot of software work to validate all the algorithms so that they work perfectly. You have to process between 10,000 and 20,000 samples that are frozen and banked. The automation, all of the lab, reagent quality control, the list goes on and on. You have one shot at doing this and you want to do it perfectly. I'm so proud of the team and what they've done here in developing the test, the clinical affairs team that has run the clinical trial. It's the largest and we think broadest clinical trial in this field, both stool and blood, comparing to the FIT test, which is one thing that we insisted on doing. We're really looking forward to joining that and announcing the results in the fourth quarter. Just to be clear, we have not processed those samples yet. When we process the samples, we will see the data, and it will be a quick turnaround to announcing topline results, presenting the data at a scientific conference, and getting them into a publication.

All right. Thanks, Catherine. And our next question comes from the line of Matt Sykes with Goldman Sachs. Matt, please go ahead.

Hey, good afternoon. Thanks for taking my questions. Congrats on the quarter. I just wanted to ask on the Q3 guide, Aaron, it just came in a little bit below our expectations. Is that sort of reflecting some of the seasonality plus care gap in Q4 and that's where that revenue goes in terms of making that full-year guide? And then just secondly on modeling, is there any way you can break out the prevention genetics from the overall screening revenue in the quarter? Thanks.

Yes. Again, rescreens are going to drive more growth in Q3 and Q4. That's going to be more Q4 weighted. Care gap programs, as we just talked about, will be more Q4 weighted, although there’s a sequential step-up from Q2 to Q3. The other thing I would just say is we know this market very well. We've consistently seen the steepest part of the growth curve really occur from mid-August through November as wellness visits accelerate coming out of the summer, and that kind of informed then what we put into our back half of the year guide as well as our sequential step-up Q2 to Q3 and then into Q4, consistent with prior year averages.

All right. Thank you, Matt. And our next question comes from the line of Dan Arias with Stifel. Dan, please go ahead.

Good afternoon, guys. Thanks for the questions. Kevin, I just wanted to go back to the USPSTF process, if I could. When those guys updated the guidelines in 2021, how far before that, I believe it was May of that year, how much before that did you hear from them first in terms of their data collection efforts? And do you think that it's any sooner or later than that this time around? Essentially, when are you expecting to first hear them reach out to you on this process?

Here is how the USPSTF process works. The USPSTF, or the United States Preventive Services Task Force, is a group of volunteer primary care physicians, nurses, and leading experts focused on prevention. They provide opinions on various topics, including vaccines and screening. The process begins with a published research plan, which leads to the creation of a modeling report and a comprehensive literature review that examines studies and evidence since the previous update. After this, they issue draft guidance, followed by final guidance about six months later. The entire process typically takes around 2.5 to three years. They review individual topics approximately every five years, although for colon cancer screening, it has varied between five to eight years depending on the task force's workload and resources. We expected the next research plan to be published in the first quarter of this year, but it appears to be delayed. Therefore, it will likely take around 2.5 to three years from the initiation of the research plan until the final guidance is released, suggesting a timeline that could extend to 2027. We are quite familiar with this process, having experienced it twice before.

Thanks for the question. And our next question comes from the line of Doug Schenkel with Wolfe Research. Doug, please go ahead.

Hey, guys. So I want to talk about two things, Cologuard momentum, and then I want to take another angle on Cologuard blood. So on Cologuard momentum, it seems like first-time orders grew double digits sequentially, assuming I'm doing the math right. That's impressive. I'm just wondering how much of that is seasonality versus new hires and maybe some of its streamlining of commercial leadership. So that's the first topic. The second topic is on Cologuard blood. So you've talked about the clear cost advantages of using PCR versus sequencing. What's unclear is if there are structural disadvantages from a performance standpoint, either because of things like limitations in terms of the number of markers or CpG islands you can query in detail or GC bias, just to name a couple of things. Last quarter, you talked about processing 3,000 samples, and I bring that up because you said specifically you were doing that to collect more data on specificity. I just want to give you an opportunity to address the question of NGS versus PCR trade-offs. Specifically, are there any structural disadvantages such as lower specificity? And then related to that, Kevin, there's a long history of attenuation in this industry when companies lock down their assays and actually run them for the first time on samples in a large randomized prospectively collected sample study. You saw this with Cologuard, we saw it with Guardant. We've seen it almost every time. Why is this not a concern?

