| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) | 12 Months Ended |
| Dec. 31, 2018 |
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
| Principles of Consolidation | Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company’s wholly‑owned subsidiaries and variable interest entities. See Note 12 for the discussion of financing arrangements involving certain entities that are variable interest entities that are included in the Company’s consolidated financial statements. All significant intercompany transactions and balances have been eliminated in consolidation.
References to “Exact”, “we”, “us”, “our”, or the “Company” refer to Exact Sciences Corporation and its wholly owned subsidiaries. |
| Use of Estimates | Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
| Cash and Cash Equivalents | Cash and Cash Equivalents
The Company considers cash on hand, demand deposits in a bank, money market funds, and all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents. The Company had no restricted cash at December 31, 2018 and 2017. |
| Marketable Securities | Marketable Securities
Management determines the appropriate classification of debt securities at the time of purchase and re‑evaluates such designation as of each balance sheet date. Debt securities carried at amortized cost are classified as held‑to‑maturity when the Company has the positive intent and ability to hold the securities to maturity. Marketable equity securities and debt securities not classified as held‑to‑maturity are classified as available‑for‑sale. Available‑for‑sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity computed under the straight‑line method. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other‑than‑temporary on available‑for‑sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available‑for‑sale are included in investment income.
At December 31, 2018 and 2017, the Company’s marketable securities were comprised of fixed income investments, and all were deemed available‑for‑sale. The objectives of the Company’s investment strategy are to provide liquidity and safety of principal while striving to achieve the highest rate of return consistent with these two objectives. The Company’s 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. Investments in which the Company has the ability and intent, if necessary, to liquidate in order to support its current operations (including those with a contractual term greater than one year from the date of purchase) are classified as current. All of the Company’s investments are considered current. Realized gains were $0.4 million, $23,000, and $24,000, net of insignificant realized losses, for the years ended December 31, 2018, 2017, and 2016, respectively and are included in investment income.
The Company periodically reviews investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, the Company’s intent not to sell the security, and whether it is more likely than not that the Company will have to sell the security before recovery of its cost basis. For the year ended December 31, 2018, no investments were identified with other-than-temporary declines in value.
Available‑for‑sale securities at December 31, 2018 consist of the following:
December 31, 2018
Gains in Accumulated
Losses in Accumulated
Other Comprehensive
Other Comprehensive
Estimated Fair
(In thousands)
Amortized Cost
Income (Loss)
Income (Loss)
Value
Corporate bonds
$
392,973
$
33
$
(719)
$
392,287
Asset backed securities
277,537
30
(568)
276,999
U.S. government agency securities
250,606
43
(178)
250,471
Commercial paper
12,158
—
(7)
12,151
Certificates of deposit
31,875
—
(31)
31,844
Total available-for-sale securities
$
965,149
$
106
$
(1,503)
$
963,752
Available‑for‑sale securities at December 31, 2017 consist of the following:
December 31, 2017
Gains in Accumulated
Losses in Accumulated
Other Comprehensive
Other Comprehensive
Estimated Fair
(In thousands)
Amortized Cost
Income (Loss)
Income (Loss)
Value
Corporate bonds
$
181,639
$
10
$
(344)
$
181,305
Asset backed securities
94,700
—
(185)
94,515
U.S. government agency securities
54,974
—
(162)
54,812
Commercial paper
9,953
—
(7)
9,946
Certificates of deposit
6,647
1
(2)
6,646
Total available-for-sale securities
$
347,913
$
11
$
(700)
$
347,224 |
| Changes in Accumulated Other Comprehensive Income (Loss) | Changes in Accumulated Other Comprehensive Income (Loss)
The amount recognized in accumulated other comprehensive income (loss) (“AOCI”) for the years ended December 31, 2018, 2017 and 2016 were as follows:
Accumulated
Cumulative
Unrealized
Other
Translation
Gain (Loss)
Comprehensive
(In thousands)
Adjustment
on Securities
Income (Loss)
Balance at January 1, 2016
$
11
$
(444)
$
(433)
Other comprehensive income (loss) before reclassifications
(215)
117
(98)
Amounts reclassified from accumulated other comprehensive loss
—
113
113
Net current period change in accumulated other comprehensive income (loss)
(215)
230
15
Balance at December 31, 2016
$
(204)
$
(214)
$
(418)
Other comprehensive income (loss) before reclassifications
143
(530)
(387)
Amounts reclassified from accumulated other comprehensive loss
—
55
55
Net current period change in accumulated other comprehensive income (loss)
143
(475)
(332)
Balance at December 31, 2017
$
(61)
$
(689)
$
(750)
Other comprehensive income (loss) before reclassifications
36
(1,025)
(989)
Amounts reclassified from accumulated other comprehensive loss
—
317
317
Net current period change in accumulated other comprehensive income (loss)
36
(708)
(672)
Balance at December 31, 2018
$
(25)
$
(1,397)
$
(1,422)
Amounts reclassified from accumulated other comprehensive loss for the years ended December 31, 2018, 2017 and 2016 were as follows:
Affected Line Item in the
Year Ended December 31,
Details about AOCI Components (In thousands)
Statements of Operations
2018
2017
2016
Change in value of available-for-sale investments
Sales and maturities of available-for-sale investments
Investment income
$
317
$
55
$
113
Total reclassifications
$
317
$
55
$
113 |
| Allowance for Doubtful Accounts | Allowance for Doubtful Accounts
The Company estimates an allowance for doubtful accounts against accounts receivable based on estimates of expected collections consistent with historical cash collection experience. The allowance for doubtful accounts is evaluated on a regular basis and adjusted when trends, significant events or other substantive evidence indicate that expected collections will be less than applicable accrual rates. At December 31, 2018 and 2017 there was no allowance for doubtful accounts recorded. For the years ended December 31, 2018, 2017 and 2016, there was no bad debt expense written off against the allowance and charged to operating expense. |
| Inventory | Inventory
Inventory is stated at the lower of cost or market value (net realizable value). The Company determines the cost of inventory using the first-in, first out method (“FIFO”). The Company estimates the recoverability of inventory by reference to internal estimates of future demands and product life cycles, including expiration. The Company periodically analyzes its inventory levels to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated realizable value and records a charge to cost of sales for such inventory as appropriate. In addition, the Company’s products are subject to strict quality control and monitoring which the Company performs throughout the manufacturing process. If certain batches or units of product no longer meet quality specifications or become obsolete due to expiration, the Company records a charge to cost of sales to write down such unmarketable inventory to its estimated realizable value.
