The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which has been filed with theSEC (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, objectives and the pending acquisition ofThrive Earlier Detection Corporation ("Thrive") 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, the anticipated results of our product development efforts, the anticipated benefits of the pending acquisition of Thrive, including estimated synergies and other financial impacts, and the expected timing of completion of the transaction. Forward-looking statements are neither historical facts nor assurances of future performance or events. Instead, they are based only on current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Actual results, conditions and events may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause actual results, conditions and events to differ materially from those indicated in the forward-looking statements include, among others, the following: uncertainties associated with the coronavirus (COVID-19) pandemic, including its possible effects on our operations, including our supply chain, and 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 theU.S. Preventive Services Task Force , theAmerican Society of Clinical Oncology , theAmerican Cancer Society , and theNational 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 Restated Promotion Agreement with Pfizer, Inc., and acquisitions; our success establishing and maintaining collaborative, licensing and supplier arrangements; our ability, and the ability ofThrive and Base Genomics Limited ("Base"), 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 business acquisitions (including the pending acquisition of Thrive and recent acquisition of Base) 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 acquired businesses' (including Thrive's and Base'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; the ability of the 48 -------------------------------------------------------------------------------- Table of Contents Company and Thrive to receive the required the required regulatory approvals for the pending merger and to satisfy the conditions to the closing of the transaction on a timely basis or at all; the occurrence of events that may give rise to a right of one or both of the Company and Thrive to terminate the merger agreement; possible negative effects of the announcement or the consummation of the pending acquisition of Thrive or recent acquisition of Base on the market price of our common stock and/or on our and/or Thrive's or Base's respective businesses, financial conditions, results of operations and financial performance; significant transaction costs and/or unknown liabilities; risks associated with contracts containing consent and/or other provisions that may be triggered by the pending acquisition of Thrive or the recent acquisition of Base; risks associated with potential transaction-related litigation; the ability of Thrive, Base and the combined company to retain and hire key personnel; 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. You are further cautioned not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. OverviewExact 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 inthe United States ("U.S.") and the leading cause of cancer deaths in theU.S. among non-smokers. In 2020 in theU.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 theU.S. Food and Drug Administration ("FDA") inAugust 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 theU.S. andCanada . The results of our DeeP-C clinical trial for Cologuard were published in theNew England Journal of Medicine inApril 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. 49 -------------------------------------------------------------------------------- Table of Contents 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. •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) thosewho aren't likely to benefit from chemotherapy avoid it and the associated chemotoxicities and (2) thosewho 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 withGenomic Health , we did not have international revenue. We now commercialize our Oncotype DX tests internationally through employees inCanada ,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 ofthe United States . We do not offer Cologuard or COVID-19 testing outside of theU.