The following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and the
related notes thereto included elsewhere in this Annual Report on Form 10-K. We
have omitted discussion of 2017 results where it would be redundant to the
discussion previously included in Management's Discussion and Analysis of
Financial Condition and Results of Operations on Form 10-K for the year ended
December 31, 2018, which has been filed with the SEC.
Overview
Exact Sciences Corporation (together with its subsidiaries, "Exact," "we," "us,"
"our" or the "Company") is a leading global cancer diagnostics company. We have
developed some of the most impactful brands in cancer diagnostics, and we are
currently working on the development of additional tests for other types of
cancer, with the goal of bringing new innovative cancer tests to patients
throughout the world.
On November 8, 2019, we completed the combination with Genomic Health, Inc.
("Genomic Health"), a leading provider of genomic-based diagnostic tests that
help to optimize cancer care, and its Oncotype IQ Genomic Intelligence Platform
comprised of its flagship line of Oncotype DX gene expression tests.
Our Clinical Laboratory and Manufacturing Facilities
We process our Cologuard test at two state-of-the-art, highly automated lab
facilities in Madison, Wisconsin that are certified pursuant to federal Clinical
Laboratory Improvement Amendments ("CLIA") and College of American Pathologists
("CAP") requirements to process Cologuard tests and provide patient results. Our
total lab capacity at both facilities is approximately seven million Cologuard
tests per year, with the opportunity to add additional capacity, if needed.
We currently manufacture the Cologuard test in a facility in Madison, Wisconsin.
As we expand the commercialization of Cologuard, we believe it will be necessary
to expand our manufacturing capacity. Accordingly, we are in the process of
building an additional manufacturing facility which we expect to receive FDA
approval for commercial production in 2020. We are committed to manufacturing
and providing medical devices and related products that meet customer
expectations and applicable regulatory requirements. We adhere to manufacturing
and safety standards required by federal, state, and local laws and regulations
and operate our manufacturing facilities under a quality management system. We
purchase certain components for our Cologuard test from third-party suppliers
and manufacturers.
All internally developed Oncotype DX tests for domestic and international
patients are currently processed in our clinical reference laboratory facilities
in Redwood City, California, which is accredited under CLIA, and certified by
CAP. The Oncotype DX AR-V7 Nucleus Detect test, which was designed and validated
by Epic Sciences, Inc. ("Epic Sciences"), is performed in its CLIA-accredited,
CAP-certified clinical reference laboratory facility in San Diego, California.
Our current clinical laboratory processing capacity in Redwood City is
approximately 175,000 tests annually, and it has significant expansion capacity
with incremental increases in laboratory personnel and equipment, including
expansion capacity for laboratory facilities. We believe that we currently have
sufficient capacity to process all of our tests. We have recently completed the
construction of an additional laboratory facility on our Redwood City,
California campus that will increase capacity for sample processing and research
and development. We may require additional facilities in the future as we expand
our business and believe that additional space, when needed, will be available
on commercially reasonable terms.
                                       57
--------------------------------------------------------------------------------
  Table of Contents
How We Recognize Revenue
We recognize revenue on the delivery of a test result to an ordering healthcare
provider for tests performed based on our estimate of the amount that we will
ultimately collect at the time delivery is complete. The amount of revenue we
recognize is based on the established billing rates less contractual and other
adjustments, which yields the constrained amount that we expect to ultimately
collect. We determine the amount we expect to ultimately collect on a per-payer
or per-agreement basis, using historical collections, established reimbursement
rates and other adjustments. 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. 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 contractual
allowance is adjusted. Finally, should we later determine the judgments
underlying estimated collections change, our financial results could be
negatively impacted in future quarters.
Acquisitions
On November 8, 2019, we completed the combination with Genomic Health, a leading
provider of genomic-based diagnostic tests that help to optimize cancer care. As
part of the combination, we acquired all of the outstanding equity interest of
the company for an aggregate purchase price of $2.5 billion through a
combination of cash and equity.
2020 Priorities
Our top priorities for 2020 are to (1) deliver more answers, (2) enhance
customer experience, and (3) power new growth.
Deliver More Answers
We want to focus on growing the Cologuard and Oncotype DX brands in order to
impact more patients' lives. We are also looking for potential opportunities for
lowering the cost of providing Cologuard and Oncotype DX.
Enhance Customer Experience
Another priority for 2020 is to improve customer satisfaction. In addition, we
are evaluating ways that we can grow patient compliance and re-screening rates
with Cologuard, including ways that we might make Cologuard even easier for
patients to use.
We are also seeking opportunities to increase the electronic order rate for our
tests, as well as simplify the claims process.
Power New Growth
We launched the BLUE-C study, a multi-center, prospective study, at the end of
2019 and are currently enrolling patients, 40 years of age and older who are
scheduled for a colorectal cancer ("CRC") screening colonoscopy. The study is
part of an effort to increase specificity of Cologuard, while maintaining its
high level of sensitivity. The launch of this study comes after promising
research from our collaboration with Mayo Foundation for Medical Education and
Research ("Mayo") identified new methylation and protein markers to detect
colorectal cancer and advanced adenomas with high accuracy. We expect to
complete this study in 2021. We cannot be certain that this study will be
successful or lead to commercially successful improvements to Cologuard or new
products.
We are also continuing to focus our research and development efforts on building
a pipeline of potential future products and services with a focus on blood or
other fluid-based ("liquid biopsy") tests. We will continue to advance liquid
biopsy through biomarker discovery and validation in tissue, blood, or other
fluids. We have identified proprietary biomarkers for several cancers, including
liver cancer and pancreatic cancer. Through our collaboration with Mayo, we have
successfully performed validation studies on tissue, blood, or other fluid
samples for many of the deadliest cancers.
We are currently seeking to develop a blood-based biomarker test to serve as an
alternative to ultrasound and AFP for use in hepatocellular carcinoma ("HCC")
testing. HCC is the most common type of liver cancer. Our goal is to develop a
patient-friendly test that performs better than the current standard of care. We
are finalizing our HCC test development and plan to make the test available in
