EXACT SCIENCES CORPORATION Objective
The purpose of this Management's Discussion and Analysis is to better allow our investors to understand and view our company from management's perspective. We are providing an overview of our business and strategy including a discussion of our financial condition and results of operations. The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , which has been filed with theSEC (the "2021 Form 10-K"). 37
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that are
intended to be covered by the "safe harbor" created by those sections.
Forward-looking statements, which are based on certain assumptions and describe
our future plans, strategies and expectations, can generally be identified by
the use of forward-looking terms such as "believe," "expect," "may," "will,"
"should," "would," "could," "seek," "intend," "plan," "goal," "project,"
"estimate," "anticipate" or other comparable terms. All statements other than
statements of historical facts included in this Quarterly Report on Form 10-Q
regarding our strategies, prospects, expectations, financial condition,
operations, costs, plans and objectives are forward-looking statements. Examples
of forward-looking statements include, among others, statements we make
regarding expected future operating results; our strategies, positioning,
resources, capabilities and expectations for future events or performance; and
the anticipated benefits of our acquisitions, including estimated synergies and
other financial impacts. Forward-looking statements are neither historical facts
nor assurances of future performance or events. Instead, they are based only on
current beliefs, expectations and assumptions regarding the future of our
business, future plans and strategies, projections, anticipated events and
trends, the economy and other future conditions. Because forward-looking
statements relate to the future, they are subject to inherent uncertainties,
risks and changes in circumstances that are difficult to predict and many of
which are outside of our control. Actual results, conditions and events may
differ materially from those indicated in the forward-looking statements.
Therefore, you should not rely on any of these forward-looking statements.
Important factors that could cause actual results, conditions and events to
differ materially from those indicated in the forward-looking statements
include, among others, the following: uncertainties associated with the
coronavirus ("COVID-19") pandemic, including its possible effects on our
operations, including our supply chain and clinical studies, and the demand for
our products and services; our ability to efficiently and flexibly manage our
business amid uncertainties related to COVID-19; our ability to meet our payment
obligations under our indebtedness; our ability to raise additional capital in
amounts and on terms satisfactory to us, if at all; our ability to successfully
and profitably market our products and services; the acceptance of our products
and services by patients and healthcare providers; our ability to meet demand
for our products and services; the willingness of health insurance companies and
other payers to cover our products and services and adequately reimburse us for
such products and services; the amount and nature of competition for our
products and services; the effects of any judicial, executive or legislative
action affecting us or the healthcare system; recommendations, guidelines and
quality metrics issued by various organizations regarding cancer screening or
our products and services; our ability to successfully develop new products and
services and assess potential market opportunities; our ability to effectively
enter into and utilize strategic partnerships and acquisitions; our success
establishing and maintaining collaborative, licensing and supplier arrangements;
our ability to obtain and maintain regulatory approvals and comply with
applicable regulations; our ability to manage an international business and our
expectations regarding our international expansion and opportunities; the
potential effects of changing macroeconomic conditions, including the effects of
inflation and interest rate and foreign currency exchange rate fluctuations and
any such efforts to hedge such effects; the possibility that the anticipated
benefits from our business acquisitions will not be realized in full or at all
or may take longer to realize than expected; the possibility that costs or
difficulties related to the integration of acquired businesses' operations or
the divestiture of business operations will be greater than expected and the
possibility that integration or divestiture efforts will disrupt our business
and strain management time and resources; the outcome of any litigation,
government investigations, enforcement actions or other legal proceedings; our
ability to retain and hire key personnel. The risks included above are not
exhaustive. Other important risks and uncertainties are described in the Risk
Factors and in Management's Discussion and Analysis of Financial Condition and
Results of Operations sections of the 2021 Form 10-K and subsequently filed
Quarterly Reports on Form 10-Q. You are further cautioned not to place undue
reliance upon any such forward-looking statements, which speak only as of the
date made. Except as otherwise required by the federal securities laws, we
undertake no obligation to publicly update any forward-looking statement,
whether written or oral, that may be made from time to time, whether as a result
of new information, future developments or otherwise.
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Overview
Acquisitions and Divestitures
OnMay 2, 2022 , we completed the acquisition ofOmicEra Diagnostics GmbH ("OmicEra"). OmicEra is a life sciences company that provides us with a state-of-the-art proteomics lab inPlanegg, Germany . OmicEra combines its mass spectrometry-based proteome analysis technology with its in-house proteomics scientific expertise to discover more reliable and valuable protein biomarkers, which will expand our research and development capabilities. We expect this acquisition to advance future products including our blood-based colorectal cancer and multi-cancer early detection ("MCED") tests. OnAugust 2, 2022 , we completed a divestiture of assets related to our Oncotype DX Genomic Prostate Score® test toMDxHealth SA ("MDxHealth"). As part of the transaction, certain members of our dedicated urology teams will transition to MDxHealth, a commercial-stage precision diagnostics company focused solely on prostate cancer and other urologic diseases. To ensure a smooth transition for patients, we have agreed to provide certain transitional services to MDxHealth, including employee leasing and lab services. We believe this will allow our team to focus on the highest impact projects core to our vision.