It's interesting. In the last study we did, there was an attenuation. The reason was we have gotten a lot better at algorithm-setting studies. The more samples that you study, especially normals, actually I shouldn't be giving away inside knowledge here. What I will say is we have gotten better at setting the algorithm. By getting better in the study, the algorithm setting study from the algorithm setting study for Cologuard Plus to the final readout, we saw a performance improvement, which was very different than the algorithm setting study for the original Cologuard to the release of the BLUE-C data. Why? We have gotten better at doing those studies. The team is world-class. There are pros and cons of PCR versus sequencing. I would say that remember, we used sequencing to discover the markers that we use in both Cologuard Plus and also our blood-based colon cancer screening test. Think of it this way: the fewer markers you use, there's less noise. The more markers you use, there can be more noise. Now that's not a rule because there's also noise generated from PCR. There's noise generated from sequencing. These things tend to balance themselves out. The Exact Sciences R&D team is world-class at figuring out a way to make that trade-off between sensitivity and specificity. I think we're the only ones who have figured out how to do it with PCR, and it's a huge advantage. People often say, well, yes, but you're not using next-generation sequencing, it's not state-of-the-art. It's actually the opposite. It's scientifically harder to do what we have done, which is to focus on cost of goods and performance and to deliver on both. The data is going to show the results, right? In the fourth quarter, we'll know. We don't know what the results are. We're confident, but we don't have a crystal ball as to what will result. The beautiful part of our advanced proprietary PCR platform, coupled with our deep knowledge of DNA methylation biomarkers and the regions within the best biomarkers is a unit cost advantage. If we deliver comparable data with our platform, with our cost advantage, we can deliver an appropriately priced test to patients who may benefit. With our system, data, and knowledge and relationships with payers and providers, we can actually get a blood test to the right people. That’s why we think we win. This will obviously take time. I would bet on the Exact Sciences team.

And Doug, then just on the Cologuard momentum, 15% growth for screening in the quarter. We saw growth actually across all three segments. So rescreen 45% to 49% and 50% plus. We highlighted rescreens last year were roughly 20% of total revenue, and we're on track to grow that by at least a couple of percentage points this year. I'd also just call out in the 45% to 49%, solid growth from that. This remains one of our leading growth opportunities. Recall there's still 19 million Americans in this cohort, and less than 20% of those have been screened. If we're able to keep them screened for 30-plus years, this is an even bigger recurring revenue opportunity for us. We're really excited about all the new ways that we can reach this patient population. They don't see their primary care provider as often as some of the other age groups. We're leveraging digital, our social marketing, unique ways to target them, as well as part of our care gap programs. We've seen a nice uptick in 45 to 49 coming through the care gap programs as well.

Thanks, Doug. And our next question comes from the line of Vijay Kumar with Evercore ISI. Vijay, please go ahead.

Thank you for taking my question and congratulations on a strong performance. Kevin, I have a two-part question. First, I noticed that your operating expenses decreased by 7% sequentially. Were there any one-time factors in this quarter related to timing? Should we expect operating expenses to remain at these current levels, or how should we view the potential increase in operating expenses in the latter half of the year? Secondly, you mentioned the pricing advantage of your blood-based test. How do you think payers will respond if there are two different blood-based tests available at varying price points? Thank you.

Hey, Vijay, good afternoon. I'll take the first part of the question just as it relates to OpEx. There are no specific one-timers, especially we broke out GAAP versus adjusted OpEx. On an adjusted OpEx basis, obviously, all the one-timers would be excluded. On a GAAP basis, there was one item that sat within the G&A line. But on the adjusted basis, you can expect kind of consistency on the G&A line, Q2 into the back half of the year. I would expect a sequential step-up implied in both sales and marketing, as well as in R&D as we move into the back half of the year, with R&D largely tied to our MRD program and then marketing just typically tied to higher viewership in the back half of the year.

