Exact Sciences Corp

NASDAQ:EXAS

Earnings Call Analysis

Solid Growth Expectations for Exact Sciences

Exact Sciences projects sustainable double-digit revenue growth and expanding profit margins, fueled by investments in resolving critical customer challenges. The company's flagship product, Cologuard, holds about 10% market share, aiming for 50% long-term using a strategic mix of team expertise, next-gen tests, and substantial clinical evidence. Cologuard 2.0's expected 2025 launch promises 30% fewer false positives, which could enhance its value to payers without altering current pricing, bolster revenue growth and improve margin profiles. Despite a seasonal Q4 decline due to holidays affecting patient screenings, incremental growth over $420 million is projected for the year. Additionally, management has effectively navigated a $50 million COVID-related headwind, with re-screenings poised for growth as the pool of eligible patients expands from 1.2 million this year to 1.6 million next year.

Sustained Growth with an Expansive Mission

In a field where addressing customer challenges is as important as financial performance, the company has maintained not just a robust double-digit revenue growth trajectory, but also an expanding profit margin. This balance of customer-centric innovation and financial prudence has positioned the company for continued leadership in addressing pivotal health concerns.

Long-term Potential of Cologuard

With a focus on life-saving diagnostics, Cologuard stands out as a product with significant long-term impact. Targeting the sizeable market of over 60 million Americans currently not up to date with colorectal screening, the company is poised to make notable inroads. Encouraged by their strong team, superior testing options, and impressive clinical evidence, they are setting sights on capturing a large share of this expansive market.

Progress Towards Financial Goals

The company is on a surefooted journey towards its financial targets for 2027, with an emphasis on strategic timing. They expect continued strong performance in the upcoming periods albeit recognizing that the fourth quarter may experience a temporary slowdown due to seasonal effects, such as fewer preventive care visits during the holiday season.

The Next Generation Cologuard Advancement

Innovation is at the forefront with Cologuard 2.0. This next-generation test is expected to greatly reduce false positives by 30%, enhancing value to payers and patients alike. Furthermore, the company anticipates a 5% reduction in costs of goods, reinforcing their commitment to incremental revenue and profitability without pricing changes.

Re-screen Market Opportunities

The company reported healthy performance in re-screens despite a $50 million headwind related to the pandemic. Looking ahead, they anticipate the pool of eligible patients for re-screens will increase from 1.2 million to 1.6 million, laying the groundwork for growth in this segment.

Venturing into Minimal Residual Disease (MRD) Testing

With the impending introduction of MRD diagnosis for colon and breast cancer, the company is tapping into a market with years of robust growth expected. The advent of these tests addresses critical questions about cancer treatment efficacy and potentially recurring tumors, providing substantial change in oncology care and heralding new frontiers for the company's diagnostic suite.

Health Systems as Growth Levers

By successfully entering into partnerships with health systems, the company is effectively targeting the 60 million individuals overdue for screening. Their proven approach through high-level engagements with health systems is poised to serve as a sustainable growth driver in the foreseeable future.

Financial Discipline and Forward Guidance

The company underscored its commitment to detail-oriented financial planning, with guidance traditionally provided during their February call. Past performance suggests strong expense discipline across the board, steady gross margin improvement, and targeted leverage on general and administrative (G&A) expenses aiming for a reduction to 10-12% of revenue in the longer term. There are expectations of new investments in sales and marketing with the introduction of fresh products, aligning with the overall strategy for sustainable growth.

Innovative Direct Engagement with Patients

A pilot program, where the company engages directly with patients through prescribed mailing of kits around screening dates, reveals a strategic shift towards greater convenience and adherence. This method, if scaled, has the potential to significantly increase screening volumes, particularly among those due for re-screening.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Exact Sciences Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that this call is being recorded. [Operator Instructions]

And now at this time, I would like to turn the call over to Mr. Erik Holznecht, Manager of Investor Relations. Please go ahead, sir.

[Erik Holznecht, executive]

Thanks, Bo. Thank you for joining us for Exact Sciences' Third Quarter 2023 Conference Call. On the call today are Kevin Conroy, the company's Chairman and CEO; and Jeff Elliott, our Chief Financial Officer. Everett Cunningham, our Chief Commercial Officer, will also be available for questions.

Exact Sciences issued a news release earlier this afternoon detailing our third quarter financial results. This news release and today's presentation are available on our website at exactsciences.com. During today's call, we will make forward-looking statements based on current expectations. Our actual results may be materially different from such statements. Discussions of non-GAAP figures and reconciliations to GAAP figures are available in our earnings press release, and descriptions of the risks and uncertainties associated with Exact Sciences are included in our SEC filings. Both can be accessed through our website.

I'll now turn the call over to Kevin.

[Kevin Conroy, executive]

Thank you, Erik. Our third quarter results reflect our commitment to help eradicate cancer with tests that prevent it, detect it earlier in guide its treatment. Cologuard and Oncotype DX fuel are growing $2.5 billion business and the next wave of breakthrough cancer diagnostic innovations. Our focus on solving the needs of patients and health care providers powered outstanding third quarter results, allowing us to raise our 2023 guidance for both revenue and adjusted EBITDA.