Our Screening Tests
Colorectal Cancer Screening
Colorectal cancer is the second leading cause of cancer deaths inthe United States and the leading cause of cancer deaths inthe United States among non-smokers. Each year inthe United States there are approximately 150,000 new cases of colorectal cancer and 53,000 deaths. It is widely accepted that colorectal cancer is among the most preventable, yet least prevented cancers. Our Cologuard® test is a non-invasive stool-based DNA ("sDNA") screening test that utilizes a multi-target approach to detect DNA and hemoglobin biomarkers associated with colorectal cancer and pre-cancer. Upon approval by theU.S. Food and Drug Administration ("FDA") inAugust 2014 , our Cologuard test became the first and only FDA-approved sDNA non-invasive colorectal cancer screening test. Our Cologuard test is now indicated for average risk adults 45 years of age and older. Clinical Genetic Testing
We provide more than 5,000 predefined genetic tests for nearly all clinically relevant genes, additional custom panels, and comprehensive germline, whole exome ("PGxome®"), and whole genome ("PGnome®") sequencing tests.
Our Precision Oncology Tests
Our portfolio delivers actionable genomic insights to inform prognosis and
cancer treatment after a diagnosis. In breast cancer, the Oncotype DX Breast
Recurrence Score® test is the only test shown to predict the likelihood of
chemotherapy benefit as well as recurrence in invasive breast cancer. The
Oncotype DX® test is recognized as the standard of care and is included in all
major breast cancer treatment guidelines. The Oncomap™ ExTra test applies
comprehensive tumor profiling, utilizing whole exome and whole transcriptome
sequencing, to aid in therapy selection for patients with advanced, metastatic,
refractory, relapsed, or recurrent cancer. With an extensive panel of
approximately 20,000 genes and 169 introns, the Oncomap ExTra test is one of the
most comprehensive genomic (DNA) and transcriptomic (RNA) panels available
today. We enable patients to take a more active role in their cancer care and
makes it easy for providers to order tests, interpret results, and personalize
medicine by applying real-world evidence and guideline recommendations.
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International Business Background and Products
We commercialize our Oncotype® tests internationally through employees in
Canada , Japan and eight European countries, as well as through exclusive
distribution agreements. We have provided our Oncotype tests in more than 90
countries outside of the United States . We do not offer our Cologuard test or
COVID-19 testing outside of the United States .
Our research and development efforts are focused on developing new products and enhancing existing products to address unmet cancer needs and expand the clinical utility and addressable patient populations for our existing tests. We expect to advance liquid biopsy through biomarker discovery and validation in tissue, blood, or other fluids and to leverage recent business development activities to accelerate our leadership in earlier cancer detection and treatment guidance. We are pursuing the following opportunities: •Colorectal Cancer Screening. We are seeking opportunities to improve upon our Cologuard test's performance characteristics. InJanuary 2022 , we andMayo Foundation for Medical Education and Research ("Mayo") presented at theAmerican Society of Clinical Oncology Gastrointestinal Cancers Symposium findings from a study including prospectively collected samples that showed overall sensitivity of 95% for colorectal cancer at specificity of 92%. Subgroup analyses showed 83% sensitivity for high-grade dysplasia, the most dangerous pre-cancerous lesions, and 57% for all advanced pre-cancerous lesions. To establish the performance of an enhanced multi-target stool DNA test, we expect to enroll at least 20,000 patients 40 years of age and older in our multi-center, prospective BLUE-C study. The timing of any such enhancements to our Cologuard test is unknown and would be subject to FDA approval. We are also working to develop a blood-based screening test for colorectal cancer. •MCED Test Development. We are currently seeking to develop a blood-based, MCED test. InJanuary 2021 , we completed the acquisition ofThrive Earlier Detection Corporation ("Thrive"), a healthcare company dedicated to developing a blood-based, MCED test. An early version of Thrive's test has achieved promising results in a 10,000-patient, prospective, interventional study detecting 10 different types of cancer, including seven with no current recommended screening guidelines, with very few false positives. We intend to combine Thrive's expertise with our scientific capabilities, clinical organization, and commercial infrastructure to bring an accurate blood-based, multi-cancer early detection test to patients. •Minimal Residual Disease ("MRD")Test Development . We plan to offer both a tumor-informed and tumor-naive minimal residual disease test to help detect small amounts of tumor DNA that may remain in patients' blood after they have undergone initial treatment. Our goal is to support all patients in MRD and recurrence monitoring, whether there is access to tumor tissue to inform patient-specific biomarker targets or no access to tissue such that a predefined biomarker panel is used. We are currently evaluating different technological approaches for both test types. InJanuary 2021 , we acquired an exclusive license toThe Translational Genomics Research Institute ("TGen") proprietary Targeted Digital Sequencing ("TARDIS") technology to support development of our tumor-informed test. We have also published proof of concept data showing the ability of cancer-associated methylation markers to detect distantly recurrent colorectal cancer with promising performance. •Hereditary Cancer Testing. InDecember 2021 , we acquiredPreventionGenetics, LLC ("PreventionGenetics"), a DNA testing laboratory that provides more than 5,000 predefined genetic tests for nearly all clinically relevant genes, additional custom panels, and comprehensive germline whole exome and whole genome sequencing tests. We intend to use PreventionGenetics' capabilities to expand the use of hereditary cancer testing in theU.S. and globally. Research and development, which includes our clinical study programs, accounts for a material portion of our operating expenses. As we seek to enhance our current product portfolio and expand our product pipeline by developing additional cancer screening and diagnostic tests, we expect that our research and development expenditures will continue to increase.