In terms of how the payers are going to look at a lower-price test, I think the way that payers tend to look at any type of service is they are adept at finding a way to deliver best performance at the best cost to the plan. That means they have a range of tools from prior authorization to step edits, to tools that allow them to make sure that the right test is performed. One key opinion leader said yesterday that she was excited, and this is public, Dr. Fola May. She said, look, I'm excited about the blood test FDA approval. There is a highly resistant population that will always refuse colonoscopy and stool tests; it gives them another option. But here’s the important part: I hope to God that everyone understands that these are not the same thing. I think payers understand that a test that is not part of the quality measures, a test whose performance is not as good in terms of life years gained as a FIT test, there’s going to be an appropriate role that is going to be determined likely by USPSTF, payers, and health systems and primary care physicians, and that’s going to be a long road.

Okay. Thank you for the question. And our next question comes from Dan Brennan with TD Cowen. Dan, please go ahead.

Great. Thanks, guys. Thanks for taking the questions. Maybe first one, I know there's been a few questions on care gap. Could you just potentially quantify how big care gap is in the second half since there's a lot of concern about the expected Cologuard ramp in the second half, first half? And is there any sales force expansion baked into the second half? And then, Kevin, on blood, I know previously you talked about getting the data in October. Now it seems like we'll get the case-control data at some point and then the pivotal data after that. Can you just speak to maybe when we might see the case-control data? And then finally, on Cologuard Plus and the clinical FV schedule. Can you just discuss the rationale for the 1.25 times crosswalk? Is that just based upon cost of goods sold or maybe lab costs? Any color on that? Thank you.

Yes, Dan, so I'll take the care gap piece first. No, we haven't sized it other than just to say again that we did more in the first half of this year than we did in all of 2023. We're excited about what care gap is and new ways to help close the screening gap. Looking at our pipeline and what we saw applied in Q2, we know there will be a sequential step-up Q2 to Q3 and Q3 to Q4. With respect to the sales force expansion, there's not an embedded like increased costs baked into that. We brought the reps on in May, and we'll see a little bit just a full quarter impact of that in Q3 and Q4. The total impact from sales and marketing investments from a revenue perspective, we would expect to see some impact and that would be more Q4 weighted. It typically takes the average rep about six months to get up to productivity.

Dan, in terms of the release of the prospective algorithm setting study and that data, we're looking for the best conference to share that data at. We do not want to do it on an earnings call. So we're looking sometime in the fall to present that data in advance of the pivotal study data. In terms of the question about the 1.25 times price, again, you know the process for getting a price from Medicare is relatively complex. We're not going to go into the details of that process. That's going to take some time to play out, and we have multiple different options there. So we're just not going to get into all of those details other than to say an increase in price is predicated on an increase of value that is delivered to the people who are going to get this test and to the healthcare system and overall costs.

All right, thanks, Dan. And our next question comes from Jack Meehan with Nephron Research. Jack, please go ahead.

Thank you. Good afternoon. I wanted to ask about what your expectation is around marketing and screening when SHIELD comes to market. So in fairness to Garton, they got a primary screening label from the FDA that was better than I was expecting. There's obviously some precautionary language in there. I was just curious what your plan is to counter detail and how do you see that playing out with PCPs?

We've built deep relationships with healthcare providers. Over 300,000 have ordered Cologuard with health systems. Virtually every health system in the U.S. utilizes Cologuard on a regular basis to drive increases in screening. As we mentioned, according to the CDC, the main reason for over a 10 percentage point increase in colon cancer screening is Cologuard. These are deep relationships. We have, we think, the best commercial team, sales and marketing team in the country. A part of that leadership team is here in the offices today. It's an amazing group. The Exact Nexus platform is making electronic ordering easy, the ability to work with payers and large health systems to meet the patient where they want to be screened in the privacy of their own home. It's a rich and deep infrastructure that we've built, and we actually look forward to competition. I really believe that competition makes people better; it makes them better individually, makes you better as a team, sharper, hungrier. Here, we start from the point that the data, the difference between Cologuard Plus, the difference between Cologuard and any of the blood data is night and day. There's a passion behind what we do — getting the best test to the people who need to get screened. I think we're going to compete. I happen to think that competition is going to make us better, and it’s going to drive growth. We're a trusted source of information to providers, and they're going to ask us, and we are going to strive to be truthful and accurate, and we can do that because of the data.

