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Genomic Health Inc (NASDAQ:GHDX)
Q2 2019 Earnings Call
Aug 1, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Kimberly -- Chairman of board

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Exact Sciences and Genomic Health Combination Second Quarter 2019 Earnings Results Call. [Operator Instructions] Thank you.

Megan Jones -- Associate Manager of Investor Relations

Thank you, Chris, and good morning. Welcome to our conference call to discuss Exact Sciences combination with Genomic Health, which we announced this morning. In conjunction with today's announcement, Exact Sciences and Genomic Health each also issued their results for the second quarter of 2019. Those releases can be found on our respective websites. During today's call, we will make forward-looking statements based on current expectations. Our actual results may be materially different from such statements. Descriptions of the risks and uncertainties associated with Exact Sciences are included in our SEC filings, which can be accessed through our website.

These forward-looking statements are not guarantees of future performance or events, and the actual results or events could differ materially. I encourage you to take a look at Slides 2 and 3 of the slide presentation and our filings with the SEC for a discussion of forward-looking statements and the risks and uncertainties that could impact actual results or events. On the call today is Kevin Conroy, our Chairman and CEO; Jeff Elliott, our Chief Financial Officer; Mark Stenhouse, President of Cologuard; Kim Popovits, Chairman and CEO of Genomic Health; and Brad Cole, Chief Financial Officer of Genomic Health. After the prepared remarks, we'll open it up for Q&A. [Operator Instructions]

With that, I will now turn the call over to Kevin Conroy, Exact Sciences CEO.

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

Thank you, Megan. Welcome, everyone, and thank you for joining us this morning. I'm excited to tell you more about this pivotal combination with Genomic Health and how it positions us as a global leader in cancer diagnostics. The Exact Sciences and Genomic Health teams have built 2 of the strongest and fastest-growing brands in our industry, Cologuard and Oncotype DX. The combined company will have an even stronger platform for the continued growth of our leading products and the development of our pipeline. We're bringing together some of the greatest minds in cancer diagnostics to form a best-in-class commercial, research, development and clinical organization with the global infrastructure to accelerate the availability of new innovative tests to patients.

Together, we have a stronger financial profile than on our own, allowing us to continue to invest in new growth opportunities. Long term, bringing together Exact Sciences and Genomic Health will create an organization with a breadth of capabilities that doesn't exist today. The diagnostic industry has never seen a company with a team that is so well positioned from research and product development to regulatory and reimbursement to the size and reach of the commercial organization. At its core, this combination is about bringing together complementary capabilities to create a leading cancer diagnostics company with unique abilities to impact more people's lives. Each company continues to see strong growth in the second quarter from our respective products, Cologuard and Oncotype DX. In the second quarter, the Exact Sciences team delivered $200 million in revenue, which is 94% growth year-over-year.

We screened more than 415,000 people with Cologuard, and we strengthened our lab capacity and our IT infrastructure. These achievements move us closer to capturing at least a 40% share of the U.S. colorectal cancer screening market from about 6% today. Genomic Health also announced strong results for the second quarter, which Kim will touch upon shortly. Our mission at Exact Sciences is to deliver life-changing innovations to early cancer detection. We developed Cologuard in collaboration with the Mayo Clinic to solve one of the biggest problems in early cancer detection today. Colorectal cancer is often recognized as the most preventable yet least prevented cancer. Nearly 40% of people in the U.S. are not up to date with current screening guidelines.

Before Cologuard, there was not an accurate convenient option for getting screened. Cologuard is the only at-home, noninvasive stool-based DNA screening test for colorectal cancer. It detects 94% of early stage cancers, providing an accurate and convenient screening option. Since launching Cologuard almost 5 years ago, more than 2.6 million people have been screened, and we estimate Cologuard has detected more than 12,000 early stage cancers and nearly 84,000 people with precancerous polyps. There are 87 million average risk Americans between the ages of 50 and 85 in the U.S. who should be screened for colorectal cancer. That represents a $15 billion opportunity. Last year, the American Cancer Society lowered the recommended screening age to 45 years old.

We recently submitted a label expansion to the FDA for this age group, which would increase the total addressable market by 19 million Americans or 3 billion for a total opportunity of $18 billion. Our long-term goal is to reach at least 40% of this market, representing more than $7 billion in revenue. Nearly 174,000 total healthcare providers have ordered Cologuard for their patients, including 142,000 in primary care. More than 900 new healthcare providers are ordering Cologuard each week. And our sales force and marketing efforts are increasing the rate that they're reordering Cologuard. The combination with the Genomic Health builds on our success, creating an even stronger growth platform for Cologuard as well as Genomic Health Oncotype DX portfolio.

