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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Exact Sciences Corporation    EXAS

EXACT SCIENCES CORPORATION

(EXAS)
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EXACT SCIENCES : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/06/2020 | 04:35pm EST

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 ended December 31, 2019, which has been filed with the SEC (the "2019 Form 10-K"). 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, anticipated results of our sales, marketing and patient adherence efforts, expectations concerning payer reimbursement, and the anticipated results of our product development efforts. Forward-looking statements are neither historical facts nor assurances of future performance. 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 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 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 success of our efforts to facilitate patient access to Cologuard via telehealth; 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 the adoption, modification or repeal of any law, rule, order, interpretation or policy relating to the healthcare system, including without limitation as a result of any judicial, executive or legislative action; the effects of changes in pricing, coverage and reimbursement for our products and services, including without limitation as a result of the Protecting Access to Medicare Act of 2014; recommendations, guidelines and quality metrics issued by various organizations such as the U.S. Preventive Services Task Force, the American Society of Clinical Oncology, the American Cancer Society, and the National Committee for Quality Assurance 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, such as through our Promotion Agreement with Pfizer, Inc., and acquisitions; our success establishing and maintaining collaborative, licensing and supplier arrangements; our ability to 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 foreign currency exchange rate fluctuations and our efforts to hedge such effects; the possibility that the anticipated benefits from our combination with Genomic Health cannot 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 Genomic Health's operations will be greater than expected and the possibility of disruptions to our business during integration efforts and strain on management time and resources; the outcome of any litigation, government investigations, enforcement actions or other legal proceedings; and the other risks and uncertainties described in the Risk Factors and in Management's Discussion and Analysis of Financial Condition and Results of Operations sections of the 2019 Form 10-K and subsequently filed Quarterly Reports on Form 10-Q. 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
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.
Our Cologuard Test
Colorectal cancer is the second leading cause of cancer deaths in the United
States ("U.S.") and the leading cause of cancer deaths in the U.S. among
non-smokers. In 2020 in the U.S. there are projected to be approximately 148,000
new cases of colorectal cancer and 53,000 deaths from colorectal cancer. 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 the U.S. Food
and Drug Administration ("FDA") in August 2014, Cologuard became the first and
only FDA-approved sDNA non-invasive colorectal cancer screening test. Cologuard
is now indicated for average risk adults 45 years of age and older.
Our original premarket approval submission to the FDA for Cologuard included the
results of our pivotal DeeP-C clinical trial that had over 10,000 patients
enrolled at 90 sites in the U.S. and Canada. The results of our DeeP-C clinical
trial for Cologuard were published in the New England Journal of Medicine in
April 2014. The peer-reviewed study, "Multi-target Stool DNA Testing for
Colorectal-Cancer Screening," highlighted the performance of Cologuard in the
trial population:
•Cancer Sensitivity: 92%
•Stage I and II Cancer Sensitivity: 94%
•High-Grade Dysplasia Sensitivity: 69%
•Specificity: 87%
Our Oncotype DX Tests
With our Oncotype IQ Genomic Intelligence Platform we are applying our
world-class scientific and commercial expertise and infrastructure to lead the
translation of clinical and genomic data into clinically actionable results for
treatment planning throughout the cancer patient's journey, from diagnosis to
treatment selection and monitoring. Our Oncotype IQ Genomic Intelligence
Platform is currently comprised of our flagship line of Oncotype DX gene
expression tests for breast, prostate and colon cancer, as well as Oncotype DX
AR-V7 Nucleus Detect® test, a liquid-based test for advanced stage prostate
cancer.
We believe our Oncotype DX tests provide information that has the following
benefits:
•Improved Quality of Treatment Decisions. We believe our approach to
genomic-based cancer analysis improves the quality of cancer treatment decisions
by providing an individualized analysis of each patient's tumor that is
correlated to clinical outcome, rather than solely using subjective, anatomic
and qualitative factors to determine treatments. Our Oncotype DX tests for
breast cancer, Ductal Carcinoma in Situ ("DCIS"), prostate cancer, and colon
cancer have been analytically and clinically validated in multiple published
studies. The Recurrence Score® results from our tests have been demonstrated to
classify patients into recurrence risk categories different than classifications
based primarily on clinical and pathologic features. Additionally, multiple
decision impact studies conducted worldwide consistently show that the
Recurrence Score result changes treatment decisions in more than 30% of
patients. As a result, we believe our tests enable patients and healthcare
providers to make more informed decisions about the risks and benefits of
various treatments, and consequently design an individualized treatment plan.
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•Improved Health Economics of Cancer Care. We believe that improving the quality
of treatment decisions can result in significant economic benefits. The results
of a number of clinical studies have demonstrated that by using the Oncotype DX
Breast Recurrence Score® test, physicians and patients can better evaluate
treatment options, such as whether a patient will or will not benefit from
chemotherapy. Patients are benefited when (1) those who aren't likely to benefit
from chemotherapy avoid it and the associated chemotoxicities and (2) those who