COVID-19 Testing Business
In lateMarch 2020 , we began providing COVID-19 testing. We have partnered with various customers, including theState of Wisconsin Department of Health Services , to administer testing. Customers are responsible for employing trained personnel to collect specimens. Specimens are sent to our laboratory inMadison, Wisconsin , where we run the assay in our laboratories and provide test results to ordering providers. In light of the uncertainty surrounding the COVID-19 pandemic, we intend to periodically reassess offering COVID-19 testing. 40
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2022 Priorities
Our top priorities for 2022 are to (1) impact more lives, (2) advance new tests, and (3) take care of the people we serve.
Impact More Lives
We are committed to delivering critical answers to patients by getting more people tested with our laboratory testing services.
Advance New Tests
In 2022, we are focused on advancing new tests to provide better answers to patients, beginning with assessing risk for cancer through screening, and then changing the way cancer is detected and treated throughout the entire cancer journey. We plan to prioritize investments in clinical studies to support our three most important product development programs:(1) colon cancer screening tests, (2) multi-cancer early detection, and (3) minimal residual disease and recurrence testing.
Take Care of the People we Serve
We want to take even better care of everyone we serve. We plan to improve customer relations by delivering simple and smooth workflows, providing communication that is clear and easy to understand, and providing results that are fast and accurate. Our goal is to become a caring partner to answer questions and help people navigate what is a difficult time in their life.
Recent Developments and Trends
Impacts of COVID-19 and Current Inflationary Environment
The ongoing COVID-19 pandemic has affected many segments of the global economy, including the cancer screening and diagnostics industry. The pandemic and related precautionary measures have significantly impacted, and may continue to impact, our workforce, supply chain, and operating results including our testing volumes, revenues, margins, and cash utilization, among other measures. The level and nature of the disruption caused by COVID-19 is unpredictable, may be cyclical, and long-lasting and may vary from location to location. As a result of the pandemic, we continue to provide COVID-19 testing. Our Screening and Precision Oncology businesses were negatively impacted by the pandemic but have in large part recovered. Future outbreaks of COVID-19 and its variants could diminish patients' and our sales representatives' access to healthcare provider offices. Pandemic-related supply chain disruptions, whether caused by restrictions or slowdowns in shipping or logistics, increases in demand for certain goods used in our operations, or otherwise, could impact our operations. The inflationary environment has resulted in higher prices which have impacted our operations, including personnel-related costs. The severity and duration of the current inflationary environment remain uncertain and may continue to impact our operations. Cologuard Promotion InMarch 2022 , we announced our partnership withKatie Couric , award winning journalist and colorectal cancer advocate, to continue to highlight the urgent need for people to get screened. Entitled 'Mission to Screen,' the year-long marketing and social-media campaign will educate Americans on the importance of early detection, starting colon cancer screening at age 45 for average risk individuals, and the availability of multiple screening options. 'Mission to Screen' will be placed in broadcast and digital outlets. It includes a national television commercial, a website featuring interviews with real doctors and patients, and a social media initiative encouraging people to share their reasons to screen.
Results of Operations
We have generated significant losses since inception and, as ofJune 30, 2022 , we had an accumulated deficit of approximately$2.99 billion . We expect to continue to incur losses for the near future, and it is possible we may never achieve profitability. 41
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Revenue. Our revenue is primarily generated by our laboratory testing services
from our Cologuard, Oncotype, and COVID-19 tests.