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 theSt. Gallen International Breast Cancer Expert Panel andEuropean Society for Medical Oncology and has been included in certain guidelines and recommendations inEngland ,Germany andJapan . We have obtained coverage for our invasive breast cancer test outside of theU.S. , including coverage for certain patients inCanada ,France ,Spain ,Germany ,Italy ,Ireland ,Israel ,Saudi Arabia ,Switzerland , and theUnited Kingdom . We expect that broadening coverage and reimbursement for our Oncotype DX tests outside ofthe 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. InOctober 2020 we announced the introduction of the Oncotype MAP™Pan-Cancer Tissue test ("Oncotype MAP" test). The Oncotype MAP test is a rapid, comprehensive tumor profiling panel that aids therapy selection for patients with advanced, metastatic, refractory, or recurrent cancer. The Oncotype MAP test utilizes next generation sequencing and immunohistochemistry to provide in-depth insights into genomic alterations in hundreds of cancer-related genes. The Oncotype MAP test report supports clinical decision making by showing actionable biomarkers associated with more than 100 evidence-based therapies, over 45 combination therapies, and more than 650 active clinical trial associations. The identification of these biomarkers helps to inform treatment options for a breadth of solid tumor types. 50 -------------------------------------------------------------------------------- Table of Contents Through our collaboration withMayo Foundation for Medical Education and Research , we have successfully performed validation studies on multiple types of cancer using tissue, blood and other samples. InSeptember 2020 , Mayo agreed to make available certain personnel to provide us product development and research and development assistance throughJanuary 2025 . 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. InOctober 2019 , we and Mayo presented at theAmerican 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 inNovember 2019 , we 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. •Multi-Cancer Screening Test Development. We are currently seeking to develop a blood-based multi-cancer screening test. InSeptember 2020 , we reported that together with Mayo we have identified methylation markers with a 97% average accuracy in identifying cancers in tissue and blood. We also presented results from an internal study using these markers on blood samples that demonstrated 86% sensitivity at 95% specificity when looking at six different cancers. •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. InNovember 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. •Development Studies for Oncotype DX Products. We may also conduct or fund clinical studies that could support additional opportunities for our Oncotype DX products. For example, we are exploring clinical studies to expand the use of genomic testing to address additional populations, including higher-risk patients. 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 theWorld Health Organization has classified as a pandemic, has prompted governments and regulatory bodies throughout the world to enact broad precautionary measures, including "stay at home" orders, 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 territories in which we market, sell, distribute and perform our tests are attempting to address the COVID-19 pandemic in varying ways, including stay-at-home orders, temporarily closing businesses, restricting gatherings, restricting travel, and mandating social distancing and face coverings. Certain jurisdictions have begun re-opening only to return to restrictions due to increases in new COVID-19 cases. Even in the absence of legal restrictions, businesses and individuals may voluntarily continue to limit in-person interactions and practice social distancing, and such behaviors may continue beyond the formal end of the pandemic, The level and nature of the disruption caused by COVID-19 is unpredictable, may be cyclical and long-lasting and may vary from location to location. The pandemic and related precautionary measures began to materially disrupt our business inMarch 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, margins, and cash utilization, among other measures. 51 -------------------------------------------------------------------------------- Table of Contents Beginning inMarch 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; requiring on-site employees to undergo COVID-19 testing, wear personal protective equipment (including face masks or shields) and maintain social distancing; 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. Our commercial partner for Cologuard, Pfizer, Inc. ("Pfizer"), took similar precautions, including suspending face-to-face interactions between sales representatives and healthcare providers. We expect to adjust our precautionary measures at our various locations based on local recovery levels and applicable governmental regulations. For example, a portion of the Company's and Pfizer's sales force has recommenced field-based interactions, although access to healthcare providers remains limited and the resumption of normal activities is expected to be gradual. Our business could be negatively affected if we take excessive, ineffective or inadequate precautions. 