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

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, objectives and the pending acquisition of Thrive
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 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 Restated Promotion Agreement with Pfizer,
Inc., and acquisitions; our success establishing and maintaining collaborative,
licensing and supplier arrangements; our ability, and the ability of Thrive 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.
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.
                                       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) 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
or COVID-19 testing 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.
In October 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 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. In September 2020, Mayo agreed to
make available certain personnel to provide us product development and research
and development assistance through January 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. 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 in November 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. In September 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. 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.
•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 the World 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 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, margins, and cash utilization, among
other measures.
                                       51
--------------------------------------------------------------------------------
  Table of Contents
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; 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
in April 2020 because of COVID-19, more notably in the U.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 in May 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 late March 2020, we began providing COVID-19 testing. The U.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 the State of Wisconsin
Department of Health, to administer testing. Customers are responsible for
employing trained personnel to collect specimens. Specimens are sent to our
laboratory in Madison, 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 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, 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 in April 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 ended
September 30, 2020.
Recent Events
On October 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. On October 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 of September 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 in March 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 ended
September 30, 2020 and 2019, we generated Screening revenue of $214.6 million
and $218.8 million, respectively. For the nine months ended September 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 ended September 30, 2020,
we generated Precision Oncology revenue of $91.6 million. For the nine months
ended September 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 ended
September 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 ended September 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 ended September 30, 2020
from $52.3 million for the three months ended September 30, 2019. Cost of sales
increased to $254.6 million for the nine months ended September 30, 2020 from
$146.3 million for the nine months ended September 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 with Genomic Health in November 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 ended September 30, 2020 compared to
$34.7 million for the three months ended September 30, 2019. Research and
development expenses increased to $107.7 million for the nine months ended
September 30, 2020 compared to $96.5 million for the nine months ended September
30, 2019. The decrease during the three months ended September 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 ended
September 30, 2020 was primarily due to an increase in personnel related costs
as a result of the combination with Genomic Health in November 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

$ 96.5 $ 11.2

                                       55
--------------------------------------------------------------------------------
  Table of Contents
General and administrative expenses. General and administrative expenses
increased to $115.6 million for the three months ended September 30, 2020
compared to $80.5 million for the three months ended September 30, 2019. General
and administrative expenses increased to $336.3 million for the nine months
ended September 30, 2020 compared to $208.1 million for the nine months ended
September 30, 2019. The increase in general and administrative expenses was
primarily related to the operations of Genomic Health being included in our
results after the completion of the combination in November 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

$ 208.1 $ 128.2

                                       56
--------------------------------------------------------------------------------
  Table of Contents
Sales and marketing expenses. Sales and marketing expenses increased to
$136.5 million for the three months ended September 30, 2020 compared to
$86.2 million for the three months ended September 30, 2019. Sales and marketing
expenses increased to $423.1 million for the nine months ended September 30,
2020 compared to $265.3 million for the nine months ended September 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 the Genomic Health combination in November 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

$ 265.3 $ 157.8

Amortization of acquired intangible assets. Amortization of acquired intangible
assets increased to $23.4 million for the three months ended September 30, 2020
compared to $0.7 million for the three months ended September 30, 2019.
Amortization of acquired intangible assets increased to $70.2 million for the
nine months ended September 30, 2020 compared to $2.3 million for the nine
months ended September 30, 2019. The increase in amortization of acquired
intangible assets was primarily due to the Genomic Health combination.
Intangible asset impairment charge. Intangible asset impairment charge was
$209.7 million for the three and nine months ended September 30, 2020 compared
to zero for the three and nine months ended September 30, 2019. The impairment
recorded during the nine months ended September 30, 2020 primarily relates to
the impairment of the in-process research and development intangible asset
acquired as part of the combination with Genomic Health.
Other operating income. Other operating income increased to $23.7 million for
the nine months ended September 30, 2020 compared to zero for the nine months
ended September 30, 2019. The income generated during the nine months ended
September 30, 2020 represents the funding received under the Coronavirus Aid,
Relief, and Economic Security Act ("CARES Act") Provider Relief Fund, which was
accepted from the Department of Health & Human Services in May 2020.
                                       57
--------------------------------------------------------------------------------
  Table of Contents
Investment income, net. Investment income, net decreased to $2.5 million for the
three months ended September 30, 2020 compared to $9.1 million for the three
months ended September 30, 2019. Investment income, net decreased to
$5.5 million for the nine months ended September 30, 2020 compared to
$23.4 million for the nine months ended September 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 ended September 30, 2020
when compared to the same period in 2019.
Interest expense. Interest expense increased to $23.6 million for the three
months ended September 30, 2020 compared to $13.2 million for the three months
ended September 30, 2019. Interest expense increased to $71.6 million for the
nine months ended September 30, 2020 compared to $47.9 million for the nine
months ended September 30, 2019. The increase is primarily due to the issuance
of additional convertible notes in February 2020, which was partially offset by
lower interest rates on the convertible notes issued in February 2020. Interest
expense recorded from our outstanding convertible notes totaled $23.2 million
and $12.7 million during the three months ended September 30, 2020 and 2019,
respectively. Of the interest expense recorded on outstanding convertible notes
for the three months ended September 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 ended September 30, 2020 and 2019, respectively. Of the interest
expense recorded on outstanding convertible notes for the nine months ended
September 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 ended September 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 ended September 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 ended September 30, 2020 compared to an expense of $0.7 million
for the three months ended September 30, 2019. Income tax benefit increased to
$7.1 million for the nine months ended September 30, 2020 compared to
$0.2 million for the nine months ended September 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 our Genomic Health
combination, of Oncotype DX tests. As of September 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
ended September 30, 2020 compared to cash use of $86.4 million for the nine
months ended September 30, 2019. The increase in cash provided by operating
activities for the nine months ended September 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
ended September 30, 2020 compared to cash provided of $713.7 million for the
nine months ended September 30, 2019. The increase in cash used in investing
activities for the nine months ended September 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 ended September 30,
2020 compared to $131.5 million for the nine months ended September 30, 2019.
Cash use consisted primarily of purchases of property and equipment of
$47.8 million and $131.0 million for the nine months ended September 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 ended September 30, 2020
and 2019.
Net cash provided by financing activities was $999.8 million for the nine months
ended September 30, 2020 compared to $246.6 million for the nine months ended
September 30, 2019. During the nine months ended September 30, 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 nine
months ended September 30, 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 nine months ended September 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, on October 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, on October 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 at
September 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 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
nine months ended September 30, 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
                                       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 ended September 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
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 nine months ended September 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 payer
who 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. 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 $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 with Genomic 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
with Armune Biosciences, Inc. The determination to record these impairment
charges was made in connection with the preparation of the financial statements
as of September 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 of September 30, 2020, we had no off-balance sheet arrangements.

                                       62

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

Table of Contents

© Edgar Online, source Glimpses