Three Months Ended June 30,
Amounts in millions 2022 2021 Change
Screening $ 353.9 $ 263.9 $ 90.0
Precision Oncology 154.0 137.8 16.2
COVID-19 Testing 13.8 33.1 (19.3)
Total $ 521.6 $ 434.8 $ 86.8
Six Months Ended June 30,
Amounts in millions 2022 2021 Change
Screening $ 660.4 $ 504.3 $ 156.2
Precision Oncology 306.6 267.2 39.4
COVID-19 Testing 41.2 65.4 (24.2)
Total $ 1,008.2 $ 836.9 $ 171.3
The increase in Screening revenue, which primarily includes laboratory service
revenue from our Cologuard test, was mainly due to an increase in the number of
completed Cologuard tests and revenue generated from new products as a result of
our acquisition of PreventionGenetics in the fourth quarter of 2021. Improved
sales team productivity, our partnership with Katie Couric , more patients
rescreening with our Cologuard test, and first-time users in the 45 to 49 age
group contributed to the increase in completed Cologuard tests for the three and
six months ended June 30, 2022 . Relative recovery from the COVID-19 pandemic
contributed to sales team productivity for the three and six months ended
June 30, 2022 . The increase in Precision Oncology revenue, which primarily
includes laboratory service revenue from our global Oncotype products, was
mainly due to an increase in the number of completed Oncotype tests, both
domestically and internationally, and revenue generated from new products as a
result of our acquisition of Ashion Analytics, LLC ("Ashion") in the second
quarter of 2021. Continued adoption by node-positive patients following the
RxPONDER publication in the New England Journal of Medicine also contributed to
the increase in completed Oncotype tests for the three and six months ended
June 30, 2022 .
During the three and six months ended June 30, 2022 , revenue recognized from
changes in transaction price was $7.1 million and $11.3 million , respectively.
During the three and six months ended June 30, 2021 , there was a downward
adjustment to revenue from a change in transaction price of $14.7 million and
$13.0 million , respectively.
We expect continuing revenue growth for our Cologuard and Oncotype products
subject to seasonal variability. We would expect revenue from our COVID-19
testing to decline as the pandemic abates and alternative testing options become
more widely available. Our revenues are affected by the test volume of our
products, patient adherence rates, payer mix, the levels of reimbursement, our
order to cash operations, and payment patterns of payers and patients.
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Cost of sales (exclusive of amortization of acquired intangible assets). Cost of
sales includes costs related to inventory production and usage, shipment of
collection kits and tissue samples, royalties and the cost of services to
process tests and provide results to healthcare providers. The increase in cost
of sales for the three and six months ended June 30, 2022 is primarily due to an
increase in production costs and personnel expenses, which is primarily due to
an increase in completed Cologuard and Oncotype tests and the corresponding
increase in headcount to support the increase in tests completed. In addition,
our production costs and personnel expenses have risen as a result of the
inflationary environment discussed above. The increase was partially offset by a
reduction in the number of COVID-19 tests completed year over year. We expect
that cost of sales will generally continue to increase in future periods as a
result of an increase in our existing laboratory testing services and as we
launch our pipeline products. We also expect to see a corresponding increase in
personnel and support services associated with this growth.
Three Months Ended June 30,
Amounts in millions 2022 2021 Change
Production costs $ 84.0 $ 64.2 $ 19.8
Personnel expenses 40.4 29.7 10.7
Facility and support services 14.9 15.0 (0.1)
Stock-based compensation 5.4 4.4
1.0
Other cost of sales expenses (0.1) 0.7
(0.8)
Total cost of sales expense$ 144.6 $ 114.0 $ 30.6 Six Months Ended June 30, Amounts in millions 2022 2021 Change Production costs$ 157.3 $ 124.8 $ 32.5 Personnel expenses 79.4 60.7 18.7 Facility and support services 32.2 29.3
2.9
Stock-based compensation 9.7 8.5
1.2
Other cost of sales expenses 0.7 0.7 - Total cost of sales expense$ 279.3 $ 224.0 $ 55.3 43
-------------------------------------------------------------------------------- Table of Contents Research and development expenses. The decrease in research and development expenses for the three and six months endedJune 30, 2022 was primarily due to the$52.3 million incurred for the acquisition of the exclusive license to TARDIS inJanuary 2021 and the$33.1 million incurred for the acquisition ofPFS Genomics, Inc. , which was completed inJune 2021 . These acquisitions were accounted for as asset acquisitions, as opposed to theMay 2022 OmicEra acquisition which was accounted for as a business combination, and are further described in Note 16 of our condensed consolidated financial statements in this Quarterly Report on Form 10-Q. When excluding the impact of these asset acquisitions, research and development expenses increased by$33.0 million and$71.8 million for the three and six months endedJune 30, 2022 primarily due to an increase in BLUE-C and MCED clinical trial related expenses. In addition, personnel related costs increased due to an increase in headcount to support our ongoing clinical trials, which was partially offset by favorable stock-based compensation expense primarily driven by a decrease in expense associated with equity awards issued in connection with the Thrive acquisition. We expect that research and development expenses will generally continue to increase in future periods as we continue to invest to advance new tests. Three Months Ended June 30, Amounts in millions 2022 2021
Change