Direct and indirect manufacturing costs incurred during process validation and for other research and development activities, which are not permitted to be sold, have been expensed to research and development in the Company’s consolidated statements of operations.
Inventory consisted of the following:
December 31,
December 31,
(In thousands)
2018
2017
Raw materials
$
12,761
$
10,344
Semi-finished and finished goods
26,387
15,683
Total inventory
$
39,148
$
26,027 |
| Property, Plant and Equipment | December 31,
December 31,
(In thousands)
2018
2017
Raw materials
$
12,761
$
10,344
Semi-finished and finished goods
26,387
15,683
Total inventory
$
39,148
$
26,027
Property, Plant and Equipment
Pro
Estimated
December 31,
December 31,
(In thousands)
Useful Life
2018
2017
Property, plant and equipment
Land
(1)
$
4,466
$
4,466
Leasehold and building improvements
(2)
38,895
17,629
Land improvements
15 years
1,530
1,419
Buildings
30 years
7,928
7,928
Computer equipment and computer software
3 years
36,969
30,148
Laboratory equipment
3 - 10 years
37,518
23,296
Furniture and fixtures
3 years
8,353
4,531
Assets under construction
(3)
167,462
28,655
Property, plant and equipment, at cost
303,121
118,072
Accumulated depreciation
(57,862)
(38,086)
Property, plant and equipment, net
$
245,259
$
79,986
(1)
Not depreciated.
(2)
Lesser of remaining lease term, building life, or useful life.
(3)
Not depreciated until placed into service.
Depreciation expense for the years ended December 31, 2018, 2017, and 2016 was $20.5 million, $14.5 million, and $11.3 million, respectively.
At December 31, 2018, the Company had $167.5 million of assets under construction which consisted of $130.8 million related to building and leasehold improvements, $5.2 million of capitalized costs related to software projects, and $31.5 million of costs related to laboratory equipment under construction. Depreciation will begin on these assets once they are placed into service. The Company expects to incur an additional $184.9 million to complete the building projects and leasehold improvements, $7.5 million of costs to complete the computer software projects, $7.2 million to complete the laboratory equipment, and minimal costs to complete the computer equipment. These projects are expected to be completed in 2019 and 2020. The Company assesses its long-lived assets, consisting primarily of property and equipment, for impairment when material events and changes in circumstances indicate that the carrying value may not be recoverable. There were no impairment losses for the years ended December 31, 2018, 2017 or 2016. |
| Software Capitalization Policy | Software Capitalization Policy
Software development costs related to internal use software are incurred in three stages of development: the preliminary project stage, the application development stage, and the post‑implementation stage. Costs incurred during the preliminary project and post‑implementation stages are expensed as incurred. Costs incurred during the application development stage that meet the criteria for capitalization are capitalized and amortized, when the software is ready for its intended use, using the straight‑line basis over the estimated useful life of the software. |
| Patent Costs, Intangible Assets and Goodwill | Patent Costs, Intangible Assets and Goodwill
Goodwill and intangible assets consisted of the following:
December 31,
December 31,
(In thousands)
2018
2017
Finite-lived intangible assets
Finite-lived intangible assets
$
33,058
$
23,726
Less: Accumulated amortization
(4,107)
(1,500)
Finite-lived intangible assets, net
28,951
22,226
Internally developed technology in process
51
—
Total finite-lived intangible assets, net
29,002
22,226
Goodwill
17,279
1,979
Goodwill and intangible assets, net
$
46,281
$
24,205
Finite-Lived Intangible Assets
The following table summarizes the net-book-value and estimated remaining life of the Company’s finite-lived intangible assets as of December 31, 2018:
Weighted
Net Balance at
Average
December 31,
Remaining
(In thousands)
2018
Life (Years)
Trade name
$
689
14.8
Customer relationships
2,666
14.8
Patents
18,979
9.6
Acquired developed technology
6,086
13.8
Internally developed technology
531
2.7
Total
$
28,951
As of December 31, 2018, the estimated future amortization expense associated with the Company’s finite-lived intangible assets for each of the five succeeding fiscal years is as follows:
(In thousands)
2019
$
3,193
2020
3,193
2021
3,092
2022
2,956
2023
2,953
Thereafter
13,564
$
28,951
The Company reviews long-lived assets, including property and equipment and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be 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. There were no impairment losses for the years ended December 31, 2018, 2017, and 2016.