are likely to benefit from chemotherapy receive it resulting in reduced
incidence of distant recurrences. These better clinical outcomes increase
survival rates and also save the patient as well as the healthcare system
significant costs.
International Business Background and Products
Prior to our combination with Genomic Health, we did not have international
revenue. We now commercialize our Oncotype DX tests internationally through
employees in Canada, Japan and six European countries, as well as through
exclusive distribution agreements. We have provided our Oncotype DX tests in
more than 90 countries outside of the United States. We do not offer Cologuard
outside of the U.S.
Inclusion of our products in guidelines and quality measures will be critical to
our international success. The Oncotype DX breast cancer test is recognized in
international guidelines issued by the St. Gallen International Breast Cancer
Expert Panel and European Society for Medical Oncology and has been included in
certain guidelines and recommendations in England, Germany and Japan. We have
obtained coverage for our invasive breast cancer test outside of the U.S.,
including coverage for certain patients in Canada, France, Spain, Germany,
Italy, Ireland, Israel, Saudi Arabia, Switzerland, and the United Kingdom. We
expect that broadening coverage and reimbursement for our Oncotype DX tests
outside of the United States will take years.
Pipeline Research and Development
Our research and development efforts are focused on developing new products and
enhancing existing products to address new cancer areas and expand the clinical
utility and addressable patient populations for our existing tests. These
development efforts may lead to a variety of possible new products, including
risk assessment, screening and prevention, early disease diagnosis, adjuvant
and/or neoadjuvant disease treatment, metastatic disease treatment selection and
patient monitoring.
Through our collaboration with Mayo Foundation for Medical Education and
Research, we have successfully performed validation studies on multiple types of
cancer using tissue, blood and other samples. We are currently focusing our
research and development efforts on building a pipeline of potential future
products and services with a focus on improving Cologuard's performance
characteristics and on developing blood or other fluid-based ("liquid biopsy")
tests. We expect to advance liquid biopsy through biomarker discovery and
validation in tissue, blood, or other fluids.
We are pursuing the following opportunities:
•Colon Cancer Screening. We are seeking opportunities to improve upon
Cologuard's performance characteristics. In October 2019, we and Mayo presented
at the American College of Gastroenterology's 2019 Annual Scientific Meeting
findings from a blinded-case control study showing enhanced colorectal cancer
and advanced adenoma detection using newly discovered methylation biomarkers and
hemoglobin. To establish the performance of the novel multi-target stool DNA
test, we recently launched the BLUE-C study, a multi-center, prospective study.
We expect to enroll more than 10,000 patients 40 years of age and older in the
BLUE-C study. The timing of any such enhancements to Cologuard is unknown and
would be subject to FDA approval. We are also working to develop a blood-based
screening test for colorectal cancer.
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•Hepatocellular Carcinoma ("HCC") Test Development. We are currently seeking to
develop a blood-based biomarker test to serve as an alternative to ultrasound
and alpha-fetoprotein ("AFP") for use in 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. 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.
•In Vitro Device ("IVD") Version of Oncotype DX Breast Cancer Test. We believe
IVD versions of our  Oncotype DX products that can be performed locally may open
up additional international opportunities. We are currently developing an IVD
version of the Oncotype DX Breast Recurrence Score test and may explore
additional IVD versions of our Oncotype DX tests.
•Development Studies for Oncotype DX Products. We may also conduct or fund
clinical studies that could support additional opportunities for our products.
For example, we may explore clinical studies to expand the use of genomic
testing to address additional populations, including higher-risk patients.
Acquisitions
In March 2020, we completed the acquisition of all of the outstanding equity
interests of Paradigm Diagnostics, Inc. ("Paradigm") and Viomics, Inc.
("Viomics"), two privately held companies based in Phoenix, Arizona. Paradigm
provides comprehensive genomic-based profiling tests that assist in the
diagnosis and therapy recommendations for late-stage cancer. Viomics provides a
platform for identification of biomarkers.
Coronavirus ("COVID-19") Pandemic
The spread of COVID-19 has affected many segments of the global economy,
including the cancer screening and diagnostics industry. The COVID-19 outbreak,
which the World Health Organization has classified as a pandemic, has prompted
governments and regulatory bodies throughout the world to issue "stay-at-home"
or similar orders, and enact restrictions on the performance of "non-essential"
services, public gatherings and travel. Health systems, including in key markets
where we operate, have been, or may be, overwhelmed with high volumes of
patients suffering from COVID-19.
The pandemic and related precautionary measures began to materially disrupt our
business in March 2020 and may continue to disrupt our business for an unknown
period of time. As a result, we anticipate significant impact to our 2020
operating results, including our revenues and margins, among other measures.
Beginning in March 2020, we undertook temporary precautionary measures intended
to help minimize the risk of the virus to our employees, including temporarily
requiring most employees to work remotely, suspending field-based, face-to-face
interactions by our sales force, pausing all non-essential travel worldwide for
our employees, and limiting employee attendance at industry events and in-person
work-related meetings, to the extent those events and meetings are continuing.
We may take additional measures, any of which could negatively affect our
business. We are also providing COVID-19 testing. We have received a letter from
the U.S. Food and Drug Administration (FDA) granting us Emergency Use
Authorization for a nasal-swab based test for the detection of SARS-CoV-2, the