Highlights from the third quarter include delivering more than 1 million total tests, including a record number of Cologuard and Oncotype DX results; growing core revenue of 23% to $625 million, also a record; generating $56 million of adjusted EBITDA, a $69 million improvement; exceeding 1 million people screened with Cologuard between ages 45 and 49 in the 2.5 years since the recommended start age was moved from 50 to 45; expanding the impact of Oncotype DX by launching in Japan on a reimbursed basis; beginning to integrate Resolution Biosciences and our new liquid therapy selection test into our portfolio; presenting pivotal BLUE-C study results at the American College of Gastroenterology Conference, demonstrating next-generation Cologuard met all endpoints; and showcasing the breadth and depth of our research with 5 abstracts with our Precision Oncology and multi-cancer test at the European Society of Medical Oncology Congress.

The investments we've made in our core business are returning sustainable revenue growth and margin expansion. This allows us to strengthen our world-class team and develop new life-changing solutions for patients.

Jeff will now review our third quarter results.

[Jeffrey Elliott, executive]

Thanks, Kevin. Third quarter revenue of $628 million grew 20% or 23% on a core basis, excluding COVID testing, M&A and FX. Screening revenue of $472 million increased 31%, driven by broad-based momentum in Cologuard adoption. This momentum was fueled by commercial productivity and our deep relationships with payers and providers. More than 10,000 new health care professionals ordered Cologuard during the quarter, more than 331,000 have ordered since launch. As we said last quarter, about 75% of primary care physicians have ordered Cologuard. So we don't plan to provide the number of new physicians starting next year.

Precision Oncology revenue grew 3% to $156 million or 5% on a core basis. Growth was led by Oncotype DX, which expanded 14% globally. Third quarter GAAP gross margin was 70%. Non-GAAP gross margin, excluding amortization of acquired intangibles, was 73%. GAAP net income was $1 million, including a gain of $72 million related to the prostate business sale. Adjusted EBITDA was $56 million, an improvement of $69 million, driven by better-than-expected revenue and continued operating expense discipline. Cash provided by operating activities was $24 million. Free cash flow was a loss of less than $1 million, an improvement of $85 million.

Third quarter included a onetime payment of $33 million for a previously disclosed and reserved matter. We ended the quarter with cash and securities of $734 million.

Turning to guidance. We're raising total revenue to between $2.476 billion and $2.486 billion for the year. This assumes Screening revenue between $1.848 billion and $1.853 billion, Precision Oncology revenue between $622 million and $627 million and COVID revenue of $6 million. We discontinued COVID testing in July. For the year, then supplies 23% core revenue growth with 30% growth in Screening and 7% core growth in Precision Oncology. We're raising adjusted EBITDA guidance to between $195 million and $205 million. This implies an adjusted EBITDA margin of 8%, giving us confidence in reaching at least 20% by 2027. The Exact Sciences platform was built to drive sustainable double-digit revenue growth and steady margin improvement. The progress we've made this year puts us in a great position to reach our long-term financial targets.

Back to you, Kevin.

[Kevin Conroy, executive]

Thanks, Jeff. We've delivered our 13 millionth Cologuard test results during the third quarter. Based on known prevalence data, we estimate Cologuard has helped find precancerous polyps and early-stage cancer in nearly 0.5 million people over the past 10 years. Cologuard is becoming deeply ingrained in clinical practice. For example, last quarter, 169,000 health care providers ordered Cologuard, a new record. Those providers are ordering Cologuard more frequently than last year. We received nearly 70% of Cologuard orders electronically, and Cologuard brand awareness with consumers reached 87%, an all-time high. There are 60 million Americans aged 45 to 85 not up to date with colon cancer screen. Cologuard is the ideal solution to get people screened accurately and conveniently. Cologuard is included in all major guidelines, quality measures and nearly universally covered by commercial insurance with no cost to the patient.

We've demonstrated Cologuard can scale rapidly. Capacity for screening colonoscopies is relatively fixed at about 6 million procedures per year. Our sales and marketing teams are creating urgency around the importance of screening by, one, partnering with health systems and payers to address their screening rates and related quality measures; two, educating providers about the benefits of Cologuard through more than 1 million face-to-face engagements each year; and three, using a multichannel marketing approach to elevate colon cancer screening. These efforts are increasingly making Cologuard a first-line screening choice.

Oncotype DX is internationally recognized as standard of care and it anchors our Precision Oncology portfolio. Oncotype DX helps early-stage breast cancer patients to determine whether they will benefit from chemotherapy and assesses their likelihood of recurrence. We're using its global presence to enter new markets and accelerate the availability of future advanced cancer tests all around the world. For example, we launched Oncotype DX in Japan 2 months ago. Japan will soon become our largest market outside the U.S.

Breast cancer is the most common cancer among Japanese women with about 45,000 new diagnosis of early-stage HR-positive HER2-negative breast cancer each year. To provide a more comprehensive understanding of each patient's disease, we're planning to introduce new genomic tools, including Oncodetect, our molecular residual disease test and our recently acquired blood-based therapy selection test that complements our tissue-based OncoExTra offer.