Patent costs, which have historically consisted of related legal fees, are capitalized as incurred, only if the Company determines that there is some probable future economic benefit derived from the transaction. A capitalized patent is amortized over its estimated useful life, beginning when such patent is approved. Capitalized patent costs are expensed upon disapproval, upon a decision by the Company to no longer pursue the patent or when the related intellectual property is either sold or deemed to be no longer of value to the Company. Other than the transactions discussed below, the Company determined that all patent costs incurred during the year ended December 31, 2018, 2017 and 2016 should be expensed and not capitalized as the future economic benefit derived from the transactions cannot be determined.
Under a technology license and royalty agreement entered into with MDx Health (“MDx”), dated July 26, 2010 (as subsequently amended, the “MDx License Agreement”), the Company was required to pay MDx milestone-based royalties on sales of products or services covered by the licensed intellectual property. Once the achievement of a milestone occurred or was considered probable, an intangible asset and corresponding liability was reported in goodwill and intangible assets and accrued liabilities, respectively. The liability was relieved once the milestone was achieved and payment made. The intangible asset is being amortized over the estimated ten-year useful life of the licensed intellectual property through 2024, and such amortization is reported in cost of sales. Payment for all remaining milestones under the License Agreement was made as part of the Royalty Buy-Out agreement outlined below.
Effective April 2017, the Company and MDx entered into a royalty buy-out agreement (“Royalty Buy-Out Agreement”), which terminated the MDx License Agreement. Pursuant to the Royalty Buy-Out Agreement, the Company paid MDx a one-time fee of $8.0 million in exchange for an assignment of certain patents covered by the MDx License Agreement and the elimination of all ongoing royalties and other payments by the Company to MDx under the MDx License Agreement. Also included in the Royalty Buy-Out Agreement is a mutual release of liabilities, which includes all amounts previously accrued under the MDx License Agreement. Concurrently with entering into the Royalty Buy-Out Agreement, the Company entered into a patent purchase agreement (“Patent Purchase Agreement”) with MDx under which it paid MDx an additional $7.0 million in exchange for the assignment of certain other patent rights that were not covered by the MDx License Agreement. The total $15.0 million paid by the Company pursuant to the Royalty Buy-Out Agreement and Patent Purchase Agreement, net of liabilities relieved of $6.6 million, was recorded as an intangible asset and is being amortized over the estimated remaining useful life of the licensed intellectual property through 2024, and such amortization is reported in cost of sales. The $6.6 million of liabilities relieved were related to historical milestones and accrued royalties under the License Agreement.
As of December 31, 2018 and 2017, an intangible asset of $7.7 million and $9.0 million, respectively, related to historical milestone payments made under the MDx License Agreement and intangible assets acquired as part of the Royalty Buy-Out Agreement and Patent Purchase Agreement is reported in intangible assets. Amortization expense for the years ended December 31, 2018, 2017, and 2016 was $1.3 million, $1.0 million, and $0.2 million, respectively.
In December 2017, the Company entered into an asset purchase agreement (the “Armune Purchase Agreement”) with Armune BioScience, Inc. (“Armune”), pursuant to which the Company acquired intellectual property and certain other assets underlying Armune’s APIFINY®, APIFINY® PRO and APIFINY® ACTIVE SURVEILLANCE prostate cancer diagnostic tests. The portfolio of Armune assets the Company acquired is expected to complement its product pipeline. The total consideration was comprised of an up-front cash payment of $12.0 million and $17.5 million in contingent payment obligations that will become payable upon the Company’s achievement of development and commercial milestones using the acquired intellectual property. The satisfaction of these milestones is subject to many risks and is therefore uncertain. The Company will not record the contingent consideration until it is probable that the milestones will be met. There is no other consideration due to Armune beyond the milestone payments and the Company is not subject to future royalty obligations should a product be developed and commercialized. In connection with the Armune Purchase Agreement, Armune terminated a license agreement pursuant to which it licensed certain patent rights and know-how from the Regents of the University of Michigan (“University of Michigan”), and the Company entered into a license agreement with the University of Michigan with respect to such patent rights and know-how, as well as certain additional intellectual property rights. Pursuant to the Company’s agreement with the University of Michigan, it is required to pay the University of Michigan a low single-digit royalty on its net sales of products using the licensed intellectual property.