Direct research and development$ 42.8 $ 27.4 $ 15.4 Personnel expenses 35.9 22.9 13.0 Facility and support services 11.0 6.4 4.6 Stock-based compensation 9.9 12.4 (2.5) Professional fees 4.4 1.9 2.5 Other research and development 2.1 2.1 - Licensed technology acquisition - 33.1 (33.1) Total research and development expenses$ 106.1 $ 106.2 $ (0.1) Six Months Ended June 30, Amounts in millions 2022 2021 Change Direct research and development$ 86.9 $ 46.2 $ 40.7 Personnel expenses 71.4 44.6
26.8
Facility and support services 20.6 12.4 8.2 Stock-based compensation 19.5 27.2 (7.7) Professional fees 6.6 3.1 3.5 Other research and development 3.3 3.0
0.3
Licensed technology acquisition - 85.3
(85.3)
Total research and development expenses
$ (13.5) 44
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Sales and marketing expenses. The increase in sales and marketing expenses was
primarily due to an increase in direct marketing spend to support the future
growth of our products and increased personnel expenses and stock-based
compensation as a result of an increase in headcount, including the
approximately 400 former Pfizer, Inc. ("Pfizer") sales representatives that were
onboarded in the third quarter of 2021. This increase was partially offset by a
decrease in professional and legal fees primarily due to a decrease in expenses
incurred related to our promotion agreement with Pfizer, which was amended in
the fourth quarter of 2021 as further discussed in Note 11 of our condensed
consolidated financial statements included in this Quarterly Report on Form
10-Q. We expect that sales and marketing expenses will generally continue to
increase in future periods to support the expected future growth of our
Cologuard, Oncotype, and pipeline products. We expect sales and marketing
expenses to decrease as a percentage of revenue over time.
Three Months Ended June 30,
Amounts in millions 2022 2021 Change
Personnel expenses $ 114.4 $ 84.6 $ 29.8
Direct marketing costs 57.4 47.2 10.2
Stock-based compensation 18.0 13.7 4.3
Facility and support services 15.2 18.0 (2.8)
Professional and legal fees 10.7 30.8 (20.1)
Other sales and marketing expenses 0.2 0.5 (0.3)
Total sales and marketing expenses$ 215.9 $ 194.8 $ 21.1 Six Months Ended June 30, Amounts in millions 2022 2021 Change Personnel expenses$ 237.3 $ 169.6 $ 67.7 Direct marketing costs 121.7 88.6 33.1 Stock-based compensation 33.1 26.8 6.3 Professional and legal fees 28.9 58.5 (29.6) Facility and support services 25.7 35.8 (10.1) Other sales and marketing expenses 1.4 1.7
(0.3)
Total sales and marketing expenses$ 448.1 $ 381.0 $ 67.1 45
-------------------------------------------------------------------------------- Table of Contents General and administrative expenses. The decrease in general and administrative expenses for the six months endedJune 30, 2022 was primarily due to lower acquisition and integration related costs in the three and six months endedJune 30, 2022 , as compared to the prior year period. We incurred$12.9 million and$131.3 million in acquisition and integration related costs during the three and six months endedJune 30, 2021 as part of our acquisitions completed during the year, which primarily consisted of integration related stock-based compensation and professional and legal fees incurred. Acquisition and integration related costs were not significant for the three and six months endedJune 30, 2022 . When excluding the impact of acquisition and integration related costs, personnel expenses increased due to an increase in headcount to support our growth in our operations and from our recent acquisitions. In addition, facility and support services increased to support the build out of our facilities and our increased headcount. The decrease in other general and administrative expenses is primarily due to gains of$25.1 million and$51.8 million recorded during the three and six months endedJune 30, 2022 as a result of the change in fair value of our outstanding contingent consideration as further described in Note 7 of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. We expect significant leverage in general and administrative expenses going forward, but expenses will generally continue to increase in future periods due to an increase in headcount that will be necessary to support the growth in our existing and pipeline products. Three Months Ended June 30, Amounts in millions 2022 2021 Change Personnel expenses$ 98.7 $ 73.7 $ 25.0 Facility and support services 34.9 19.9 15.0 Professional and legal fees 30.1 29.8 0.3 Stock-based compensation 25.6 25.8 (0.2) Other general and administrative (7.6) 18.4 (26.0) Total general and administrative expenses$ 181.7 $ 167.6 $ 14.1 Six Months Ended June 30, Amounts in millions 2022 2021 Change Personnel expenses$ 199.2 $ 146.2 $ 53.0 Facility and support services 66.6 35.2 31.4 Professional and legal fees 57.0 65.1 (8.1) Stock-based compensation 49.1 157.2 (108.1) Other general and administrative (20.5)
31.7 (52.2)
Total general and administrative expenses
Amortization of acquired intangible assets. Amortization of acquired intangible assets increased to$26.4 million for the three months endedJune 30, 2022 compared to$23.8 million for the three months endedJune 30, 2021 . Amortization of acquired intangible assets increased to$51.0 million for the six months endedJune 30, 2022 , compared to$47.0 million for the six months endedJune 30, 2021 . The increase in amortization of acquired intangible assets was due to the amortization of intangible assets acquired as part of our acquisitions of Ashion inApril 2021 , PreventionGenetics inDecember 2021 , and OmicEra inMay 2022 . Intangible asset impairment charge. Intangible asset impairment charge was$6.6 million for the three and six months endedJune 30, 2022 compared to zero for the three and six months endedJune 30, 2021 . The intangible asset impairment charge recorded during the three and six months endedJune 30, 2022 related to the impairment of the acquired developed technology intangible asset acquired as part of the acquisition ofParadigm Diagnostics, Inc. ("Paradigm"). 