virus that causes COVID-19.
Due to social distancing, stay-at-home orders, and other actions taken in
response to COVID-19, there has been a significant and widespread decline in
standard wellness visits and preventive services. That decline has negatively
impacted Cologuard test orders in our Screening business, notwithstanding the
availability of alternative ordering channels such as telehealth. Additionally,
patients have been completing tests at a lower rate. Cologuard test orders
declined 63 percent year-over-year during the first 20 days of April 2020. We
saw a slight recovery in the last 10 days of April 2020, with orders declining
47 percent year-over-year. We expect that Cologuard orders and revenues will be
negatively impacted in the second quarter of 2020 and beyond.
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After delivering strong results in the first quarter, the Precision Oncology
business is also starting to see weakening underlying conditions because of
COVID-19, more notably in the U.S. prostate business and in certain
international geographies. We expect the widespread decrease in preventive
services, such as mammograms and prostate cancer screenings, to negatively
impact Precision Oncology test volumes in the coming months due to the typical
lag between cancer screening and genomic test ordering.
Despite our efforts, the ultimate impact of COVID-19 depends on factors beyond
our knowledge or control, including the duration and severity of the outbreak as
well as third-party actions taken to contain its spread and mitigate its public
health effects.
2020 Priorities
As a result of COVID-19 and its impact to our business, we have re-prioritized
our goals for 2020 with a focus on serving patients who continue to need the
healthcare services we provide while aligning our cost structure with the
anticipated lower sales volumes and revenues. Our top priorities for 2020 are
(1) get people tested, (2) take care of our customers, and (3) preserve
financial strength.
Get People Tested
Business continuity plans are in place at all of our sites to help sustain
operations and ensure continuity of services for patients during this
unprecedented time. Despite the COVID-19 pandemic, many people still need to be
screened for colorectal cancer, and treated for breast, colon, and prostate
cancers. Our lab facilities presently remain operational so that we can continue
to process results of our Cologuard and Oncotype DX tests.
We are also providing COVID-19 testing after the FDA granted us Emergency Use
Authorization for a nasal-swab based test for the detection of COVID-19.
Take Care of our Customers
Due to social distancing, stay-at-home orders, and other actions taken in
response to COVID-19, there has been a significant and widespread decline in
standard wellness visits and preventive services. We have taken steps to limit
exposure to COVID-19 based on recommendations from government and health
agencies, including suspending field-based, face-to-face interactions by our
sales force. The sales team will serve healthcare providers via telephone and
online technologies until it is safe to return to the field.
Preserve Financial Strength
In order to minimize the adverse impacts to our business and operations thus far
and anticipated for the remainder of 2020 due to the COVID-19 pandemic, we have
initiated proactive measures to achieve cost savings. Actions we have taken
include the reduction of base pay for our chief executive officer to effectively
zero, elimination of the Board of Directors annual cash retainer, reducing base
salaries for our executive team, and reducing the quarterly sales commissions.
We implemented a workforce reduction, involuntary furloughs, work schedule
reductions, as well as a voluntary furlough program. Additionally, we are
reducing our investments in marketing and other promotional activities, pausing
certain clinical trial activities, reducing travel and professional services,
and delaying or terminating certain capital projects. We also expect a reduction
in certain volume based cost of goods sold expenses consistent with the
reduction in revenue. We estimate that these items will contribute over $400.0
million of cost savings in 2020, with the majority in reduced operating expense.
If we see a faster-than-expected recovery from COVID-19 and re-acceleration of
growth, cost savings may be materially lower, as we would invest to support that
growth.
Results of Operations
We have generated significant losses since inception and, as of March 31, 2020,
we had an accumulated deficit of approximately $1.2 billion. We expect to
continue to incur losses for the near future, and it is possible we may never
achieve profitability. As mentioned in further detail above, we expect the
recent outbreak of COVID-19 will have an adverse impact on our operations in
2020.
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Revenue. Our revenue is primarily generated by our laboratory testing services,
from our Cologuard and Oncotype DX tests. For the three months ended March 31,
2020 and 2019, we generated Screening revenue of $219.5 million and
$162.0 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. For the three months ended March 31, 2020, we generated Precision
Oncology revenue of $128.4 million. Precision Oncology includes laboratory
service revenue from global Oncotype DX and Paradigm products. For the three
months ended March 31, 2020, the Company's revenue was adversely impacted by the
COVID-19 outbreak as further discussed above.
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 intangible assets). Cost of
sales increased to $81.6 million for the three months ended March 31, 2020 from
$42.8 million for the three months ended March 31, 2019. The increase in cost of
sales is primarily due to the increases in completed Cologuard tests and due to
the completion of the combination with Genomic Health in November 2019.
                                             Three Months Ended March 31,
Amounts in millions                     2020                  2019        Change
Production costs                    $    44.1$ 30.3$ 13.8
Personnel expenses                       22.3                  8.0         14.3
Facility and support services            12.4                  3.3          9.1
Stock-based compensation                  2.5                  1.1          1.4
Other cost of sales expenses              0.3                  0.1          0.2
Total cost of sales expense         $    81.6$ 42.8$ 38.8