The Company accounted for the transaction as an asset acquisition under GAAP. The asset is comprised of a portfolio of biomarkers, related technology and know-how, which is a group of complementary assets concentrated in a single identifiable asset. The transaction costs directly related to the asset acquisition were added to the asset in accordance with GAAP. As such, the collective asset value from the acquisition resulted in an intangible asset of $12.2 million. The intellectual property asset, which includes related transaction costs, is being amortized on a straight-line basis over the period the Company expects to be benefited, which is consistent with the legal life of the patents acquired. The Company capitalized these costs as there is a reasonable expectation that the assets acquired will be used in an alternative manner in the future, that is not contingent on future development subsequent to acquisition, and the Company anticipates there to be economic benefit from these alternative uses. For the years ended December 31, 2018 and 2017, the Company recorded amortization expense of $0.9 million and $40,000, respectively. At December 31, 2018 and 2017, the net balances of $11.3 million and $12.2 million, respectively are reported in net goodwill and intangible assets in the Company’s consolidated balance sheet.
As a result of the Sampleminded, Inc. (“Sampleminded”) acquisition discussed in Note 14, the Company recorded an intangible asset of $1.0 million which was comprised of acquired developed technology of $0.9 million, customer relationships of $0.1 million, and non-compete agreements of $32,000. The intangible assets acquired are being amortized over the remaining useful life which was determined to be eight years for acquired developed technology, three years for customer relationships, and five years for non-compete agreements. For the years ended December 31, 2018 and 2017, the Company recorded amortization expense of $0.1 million and $52,000, respectively, and the net balances of $0.8 million and $0.9 million, respectively, are reported in net goodwill and intangible assets in the Company’s consolidated balance sheet.
As a result of the Biomatrica Acquisition discussed in Note 14, the Company recorded an intangible asset of $8.8 million which was comprised of acquired developed technology of $5.4 million, customer relationships of $2.7 million, and trade names of $0.7 million. The intangible assets acquired are being amortized over the remaining useful life which was determined to be fifteen years for the acquired developed technology, fifteen years for the customer relationships, and fifteen years for the trade names. For the year ended December 31, 2018, the Company recorded amortization expense of $0.1 million and the net balance of $8.7 million is reported in net goodwill and intangible assets in the Company’s consolidated balance sheet.
In 2017, the Company recognized goodwill of $2.0 million from the acquisition of Sampleminded, Inc. During the fourth quarter of 2018, the Company recognized goodwill of $15.3 million from the acquisition of Biomatrica, Inc. Goodwill is reported in net goodwill and intangible assets in the Company’s consolidated balance sheet. The Company will evaluate goodwill impairment on an annual basis or more frequently should an event or change in circumstance occur that indicates that the carrying amount is in excess of the fair value. There were no impairment losses for the years ended December 31, 2018, 2017, and 2016. Refer to Note 14 for further discussion of the goodwill recorded.
The change in the carrying amount of goodwill for the years ended December 31, 2018 and 2017 is as follows:
(In thousands)
Balance, December 31, 2016
$
—
Sampleminded acquisition
1,979
Balance, December 31, 2017
1,979
Biomatrica acquisition
15,300
Balance, December 31, 2018
$
17,279 |
| Net Loss Per Share | (In thousands)
Balance, December 31, 2016
$
—
Sampleminded acquisition
1,979
Balance, December 31, 2017
1,979
Biomatrica acquisition
15,300
Balance, December 31, 2018
$
17,279
Net Loss Per Share
Basic net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average common shares outstanding during the period. Basic and diluted net loss per share is the same because all outstanding common stock equivalents have been excluded, as they are anti‑dilutive as a result of the Company’s losses.
The following potentially issuable common shares were not included in the computation of diluted net loss per share because they would have an anti‑dilutive effect due to net losses for each period:
December 31,
(In thousands)
2018
2017
2016
Shares issuable upon exercise of stock options
2,532
3,360
3,505
Shares issuable upon the release of restricted stock awards
6,246
6,149
5,601
Shares issuable upon conversion of convertible notes
12,044
—
—
20,822
9,509
9,106 |
| Accounting for Stock-Based Compensation | Accounting for Stock‑Based Compensation
The Company requires all share‑based payments to employees, including grants of employee stock options, restricted stock, restricted stock units and shares purchased under an employee stock purchase plan (if certain parameters are not met), to be recognized in the financial statements based on their fair values. |
| Revenue Recognition | Revenue Recognition
The Company’s revenue is primarily generated by screening services using its Cologuard test, and the service is completed upon delivery of a patient’s test result to the ordering physician. The Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), which it adopted on January 1, 2018, using the modified retrospective method, which it elected to apply to all contracts. Application of the modified retrospective method did not impact amounts previously reported by the Company, nor did it require a cumulative effect adjustment upon adoption, as the Company’s method of recognizing revenue under ASC 606 was analogous to the method utilized immediately prior to adoption. Accordingly, there is no need for the Company to disclose the amount by which each financial statement line item was affected as a result of applying the new standard and an explanation of significant changes.
The core principle of ASC 606 is that the Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company recognizes revenue from its Cologuard test in accordance with that core principle, and key aspects considered by the Company include the following:
Contracts
The Company’s customer is the patient. However, the Company does not enter into a formal reimbursement contract with a patient, as formal reimbursement contracts, including national coverage determination for Cologuard, are established with payers. Accordingly, the Company establishes a contract with a patient in accordance with other customary business practices.
·
Approval of a contract is established via the order submitted by the patient’s physician and the return of a sample by the patient.