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 negatively impacted Cologuard test orders during the second quarter of 2020 in our Screening business, notwithstanding the availability of alternative ordering channels such as telehealth. During the third quarter, orders have recovered to pre-pandemic levels. The Precision Oncology business started to see weakening underlying conditions inApril 2020 because of COVID-19, more notably in theU.S. prostate business and in certain international geographies. The widespread decrease in preventive services, including mammograms and prostate cancer screenings, negatively impacted Precision Oncology test volumes beginning inMay 2020 and continuing throughout the third quarter of 2020 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, third-party actions taken to contain its spread and mitigate its public health effects and the extent to which behavioral changes resulting from the pandemic continue even after it ends. COVID-19 Testing Business In lateMarch 2020 , we began providing COVID-19 testing. TheU.S. Food and Drug Administration (FDA) has granted us Emergency Use Authorization to test for SARS-CoV-2, the virus that causes COVID-19, in upper respiratory samples. We have partnered with various customers, including theState of Wisconsin Department of Health , to administer testing. Customers are responsible for employing trained personnel to collect specimens. Specimens are sent to our laboratory inMadison, Wisconsin , where we run the assay in our laboratories and provide test results to ordering providers. In light of the uncertainty surrounding the COVID-19 pandemic, we intend to periodically reassess our COVID-19 testing business. 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 patientswho 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, Oncotype DX and COVID-19 tests. 52 -------------------------------------------------------------------------------- Table of Contents 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 limiting field-based, face-to-face interactions by our sales force. The sales team that is not engaged in face-to-face interactions will serve healthcare providers via telephone and online technologies until it is safe to return to the field and practices allow representatives back in their offices. Preserve Financial Strength In order to minimize the adverse impacts to our business and operations anticipated during 2020 due to the COVID-19 pandemic, beginning inApril 2020 , we initiated proactive measures to achieve cost savings. Actions we took included a temporary reduction of base pay for our executive officers and other employees, a reduction in the annual retainer payable to our board of directors, and a reduction of quarterly sales commissions. We implemented a workforce reduction, involuntary furloughs, work schedule reductions, as well as a voluntary furlough program. Additionally, we reduced investments in marketing and other promotional activities, paused certain clinical trial activities, reduced travel and professional services, and delayed or terminated certain capital projects. We also saw a reduction in certain volume based cost of goods sold expenses consistent with the reduction in revenue. These actions have contributed to significant cost savings in 2020 during the nine months endedSeptember 30, 2020 . Recent Events OnOctober 26, 2020 , we entered into a definitive agreement and plan of merger ("Thrive Merger Agreement") with Thrive, which we currently expect to be completed in the first quarter of 2021. OnOctober 26, 2020 , we acquired all of the outstanding stock of Base ("Base Merger Agreement"). Refer to Note 19 in our condensed consolidated financial statements included in this Quarterly Report for additional information. Results of Operations We have generated significant losses since inception and, as ofSeptember 30, 2020 , we had an accumulated deficit of approximately$1.5 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, the COVID-19 outbreak has had an adverse impact on our operations beginning inMarch 2020 . While we have seen recovery in our Screening and Precision Oncology businesses, the impact of the pandemic in the fourth quarter of 2020 and after is uncertain and subject to factors beyond our control. Revenue. Our revenue is primarily generated by our laboratory testing services, from our Cologuard, Oncotype DX and COVID-19 tests. For the three months endedSeptember 30, 2020 and 2019, we generated Screening revenue of$214.6 million and$218.8 million , respectively. For the nine months endedSeptember 30, 2020 and 2019, we generated Screening revenue of$565.4 million and$580.7 million , respectively. Screening includes laboratory service revenue from Cologuard and revenue from Biomatrica products. For the three months endedSeptember 30, 2020 , we generated Precision Oncology revenue of$91.6 million . For the nine months endedSeptember 30, 2020 , we generated Precision Oncology revenue of$322.9 million . Precision Oncology includes laboratory service revenue from global Oncotype DX and Paradigm products. For the three and nine months endedSeptember 30, 2020 , we also generated$102.2 million and$136.7 million , respectively, in revenue from our COVID-19 testing. For the three and nine months endedSeptember 30, 2020 , our Screening and Precision Oncology testing service revenue was adversely impacted by the effects of the COVID-19 outbreak. In response to the pandemic, we are conducting COVID-19 testing, which has served as additional revenue outside our normal Screening and Precision Oncology testing services. 