All right. Thank you for that question. And our next question comes from the line of Michael Ryskin with Bank of America. Michael, please go ahead.

I just have a quick question to follow up on something you've mentioned several times, Kevin. You stated that with CGPlus, you believe it will be comparable to other blood tests. Could you clarify what you mean by comparable? Are you referring to sensitivity and specificity? What specific metrics are you considering? Are you talking about advanced adenoma or Stage 1? How should we evaluate that? There are obviously various ways to assess these tests. Thank you.

The specificity we are aiming for is 90%, which is the minimum required by Medicare to receive payment. The minimum sensitivity required by Medicare is 74%. We have observed that others have sensitivity in the low 80s. Additionally, pre-cancer detection rates we've noted range from 11% to 13%. It's important to remember that you receive a 10-point boost in pre-cancer detection due to the 10% false positive rate. Blood tests or liquid biopsies for colon cancer screening often overlook pre-cancerous polyps, given their false positive rate. What we’re finding is that our cancer detection is comparable, but with improved pre-cancer detection. While we are uncertain how this will manifest in the BLUE-C study, our scientific team has done exceptional work. We’ve conducted seven, eight, or nine case-control studies leading up to this pivotal moment, reflecting rigorous scientific efforts. Our goal remains a 90% minimum specificity and we're also working within the low 80 range for sensitivity. It's crucial to note the Medicare minimum is 74%, and when considering modeling for life years gained, increased sensitivity in pre-cancer detection leads to more life years gained. A significant measure would be comparing the life years gained.

All right. Thanks, Michael. And our next question comes from the line of Puneet Souda with Leerink Partners. Puneet, please go ahead.

Yes, hi, Kevin. Following up on that question, we have been getting another question: do you think the FDA would consider approving an assay if its performance is slightly lower than the currently approved test on the market? Additionally, could you share your thoughts on the expected interest from primary care physicians when Cologuard Plus launches next year?

When you run a study, you run that study based upon endpoints that are set in the study, and our endpoints have already been established. We are confident that any test, not just ours, that achieves the Medicare minimum of 74% is likely to get FDA approval. From a pre-cancer detection standpoint, I think that's probably less likely, given the limited label that the blood tests are seeking. In terms of Cologuard Plus adoption over the long term, after launch, two out of three docs say they will order more frequently because of the lower false positive rate. One of the challenges with Cologuard was a 10% false positive rate. The false positive rate is now 7% with Cologuard Plus, and that is very important because when you look at it at a population level, if you screen, let's say a million people, you're talking about tens of thousands of fewer people going to colonoscopy because Cologuard Plus is available. This goes back to the science; the science that lowered the false positive rate with fewer markers and a lower false positive rate. Same essential PCR platform that we're using in CRC blood.

All right. Thank you, Puneet. And our final question today comes from the line of Subbu Nambi with Guggenheim. Subbu, please go ahead.

Hey, thank you guys. Thank you for taking my question. Two questions. One, what does the TGen discontinuation mean for MRD? And second, regarding Oncotype and MRD, it seems like there could be an opportunity and also a threat. On one hand, with Oncotype, you have the tumor tissue, which would seemingly give you an advantage in that you can create a bespoke assay. But on the other hand, bespoke MRD assays could conceivably cannibalize Oncotype or even lead to some share loss. Am I thinking about this the right way, or can you share your thoughts on opportunity versus risk?

In terms of the TGen question, we attempted to develop an MRD test with that technology, and then we opted for our own internally developed technology, coupled with technology that we licensed from Broad. In terms of the advantage we have because of our Oncotype DX is that we see an enormous percentage of all U.S. breast cancer tissue samples. Having that tissue sample at the starting point for breast MRD is a huge advantage. Oncotype DX has about 90% share, and as a result, we have deep relationships with almost every health system in the U.S., which we think will confer a real advantage for us over time. These tests are really complementary: the Oncotype DX test and the MRD test, Oncodetect that we're developing. We're looking forward to sharing the Oncodetect data later this year, and we look forward to our next earnings call and having future conversations with all of you in between. Thank you all. Just one more shout out to the Exact Sciences team, so dedicated to the mission, so dedicated to delivering on our goals for the year. Thank you very much.

And ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.