·
The Company is obligated to perform its laboratory services upon receipt of a sample from a patient, and the patient and/or applicable payer are obligated to reimburse the Company for services rendered based on the patient’s insurance benefits.
·
Payment terms are a function of a patient’s existing insurance benefits, including the impact of coverage decisions with CMS and applicable reimbursement contracts established between the Company and payers, unless the patient is a self-pay patient, whereby the Company requires payment from the patient prior to the Company shipping a collection kit to the patient.
·
Once the Company delivers a patient’s test result to the ordering physician, the contract with a patient has commercial substance, as the Company is legally able to collect payment and bill an insurer and/or patient, depending on payer contract status or patient insurance benefit status.
·
The Company’s consideration is deemed to be variable, and the Company considers collection of such consideration to be probable to the extent that it is unconstrained.
Performance obligations
A performance obligation is a promise in a contract to transfer a distinct good or service (or a bundle of goods or services) to the customer. The Company’s contracts have a single performance obligation, which is satisfied upon rendering of services, which culminates in the delivery of a patient’s Cologuard test result to the ordering physician. The duration of time between sample receipt and delivery of a valid test result to the ordering physician is typically less than two weeks. Accordingly, the Company elects the practical expedient and therefore, the Company does not disclose the value of unsatisfied performance obligations.
Transaction price
The transaction price is the amount of consideration that the Company expects to collect in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration expected from a contract with a customer may include fixed amounts, variable amounts, or both.
The consideration derived from the Company’s contracts is deemed to be variable, though the variability is not explicitly stated in any contract. Rather, the implied variability is due to several factors, such as the amount of contractual adjustments, any patient co-payments, deductibles or patient compliance incentives, the existence of secondary payers and claim denials.
The Company estimates the amount of variable consideration using the expected value method, which represents the sum of probability-weighted amounts in a range of possible consideration amounts. When estimating the amount of variable consideration, the Company considers several factors, such as historical collections experience, patient insurance eligibility and payer reimbursement contracts.
The Company limits the amount of variable consideration included in the transaction price to the unconstrained portion of such consideration. In other words, the Company recognizes revenue up to the amount of variable consideration that is not subject to a significant reversal until additional information is obtained or the uncertainty associated with the additional payments or refunds is subsequently resolved. Differences between original estimates and subsequent revisions, including final settlements, represent changes in the estimate of variable consideration and are included in the period in which such revisions are made. Revenue recognized from changes in transaction prices was $15.0 million for the year ended December 31, 2018.
The Company monitors its estimates of transaction price to depict conditions that exist at each reporting date. If the Company subsequently determines that it will collect more consideration than it originally estimated for a contract with a patient, it will account for the change as an increase in the estimate of the transaction price (i.e., an upward revenue adjustment) in the period identified. Similarly, if the Company subsequently determines that the amount it expects to collect from a patient is less than it originally estimated, it will generally account for the change as a decrease in the estimate of the transaction price (i.e., a downward revenue adjustment), provided that such downward adjustment does not result in a significant reversal of cumulative revenue recognized.
When the Company does not have significant historical experience or that experience has limited predictive value, the constraint over estimates of variable consideration may result in no revenue being recognized upon delivery of a patient’s Cologuard test result to the ordering physician, with recognition, generally occurring at the date of cash receipt. Since the first quarter of 2017, the Company has determined that its historical experience has sufficient predictive value, such that there are no longer any contracts for which no revenue is recognized upon delivery of a Cologuard test result to an ordering physician. Of the revenue recognized in the twelve months ended December 31, 2017, approximately $4.3 million relates to the one-time impact of certain payers meeting the Company’s revenue recognition criteria for accrual-basis revenue recognition beginning with the period ended March 31, 2017. Approximately $1.0 million of this one-time impact relates to tests completed in the prior year and for which the Company’s accrual revenue recognition criteria were not met until 2017.
Allocate transaction price
The entire transaction price is allocated entirely to the performance obligation contained within the contract with a patient.
Point in time recognition
The Company’s single performance obligation is satisfied at a point in time, and that point in time is defined as the date a patient’s successful test result is delivered to the patient’s ordering physician. The Company considers this date to be the time at which the patient obtains control of the promised Cologuard test service.
Disaggregation of Revenue
The following table presents our revenues disaggregated by revenue source for the years ended December 31, 2018, 2017 and 2016, respectively:
Year Ended December 31,
(In thousands)
2018
2017
2016
Medicare Parts B & C
$
254,431
$
172,255
$
81,976
Commercial
184,538
84,842
16,017
Other
15,493
8,892
1,383
Total
$
454,462
$
265,989
$
99,376
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable and deferred revenue on the consolidated balance sheets. Generally, billing occurs subsequent to delivery of a patient’s test result to the ordering physician, resulting in an account receivable. However, the Company sometimes receives advance payment from a patient, particularly a self-pay patient, before a Cologuard test result is completed, resulting in deferred revenue. The deferred revenue balance is relieved upon delivery of the applicable patient’s test result to the ordering physician. Changes in accounts receivable and deferred revenue were not materially impacted by any other factors.