46 -------------------------------------------------------------------------------- Table of Contents Investment income (expense), net. For the three months endedJune 30, 2022 , we had net investment expense of$3.7 million , compared to net investment income of$3.4 million for the three months endedJune 30, 2021 . For the six months endedJune 30, 2022 , we had net investment expense of$5.2 million , compared to net investment income of$34.6 million for the six months endedJune 30, 2021 . The net investment expense for the three and six months endedJune 30, 2022 was primarily due to losses recorded on our equity securities. Net investment income for the six months endedJune 30, 2021 was primarily due to the realized gain of$30.5 million that was recorded on our preferred stock investment in Thrive at closing inJanuary 2021 , which represented the adjustment to our historical investment to its fair value prior to our acquisition of Thrive. Our acquisition of Thrive is further described in Note 19 of our most recently filed Form 10-K for the year endedDecember 31, 2021 . Interest expense. Interest expense decreased to$4.5 million for the three months endedJune 30, 2022 compared to$4.7 million for the three months endedJune 30, 2021 . Interest expense recorded from our outstanding convertible notes totaled$4.0 million during each of the three months endedJune 30, 2022 and 2021. Interest expense decreased to$9.0 million for the six months endedJune 30, 2022 compared to$9.3 million for the six months endedJune 30, 2021 . Interest expense recorded from our outstanding convertible notes totaled$8.0 million during each of the six months endedJune 30, 2022 and 2021. The convertible notes are further described in Note 9 of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. Income tax benefit (expense). Income tax benefit was$1.8 million for the three months endedJune 30, 2022 compared to an expense of$4.0 million for the three months endedJune 30, 2021 . Income tax benefit decreased to$3.8 million for the six months endedJune 30, 2022 compared to$238.8 million for the six months endedJune 30, 2021 . This decrease in income tax benefit is primarily due to an income tax benefit of$239.2 million recorded during the six months endedJune 30, 2021 as a result of the change in the deferred tax asset valuation allowance resulting from the acquisition of Thrive.
Liquidity and Capital Resources
Overview
We have incurred losses and negative cash flows from operations since our inception, and have historically financed our operations primarily through public offerings of our common stock and convertible debt and through revenue generated by the sale of our laboratory testing services. We expect our operating expenditures to continue to increase to support future growth of our laboratory testing services, as well as an increase in research and development and clinical trial costs to support the advancement of our pipeline products and bringing new tests to market. We expect that cash and cash equivalents and marketable securities on hand atJune 30, 2022 , along with cash flows generated through our operations, will be sufficient to fund our current operations for at least the next twelve months based on current operating plans. We have access to a revolving line-of-credit (the "Revolver") of up to$150.0 million , which expires inNovember 2023 . The Revolver is collateralized by certain marketable securities which must continue to maintain a minimum market value of$150.0 million . During the fourth quarter of 2021,PNC Bank, National Association issued a letter of credit of$2.9 million , which reduced the amount available for cash advances under the line of credit to$147.1 million . As ofJune 30, 2022 , we had not drawn any funds under the Revolver. In addition to the Revolver, we have access to$150.0 million under an accounts receivable securitization facility (the "Securitization Facility"), which expires inJune 2024 . The amount that we may borrow is determined based on the amount of qualifying accounts receivable at a given point in time. The Securitization Facility is collateralized by our accounts receivables. As ofJune 30, 2022 , we had$50.0 million outstanding under the Securitization Facility, which is the minimum amount that we must borrow under the terms of the Securitization Facility. The Revolver and Securitization Facility are further described in Note 8 of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. We may raise additional capital to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons. If we are unable to obtain sufficient additional funds to enable us to fund our business plans and strategic investments, our results of operations and financial condition could be materially adversely affected, and we may be required to delay the implementation of our plans or otherwise scale back our operations. There can be no certainty that we will ever be successful in generating sufficient cash flow from operations to achieve and maintain profitability and meet all of our obligations as they come due. 47 -------------------------------------------------------------------------------- Table of Contents Cash,Cash Equivalents and Marketable Securities
As of
The majority of our investments in marketable securities consist of fixed income
investments, and all are deemed available-for-sale. The objectives of this
portfolio are to provide liquidity and safety of principal while striving to
achieve the highest rate of return. Our investment policy limits investments to
certain types of instruments issued by institutions with investment grade credit
ratings and places restrictions on maturities and concentration by type and
issuer.