Research and development expenses. Research and development expenses increased to $43.5 million for the three months ended March 31, 2020 compared to $31.8 million for the three months ended March 31, 2019. The increase in research and development expenses was primarily due to an increase in personnel costs due to increased headcount from the combination with Genomic Health in November 2019.

                                                      Three Months Ended March 31,
Amounts in millions                              2020                  2019        Change
Direct research and development              $    18.3$ 18.6$ (0.3)
Personnel expenses                                16.4                  8.4          8.0
Stock-based compensation                           3.9                  2.7          1.2
Facility and support services                      2.9                  0.9          2.0
Professional fees                                  1.1                  0.9          0.2
Other research and development                     0.9                  0.3          0.6
Total research and development expenses      $    43.5$ 31.8$ 11.7


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General and administrative expenses. General and administrative expenses increased to $114.0 million for the three months ended March 31, 2020 compared to $63.8 million for the three months ended March 31, 2019. The increase in general and administrative expenses was primarily to support the overall growth of the Company and due to the completion of the combination with Genomic Health in November 2019.

                                                         Three Months Ended March 31,
Amounts in millions                                  2020                 2019        Change
Personnel expenses                              $     53.2$ 30.0$ 23.2
Professional and legal fees                           21.8                 9.1         12.7
Facility and support services                         15.4                13.0          2.4
Stock-based compensation                              14.5                 8.2          6.3
Other general and administrative                       9.1                 3.5          5.6
Total general and administrative expenses       $    114.0$ 63.8$ 50.2

Sales and marketing expenses. Sales and marketing expenses increased to $167.7 million for the three months ended March 31, 2020 compared to $90.9 million for the three months ended March 31, 2019. The increase in sales and marketing expenses was a result of hiring additional sales and marketing personnel including the Precision Oncology team from the completion of the Genomic Health combination in November 2019, 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 8 of our condensed consolidated financial statements included in this Quarterly Report.