Deferred revenue balances are reported in other short-term liabilities in the Company’s consolidated balance sheets and were $0.5 million and $0.2 million as of December 31, 2018 and 2017, respectively.
Revenue recognized for the years ended December 31, 2018 and 2017, which was included in the deferred revenue balance at the beginning of each period was $0.1 million and $44,000, respectively.
Practical Expedients
The Company does not adjust the transaction price for the effects of a significant financing component, as at contract inception, the Company expects the collection cycle to be one year or less.
The Company expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses in the Company’s consolidated statements of operations.
The Company incurs certain other costs that are incurred regardless of whether a contract is obtained. Such costs are primarily related to legal services and patient communications (e.g. compliance reminder letters). These costs are expensed as incurred and recorded within general and administrative expenses in the Company’s consolidated statements of operations. |
| Advertising Costs | Advertising Costs
The Company expenses the costs of media advertising at the time the advertising takes place. The Company expensed approximately $93.7 million, $58.0 million, and $38.1 million of media advertising during the years ended December 31, 2018, 2017, and 2016, respectively. |
| Fair Value Measurements | Fair Value Measurements
The FASB has issued authoritative guidance that requires fair value to be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under that standard, fair value measurements are separately disclosed by level within the fair value hierarchy. The fair value hierarchy establishes and prioritizes the inputs used to measure fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
The three levels of the fair value hierarchy established are as follows:
Level 1
Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3
Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.
Fixed‑income securities are valued using a third-party pricing agency. The valuation is based on observable inputs including pricing for similar assets and other observable market factors. There has been no material pricing change from period to period. The estimated fair value of the Company’s long-term debt represents a Level 2 measurement. When determining the estimated fair value of the Company’s long-term debt, the Company used market-based risk measurements, such as credit risk. See Note 9 and Note 10 for further detail on the Company’s long-term debt. The fair value of contingent consideration related to the Biomatrica Acquisition was categorized as a Level 3 liability, as the measurement amount is based primarily on significant inputs not observable in the market. The Company assesses the fair value of expected contingent consideration and the corresponding liability each reporting period using the Monte Carlo Method, which is consistent with the initial measurement of the expected earn out liability. This fair value measurement is considered a Level 3 measurement because the Company estimates projections during the earn out period utilizing various potential pay-out scenarios. Probabilities were applied to each potential scenario and the resulting values were discounted using a rate that considers weighted average cost of capital as well as a specific risk premium associated with the riskiness of the earn out itself, the related projections, and the overall business. The contingent earn out liability is classified as a component of other long-term liabilities in the Company’s consolidated balance sheets. There were no changes in the fair value assessed between the acquisition date and December 31, 2018. See Note 14 for further detail on the Biomatrica Acquisition.
The following table presents the Company’s fair value measurements as of December 31, 2018 along with the level within the fair value hierarchy in which the fair value measurements, in their entirety, fall.
Fair Value Measurement at December 31, 2018 Using:
Quoted Prices
Significant
in Active
Other
Significant
Markets for
Observable
Unobservable
Fair Value at
Identical Assets
Inputs
Inputs
(In thousands)
December 31, 2018
(Level 1)
(Level 2)
(Level 3)
Cash and cash equivalents
Cash and money market
$
86,375
$
86,375
$
—
$
—
U.S. government agency securities
49,985
—
49,985
—
Commercial paper
24,070
—
24,070
—
Available-for-sale
Marketable securities
Corporate bonds
392,287
—
392,287
—
Asset backed securities
276,999
—
276,999
—
U.S. government agency securities
250,471
—
250,471
—
Certificates of deposit
31,844
—
31,844
—
Commercial paper
12,151
—
12,151
—
Contingent consideration
(3,060)
—
—
(3,060)
Total
$
1,121,122
$
86,375
$
1,037,807
$
(3,060)
The following table presents the Company’s fair value measurements as of December 31, 2017 along with the level within the fair value hierarchy in which the fair value measurements, in their entirety, fall.
Fair Value Measurement at December 31, 2017 Using:
Quoted Prices
Significant
in Active
Other
Significant
Markets for
Observable
Unobservable
Fair Value at
Identical Assets
Inputs
Inputs
(In thousands)
December 31, 2017
(Level 1)
(Level 2)
(Level 3)
Cash and cash equivalents
Cash and money market
$
61,297
$
61,297
$
—
$
—
Commercial paper
10,995
—
10,995
—
Certificates of deposit
1,499
—
1,499
—
U.S. government agency securities
3,700
—
3,700
—
Available-for-sale
Marketable securities
Corporate bonds
181,305
—
181,305
—
Asset backed securities
94,515
—
94,515
—
U.S. government agency securities
54,812
—
54,812
—
Commercial paper
9,946
—
9,946
—
Certificates of deposit
6,646
—
6,646
—
Total
$
424,715
$
61,297
$
363,418
$
—
The Company monitors investments for other-than-temporary impairment. It was determined that unrealized gains and losses at December 31, 2018 and 2017 are temporary in nature because the change in market value for those securities has resulted from fluctuating interest rates rather than a deterioration of the credit worthiness of the issuers. So long as the Company holds these securities to maturity, it is unlikely to experience gains or losses. In the event that the Company disposes of these securities before maturity, it is expected that realized gains or losses, if any, will be immaterial.