Cash Flows
Six Months Ended June 30,
Amounts In millions 2022 2021
Net cash used in operating activities $ (234.7) $ (36.9)
Net cash provided by (used in) investing activities 67.2 (1,111.3)
Net cash provided by financing activities 66.1 20.6
Operating activities
The increase in cash used in operating activities for the six months ended June
30, 2022 was primarily due to an increase in our net loss. The increase in our
net loss was primarily due to an increase in expenses incurred to process our
tests and an increase in operating expenses incurred to support the growth of
our operations as further discussed above. The increase in cash used was also
due to timing of payments on our accounts payable and accrued expenses,
including payments made during the six months ended June 30, 2022 under our
promotion agreement with Pfizer and for certain personnel related liabilities
that were accrued for as of December 31, 2021 . This was partially offset by an
increase in revenue, which was driven by an increase in completed Cologuard and
Oncotype tests.
Investing activities
Cash provided by investing activities for the six months ended June 30, 2022 ,
was primarily due to a net cash inflow from purchases, sales, and maturities of
marketable securities of $190.2 million , which was partially offset by purchases
of property and equipment of $96.9 million and investments in privately held
companies of $26.7 million . Cash used in investing activities for the six months
ended June 30, 2021 was primarily due to a net cash outflow from purchases,
sales, and maturities of marketable securities of $589.9 million , our
acquisition of Thrive of $343.2 million , our acquisition of Ashion of
$72.3 million , our asset acquisition of PFS Genomics of $33.1 million , our
TARDIS license asset acquisition of $25.0 million , purchases of property and
equipment of $37.5 million , and investments in privately held companies of
$10.0 million .
Financing activities
The cash provided by financing activities during the six months endedJune 30, 2022 consisted of proceeds of$50.0 million from our accounts receivable securitization facility,$15.5 million in connection with our employee stock purchase plan, and$5.0 million from the exercise of stock options, which was partially offset by cash outflows of$4.4 million for other financing activities. The cash provided by financing activities for the six months endedJune 30, 2021 consisted of proceeds of$11.6 million from the exercise of stock options and$12.0 million in connection with our employee stock purchase plan, which was partially offset by$3.1 million for other financing activities.
Material Cash Requirements
A discussion of our material cash requirements as ofDecember 31, 2021 was provided in the Management's Discussion and Analysis of Financial Condition and Results of Operation of our 2021 Form 10-K. Other than the Securitization Facility described above, there were no material changes outside the ordinary course of our business in our specified material cash requirements during the six months endedJune 30, 2022 .
As of
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Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in theU.S. ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that are believed to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in Note 1 of our financial statements included in our 2021 Form 10-K, as well as our Management's Discussion and Analysis of Financial Condition and Results of Operations on our 2021 Form 10-K, we believe that the following judgments are most critical to aid in fully understanding and evaluating our reported financial results. Revenue Recognition. We recognize revenues when we release a result to the ordering healthcare provider, in an amount that reflects the consideration we expect to collect in exchange for those services. The amount of revenue we recognize is based on the established billing rates less contractual and other adjustments, which yields the unconstrained amount that we expect to ultimately collect. We determine the amount we expect to ultimately collect using historical collections, established reimbursement rates, and other adjustments. Any changes in these inputs would ultimately impact the amount of revenue recognized during the period. The expected amount is typically lower than, if applicable, the agreed-upon reimbursement amount due to several factors, such as the amount of any patient co-payments, out-of-network payers, the existence of secondary payers, and claim denials. The consideration derived from our contracts is fixed when we contract with a direct bill payer. Our ability to collect is not contingent on the customer's ability to collect through their downstream billing efforts. In the case of some of our agreements, the right to bill and collect exists prior to the receipt of a specimen and release of a test result to the ordering healthcare provider, which results in deferred revenue. The deferred revenue balance is generally relieved upon the release of the applicable patient's test result to the ordering healthcare provider or as of the date the customer has surpassed the window of time in which they are able to exercise their rights for testing services. We believe these points in time represent our fulfillment of our obligations to the customer. The quality of our billing operations, most notably those activities that relate to obtaining the correct information in order to bill effectively for services provided, directly impacts the collectability of our receivables and revenue estimates. As such, we continually assess the state of our order to cash operations in order to identify areas of risk and opportunity that allow us to appropriately estimate receivables and revenue. Upon ultimate collection, the aggregate amount received from payers and patients where reimbursement was estimated is compared to previous collection estimates and, if necessary, the transaction price is adjusted. Finally, should we later determine the judgments underlying estimated collections change, our financial results could be negatively impacted in future quarters. Tax Positions. We record a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We compute our provision for income taxes based on the statutory tax rates and tax planning opportunities available to us in the various jurisdictions that we operate. Judgment is required in evaluating our tax positions and determining our annual tax provision.