Expanding our portfolio allows our oncology customers to work with 1 trusted advanced diagnostics partner. Combining information from our tests will help guide each of their patients to the most effective cancer treatments. The Exact Sciences team has made progress in our 3 most impactful pipeline programs, colon cancer screening, molecular residual disease and multi-cancer screen. For next-generation Cologuard, our data presentation at ACG in October have demonstrated the pivotal head-to-head BLUE-C studies is the new gold standard for evidence in colon cancer screening. The study was designed to validate our prespecified algorithm. BLUE-C enrolled over 20,000 people, including 98 with cancer and more than 2,000 with pre-cancerous polyps. This provided excellent statistical power for analyzing our predefined primary and secondary.

Next-generation Cologuard met all endpoints achieving 94% cancer sensitivity, 93% sensitivity for curable stage cancer or stages 1 to 3 and 91% specificity as calculated by FDA. Specificity, excluding small adenomas and patients with no findings was 93%. The results also confirm next-generation Cologuard is superior to the FIT test in detecting cancer and precancerous polyps. Our team plans to finalize the FDA submission in December, and we're working to make next-generation Cologuard available to patients in early 2025.

In molecular residual disease, we're on track to make our tumor-informed test available for colon cancer patients by year-end and for breast cancer patients next year. At Exact Sciences, we will help eradicate cancer by preventing it, detecting it earlier and guiding its treatment. We have an innovative, patient-focused culture; a deep scientific understanding of cancer; and the best portfolio in advanced diagnostics. The strength of our business allows us to invest in solving the most pressing challenges our customers face, while delivering sustainable double-digit revenue growth and expanding profit margins. We are in a leading position to help achieve our important mission.

Before we take your questions, I'd like to congratulate Megan Jones on her new role as VP of Finance International. Through her 6.5-year tenure leading our IR team, Megan has proven herself as a strategic thought leader and an outstanding business partner. We have big plans for her going forward.

We're now happy to take your questions.

[Operator]

[Operator Instructions] We'll go first this afternoon to Catherine Schulte at Baird.

[Catherine Ramsey, analyst]

Kevin, I just wanted to kick things off with a big picture question on Cologuard. Just given where you sit today around 10% market share, how do you think Cologuard is positioned for the long term? And can you just help us think about the strategy to get from where we are today to your 50% long-term market share target?

[Kevin Conroy, executive]

Thanks, Catherine. We're so excited about the impact that Cologuard can have over the long term. And as you know, it's been a long road to start to change the standard of care in screening. You're talking about a population of over 100 million Americans that need to be screened and 60 million who are not up to date today. So if you take a look at this over the next decade, you have to look at who has the best team. We believe we have the best team. We have the best test presently in our next-generation Cologuard test and the best clinical evidence as BLUE-C data is sterling and such a strong case for moving, screening generally to noninvasive at-home testing.

And then you couple this with the incredible services and IT infrastructure and commercial organization that we have. We believe that we can go get a large percentage of those 60 million people screened. And we also believe we can leverage this then outside the U.S. over the next decade and reach well over 100 million people outside the U.S. So we're excited about the other programs we have in colon cancer screening and the ability to surround our customer, patients and physicians and health systems, large organized health systems to get more people screened. So over the next decade, where we see growth continuing for as far as we can see with all of these strengths.

[Operator]

We go next now to Brandon Couillard at Jefferies.

[S. Brandon Couillard, analyst]

Jeff or Kevin, I'm just curious how you're thinking about the fourth quarter, which usually is tricky in terms of seasonality. Do you think this year will be any different in terms of seasonality? Just thinking about Cologuard being so much more ingrained, it's so much deeper penetrated in health systems. Just curious if you anticipate a big bolus of gap testing. How we think about, I guess, fourth quarter dynamics?

[Jeffrey Elliott, executive]

Brandon, this is Jeff. I'll start and then maybe Everett can jump in. Look, we're really pleased with the results through 3 quarters. The team has delivered, I think, outstanding results. We've made very good progress towards our long-term 2027 financial goals. If you just look at what we've done so far, what we're -- the new guide, the updated guide calls for is over $420 million of incremental growth this year, which is the best so far. It's a really good year. So we feel good about that.

When you look at your comments on 3Q go through that trend, just take a step back here. Look, I don't expect any difference here because the main reason -- the reason for the seasonal effect is not really ours, it really relates to the holidays. When you think of Thanksgiving, Christmas and New Year, fewer people go out and get physicals. They're spending time at home with their families and friends, which they should be as opposed to going out and seeking preventative care. So that leads to fewer physicals and fewer Cologuard orders temporarily during the holidays. Patients are also slower to return the kits that are out in the field during that time. So again, temporarily Q4 feels a bit of that and then Q1 feels a bigger impact from the holidays. So I don't expect that to change this year. That trend is always going to be there. Again, it's not specific to us. It's more primary care and general.

You mentioned the Care gap business. It's a smaller part of the business. I do expect that to be a little weighted towards Q4, but whatever and team are doing are looking to build that up as a bigger part of the business as we scale. I did notice this year that some of the business we had previously expected to come in Q4 actually fell into Q3. So that explains part of the dynamic on 3Q to 4Q this year.

[Operator]

We go next now to Derek DeBruin of Bank of America.

[Derik De Bruin, analyst]

So I got a couple. So on Cologuard 2.0, really good data. How should we think about pricing and reimbursement versus Cologuard classic, I guess? Is it going to be a price benefit to that? And on rescreening, what was the tailwind from rescreens in '23? And how do you think about the opportunity for rescreening in '24?