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. 53 -------------------------------------------------------------------------------- Table of Contents 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$95.1 million for the three months endedSeptember 30, 2020 from$52.3 million for the three months endedSeptember 30, 2019 . Cost of sales increased to$254.6 million for the nine months endedSeptember 30, 2020 from$146.3 million for the nine months endedSeptember 30, 2019 . The increase in cost of sales is primarily due to costs incurred on our Precision Oncology tests due to the completion of the combination withGenomic Health inNovember 2019 and costs incurred from our COVID testing. Three Months Ended September 30, Amounts in millions 2020 2019 Change Production costs$ 51.4 $ 36.5 $ 14.9 Personnel expenses 26.8 9.4 17.4 Facility and support services 13.3 4.9 8.4 Stock-based compensation 3.5 1.4 2.1 Other cost of sales expenses 0.1 0.1 - Total cost of sales expense$ 95.1 $ 52.3 $ 42.8 Nine Months Ended September 30, Amounts in millions 2020 2019 Change Production costs$ 134.3 $ 103.4 $ 30.9 Personnel expenses 72.5 25.7 46.8 Facility and support services 38.2 13.2 25.0 Stock-based compensation 9.3 3.9 5.4 Other cost of sales expenses 0.3 0.1 0.2 Total cost of sales expense$ 254.6 $ 146.3 $ 108.3 54
-------------------------------------------------------------------------------- Table of Contents Research and development expenses. Research and development expenses decreased to$31.5 million for the three months endedSeptember 30, 2020 compared to$34.7 million for the three months endedSeptember 30, 2019 . Research and development expenses increased to$107.7 million for the nine months endedSeptember 30, 2020 compared to$96.5 million for the nine months endedSeptember 30, 2019 . The decrease during the three months endedSeptember 30, 2020 was primarily due to a reduction of certain direct research and development costs due to the cost saving measures and the timing of certain expenditures as a result of the COVID-19 pandemic. The increase during the nine months endedSeptember 30, 2020 was primarily due to an increase in personnel related costs as a result of the combination withGenomic Health inNovember 2019 , which was partially offset by a reduction in of certain direct research and development costs as discussed above. Three Months Ended September 30, Amounts in millions 2020 2019 Change Personnel expenses$ 13.1 $ 7.9 $ 5.2 Direct research and development 7.3 16.4 (9.1) Stock-based compensation 5.0 6.9 (1.9) Facility and support services 5.0 1.2 3.8 Professional fees 0.6 1.8 (1.2) Other research and development 0.5 0.5 - Total research and development expenses$ 31.5 $ 34.7 $ (3.2) Nine Months Ended September 30, Amounts in millions 2020 2019 Change Personnel expenses$ 45.2 $ 23.7 $ 21.5 Direct research and development 32.4 51.3 (18.9) Stock-based compensation 14.6 12.9 1.7 Facility and support services 11.1 3.3 7.8 Professional fees 2.3 3.9 (1.6) Other research and development 2.1 1.4 0.7 Total research and development expenses$ 107.7
55 -------------------------------------------------------------------------------- Table of Contents General and administrative expenses. General and administrative expenses increased to$115.6 million for the three months endedSeptember 30, 2020 compared to$80.5 million for the three months endedSeptember 30, 2019 . General and administrative expenses increased to$336.3 million for the nine months endedSeptember 30, 2020 compared to$208.1 million for the nine months endedSeptember 30, 2019 . The increase in general and administrative expenses was primarily related to the operations ofGenomic Health being included in our results after the completion of the combination inNovember 2019 , and an overall increase in headcount, information technology and customer care center costs to support the growth of the Company. Three Months Ended September 30, Amounts in millions 2020 2019 Change Personnel expenses$ 53.7 $ 29.2 $ 24.5 Professional and legal fees 15.9 20.1 (4.2) Stock-based compensation 21.5 11.1 10.4 Facility and support services 13.4 16.1 (2.7) Other general and administrative 11.1 4.0 7.1 Total general and administrative expenses$ 115.6 $ 80.5 $ 35.1 Nine Months Ended September 30, Amounts in millions 2020 2019 Change Personnel expenses$ 159.3 $ 85.9 $ 73.4 Professional and legal fees 52.9 39.4 13.5 Stock-based compensation 54.8 29.6 25.2 Facility and support services 42.4 42.0 0.4 Other general and administrative 26.9 11.2 15.7 Total general and administrative expenses$ 336.3