The following table summarizes the gross unrealized losses and fair values of investments in an unrealized loss position as of December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
December 31, 2018
Less than 12 months
12 months or greater
Total
(In thousands)
Fair Value
Gross Unrealized Loss
Fair Value
Gross Unrealized Loss
Fair Value
Gross Unrealized Loss
Marketable securities
Corporate bonds
$
340,287
$
(638)
$
35,773
$
(81)
$
376,060
$
(719)
U.S. government agency securities
201,036
(178)
—
—
201,036
(178)
Asset backed securities
243,846
(501)
18,335
(67)
262,181
(568)
Certificates of deposit
31,843
(31)
—
—
31,843
(31)
Commercial paper
12,151
(7)
—
—
12,151
(7)
Total
$
829,163
$
(1,355)
$
54,108
$
(148)
$
883,271
$
(1,503)
The following table summarizes the gross unrealized losses and fair value of investments in an unrealized loss position as of December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
December 31, 2017
Less than 12 months
12 months or greater
Total
(In thousands)
Fair Value
Gross Unrealized Loss
Fair Value
Gross Unrealized Loss
Fair Value
Gross Unrealized Loss
Marketable Securities
Corporate bonds
$
158,790
$
(340)
$
4,715
$
(4)
$
163,505
$
(344)
Asset backed securities
85,906
(179)
8,609
(6)
94,515
(185)
U.S. government agency securities
24,878
(90)
29,934
(72)
54,812
(162)
Commercial paper
19,944
(7)
—
—
19,944
(7)
Certificates of deposit
2,997
(2)
—
—
2,997
(2)
Total
$
292,515
$
(618)
$
43,258
$
(82)
$
335,773
$
(700)
The following table summarizes contractual underlying maturities of the Company’s available‑for‑sale investments at December 31, 2018:
Due one year or less
Due after one year through four years
(In thousands)
Cost
Fair Value
Cost
Fair Value
Marketable securities
Corporate bonds
$
282,910
$
282,437
$
110,062
$
109,850
U.S. government agency securities
201,116
200,961
49,491
49,510
Asset backed securities
70,859
70,681
206,678
206,318
Certificates of deposit
25,485
25,471
6,390
6,373
Commercial paper
12,158
12,151
—
—
Total
$
592,528
$
591,701
$
372,621
$
372,051 |
| Concentration of Credit Risk | Concentration of Credit Risk
In accordance with GAAP, the Company is required to disclose any significant off‑balance‑sheet risk and credit risk concentration. The Company has no significant off‑balance‑sheet risk, such as foreign exchange contracts or other hedging arrangements. Financial instruments that subject the Company to credit risk consist of cash, cash equivalents and marketable securities. As of December 31, 2018, the Company had cash and cash equivalents deposited in financial institutions in which the balances exceed the federal government agency insured limit of $250,000 by approximately $43.6 million. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk.
Through December 31, 2018, the Company’s revenues have been primarily derived from the sale of Cologuard. The following is a breakdown of revenue and accounts receivable from major payers:
% Revenue for the years ended December 31,
% Accounts Receivable at December 31,
Major Payer
2018
2017
2016
2018
2017
2016
Centers for Medicare and Medicaid Services
36%
44%
60%
32%
39%
63%
UnitedHealthCare
13%
11%
(1)
10%
10%
(1)
(1)
Payer was less than 10 percent of revenue for the year.
As the number of payers reimbursing for Cologuard increases, the percentage of revenue derived from major payers will continue to change as a percentage of revenue and accounts receivable. |
| Tax Positions | Tax Positions
A valuation allowance to reduce the deferred tax assets is reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has incurred significant losses since its inception and due to the uncertainty of the amount and timing of future taxable income, the Company has determined that a $209.9 million and $214.3 million valuation allowance at December 31, 2018 and 2017 is necessary to reduce the tax assets to the amount that is more likely than not to be realized. The change in valuation allowance as of December 31, 2018 and 2017 was a decrease of $4.4 million and $45.8 million, respectively. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate. |
| Subsequent Events | Subsequent Events
The Company evaluates events that occur through the filing date and discloses those events or transactions that provide additional evidence with respect to conditions that existed at the date of the balance sheet. In addition, the financial statements are adjusted for any changes in estimates resulting from the use of such evidence. |
| Recent Accounting Pronouncements | Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) . The Company adopted this guidance on January 1, 2018. See Note 2 for additional discussion .
In January 2016, the Financial Accounting Standards Board issued ASU No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“Update 2016-01”). Update 2016-01 modifies how entities will have to measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820, “Fair Value Measurements,” and as such these investments may be measured at cost. Update 2016-01 will be effective for the Company’s fiscal year beginning January 1, 2018, and subsequent interim periods. Update 2016-01 was further amended in February 2018 by ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities , (“Update 2018-03”). Update 2018-03 clarifies certain aspects of the guidance issued in Update 2016-01. Public business entities with fiscal years beginning between December 15, 2017 and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018. The Company adopted Update 2016-01 on January 1, 2018, and it did not have an impact on its consolidated financial statements.