[Kevin Conroy, executive]

I'll take the first part of that and add -- toss the rescreening over to Jeff and Everett. What's the first part -- yes. In terms of pricing, we are -- we're not prepared to talk about price at a detailed level. Taking a step up, Cologuard 2.0 or next-generation Cologuard is -- provides a significant increment in value because there are 30% fewer false positives. False positives lead to unnecessary colonoscopies, lead to unnecessary complications, et cetera, leading to cost and diminished care.

So by eliminating those, 30% of all false positives, it gives tremendous value to commercial payers and to Medicare. So those are conversations that we plan to have. It's too early to tell where that will go. But we'll talk more about those plans as we head into 2025 when we launch Cologuard 2.0, next gen.

[Jeffrey Elliott, executive]

Derek, thanks for the question. This is Jeff. Even without a change in pricing for 2.0, we expect incremental revenue to Exact Sciences because, as Kevin mentioned, a reduction in false positives means more patients stay with Exact Sciences and Cologuard over time. So it should really help the rescreen business, which is doing well today, and I think it can do even better going forward.

Also to remind you, the cost of goods for 2.0, we expect to be at least 5% below what we see today. So that should help -- that's the per test cost of goods. So that should help both the revenue growth and margin profile.

To your second question on rescreens. Rescreens, we had a good quarter. The team is doing a very nice job managing through the headwind that we faced this year. And the headwind, to remind folks on the call, relates back to 2020 when COVID first hit. That led to a temporary pause in people getting screens. So now 3 years later, as people are looking to do or would normally look to do a rescreen for Cologuard, we see a bit of a headwind. That's about a $50 million headwind to the business this year. So again, the team is doing a nice job of navigating that.

When you look at the number of new patients who are becoming eligible for rescreens this year, it's $1.2 million. That's the same as what it was last year. However, when you look ahead to next year, it jumps up to $1.6 million. So not only are we improving our success rate at getting more people rescreened, the pool of patients is also growing, who are eligible for rescreening.

[Everett Cunningham, executive]

And Jeff, I'll just add something. Commercial -- it's a great example of our commercial organization from a rescreen execution standpoint. Our field force is one of their major messages to our providers that are out there. From a marketing standpoint, we have specific marketing materials for the rescreen population. And then from a customer experience standpoint, we're actually reaching out to those patients that are super overdue from a rescreen population through text messaging, through phone calls, through e-mails and making sure that we remind them that they are up for their date. So that focus has been really, really solid in '23, and we're looking to continue that in '24.

[Operator]

We'll go next now to Dan Brennan at TD COwen.

[Daniel Brennan, analyst]

Congrats, Megan. So maybe 2-parter, first would just be on Cologuard. You've had 30%, I think, plus growth the last couple of years. You just talked about the rescreen opportunity being even greater next year given the headwinds. So just wondering is there are any factors that you would see today that would slow down the 30% type growth rate as we look ahead?

And then b, could you just provide an update on MRD? I know in Q2, you gave some color in terms of the launch timing and then the time it would take the coverage and things of that nature, but just wondering if you can just update us on how we should be thinking about the breast launch and then the colorectal launch.

[Kevin Conroy, executive]

Why don't I start with this, Dan, thanks. MRD will, as we mentioned in the earlier comments, will be available for colon cancer at the -- by the end of this year and breast cancer next year in terms of a MALDI X submission that will occur next year for colon cancer screening and most likely breast cancer the year after. Jeff, why don't you take the other question.

[Jeffrey Elliott, executive]

Sure. I'll take the one on Cologuard. Kevin and Everett have talked about some of the things we're doing commercially to keep that growth going. And look, we have very broad-based momentum. There are 60 million people unscreened. And our goal, as you well know, is to get to at least $7 billion of revenue long term. So we expect many years of robust growth ahead. Back in June, we guided to total company revenue growth of 15% about from the period of 2022 through 2027. What they're really implied was Cologuard growth a bit faster than that and then some of the other non-Cologuard areas growing a bit slower.

So obviously, over time, with the large numbers kicking in from a growth rate standpoint, yes, we expect it to grow -- to slow down. But over time, we expect very sustainable double-digit growth, which is what we guided to back in June.

[Operator]

We'll go next now to Andrew Brackman at William Blair.

[Andrew Brackmann, analyst]

Congrats to Megan. I wanted to ask on Resolution Bio. It seems like a nice tuck-in business for you guys. Can you maybe just sort of talk about the rationale there broadly? And then also, just as it relates to M&A and capital allocation, anything that you would call out with respect to changes in your philosophy there as we look to 2024?

[Kevin Conroy, executive]

No change to our perspective on capital allocation in terms of our acquisition of Resolution Bio. It's a very strong company with a culture of innovation, and they have an amazing liquid biopsy test. We believe it's going to be a home run of an acquisition for us over the long haul. The quality of their therapies selection test complements OncoExTra, which is our solid tumor tissue test for therapy selection. Liquid is a preferred solution in many situations, enabling faster turnaround times. And it also helps us expand our biopharma opportunity as a CDx port, non-small cell lung cancer.