56 -------------------------------------------------------------------------------- Table of Contents Sales and marketing expenses. Sales and marketing expenses increased to$136.5 million for the three months endedSeptember 30, 2020 compared to$86.2 million for the three months endedSeptember 30, 2019 . Sales and marketing expenses increased to$423.1 million for the nine months endedSeptember 30, 2020 compared to$265.3 million for the nine months endedSeptember 30, 2019 . The increase in sales and marketing expenses was a result of additional sales and marketing personnel, including the Precision Oncology team added following the completion of theGenomic Health combination inNovember 2019 , which was partially offset by a reduction in advertising and marketing spend as a result of the COVID-19 pandemic. Three Months Ended September 30, Amounts in millions 2020 2019 Change Personnel expenses$ 67.4 $ 37.7 $ 29.7 Direct marketing costs and professional fees 26.9 23.0 3.9 Professional and legal fees 19.5 19.6 (0.1) Facility and support services 10.5 0.8 9.7 Stock-based compensation 11.5 4.9 6.6 Other sales and marketing expenses 0.7 0.2 0.5 Total sales and marketing expenses$ 136.5 $ 86.2 $ 50.3 Nine Months Ended September 30, Amounts in millions 2020 2019 Change Personnel expenses$ 209.0 $ 111.0 $ 98.0 Direct marketing costs and professional fees 90.0 68.9 21.1 Professional and legal fees 56.9 68.5 (11.6) Facility and support services 33.4 2.4 31.0 Stock-based compensation 32.4 14.3 18.1 Other sales and marketing expenses 1.4 0.2 1.2 Total sales and marketing expenses$ 423.1
Amortization of acquired intangible assets. Amortization of acquired intangible assets increased to$23.4 million for the three months endedSeptember 30, 2020 compared to$0.7 million for the three months endedSeptember 30, 2019 . Amortization of acquired intangible assets increased to$70.2 million for the nine months endedSeptember 30, 2020 compared to$2.3 million for the nine months endedSeptember 30, 2019 . The increase in amortization of acquired intangible assets was primarily due to theGenomic Health combination. Intangible asset impairment charge. Intangible asset impairment charge was$209.7 million for the three and nine months endedSeptember 30, 2020 compared to zero for the three and nine months endedSeptember 30, 2019 . The impairment recorded during the nine months endedSeptember 30, 2020 primarily relates to the impairment of the in-process research and development intangible asset acquired as part of the combination withGenomic Health . Other operating income. Other operating income increased to$23.7 million for the nine months endedSeptember 30, 2020 compared to zero for the nine months endedSeptember 30, 2019 . The income generated during the nine months endedSeptember 30, 2020 represents the funding received under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act")Provider Relief Fund , which was accepted from theDepartment of Health & Human Services inMay 2020 . 57 -------------------------------------------------------------------------------- Table of Contents Investment income, net. Investment income, net decreased to$2.5 million for the three months endedSeptember 30, 2020 compared to$9.1 million for the three months endedSeptember 30, 2019 . Investment income, net decreased to$5.5 million for the nine months endedSeptember 30, 2020 compared to$23.4 million for the nine months endedSeptember 30, 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 nine months endedSeptember 30, 2020 when compared to the same period in 2019. Interest expense. Interest expense increased to$23.6 million for the three months endedSeptember 30, 2020 compared to$13.2 million for the three months endedSeptember 30, 2019 . Interest expense increased to$71.6 million for the nine months endedSeptember 30, 2020 compared to$47.9 million for the nine months endedSeptember 30, 2019 . The increase is primarily due to the issuance of additional convertible notes inFebruary 2020 , which was partially offset by lower interest rates on the convertible notes issued inFebruary 2020 . Interest expense recorded from our outstanding convertible notes totaled$23.2 million and$12.7 million during the three months endedSeptember 30, 2020 and 2019, respectively. Of the interest expense recorded on outstanding convertible notes for the three months endedSeptember 30, 2020 and 2019,$20.6 million and$11.0 million of interest expense relates to amortization of debt discount and debt issuance costs, respectively. Interest expense recorded from our outstanding convertible notes totaled$62.3 million and$36.4 million during the nine months endedSeptember 30, 2020 and 2019, respectively. Of the interest expense recorded on outstanding convertible notes for the nine months endedSeptember 30, 2020 and 2019,$55.2 million and$30.8 million of interest expense relates to amortization of debt discount and debt issuance costs, respectively. The remaining interest expense recorded on outstanding