                                                            Three Months Ended March 31,
Amounts in millions                                     2020                 2019        Change
Personnel expenses                                 $     81.0$ 36.4$ 44.6
Direct marketing costs and professional fees             33.4                22.1         11.3
Professional and legal fees                              32.1                27.4          4.7
Other sales and marketing expenses                       12.5                 0.8         11.7
Stock-based compensation                                  8.7                 4.2          4.5
Total sales and marketing expenses                 $    167.7$ 90.9$ 76.8

Amortization of acquired intangible assets. Amortization of acquired intangible assets increased to $23.3 million for the three months ended March 31, 2020 compared to $0.8 million for the three months ended March 31, 2019. The increase in amortization of acquired intangible assets was primarily due to the Genomic Health combination. Investment income, net. Investment income, net decreased to $0.1 million for the three months ended March 31, 2020 compared to $6.7 million for the three months ended March 31, 2019. The decrease in investment income, net was due to a decrease in realized gains generated from the sale of marketable securities and a decrease in the average rate of return on investments due to an decrease in market interest rates and a lower average balance in marketable securities for the three months ended March 31, 2020 when compared to the same period in 2019.

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Interest expense. Interest expense increased to $25.2 million for the three
months ended March 31, 2020 compared to $22.0 million for the three months ended
March 31, 2019. The increase is primarily due to the issuance of additional
convertible notes in March 2020 as further described in Note 15 of our condensed
consolidated financial statements included in this Quarterly Report, which was
partially offset by lower interest rates on the convertible notes issued in
March 2020. Interest expense recorded from our outstanding convertible notes
totaled $16.5 million and $11.2 million during the three months ended March 31,
2020 and 2019, respectively. In addition to the $16.5 million in interest
expense recorded on outstanding convertible notes, an additional $8.0 million
and $10.6 million was recorded during the three months ended March 31, 2020 and
2019, respectively, as a result of the settlement of convertible notes, as
further described in Note 15 of our condensed consolidated financial statements
included in this Quarterly Report. Of the $16.5 million and $11.2 million in
interest expense recorded on outstanding convertible notes, $14.6 million and
$9.1 million of interest expense relates to amortization of debt discount and
debt issuance costs for the three months ended March 31, 2020 and 2019,
respectively. The remaining $2.6 million and $2.4 million of interest expense
for the three months ended March 31, 2020 and 2019, 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. Income tax benefit increased to $1.7 million for the three
months ended March 31, 2020 compared to a benefit of $0.5 million for the three
months ended March 31, 2019. This increase in income tax benefit is primarily
due to future limitations on and expiration of certain Federal and State
deferred tax assets.
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 the Cologuard, and since the completion of our Genomic Health
combination, of Oncotype DX tests. As of March 31, 2020, we had approximately
$701.1 million in unrestricted cash and cash equivalents and approximately
$530.1 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 $49.8 million for the three months
ended March 31, 2020 compared to $74.2 million for the three months ended March
31, 2019. The principal use of cash in operating activities for the three months
ended March 31, 2020 and 2019 was to fund our net loss.
Net cash used in investing activities was $405.8 million for the three months
ended March 31, 2020 compared to $41.2 million for the three months ended March
31, 2019. The increase in cash used in investing activities for the three months
ended March 31, 2020 compared to the same period in 2019 was primarily the
result of the timing of purchases, sales, and maturities of marketable
securities. Excluding the impact of purchases, sales, and maturities of
marketable securities, net cash used in investing activities was $19.8 million
for the three months ended March 31, 2020 compared to $10.8 million for the
three months ended March 31, 2019. Cash use consisted primarily of purchases of
property and equipment of $12.7 million and $10.7 million for the three months
ended March 31, 2020 and 2019, respectively, and an acquisition of $6.8 million.
There were also minimal purchases of intangible assets during the three months
ended March 31, 2020 and 2019.
Net cash provided by financing activities was $979.5 million for the three
months ended March 31, 2020 compared to $240.1 million for the three months
ended March 31, 2019. During the three months ended March 31, 2020, we received
net cash of $1,125.5 million from the issuance of Convertible Notes with a
maturity date of March 1, 2028 (the "2028 Notes"), and we used $150.1 million of
cash to settle Convertible Notes with an original maturity date of January 15,