We have incurred significant losses since our inception and due to the uncertainty of the amount and timing of future taxable income, it may be necessary to record an allowance to reduce the tax assets we have recognized.
Management has determined that a valuation allowance is necessary to reduce the
tax assets to the amount that is more likely than not to be realized. Based on
this determination, we continue to maintain a full valuation allowance against
our deferred tax assets. Due to the existence of the valuation allowance, future
changes in our unrecognized tax benefits will not impact our effective tax rate.
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Business Combinations and Asset Acquisitions. We account for acquired businesses
using the acquisition method of accounting, which requires that the assets
acquired and liabilities assumed be recorded at the date of acquisition at their
respective fair values. Goodwill is the residual after allocating the purchase
price to net assets acquired, unless the transaction is an asset acquisition in
which the excess is allocated to acquired assets on a relative fair value basis.
Determining the fair value of identifiable assets and liabilities, particularly
intangible assets and contingent consideration, requires management to make
significant judgements and estimates.
As a result of the acquisition of OmicEra, we identified a developed technology
intangible asset, which we determined to have a fair value of $10.0 million . Key
assumptions used to value our finite lived intangible assets acquired through
business combinations include projected revenue growth, projected gross margin
and operating expenses, discount rates, terminal growth rate, and other factors.
We believe that the estimates applied are based on reasonable assumptions, but
the estimates are inherently uncertain. As a result, the actual results may
differ from the assumptions and judgments used to determine fair value of the
assets acquired, which could result in material impairment charges in the
future. Determining the useful life of the developed technology also requires
judgment and actual useful life may differ.
In-process research and development ("IPR&D") assets may be identified as a
result of business combinations. There are major risks and uncertainties
associated with IPR&D due to the regulatory approvals needed, which rely on the
success of clinical trials that demonstrate product effectiveness. Key
assumptions used to calculate the fair value of the IPR&D asset included inputs
such as projected revenues, gross margin, required rate of return, tax rate,
probability of commercial success, and obsolescence factor. We believe that the
estimates applied are based on reasonable assumptions, but the estimates are
inherently uncertain. As a result, the eventual realized value of the IPR&D
project may vary from its fair value at the date of acquisition, and material
IPR&D impairment charges may occur in future periods.
Business Combinations may include contingent consideration to be paid based on
the occurrence of future events, such as the achievement of certain development,
regulatory and sales milestones. Contingent consideration is a financial
liability recorded at fair value at the acquisition date. The estimate of fair
value contains uncertainties as it involves judgement about the likelihood and
timing of achieving milestones as well as the present-value factor. We recorded
a contingent consideration liability of $4.6 million as a result of the
acquisition of OmicEra
Remeasurement of Contingent Consideration. We remeasure the fair value of
outstanding contingent consideration liabilities at each reporting period. The
estimate of fair value contains uncertainties as it involves judgement about the
likelihood and timing of achieving milestones as well as the present-value
factor. A change in the probability of success assumption could have a material
impact on the estimated fair value.
Impairment of Indefinite-Lived Assets. We test indefinite-lived assets for
impairment on an annual basis during the fourth quarter, or more frequently if
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Based on the qualitative assessment, if it is
determined that the fair value of indefinite-lived intangible assets is more
likely than not to be less than its carrying amount, the fair value will be
calculated and compared with its carrying amount and an impairment charge will
be recognized for the amount that the carrying value exceeds the fair value.
Determining whether impairment indicators exist and estimating the fair value of
our indefinite-lived intangible assets if necessary for impairment testing
requires significant judgment. Qualitative factors considered in this assessment
include industry and market conditions, overall financial performance, and other
relevant events and factors. We also perform our annual IPR&D assessment using a
qualitative assessment. Qualitative factors considered in this assessment
include industry and market conditions, financial and strategic factors, the
status of product development, and the consideration of legal, competitive,
regulatory, and technical risks. There were no events or changes in
circumstances that indicated that the carrying amount of our indefinite-lived
assets may not be recoverable six months ended June 30, 2022 .
Impairment of Long-Lived Assets. We evaluate the fair value of long-lived
assets, which include property, plant and equipment, finite-lived intangible
assets, and investments in privately held companies, for impairment whenever
events or changes in circumstances indicate that the carrying amounts of the
assets may not be fully recoverable. The review of qualitative factors requires
significant judgement. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. We
recorded an impairment charge of $6.6 million during the three and six months
ended June 30, 2022 related to the acquired developed technology intangible
asset acquired as part of the acquisition of Paradigm. We utilized the income
approach to measure the fair value of the acquired developed technology, which
required management to make estimates including revenue projections, estimated
cash flows and discount rate.
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See Note 1 in the Notes to Condensed Consolidated Financial Statements for the discussion of Recent Accounting Pronouncements.
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