the second half of 2020.
                                       58
--------------------------------------------------------------------------------
  Table of Contents
The American Cancer Society ("ACS") estimates that liver cancer will be
diagnosed in 43,000 Americans and cause 30,000 deaths in 2020, approximately 90
percent of which will be hepatocellular carcinoma ("HCC"). Incidence and
mortality rates are both increasing at approximately 3 percent per year. People
who have been diagnosed with cirrhosis of the liver or Hepatitis B are at high
risk of developing HCC. Evidence shows that HCC testing in these high-risk
groups leads to earlier detection and improved outcomes. The National
Comprehensive Cancer Network ("NCCN") and American Association for the Study of
Liver Diseases ("AASLD") guidelines recommend that these two groups be tested
for HCC every six months using ultrasound and the blood-based biomarker
alpha-fetoprotein ("AFP"). However, ultrasound and AFP are documented to have
poor sensitivity for early stage cancer, which is the primary target of testing.
In November 2019, we released the results of a 443-patient study which
demonstrated 80% sensitivity at 90% specificity with a novel combination of six
blood-based biomarkers for HCC. The study also showed 71% sensitivity for
early-stage HCC at 90% specificity. The study compared performance to the AFP
test, which demonstrated 45% sensitivity at 90% specificity for early-stage HCC.
Our HCC test has been granted Breakthrough Device designation by the FDA. The
agency's Breakthrough Devices program expedites development, assessment, and
review processes to provide patients and healthcare providers with timely access
to new technologies.
We are also focusing on next generation technologies. When the presence of
tumor-derived DNA in blood or urine is high and persists or increases over time,
the cancer is likely growing and a new course of treatment may be appropriate.
We plan on monitoring this tumor-derived DNA through a variety of technologies
to expand our focus beyond early-stage treatment decision support toward
patients with later-stage disease to help guide therapeutic choices, monitor
progression and response to therapeutics, and monitor disease recurrence. We may
pursue additional research and development opportunities and leverage our
existing and future collaborations using other analytes such as circulating
tumor cells ("CTCs"), RNA, and proteins. Additionally, we may also use a number
of other technologies across our various development programs and to implement
our products. While early-stage cancer continues to be our main focus, we
believe we also have an opportunity to expand our business further along the
patient's cancer journey, both through our research and development process and
strategic collaborations.
Results of Operations
Our top priorities for 2019 were to (1) power the partnership by executing on
the Pfizer partnership in order to grow the Cologuard brand and get more
patients screened, (2) enhance Cologuard through expansion of Cologuard's
indication to people between the ages of 45 and 49 who are at average risk for
colorectal cancer, and seek opportunities to improve upon Cologuard's
performance characteristics, and (3) advance liquid biopsy through biomarker
discovery and validation in tissue, blood, or other fluids.
During 2019, we generated total revenue of $876.3 million compared to
$454.5 million in 2018. In 2019, we completed approximately 1.7 million
Cologuard tests, and generated $810.1 million of screening revenue compared to
2018 when we completed 0.9 million tests and generated $454.5 million of
screening revenue. The increase in revenues and tests completed from the prior
year was primarily driven by sales force execution, our patient advertising
campaign, and our partnership with Pfizer. As of December 31, 2019,
approximately 197,000 healthcare providers have ordered Cologuard compared to
approximately 147,000 healthcare providers as of December 31, 2018. Subsequent
to the combination with Genomic Health, we completed approximately 23,000
Oncotype DX tests and generated $66.2 million of laboratory service revenue from
global Oncotype DX products.
During 2019, we made investments in our technical systems, lab capacity, and our
sales force in order to enhance our infrastructure and position our operations
and processes for continued growth. Additionally, we continued to focus on cost
containment throughout the business which, along with the increase in test
volume, helped drive improvements in our gross margin.
In 2019, we continued to invest in research and development and focused on the
development of additional cancer tests as outlined in the "Power New Growth"
section above.  We also obtained FDA approval to expand Cologuard's indication
to include individuals between the ages of 45 and 49 who are at average risk for
colorectal cancer.
                                       59
--------------------------------------------------------------------------------
  Table of Contents
In order to support the commercialization of Cologuard and to achieve our goals
for 2019, our selling, general, and administrative costs increased by
$310.3 million during the year. In addition, our efforts in 2019 to develop our
pipeline products and improvements to Cologuard led to an increase in research
and development costs of $72.4 million during the year. We ensured that we were
well capitalized to meet our future goals by raising $729.5 million, net of
issuance costs, through an underwritten public offering of convertible notes
completed in March 2019 and finished the year with $323.7 million in cash, cash
equivalents, and marketable securities.
Comparison of the years ended December 31, 2019 and 2018
Revenue. Our revenue is primarily generated by our laboratory testing services,
from our Cologuard and Oncotype DX tests. For the years ended December 31, 2019
and 2018, we generated screening revenue of $810.1 million and $454.5 million,
respectively. Screening includes laboratory service revenue from Cologuard and
revenue from Biomatrica products. The increase in revenue was primarily due to
an increase in completed Cologuard tests during the current period. Subsequent
to the combination with Genomic Health in November 2019, we generated precision
oncology revenue of $66.2 million. Precision oncology includes laboratory
service revenue from global Oncotype DX products.
Our cost structure. Our selling, general, and administrative expenses consist
primarily of non-research personnel salaries, office expenses, professional
fees, sales and marketing expenses incurred in support of our commercialization
efforts and non-cash stock-based compensation.
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.
We expect that gross margin for our services will continue to fluctuate and be
affected by the test volume of our products, our operating efficiencies, patient
adherence rates, payer mix, the levels of reimbursement, and payment patterns of
payers and patients.
Cost of sales (exclusive of amortization of acquired intangibles). Cost of sales
increased to $216.7 million for the year ended December 31, 2019 from $116.6
million for the year ended December 31, 2018. The increase in cost of sales is
primarily due to the increases in completed Cologuard and Oncotype DX tests.
Amounts in millions                    2019          2018         Change
Production costs                    $ 144.8       $  81.4       $  63.4
Personnel expenses                     42.3          20.3          22.0