convertible notes relates to the stated interest that is paid out in cash. In addition to the interest expense recorded on outstanding convertible notes, an additional$8.0 million and$10.6 million was recorded during the nine months endedSeptember 30, 2020 and 2019, respectively, as a result of the settlement of convertible notes. The convertible notes are further described in Note 15 of our condensed consolidated financial statements included in this Quarterly Report. The remaining interest expense for the three and nine months endedSeptember 30, 2020 and 2019, relates to the stated interest on our construction loan. Income tax benefit (expense). Income tax benefit increased to$4.5 million for the three months endedSeptember 30, 2020 compared to an expense of$0.7 million for the three months endedSeptember 30, 2019 . Income tax benefit increased to$7.1 million for the nine months endedSeptember 30, 2020 compared to$0.2 million for the nine months endedSeptember 30, 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 ourGenomic Health combination, of Oncotype DX tests. As ofSeptember 30, 2020 , we had approximately$806.7 million in unrestricted cash and cash equivalents and approximately$476.3 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 provided by operating activities was$25.1 million for the nine months endedSeptember 30, 2020 compared to cash use of$86.4 million for the nine months endedSeptember 30, 2019 . The increase in cash provided by operating activities for the nine months endedSeptember 30, 2020 was primarily due to the increase in revenue and reduction of discretionary operating expenses due to cost saving measures as a result of the COVID-19 pandemic. Net cash used in investing activities was$395.4 million for the nine months endedSeptember 30, 2020 compared to cash provided of$713.7 million for the nine months endedSeptember 30, 2019 . The increase in cash used in investing activities for the nine months endedSeptember 30, 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 58 -------------------------------------------------------------------------------- Table of Contents of purchases, sales, and maturities of marketable securities, net cash used in investing activities was$65.3 million for the nine months endedSeptember 30, 2020 compared to$131.5 million for the nine months endedSeptember 30, 2019 . Cash use consisted primarily of purchases of property and equipment of$47.8 million and$131.0 million for the nine months endedSeptember 30, 2020 and 2019, respectively, investments in privately held companies of$10.6 million , and an acquisition of$6.7 million . There were also minimal purchases of intangible assets during the nine months endedSeptember 30, 2020 and 2019. Net cash provided by financing activities was$999.8 million for the nine months endedSeptember 30, 2020 compared to$246.6 million for the nine months endedSeptember 30, 2019 . During the nine months endedSeptember 30, 2020 , we received net cash of$1,125.5 million from the issuance of Convertible Notes with a maturity date ofMarch 1, 2028 (the "2028 Notes"), and we used$150.1 million of cash to settle Convertible Notes with an original maturity date ofJanuary 15, 2025 (the "2025 Notes"). The cash provided by financing activities for the nine months endedSeptember 30, 2019 was primarily the result of proceeds of$729.5 million from our issuance of Convertible Notes with a maturity date ofMarch 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 nine months endedSeptember 30, 2020 we received proceeds of$15.4 million from the exercise of stock options and$9.8 million from our employee stock purchase plan. As described above, onOctober 26, 2020 , we entered into the Base Merger Agreement, under which we acquired Base in a cash transaction valued at approximately$410.0 million . As described above, onOctober 26, 2020 , we entered into the Thrive Merger Agreement, under which we agreed to acquire Thrive in a cash and stock transaction valued at approximately$2.2 billion , of which$1.7 billion would be payable at closing. We currently expect the merger will be completed in the first quarter of 2021, subject to customary closing conditions and regulatory approvals. We anticipate that cash of approximately$0.6 billion will be required to pay the aggregate cash portion of the merger consideration. We expect that cash and cash equivalents and marketable securities on hand atSeptember 30, 2020 will be sufficient to fund the cash portion of the purchase price to be paid in connection with the Thrive and Base acquisitions as well as 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 disrupted our operations, as well as the operations and behaviors of healthcare providers, patients and suppliers. Depending on how healthcare providers, patients and suppliers are adversely impacted by the pandemic, as well as the overall duration and severity of the pandemic and changes in behavior that continue even after the pandemic, our