So the next steps here are to generate evidence and submit to MALDI X for reimbursement, make this available through our Oncotype DX or Precision Oncology commercial organization and continue to deliver additional new tests to the oncologists that are such strong customers. So we're thrilled about this acquisition. It's a great team in the Seattle, Washington area, high-quality people that add to the culture and capabilities of Exact Sciences.

[Operator]

We'll go next now to Vijay Kumar at Evercore ISI.

[Vijay Kumar, analyst]

Kevin -- actually, I had a 2-parter, Kevin, one on MRD here. Can you just compare in contrast with screening when you think about the launch curve, what's the level of evidence? How should we think about the launch curve. Screening you need USPSTF recommendation, et cetera. How does it work in MRD? And Jeff, on the guidance here, did the guide rates include Resolution Biosciences, and if you don't mind quantifying if it in fuel.

[Jeffrey Elliott, executive]

So Vijay, why don't I start with the second one and then Kevin...

[Kevin Conroy, executive]

Let me just jump in and clarify the first question, Vijay, on -- when you're talking about screening and MRD, do you mean screening and multi-cancer early detection? Or do you mean screening and MRD. I think you probably meant screening and MSET.

[Vijay Kumar, analyst]

Yes. What I meant was when you compare and contrast those 2 different end markets, it seems like in screening MCD, a lot of evidence data. How does that work in MRD? Do you need some data sets to make this commercially successful? What drives success in MRD?

[Kevin Conroy, executive]

Okay. I understand it better. Jeff, do you want to take your piece and I'll take the other.

[Jeffrey Elliott, executive]

Sure. I'll take the guidance question. So Res Bio, from a revenue standpoint, not material. So there's no contribution into the guide. So the guide raise was based on the strength of the core business.

[Kevin Conroy, executive]

So MRD evidence is developing at a rapid clip. Many studies in the U.S. and around the world are occurring because of the promise of being able to answer 2 questions. Number one, post initial treatment, is there still tumor present? Did the surgeon, did the oncologist, did the treatment get all of the cancer? And then the second question that MRD testing answers is has the cancer returned? Has it recurred? So what is the evidence that is being developed? There are a number of prospective studies that are occurring globally. And I think the question is, is that going to occur on a tumor type by tumor type? Or is it going to occur like it did with therapy selection where, after a few tumors were proven out -- tumor types were proven out, that there was widespread utilization.

We are starting to see signs of the of the latter that there will be enough evidence developed that MRD testing will be used broadly. So it's very different than the screening markets, which are unlocked generally by 1 group, called the United States Preventive Services Task Force. In MRD, in oncology, there's a number of different guidelines that will come into play. We are making progress in terms of our own studies to support our MRD test, and we think this is going to be a huge change in oncology, a huge market and one that we're excited to participate in.

[Operator]

We'll go next now to Matt Sykes at Goldman Sachs.

[Matthew Sykes, analyst]

Congrats, Megan. Maybe one for Everett, just on the commercial penetration. In previous quarters, you've given some pretty good color on health system penetration. I don't know if there's any update on that. And then secondarily, related to that, there's obviously a lot of opportunity given the penetration rate where today and where you want to get to. Could you kind of like prioritize the white space opportunities that you provide for your commercial team in terms of what they're going after over the course of the next 1 to 2 years?

[Everett Cunningham, executive]

Yes. Thanks for the question. Yes, our health system volume continues to be our largest lever of growth this year. We knew that, and that's why we put additional resources on the Health Systems side, we more than doubled our team in Health Systems. And we're also finding a different type of of shift or dynamic in the Health Systems to where we're actually calling on Health Systems. We're going to always do that. But we're also -- Health Systems are actually requesting meetings with us, because they know and Kevin said it that the capacity of screening colonoscopies is relatively fixed at 6 million per year, and Health Systems are saying, we need help. And this colonoscopy alone strategy is not going to get us there.

So we have several health systems that have documented that, hey, listen, it's average risk patient, first-line Cologuard will be used, and we're seeing volume go up that way. So we're really happy about that. Also, I look at it as a multipronged approach of good product, but we also have to make it easier for health systems to write and order Cologuard. And as we said, 70% of our Cologuard orders are coming in electronically. And what I like about that is we're not going to stop there. We know that there are additional targets to get this year and next year. And if we can make it easier to prescribe or to order Cologuard, we know that we're going to be even a better partner moving forward.

As far as in the future, we see -- we know that there's a lot of opportunity. As we stated earlier, we're only 10% penetrated with Cologuard. There's 60 million people that are not up to date with their screening. A lot of those people sit in that health systems segment. And I really like the way that we're structured now at Exact Sciences, with reaching out the health systems, talking to the C-suite, making sure that we can get unique partnerships and how that falls through to the affiliated physicians in those geographies, we're perfectly structured to continue to make this a growth lever.

[Operator]

We'll go next now to Patrick Donnelly at Citi.

[Patrick Donnelly, analyst]

Jeff, maybe one just on the expense side on the go forward. Can you help us think about just the moving pieces as we work our way into '24? Obviously, some trials that wrapped up this year, some trials that maybe ramp up next year. Maybe touch on the SG&A piece. I know historically, you felt that it's clearly going to grow expenses were going to grow below revs. But is that kind of low, mid-single digit the right area to think about on expenses? And then a very quick follow-up. Just I think you called out some pull forward on revs in 3Q. If you could just quantify it, that would be great. .