Facility and support services 21.8 11.1 10.7 Stock-based compensation

                5.8           3.5           2.3
Other cost of sales expenses            2.0           0.3           1.7

Total cost of sales expense $ 216.7 $ 116.6 $ 100.1




Research and development expenses. Research and development expenses increased
to $139.7 million for the year ended December 31, 2019 compared to $67.3 million
for the year ended December 31, 2018. The increase in research and development
expenses was primarily due to an increase in direct research and development
activities, which includes clinical studies, for our pipeline and improvements
to Cologuard, as well as personnel costs due to increased headcount.

Amounts in millions                                2019         2018

Change


Direct research and development expenses        $  69.9       $ 30.5       $ 39.4
Personnel expenses                                 37.0         19.3         17.7
Stock-based compensation                           17.2         10.2          7.0
Other research and development expenses            10.8          4.2

6.6


Professional and legal fees                         4.8          3.1

1.7

Total research and development expenses $ 139.7 $ 67.3 $ 72.4


                                       60
--------------------------------------------------------------------------------
  Table of Contents
General and administrative expenses. General and administrative expenses
increased to $352.5 million for the year ended December 31, 2019 compared to
$178.0 million for the year ended December 31, 2018. The increase in general and
administrative expenses was primarily to support the overall growth of the
Company. In addition, we incurred $62.8 million in acquisition and integration
related costs as part of our combination with Genomic Health.

Amounts in millions                                2019          2018         Change
Personnel expenses                              $ 136.5       $  67.8       $  68.7
Professional and legal fees                        85.3          30.9          54.4
Stock-based compensation                           64.2          34.4          29.8
Facility and support services                      62.6          37.6          25.0
Other general and administrative                    3.9           7.3

(3.4)

Total general and administrative expenses $ 352.5 $ 178.0 $ 174.5

Sales and marketing expenses. Sales and marketing expenses increased to $385.2 million for the year ended December 31, 2019 compared to $249.4 million for the year ended December 31, 2018. The increase in sales and marketing expenses was a result of hiring additional sales and marketing personnel, increasing our advertising and patient marketing efforts for our tests, and expenses incurred related to our Promotion Agreement with Pfizer as further described in Note 3 of our consolidated financial statements.