liquidity could be materially and adversely affected. Management continues to monitor and assess the evolving developments with respect to COVID-19. A table reflecting certain of our specified contractual obligations as ofDecember 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 nine months endedSeptember 30, 2020 , we issued$1,150.0 million in aggregate principal amount of 0.375% Convertible Notes that will mature onMarch 1, 2028 . The holders of the Notes may convert prior toSeptember 1, 2027 only under certain circumstances and may convert at any time afterSeptember 1, 2027 . The Notes accrue interest at a fixed rate of 0.375% per year, payable semi-annually in arrears onMarch 1 andSeptember 1 of each year, beginning onSeptember 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 59 -------------------------------------------------------------------------------- Table of Contents 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 nine months endedSeptember 30, 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 inthe 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 nine months endedSeptember 30, 2020 . Revenue Recognition. Revenues are recognized when control of the promised services are transferred to the patient's healthcare provider, in an amount that reflects the consideration we expect to collect in exchange for those services. The amount of revenue we recognize is based on the established billing rates less contractual and other adjustments, which yields the 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. The consideration derived from our contracts is fixed when we contract with a direct bill payerwho assumes the downstream patient billing. Our ability to collect is not contingent on the customer's ability to collect through their downstream billing efforts. In the case of some of our laboratory service agreements ("LSAs") with various organizations, the right to bill and collect exists prior to the receipt of a specimen and release of a test result to the ordering healthcare provider, which results in deferred revenue. The deferred revenue balance is relieved upon the release of the applicable patient's test result to the ordering healthcare provider, the date a non-conforming specimen is received, or as of the date the customer has surpassed the window of time in which they are able to exercise their rights for testing services. We believe these points in time represent our fulfillment of our obligations to the customer. The quality of our billing operations, most notably those activities that relate to obtaining the correct information in order to bill effectively for services provided, directly impacts the collectability of our receivables and revenue estimates. As such, we continually assess the state of our order to cash cycle for areas of opportunity as we believe adequate operations support our ability to appropriately estimate receivables and revenue. Upon ultimate collection, the aggregate amount received from payers and patients where reimbursement was estimated is compared to previous collection estimates and, if necessary, the 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. 60 -------------------------------------------------------------------------------- Table of Contents 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. InFebruary 2020 we issued the 2028 Notes of$1,150.0 million in aggregate principal amount of 0.375% Convertible Notes with a maturity date ofMarch 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 theFebruary 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. InMarch 2020 , we recognized goodwill of$30.4 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. 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. Impairment of Long-Lived Assets. We evaluate the fair value of long-lived assets, which include property, plant and equipment, intangible assets, and investments in privately held companies, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the third quarter, we recorded an impairment loss of$200.0 million related to the in-process research and development intangible asset acquired as part of the business combination withGenomic Health and an impairment loss of$9.7 million relating to the abandonment of certain research and development efforts using intangible assets acquired as part of an asset purchase agreement withArmune Biosciences, Inc. The determination to record these impairment charges was made in connection with the preparation of the financial statements as ofSeptember 30, 2020 . Refer to Note 5 of the condensed consolidated financial statements included in this Quarterly Report for further discussion on the impairment charges recorded. 61 -------------------------------------------------------------------------------- Table of Contents 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 ofSeptember 30, 2020 , we had no off-balance sheet arrangements. 62
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