[Jeffrey Elliott, executive]

Sure. Thanks, Patrick. This is Jeff. We typically provide guidance on our February call, which is that's when we do plan to provide it for now. But over time, you can think about continued very good expense discipline across the board. You want on the full P&L on gross margin. I mean many of you saw the tour of our lab this summer. That team has done a fantastic job finding ways to increase efficiencies, automate more tasks and scale the business. So I'd expect continued steady gross margin improvement. This year, we're tracking in that 73.5% to 74% range, probably towards the higher end. So no change there. But over time, I expect this to get to -- our goal is 80%. When you look at sales and marketing, Everett and the team have done a very nice job focusing on the highest impact areas to grow this business. And so now you see the result of that 2 years in a row with sales and marketing down in absolute terms.

Now on a go-forward basis, as we launch new products, I expect us to start to reinvest in sales and marketing. So that will grow in dollar terms, but I think we'll manage it down on a percent of revenue basis.

R&D, I look at that as more project by project. You know as well that we scrutinize all of our R&D investments, to make sure they carry very good ROIs. I think we'll continue to do that. That has been a hallmark of Exact. So over time, you may see some movement there. A big one would be our multi-cancer study. If we see that pathway forward from Congress for reimbursement for Medicare, that would help us then make the decision to move forward with a big study in MSED. So that study would lead to a higher growth rate temporarily. But over time, I think you can see R&D coming down as a percent of revenue pretty steadily, barring the kind of the one-off studies.

G&A is an area that there's been a lot of focus for us. It's an area that I do expect over time to see probably the most incremental leverage from here. The biggest areas of investment have been building out this foundation. This foundation that has served us so well to get the first $1 billion diagnostic to market and, over time, support multiple billion dollar diagnostics. Our longer-term goal is to get G&A down to the 10% to 12% of revenue range. To do that, we have to keep automating. That is a challenge to the broader Exact Sciences team, finding ways to continue to drive efficiencies. So over the next 5 years or so, I think that's going to be the biggest area of improvement, to drive margin expansion.

[Operator]

We'll go next now to Jack Meehan at Nephron Research.

[Jack Meehan, analyst]

Kevin, it would be great to get your latest thoughts on the competitive landscape for CRC screening. There were some additional updates at ACG from another school-based competitor. Would just love to get your thoughts on what that might mean, if anything, for you guys.

[Kevin Conroy, executive]

Ever since I've been with Exact Sciences, there's been a litany of aspiring entrants into this field. There is just a long list of things you need to do to get into the field. And first of all, you need high-quality products, high-quality studies, high-quality data published. You need to get through the gauntlet of FDA, Medicare, CMS, United States Preventive Services Task Force, USPSTF, quality measure inclusion, commercial insurers. And we've yet to see any of these aspiring entrants get past first base there, namely high-quality evidence in high-quality study. So there's a lot of work to be done for these folks before they will earn the ability to serve patients and physicians. And other than that, I'm not going to -- we're not going to comment on other people's studies.

[Operator]

We'll go next now to Puneet Souda at Leerink.

[Puneet Souda, analyst]

Good luck to Megan. So Kevin, following up on the sort of the competition side, just wondering how should we think about sort of the timing for Cologuard Blood? Where is the positioning of that? Any updated thoughts on the positioning of Cologuard Blood as a product? And just wondering if you have any updated thoughts on blood-based assays that are potentially suggesting improvements in advanced adenoma. We haven't seen the data yet, but remains to be seen.

[Kevin Conroy, executive]

No update here. We've talked about this field for a long time. The data that we've seen to date has been very impressive in terms of pre-cancer detection or in terms of specificity. So hard to see how this class of tests makes it into the guidelines and into commercial viability reimbursed by commercial insurers. So there's really no update there in terms of the -- those who hope to get into the field. We have our own test, as we've articulated. There are many people who refuse a colonoscopy, refuse a Cologuard test and still need to be screened.

And so we know who those people are. They are in our massive database and the only national database of colon cancer screening of its size and accuracy. So we're able to reach out to patients who, for example, refuse frontline screening tests like colonoscopy or Cologuard, and help get those people screened. And we think that there is a need to address there. And we believe that our test is going to be able to meet that need. In terms of when to expect to see that data, again, that's next year. Likely, we will complete that study mid-year and then make the data available thereafter. So that's where we are with blood-based colon cancer screening.

[Operator]

We'll go next now to Dan Arias at Stifel.

[Daniel Arias, analyst]

I wanted to just ask a follow-up on rescreening. Everett, at the Analyst Day, you talked about a pilot program that you guys have, where you're auto mailing kits directly to the patients as their recommended screening date arrives. Is that something that you think might get deployed more broadly? And if so, do you think that could start to move the needle on volumes, just given that it seems for rescreeners that would be pretty receptive to that idea.

[Everett Cunningham, executive]

Yes. Thanks, Dan. And just a clarification. It's not an auto mail, even though it might be a non-point-of-care visit, it's still a prescription. And I go back to this -- these are -- from a rescreen population, these are different ways that we're partnering with health systems, with payers, with physicians in terms of getting hard to screen patients to screen. Whether it's the rescreen population, the 45 to 49 or just the general population. We're happy that we can do these different partnerships, and we'll continue to partner differently with health systems.