In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, Leases (Topic 842) (“Update 2016-02”), to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. The most noteworthy change in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. The standard requires disclosures to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The Company will adopt the standard on January 1, 2019 with initial application on the effective date as permitted under ASU No. 2018-11. The Company will recognize and measure leases existing at the initial application date of January 1, 2019 through a cumulative-effect adjustment recorded at the beginning of fiscal year 2019. The Company intends to elect the package of practical expedients and accordingly, the Company will not reassess the lease classification or whether expired or existing contracts contain leases under the new definition of a lease. Additionally, we will elect not to separate the lease components from the non-lease components for all classes of underlying assets. The Company’s ability to adopt the new standards depends on system readiness, including software procured from a third-party provider. The Company remains on schedule and have implemented key system functionality to enable preparation of financial statements in accordance with the new standard.
The Company anticipates this standard will have a material impact on its consolidated balance sheets; however, the Company does not expect adoption to have a material impact on its consolidated statements of operations. The Company expects the most significant impact to be the recognition of ROU assets and lease liabilities for operating leases. Adoption of the standard is expected to result in the recognition of ROU assets of approximately $17.0 million to $18.0 million and lease liabilities of $19.5 million to $20.5 million as of December 31, 2018. The Company is not party to any capital lease agreements as of December 31, 2018.
Based on the Company’s analysis, the sale-lease back transaction detailed within Note 9, the buyer-lessor has not obtained control of the underlying asset as the present value of the lease payments is substantially all of the fair value of the underlying asset. As such, the underlying asset and related financing obligation will continue to be included in the Company’s consolidated balance sheets upon adoption.
At December 31, 2018, the Company included $7.3 million as an asset under construction, including $2.1 million that is funded by the landlord, with a corresponding financing obligation related to a build-to-suit construction project. See Note 9 to the Company’s consolidated financial statements for further information. Based on the Company’s analysis, upon adoption of Topic 842, the Company does not control the asset under construction and as such, the asset and corresponding financing obligation will be de-recognized at adoption of ASC 842 on January 1, 2019.
In August 2016, the Financial Accounting Standards Board issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, (“Update 2016-15”). Current GAAP either is unclear or does not include specific guidance on the eight cash flow classification issues included in the amendments in Update 2016-15. The amendments are an improvement to GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice. The Company adopted this guidance on January 1, 2018, and it did not have an impact on its consolidated statements of cash flows .
In October 2016, the Financial Accounting Standards Board issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, (“Update 2016-16”). This amendment improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The Company adopted this guidance on January 1, 2018, and it did not have an impact on its consolidated financial statements.
In November 2016, the Financial Accounting Standards Board issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, (“Update 2016-18”). Update 2016-18 provides guidance on the classification of restricted cash in the statement of cash flows. The Company adopted this guidance on January 1, 2018, and it did not have an impact on its consolidated financial statements, as we do not have restricted cash.
In May 2017, the Financial Accounting Standards Board issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting , (“Update 2017-09”). Update 2017-09 provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The Company adopted this guidance on January 1, 2018, and it did not have an impact on its consolidated financial statements.
In June 2018, the Financial Accounting Standards Board issued ASU No. 2018-07 (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, (“Update 2018-07”). Update 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for certain exemptions specified in the amendment. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption of Topic 606. The Company will adopt this guidance on January 1, 2019, and it does not anticipate it will have an impact on its consolidated financial statements.
In July 2018, the Financial Accounting Standards Board issued ASU 2018-09, Codification Improvements , ("Update 2018-09"). Update 2018-09 provided various minor codification updates and improvements to address comments that the FASB had received regarding unclear or vague accounting guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year. The Company will adopt this guidance on January 1, 2019, and it does not anticipate it will have an impact on its consolidated financial statements.
In August 2018, the Financial Accounting Standards Board issued ASU 2018-13, Fair Value Measurement (Topic 820); Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement , ("Update 2018-13"). Update 2018-13 provided an update to the disclosure requirements for fair value measurements under the scope of ASC 820. The guidance is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.
In August 2018, the Financial Accounting Standards Board issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software, (“Update 2018-15”). Update 2018-15 provided guidance for evaluating the accounting for fees paid by a customer in a cloud computing arrangement that is a service contract. The guidance is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.
In November 2018, the Financial Accounting Standards Board issued ASU 2018-18, Collaborative Arrangements (Topic 808), (“Update 2018-18”). Update 2018-18 provided additional guidance regarding the interaction between Topic 808 on Collaborative Arrangements and Topic 606 on Revenue Recognition. The guidance is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of the guidance on its consolidated financial statements. |
| Foreign Currency Translation | Foreign Currency Translation
For the Company’s international subsidiaries, the local currency is the functional currency. Assets and liabilities of these subsidiaries are translated into United States dollars at the period-end exchange rate or historical rates, as appropriate. Consolidated statements of operations amounts are translated at average exchange rates for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the consolidated balance sheet as a component of accumulated other comprehensive loss in total Exact Sciences Corporation’s shareholders’ equity. Transaction gains and losses are included in the consolidated statements of operations. |
| Reclassifications | Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation in the consolidated financial statements and accompanying notes to the consolidated financial statements. |