2025 (the "2025 Notes"). The cash provided by financing activities for the three
months ended March 31, 2019 was primarily the result of proceeds of
$729.5 million from our issuance of Convertible Notes with a maturity date of
March 15, 2027 (the "2027 Notes", and, collectively with the 2025 Notes and 2028
Notes, the "Notes"), and we used $493.4 million of cash to settle a portion of
the 2025 Notes. In addition, during the three months ended March 31, 2020 we
received proceeds of $4.3 million from the exercise of stock options.
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We expect that cash and cash equivalents and marketable securities on hand at
March 31, 2020 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.
The spread of COVID-19 and measures to prevent further spread, have
significantly disrupted our business, and may continue to disrupt our business
for an unknown period of time. The full impact of the outbreak is uncertain at
this time and continues to evolve globally. We do not yet know the extent to
which COVID-19 will negatively impact our financial results or liquidity. The
outbreak has already disrupted our operations, as well as the operations and
behaviors of healthcare providers, patients and suppliers. To the extent that
healthcare providers, patients and suppliers continue to be adversely impacted
by the pandemic, we could see a material interruption our operations and
liquidity. Management continues to monitor and assess the evolving developments
with respect to COVID-19.
A table reflecting certain of our specified contractual obligations as of
December 31, 2019 was provided in the Management's Discussion and Analysis of
Financial Condition and Results of Operation of our 2019 Form 10-K. During the
three months ended March 31, 2020, we issued $1,150.0 million in aggregate
principal amount of 0.375% Convertible Notes that will mature on March 1, 2028.
The holders of the Notes may convert prior to September 1, 2027 only under
certain circumstances and may convert at any time after September 1, 2027. The
Notes accrue interest at a fixed rate of 0.375% per year, payable semi-annually
in arrears on March 1 and September 1 of each year, beginning on September 1,
2020. Of the cash received upon issuance of the 2028 Notes, approximately
$150.1 million was used to repay a portion of the outstanding principal balance
and accrued interest of the 2025 Notes held by certain Noteholders. Upon
repayment of such portion of the outstanding principal balance of the 2025
Notes, there was $315.0 million in aggregate principal balance remaining under
the 2025 Notes. See Note 15 of the condensed consolidated financial statements
included in this Quarterly Report for further details. With the exception of
this item, there were no material changes outside the ordinary course of our
business in our specified contractual obligations during the three months ended
March 31, 2020.
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 the United States ("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.
Our significant accounting policies are more fully described in Note 1 of our
financial statements included in our 2019 Form 10-K, as well as our Management's
Discussion and Analysis of Financial Condition and Results of Operations on our
2019 Form 10-K. There have not been any significant changes to our critical
accounting policies and estimates during the three months ended March 31, 2020.
Revenue Recognition. We recognize revenue on the release 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 the release 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-
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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.
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 February 2020 we issued the 2028 Notes of $1,150.0 million in
aggregate principal amount of 0.375% Convertible Notes with a maturity date of
March 1, 2028. As part of that issuance, we settled approximately $100.0 million
in outstanding 2025 Notes. We determined the carrying amount of the liability
component of the 2028 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 February 2020 offering, we allocated $346.6 million, net of tax, to the
equity component of the convertible debt instrument. That equity component is
treated as a discount on the liability component of the Notes, which is
amortized over the eight-year term of the 2028 Notes using the effective
interest rate method. In addition, debt issuance costs related to the 2028 Notes
was $24.4 million. We allocated the costs to the liability and equity components
of the 2028 Notes based on their relative values. The debt issuance costs
allocated to the liability component are being amortized over the life of the
2028 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 March 2020, we recognized goodwill of $29.7 million from the acquisitions of
Paradigm and Viomics. 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 periods ended March 31, 2020 and December 31, 2019. Refer to Note
5 and Note 16 of the condensed consolidated financial statements included in
this Quarterly Report for further discussion of the goodwill recorded.
Recent Accounting Pronouncements
See Note 1 in the Notes to Condensed Consolidated Financial Statements for the
discussion of Recent Accounting Pronouncements.
Off-Balance Sheet Arrangements
As of March 31, 2020, we had no off-balance sheet arrangements.

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