Again, I go back to a lot of these different partnerships are being generated by the health systems themselves, and they know that we're a good partner because of what we have. Our sales arm, our marketing arm, the way in which our customer call center can reach out to patients and remind them the importance of rescreening, our advanced order workflow we have there. So they like that.

And then secondly, we're a 3-year interval versus FIT, which is a 1-year interval where they've been using these different reach out care gap programs. So now they're looking at us and they're finding that we're a better partner, we'll continue these throughout the rest of the year and years to come.

[Operator]

We'll go next now to Dan Leonard at UBS.

[Daniel Leonard, analyst]

Kevin, I'd love to learn how or if you're planning for additional FDA oversight of LDTs, specifically in your Precision Oncology business? And what do you think are the implications?

[Kevin Conroy, executive]

We do have a lab-developed test, Oncotype DX is a lab-developed test. And because of the level of evidence that we have with Oncotype DX, that would not be a huge burden for us to make a submission, the quality standards that, that test has undergone. We've already submitted for IVDR and CE marking for that test. So the quality system there is incredibly strong.

The interesting thing about the proposed LDT regulation is that Exact Sciences was built as a PMA or IDD company because of Cologuard. That means that the people, the incredibly complex systems, data that is collected, processes that you follow, from quality systems and manufacturing to good manufacturing processes and all that goes into that, that's who we are as a company. So we are better suited than anybody really in our field of advanced diagnostics to be able to comply with the proposed lab-developed regulations. That puts us in a good position because we do have those people and systems in place to succeed.

So although we have our view on lab-developed test regulation and there -- we believe that it would have been better, and we still hope that Congress steps in and passes the Valid Act. We are very well prepared to be able to comply with the proposed LDT regulations.

[Operator]

We'll go next now to Mark Massaro at BTIG.

[Mark Massaro, analyst]

Congrats on the progress. Just a 2-parter. It looks like you invested about $54 million to acquire Resolution Biosciences. I would just be curious, as you think about valuations being down in the space, whether or not you have an appetite to do something larger? And then on the second part, you guys have indicated plans to soon launch MRD and CRC and breast in 2024. Obviously, both solid tumors. Can you just give us a sense of how you view the opportunity in MRD in blood cancers?

[Kevin Conroy, executive]

In terms of M&A, our view hasn't changed there. We have a disciplined approach to the way we think about this that falls around our capital allocation processes. We look at, number one, core growth. We'd take a look at our pipeline. We look at retaining cash flow. That's a -- in terms of capital allocation. We're highly focused on continuing to grow Cologuard, investing in Cologuard and Cologuard growth, and Oncotype DX growth internationally. Both provide significant returns on investments.

In terms of our process around M&A, we look at what can help us accelerate our mission, what is the right culture fit, what creates value. And we're -- we just don't comment on any particular regions. We think it's probably irresponsible for those to guess at what we may do or not do. And because we have a disciplined approach to the way we look at these things.

And in terms of Res Bio, that's a great example. We had a need for a liquid biopsy therapy selection test. We had an internal program that eventually we were going to get around to and a test was available through Res Bio that met those needs, that accelerated our mission in our core solid tumor business. It was a great fit culturally, amazing innovator, scientists, bioinfermentatians. And we believe it's going to create value over the long haul. So I think that's kind of right up the alley of the way that we think about things.

[Operator]

We'll go next now to Kyle Mikson at Canaccord.

[Kyle Mikson, analyst]

Congrats on the quarter. Congrats to Megan and great to hear on the new role. So in the updated '23 revenue guidance, it is implied annual screening growth is about 30%. That the Street is modeling 16% year-over-year for screening next year? I know you're going to talk about that more early next year, but is that too far of a step down in growth rate considering it looks like the jumping off point in 4Q is going to be over 20%, if you account for that rescreen headwind?

[Jeffrey Elliott, executive]

Look -- Kyle, this is Jeff. There's a question earlier about, is there anything changing on the landscape? And the answer to that is no. The -- in fact, as you heard today, we're very confident in not only next year, but the growth opportunity for many years to come. And part of why is we've got the best team in diagnostics. We've got the highest quality of evidence. And there's a massive, massive unmet need that won't be met in 1 year. It won't be met in 5 years. There's 60 million people out there with more entering every day. About 10,000 new people age into this market every day.

So we're very optimistic on the growth. From a growth rate standpoint, though, the large numbers is going to kick in and we'll have that growth rate come down. But as you can see this year, we're guiding to over $420 million of incremental revenue, the best yet. And Exact Sciences has been around for a while. So I think from a growth incremental dollar standpoint, very optimistic here. From a percentage standpoint, it's going to come down as it would with any company as they grow.

[Operator]

We'll go next now to E. Berstein at Bernstein.

[Unknown Analyst]

Two part. The first is you'd called out capacity constraints on colonoscopies when you talked about your health system partnerships. Obviously, these have always existed in some geographies, but the problem is definitely exacerbated by this influx of 45- to 49-year-old patients that are suddenly eligible for screening. So can you talk about how that dynamic is evolving? And is this something that's giving you like a onetime bump in growth, but isn't sort of a durable driver of growth going forward?