Amounts in millions                                   2019          2018

Change

Direct marketing costs and professional fees $ 184.6 $ 127.7

   $  56.9
Personnel expenses                                   166.7         105.6          61.1
Stock-based compensation                              21.3          12.4           8.9
Other sales and marketing expenses                    12.6           3.7

8.9


Total sales and marketing expenses                 $ 385.2       $ 249.4

$ 135.8




Amortization of acquired intangibles. Amortization of acquired intangibles
increased to $16.0 million for the year ended December 31, 2019 compared to $2.5
million for the year ended December 31, 2018. This increase in amortization was
due to the Genomic Health combination.
Investment income. Investment income increased to $26.5 million for the year
ended December 31, 2019 compared to $21.2 million for the year ended
December 31, 2018. This increase in investment income was due to realized gains
generated from the sale of marketable securities and an increase in the average
rate of return on investments due to an increase in market interest rates for
the year ended December 31, 2019 when compared to the same period in 2018.
Interest expense. Net interest expense increased to $61.6 million for the year
ended December 31, 2019 compared to $36.8 million for the year ended
December 31, 2018. Interest expense recorded from our outstanding convertible
notes totaled $49.6 million and $36.4 million for the years ended December 31,
2019 and 2018, respectively. In addition to the $49.6 million in interest
expense recorded on outstanding convertible notes, an additional $10.6 million
was recorded as a result of the settlement of convertible notes, as further
described in Note 9 of our consolidated financial statements included in this
Annual Report. Of the $49.6 million and $36.4 million in interest expense
recorded on outstanding convertible notes, $42.3 million and $28.6 million of
interest expense relates to amortization of debt discount and debt issuance
costs for the years ended December 31, 2019 and 2018, respectively. The
remaining $8.8 million and $8.2 million of interest expense for the years ended
December 31, 2019 and 2018, respectively, relates to the stated interest that
was paid in cash during the years on our outstanding convertible notes and
construction loan.
Income tax benefit (expense). Income tax benefit increased to $184.9 million for
the year ended December 31, 2019 compared to an expense of $0.1 million for the
year ended December 31, 2018. This increase in income tax benefit is primarily
due to an income tax benefit of $185.1 million recorded as a result of a change
in deferred tax asset valuation allowance resulting from the Genomic Health
combination.
                                       61
--------------------------------------------------------------------------------
  Table of Contents
Liquidity and Capital Resources
We have financed our operations since inception primarily through public
offerings of our common stock and convertible debt and through revenue generated
by the sale of Cologuard, and since the completion of our Genomic Health
combination, of Oncotype DX tests. As of December 31, 2019, we had approximately
$177.3 million in unrestricted cash and cash equivalents and approximately
$146.4 million in marketable securities.
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.
Net cash used in operating activities was $115.0 million, $69.3 million, and
$71.7 million for the years ended December 31, 2019, 2018 and 2017,
respectively. The principal use of cash in operating activities for each of the
years ended December 31, 2019, 2018 and 2017 was to fund our net loss.
Net cash used in investing activities was $121.1 million, $781.9 million, and
$160.8 million for the years ended December 31, 2019, 2018, and 2017,
respectively. The decrease in cash used in investing activities for the year
ended December 31, 2019 when compared to the same period in 2018 and 2017 was
primarily the result of the timing of purchases and maturities of marketable
securities following our convertible debt offerings and our combination with
Genomic Health. Excluding the impact of purchases and maturities of marketable
securities, net cash used in investing activities was $1.1 billion,
$168.6 million, and $75.2 million for the years ended December 31, 2019, 2018,
and 2017, respectively. The increase in investing activities from 2018 to 2019,
excluding the impact of purchases and maturities of marketable securities, was
primarily due to the cash utilized for our combination with Genomic Health of
$973.9 million and an increase in purchases of property and equipment during the
year ended December 31, 2019 consisting primarily of increased laboratory
equipment purchases, computer equipment and computer software purchases, and
assets under construction in order to continue to scale-up our operations for
future expected growth of our Cologuard business. Additionally, the increase for
2018 was driven by the acquisition of Biomatrica for $17.9 million compared to
2017 when we completed an acquisition of Sampleminded, Inc. ("Sampleminded") for
$3.0 million. The increase in investing activities from 2017 to 2018, excluding
the impact of purchases and maturities of marketable securities was primarily
due to an increase in purchases of property and equipment during the year ended
December 31, 2018.
Net cash provided by financing activities was $253.2 million, $934.1 million,
and $261.0 million for the years ended December 31, 2019, 2018, and 2017,
respectively. During the year ended December 31, 2019, we received net cash of
$729.5 million from the issuance of Convertible Notes with a maturity date of
March 15, 2027 (the "2027 Notes"), and we used $493.4 million of cash to settle
Convertible Notes with an original maturity date of January 15, 2025 (the "2025
Notes", and collectively with the 2027 Notes, the "Notes"). The cash provided
for the year ended December 31, 2018 was primarily the result of proceeds from
our issuance of the 2025 Notes in January 2018 and June 2018. The cash provided
for the year ended December 31, 2017 was primarily the result of proceeds from
the sale of common stock of $253.4 million in 2017. In addition, during the year
ended December 31, 2019, we received proceeds of $8.4 million from our employee
stock purchase plan, $8.8 million from the exercise of stock options, $0.3
million from drawing on our construction loan, and made payments of $0.4 million
for stock issuance costs.
We expect that cash and cash equivalents and marketable securities on hand at
December 31, 2019 will be sufficient to fund our current operations for at least
the next twelve months, based on current operating plans. However, we may need
to raise additional capital to fully fund our current strategic plan, which
includes successfully commercializing Cologuard and Oncotype DX and developing a
pipeline of future products. Additionally, we may enter into transactions to
acquire other businesses, products, services, or technologies as part of our
strategic plan. If we are unable to obtain sufficient additional funds to enable
us to fund our operations through the completion of such plan, our results of
operations and financial condition would be materially adversely affected, and
we may be required to delay the implementation of our plan and otherwise scale
back our operations. Even if we successfully raise sufficient funds to complete
our plan, we cannot assure that our business will ever generate sufficient cash
flow from operations to become profitable.
                                       62
--------------------------------------------------------------------------------
  Table of Contents
The following table sets forth certain information concerning our obligations to
make contractual future payments, such as pursuant to debt and lease agreements,
as of December 31, 2019:

                                                                                       Payments Due by Period (4)
                                                                Less Than                                                    More Than
(In thousands)                                Total             One Year          1 - 3 Years          3 - 5 Years            5 Years
Convertible notes (1)                     $ 1,162,549          $      -

$ - $ - $ 1,162,549 Long-term debt obligations (2)

                 25,000               834               24,166                    -                    -
Other liabilities                              19,243             1,196                3,297                3,136               11,614
Operating lease obligations (3)               179,549            15,966               34,117               37,614               91,852
Total                                     $ 1,386,341          $ 17,996          $    61,580          $    40,750          $ 1,266,015



(1) Senior convertible notes were issued in 2018 and 2019 and have maturity
dates in 2025 and 2027, respectively. The table excludes expected interest
payments related to the Notes. See Note 9 in the Notes to Consolidated Financial
Statements for further information.
(2) Includes obligations associated with outstanding construction loan
agreement. The table excludes expected interest payments related to long term
debt obligations. See Note 8 in the Notes to Consolidated Financial Statements
for further information.
(3) Operating leases reflect remaining obligations associated with the leased
facilities at our headquarters, operations and lab facilities in Madison,
Wisconsin, Redwood City, California, San Diego, California, and Salt Lake City,
Utah. This also includes lease payments for equipment, vehicles, and other
miscellaneous leases. See Note 6 and Note 8 in the Notes to Consolidated
Financial Statements for further information.
(4) Contingent consideration and contingent license payments are excluded from
this table as the amount and timing of such outflows cannot be reasonably
determined. See Note 6 in the Notes to Consolidated Financial Statements for
further information.
Net Operating Loss Carryforwards
As of December 31, 2019, we had federal, state, and foreign net operating loss
carryforwards of approximately $1,548.4 million, $672.7 million, $18.1 million,
respectively. We also had federal and state research tax credit carryforwards of
approximately $39.1 million and $27.5 million, respectively. The net operating
loss and tax credit carryforwards will expire at various dates through 2039, if
not utilized. The Internal Revenue Code and applicable state laws impose
substantial restrictions on a corporation's utilization of net operating loss
and tax credit carryforwards if an ownership change is deemed to have occurred.
Additionally, tax law limitations may result in our NOLs expiring before we have
the ability to use them. The Tax Cuts and Jobs Act (H.R. 1) of 2017 limit the
deduction for NOLs to 80 percent of current year taxable income and provides for
an indefinite carryover period for federal NOLs. Both provisions are applicable
for losses arising in tax years beginning after December 31, 2017. As of
December 31, 2019, we had $610.5 million of NOLs incurred after December 31,
2017. For these reasons, even if we attain profitability our ability to utilize
our NOLs may be limited, potentially significantly so.
                                       63
--------------------------------------------------------------------------------
  Table of Contents
A valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before we are able to realize their
benefit, or that future deductibility is uncertain. In general, companies that
have a history of operating losses are faced with a difficult burden of proof on
their ability to generate sufficient future income in order to realize the
benefit of the deferred tax assets. We have recorded a valuation against our
deferred tax assets based on our history of losses and current uncertainty as to
timing of future taxable income. Given the future limitations on and expiration
of certain Federal and State deferred tax assets, the recording of a valuation
allowance resulted in a deferred tax liability of approximately $20.4 million
remaining at the end of 2019, which is included in other long-term liabilities
on our consolidated balance sheet. The deferred tax assets are still available
for us to use in the future to offset taxable income, which would result in the
recognition of a tax benefit and a reduction to our effective tax rate.
Additionally, an income tax benefit of $185.1 million was recorded as a result
of a change in the deferred tax asset valuation allowance resulting from the
Genomic Health combination. In connection with the Genomic Health combination, a
deferred tax liability was recorded for identified intangible assets. These
deferred tax liabilities are considered a source of future taxable income which
allowed us to reduce the pre-combination deferred tax asset valuation allowance.
The change in pre-combination deferred tax asset valuation allowance of an
acquirer is a transaction recognized separate from the business combination and
reduces income tax expense in the period of the business combination.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
("GAAP"). The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported revenues and expenses during
the reporting periods. On an ongoing basis, we evaluate our estimates and
judgments, including those related to revenue recognition, tax positions, and
stock-based compensation. 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 in
the Notes to Consolidated Financial Statements, we believe that the following
accounting policies and judgments are most critical to aid in fully
understanding and evaluating our reported financial results.
Revenue Recognition.
Revenue. Our revenue is primarily generated by our laboratory testing services
utilizing our Cologuard and Oncotype DX tests. The services are completed upon
delivery of a patient's test result to the ordering healthcare provider. We
account for revenue in accordance with Accounting Standards Codification Topic
606, Revenue from Contracts with Customers ("ASC 606"), which we adopted on
January 1, 2018, using the modified retrospective method, which we elected to
apply to all contracts. Application of the modified retrospective method did not
impact amounts previously reported by us, nor did it require a cumulative effect
adjustment upon adoption, as our method of recognizing revenue under ASC 606 was
analogous to the method utilized immediately prior to adoption. Accordingly,
there is no need for us to disclose the amount by which each financial statement
line item was affected as a result of applying the new standard and an
explanation of significant changes.
The core principle of ASC 606 is that we recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects
the consideration to which we expect to be entitled in exchange for those goods
or services. We recognize revenues from our products in accordance with that
core principle, and key aspects considered include the following:
Contracts
Our customer is the patient. However, we do not enter into a formal
reimbursement contract with a patient, as formal reimbursement contracts are
established with payers. Accordingly, we establish a contract with a patient in
accordance with other customary business practices.
•Approval of a contract is established via the order submitted by the patient's
healthcare provider and the receipt of a sample in the laboratory.
                                       64
--------------------------------------------------------------------------------
  Table of Contents
•We are obligated to perform our laboratory services upon acceptance of a sample
from a patient, and the patient and/or applicable payer are obligated to
reimburse us for services rendered based on the patient's insurance benefits.
•Payment terms are a function of a patient's existing insurance benefits,
including the impact of coverage decisions with CMS and any applicable
reimbursement contracts established between us and payers, unless the patient is
a self-pay patient, whereby we require payment from the patient prior to
commencement of the our performance obligations.
•Once we release a patient's test result to the ordering healthcare provider, we
are legally able to collect payment and bill an insurer, patient and/or health
system, depending on payer contract status or patient insurance benefit status.
•Our consideration is deemed to be variable, and we consider collection of such
consideration to be probable to the extent that it is unconstrained.
Performance obligations
A performance obligation is a promise in a contract to transfer a distinct good
or service (or a bundle of goods or services) to the customer. Our contracts
have a single performance obligation, which is satisfied upon rendering of
services, which culminates in the release of a patient's test result to the
ordering healthcare provider. We elect the practical expedient related to
disclosure of unsatisfied performance obligations, as the duration of time
between sample receipt and release of a valid test result to the ordering
healthcare provider is far less than one year.
Transaction price
The transaction price is the amount of consideration that we expect to collect
in exchange for transferring promised goods or services to a customer, excluding
amounts collected on behalf of third parties (for example, some sales taxes).
The consideration expected from a contract with a customer may include fixed
amounts, variable amounts, or both.
The consideration derived from our contracts is deemed to be variable, though
the variability is not explicitly stated in any contract. Rather, the implied
variability is due to several factors, such as the amount of contractual
adjustments, any patient co-payments, deductibles or compliance incentives, the
existence of secondary payers and claim denials.
We estimate the amount of variable consideration using the expected value
method, which represents the sum of probability-weighted amounts in a range of
possible consideration amounts. When estimating the amount of variable
consideration, the Company considers several factors, such as historical
collections experience, patient insurance eligibility and payer reimbursement
contracts.
We limit the amount of variable consideration included in the transaction price
to the unconstrained portion of such consideration. In other words, we recognize
revenue up to the amount of variable consideration that is not subject to a
significant reversal until additional information is obtained or the uncertainty
associated with the additional payments or refunds is subsequently resolved.
Differences between original estimates and subsequent revisions, including final
settlements, represent changes in the estimate of variable consideration and are
included in the period in which such revisions are made. Revenue recognized from
changes in transaction prices was $9.9 million and $15.0 million for the years
ended December 31, 2019 and 2018, respectively.
We monitor our estimates of transaction price to depict conditions that exist at
each reporting date. If we subsequently determine that we will collect more
consideration than we originally estimated for a contract with a patient, we
will account for the change as an increase in the estimate of the transaction
price (i.e., an upward revenue adjustment) in the period identified. Similarly,
if we subsequently determine that the amount we expect to collect from a patient
is less than we originally estimated, we will generally account for the change
as a decrease in the estimate of the transaction price (i.e., a downward revenue
adjustment), provided that such downward adjustment does not result in a
significant reversal of cumulative revenue recognized.
When we do not have significant historical experience or that experience has
limited predictive value, the constraint over estimates of variable
consideration may result in no revenue being recognized upon release of the
performance obligations associated with our tests, with recognition generally
occurring at the date of cash receipt.
                                       65
--------------------------------------------------------------------------------
  Table of Contents
Allocate transaction price
The transaction price is allocated entirely to the single performance obligation
contained within the contract with a patient.
Point in time recognition
Our single performance obligation is satisfied at a point in time, and that
point in time is defined as the date a patient's successful test result is
released to the patient's ordering healthcare provider. We consider this date to
be the time at which the patient obtains control of the promised test service.
Disaggregation of Revenue
The following table presents our revenues disaggregated by revenue source:
                                        Year Ended December 31,
(In thousands)                    2019            2018            2017
Screening
Medicare Parts B & C          $ 404,331       $ 254,431       $ 172,255
Commercial                      368,006         184,538          84,842
Other                            37,783          15,493           8,892
Total Screening                 810,120         454,462         265,989
Precision Oncology
Medicare Parts B & C          $  24,325       $       -       $       -
Commercial                       29,976               -               -
International                    11,444               -               -
Other                               428               -               -
Total Precision Oncology         66,173               -               -
Total                         $ 876,293       $ 454,462       $ 265,989