And then second question, just a clarification. You talked about -- you've been telegraphing rescreen headwinds in the quarter. You'd also said some of the business you expected to fall in Q4 came in Q3. So can you just help us understand, quantify the headwinds and tailwinds in the quarter and what you see as sort of the base rate of sales?

[Kevin Conroy, executive]

Let me start with the capacity constraints around colonoscopies. You basically have very little growth in the number of gastroenterologists in the U.S. There's a fixed capacity for those residency programs. And what you saw was a significant number of retirements coming out of COVID. And so there is an overall flat or reduction in the total number of people scoping. What we're saying is about 6 million screening colonoscopies this year and next year, and as far as the eye can see, it's about -- that's about the capacity that we see now.

But you added 19 million Americans who need to be screened and who -- that's in the 45- to 49-year-old age group. So it's a permanent shift in the way that these health systems are thinking about getting their patients screened and they're highly incentive and pushed to get their quality measures up. And one important quality measure is colon cancer screening. And so Everett, maybe you can touch it upon, again, the way that the commercial organization is addressing this important need.

[Everett Cunningham, executive]

Yes. And I love it when we say commercial because in addition to sales, having to be a focus of ours, we have a specific value proposition that we lay out to our customers around the 45- to 49-year-old. It's a different patient type. It's a patient type that they're busy parents, they're racing around dealing with kids. Cologuard is the perfect product for that 45- to 49-year-old. Plus, we know commercially when we get them, that 49- to 45- -- 45- to 49-year-old, we have them for multiple years moving forward. So that's one.

Marketing. We're marketing different to this cohort. It's important that we have a different marketing message that really plays out the different lifestyles that 45- to 49-year-olds have. And our marketing mix is different. In addition to TV, we're finding out that they go through social media and digital more. So we've changed our mix more to market towards that cohort. So we're clearly explaining this to our health system customers. Our health system customers are coming to us because of the scenario that Kevin mentioned, and this will continue to be a growth lever for us this year and years to come.

[Jeffrey Elliott, executive]

There's 2 more parts to the question. This is Jeff. There's one on rescreens. The headwind that I talked about before, it's about $50 million for the year. If you think about that hitting second quarter, third quarter and fourth quarter. Third quarter gets a bit more than 1/3 of that and second and fourth get a bit less than 1/3, but it's fairly evenly spread. And the team did a very nice job working to offset, at least partially offset, the headwind during the quarter.

You also see the Care Gap business, but this is a really small part of it. I had previously guided to somewhere just over $10 million in the whole second half for this business. It was more weighted towards Q4. That was the previous guidance. And what we found out during the quarter is that a bit more of that fell into Q3 than I previously expected. All told, it's a pretty small part of the business today. What really drove the quarter was the core underlying business that will sustain it is a very durable leg of growth for us.

[Operator]

We'll go next now to Alex Nowak at Craig-Hallum.

[Unknown Analyst]

This is Albert Hu on for Alex. So after the FDA approval for the next-gen Cologuard, can you give us some rollout plans to physicians across the U.S. that you guys have as of right now? And we were also in the lab in June and what's the latest plan about the next-gen Cologuard and the vacant footprint for the lab? And how do you guys plan to convert the existing process over to the next-gen without running into any backlog issues?

[Kevin Conroy, executive]

Yes. Let me take the second part of that and hand the first part in terms of promoting and educating next-gen Cologuard to primary care docs. In terms of lab capacity, during that tour, you saw the additional 200,000 square feet of space that we have that is prepared for current and future product growth. So we have ample capacity at the 2 labs that we have today, coupled with automation that constantly is being implemented to increase to a capacity easily of 10 million tests per year.

And switching over to Cologuard 2.0, we have plenty of space -- physical space here in Madison, Wisconsin, to be able to meet that need. We have a very thoughtful plan from top to bottom about how that is going to happen and our team over the last 10 years, I'm very proud to say our operations team, our lab team have never missed. We've never had a day, a week, a month that we couldn't generate Cologuard results. This is an amazing team of professionals, automation experts, scientists, laboratorians who will make this a smooth changeover.

[Everett Cunningham, executive]

In terms of getting Cologuard ready for the next kind of year, what we're going to do -- I look at it 2 ways. First of all, we have a year to get ready, but the most important thing that we can do commercially is sell Cologuard and focus on making sure that we get those providers that are writing it to write more, and those providers that are not writing it to start writing Cologuard.

What we like about the next-generation Cologuard is there's 30% fewer false positive. And we know those physicians, for whatever reason, it is a major roadblock for them. They stay away from Cologuard because of the false positives. We know exactly who those physicians are, and that will be our first kind of low-hanging fruit is to go to those physicians and talk about the next-generation Cologuard and get them excited.

What I like about the next generation Cologuard is internally, our entire company is excited about this. And so we're going to use that excitement, that excitement in the field to increase, again, the people that are writing Cologuard

[Operator]

Thank you. And that does conclude our question-and-answer session for this afternoon, ladies and gentlemen, and it will bring us to the close of the call. We'd like to thank you all so much for joining the Exact Sciences Third Quarter 2023 Earnings Call. Again, thank you for joining, and have a great afternoon. Goodbye.