Screening includes laboratory service revenue from Cologuard and revenue from
Biomatrica products. Precision Oncology includes laboratory service revenue from
global Oncotype DX products.
Contract Balances
The timing of revenue recognition, billings and cash collections results in
billed accounts receivable and deferred revenue on the consolidated balance
sheets. Generally, billing occurs subsequent to the release of a patient's test
result to the ordering healthcare provider, resulting in an account
receivable. However, we sometimes receive advance payment from a patient,
particularly a self-pay patient, before a test result is completed, resulting in
deferred revenue. The deferred revenue balance is relieved upon release of the
applicable patient's test result to the ordering healthcare provider. As of
December 31, 2019 and 2018, the deferred revenue balance is not material to our
consolidated financial statements.
Practical expedients
We do not adjust the transaction price for the effects of a significant
financing component, as at contract inception we expect the collection cycle to
be one year or less.
We expense sales commissions when incurred because the amortization period would
have been one year or less. These costs are recorded within sales and marketing
expenses on our consolidated statements of operations.
We incur certain other costs that are incurred regardless of whether a contract
is obtained. Such costs are primarily related to legal services and patient
communications (e.g. adherence reminder letters). These costs are expensed as
incurred and recorded within general and administrative expenses on our
consolidated statements of operations.
                                       66
--------------------------------------------------------------------------------
  Table of Contents
Tax Positions. A valuation allowance to reduce the deferred tax assets is
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
have incurred significant losses since our inception and due to the uncertainty
of the amount and timing of future taxable income, management has determined
that a $120.7 million and $209.9 million valuation allowance at December 31,
2019 and 2018 is necessary to reduce the tax assets to the amount that is more
likely than not to be realized. The change in valuation allowance for 2019 and
2018 was a decrease of $89.2 million and $4.4 million, respectively. An income
tax benefit of $185.1 million was recorded as a result of a change in the
deferred tax asset valuation allowance resulting from the Genomic Health
combination. In connection with the Genomic Health combination, a deferred tax
liability was recorded for identified intangible assets. These deferred tax
liabilities are considered a source of future taxable income which allowed us to
reduce the pre-combination deferred tax asset valuation allowance. The change in
pre-combination deferred tax asset valuation allowance of an acquirer is a
transaction recognized separate from the business combination and reduces income
tax expense in the period of the business combination. Due to the existence of
the valuation allowance, future changes in our unrecognized tax benefits will
not impact our effective tax rate.
Convertible Notes. We account for convertible debt instruments that may be
settled in cash or equity upon conversion by separating the liability and equity
components of the instruments in a manner that reflects our nonconvertible debt
borrowing rate. In January 2018 and June 2018, we issued the 2025 Notes of
$690.0 million and $218.5 million, in aggregate principal amount of 1.0%
Convertible Notes with a maturity date of January 15, 2025. In March 2019 we
issued the 2027 Notes of $747.5 million in aggregate principal amount of 0.375%
Convertible Notes with a maturity date of March 15, 2027. In March 2019, we
settled approximately $493.4 million in outstanding 2025 Notes. We determined
the carrying amount of the liability component of the Notes by using assumptions
that market participants would use in pricing a debt instrument, including
market interest rates, credit standing, yield curves and volatilities.
Determining the fair value of the debt component requires the use of accounting
estimates and assumptions. These estimates and assumptions are judgmental in
nature and could have a significant impact on the determination of the debt
component, and the associated non-cash interest expense.
For the January 2018 offering, we allocated $194.9 million to the equity
component of the convertible debt instrument. That equity component is treated
as a discount on the liability component of the 2025 Notes, which is amortized
over the seven-year term of the 2025 Notes using the effective interest rate
method. For the June 2018 offering, we allocated $73.0 million to the equity
component of the convertible debt instrument. That equity component, less the
$14.2 million premium, is treated as a discount on the liability component of
the 2025 Notes, which is amortized over the remaining six-and-a-half-year term
of the 2025 Notes using the effective interest rate method. For the March 2019
offering, we allocated $275.0 million to the equity component of the convertible
debt instrument. That equity component is treated as a discount on the liability
component of the 2027 Notes, which is amortized over the eight-year term of the
2027 Notes using the effective interest rate method. In addition, debt issuance
costs related to the Notes were $18.8 million, $7.4 million, and $18.0 million
for the January 2018, June 2018, and March 2019 offerings, respectively. We
allocated the costs to the liability and equity components of the Notes based on
their relative values. The debt issuance costs allocated to the liability
component are being amortized over the life of the Notes as additional non-cash
interest expense. The transaction costs allocated to the equity component are
netted with the equity component of the convertible debt instrument in
stockholders' equity.
Business Combinations. Business Combinations are accounted for under the
acquisition method in accordance with ASC 805, Business Combinations. The
acquisition method requires identifiable assets acquired and liabilities assumed
and any non-controlling interest in the business acquired be recognized and
measured at fair value on the acquisition date, which is the date that the
acquirer obtains control of the acquired business. The amount by which the fair
value of consideration transferred as the purchase price exceeds the net fair
value of assets acquired and liabilities assumed is recorded as goodwill.
Acquisitions that do not meet the definition of a business combination under the
ASC are accounted for as asset acquisitions. Asset acquisitions are accounted
for by allocating the cost of the acquisition to the individual assets acquired
and liabilities assumed on a relative fair value basis. Goodwill is not
recognized in an asset acquisition with any consideration in excess of net
assets acquired allocated to acquired assets on a relative fair value basis.
Transaction costs are expensed in a business combination and are considered a
component of the cost of the acquisition in an asset acquisition.
In 2017, we recognized goodwill of $2.0 million from the acquisition of
Sampleminded. In 2018, we recognized goodwill of $15.3 million from the
acquisition of Biomatrica. In November 2019, we recognized goodwill of
$1.2 billion from the combination with Genomic Health. We evaluate goodwill
impairment on an annual basis or more frequently should an event or change in
circumstance occur that indicates that the carrying amount is in excess of the
fair value. There were no impairment losses for the years ended December 31,
2019, 2018, and 2017. Refer to Note 1 and 13 for further discussion of the
goodwill recorded.
                                       67
--------------------------------------------------------------------------------
  Table of Contents
Recent Accounting Pronouncements
See Note 1 in the Notes to Consolidated Financial Statements for the discussion
of Recent Accounting Pronouncements.
Off-Balance Sheet Arrangements
As of December 31, 2019, we had no off-balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to market risk is principally confined to our cash, cash
equivalents and marketable securities. We invest our cash, cash equivalents, and
marketable securities in securities of the U.S. governments and its agencies and
in investment-grade, highly liquid investments consisting of commercial paper,
bank certificates of deposit, and corporate bonds, which as of December 31, 2019
and December 31, 2018 were classified as available-for-sale. We place our cash,
cash equivalents, restricted cash, and marketable securities with high-quality
financial institutions, limit the amount of credit exposure to any one
institution, and have established investment guidelines relative to
diversification and maturities designed to maintain safety and liquidity.
Based on a hypothetical ten percent adverse movement in interest rates, the
potential losses in future earnings, fair value of risk-sensitive financial
instruments, and cash flows are immaterial, although the actual effects may
differ materially from the hypothetical analysis. While we believe our cash,
cash equivalents, restricted cash, and marketable securities do not contain
excessive risk, we cannot provide absolute assurance that, in the future, our
investments will not be subject to adverse changes in market value. In addition,
we maintain significant amounts of cash, cash equivalents, restricted cash, and
marketable securities at one or more financial institutions that are in excess
of federally insured limits. Given the potential instability of financial
institutions, we cannot provide assurance that we will not experience losses on
these deposits. We do not utilize interest rate hedging agreements or other
interest rate derivative instruments.
A hypothetical ten percent change in interest rates would not have a material
adverse impact on our future operating results or cash flows. All of our
significant interest-bearing liabilities bear interest at fixed rates and
therefore are not subject to fluctuations in market interest rates; however,
because these interest rates are fixed, we may be paying a higher interest rate,
relative to market, in the future if circumstances change.
Foreign Currency Risk
Substantially all of our revenues are recognized in U.S. dollars, although a
growing percentage is denominated in foreign currency as we continue to expand
into markets outside of the U.S. Certain expenses related to our international
activities are payable in foreign currencies. As a result, factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets will affect our financial results.
In 2017 and 2018, our international subsidiaries functional currency was the
local currency. For 2019 our international subsidiaries use the U.S. dollar as
the functional currency, resulting in no net foreign exchange transaction gains
(losses) for the year ended December 31, 2019 and net foreign exchange
transaction gains (losses) were not significant for the years ended December 31,
2018, and 2017, respectively. In September 2017, Genomic Health (now a wholly
owned subsidiary) started entering into forward contracts to mitigate the impact
of adverse movements in foreign exchange rates related to the re-measurement of
monetary assets and liabilities and hedge our foreign currency exchange rate
exposure. As of December 31, 2019, we had open foreign currency forward
contracts with notional amounts of $17.9 million. Although the impact of
currency fluctuations on our financial results has been immaterial in the past,
there can be no guarantee that the impact of currency fluctuations related to
our international activities will not be material in the future.
                                       68

--------------------------------------------------------------------------------

Table of Contents

© Edgar Online, source Glimpses