I'll now turn the call over to Kim to discuss the transaction from Genomic Health's perspective.

Kimberly Popovits -- Chief Executive Officer

Thanks, Kevin. To start, I too, am excited about the combination of Genomic Health with Exact Sciences and the significant value we believe the transaction creates for all of our stakeholders. We believe this is the right time for Genomic Health and Exact Sciences to combine and believe Exact Sciences is the right partner. Our board carefully and thoroughly reviewed the strategic and financial benefits of this combination and unanimously concluded this transaction represents a unique opportunity for Genomic Health. This combination provides significant and immediate cash value for our shareholders and with the stock component creates the opportunity to participate in the upside potential of the combined company. We have great respect for the Exact Sciences' team, and we believe we have found a tremendous partner to advance our mission. Patients are our priority, and we see significant benefits for them as well.

Together with Exact Sciences, we will have the collective talent, expertise and platform to bring our products to even more people around the world. Genomic Health is a leading provider of diagnostic tests that help improve cancer care. Our test have achieved significant success over nearly 2 decades as Genomic Health has become a pioneer in cancer diagnostics. Our flagship product, Oncotype DX, is an innovative breast cancer test that examines the activity of 21 genes in a patient's breast tumor tissue to guide individual live treatment based on a patient's biology and disease. Our Oncotype IQ portfolio has guided personalized treatment decisions for more than 1 million cancer patients worldwide. In the second quarter of 2019, we delivered more than 19% year-over-year overall revenue growth and 15% year-over-year growth for Oncotype DX tests delivered.

The recent landmark TAILORx breast cancer trial result established Oncotype DX as the new standard of care for women with early stage invasive breast cancer. This is just one example of the impact of the Oncotype DX test on patients around the world, definitively showing that Oncotype DX uniquely identifies the majority of patients who do not benefit from chemotherapy. We believe Genomic Health and Exact Sciences will be strong partners due to our shared mission to improve outcomes and our highly complementary operating model. And as part of the combined organization, we believe there will be significant opportunities for Genomic Health employees to enhance their capabilities, develop new and innovative products and grow professionally. I'd like to thank all of our employees for their contributions and their continued focus and dedication to Genomic Health. We are confident that together with Exact Sciences, we can have a positive impact on more patients and create additional value for our stakeholders.

With that, I'll turn the call back over to Kevin.

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

Thanks, Kim. This combination is a pivotal step for Exact Sciences to accelerate new sources of growth. Through Cologuard and Oncotype DX, our leading brands will continue to help detect and treat colorectal, breast and prostate cancer, which represent about 40% of all solid tumor incidents in the U.S. The Oncotype DX suite of products represents significant growth opportunities with a total available market of $2 billion across U.S. breast, international breast, U.S. prostate and other product markets. Together with Cologuard, this represents a $20 billion total addressable market. The combined companies' proven capabilities and scale position us to capture a significant share of these markets. The strength of Cologuard and Oncotype DX create a strong platform for continued growth.

Our combined company will have a best-in-class R&D and clinical organization with unmatched scale and scope. Together, we have advanced technology platforms, extensive clinical capabilities and a robust evidence generation engine. This, coupled with proven regulatory expertise and key relationships with oncologists, provides this team with the necessary resources to support growth in our current tests and to bring new innovative products to patients. Exact Sciences has already made exciting progress, building on the early success of Cologuard. We've identified proprietary biomarkers across the deadliest -- 15 deadliest cancers through our unique and long-standing partnership with Mayo Clinic. The combined team's clinical trial experience is unrivaled in the industry led by 2 landmark studies: DeeP-C for Cologuard and TAILORx for Oncotype DX. The R&D capabilities of Exact Sciences and Genomic Health together will drive breakthroughs and growth, positioning the combined company as a global leader in cancer diagnostics.

Not only will we have the scientific capabilities to develop new products, we'll have the commercial scale to successfully bring them to physicians and patients. The combined organization will have more than 1,000 team members, including sales, marketing and reimbursement teams. Exact Sciences has the largest primary care sales team in cancer diagnostics. This is important because primary care touches many different aspects of the patient journey. We also launched a new GI sales team this month, complemented by extensive marketing capabilities and a robust lab and IT infrastructure to support our growth. This combination expands our sales force in that reach to oncology, OB/GYN and neurology and establishes an international presence for the Exact Sciences team. Genomic Health's well-established global infrastructure spans more than 90 countries and will help accelerate the launch of pipeline products.

Within the U.S., we're adding Genomic Health's strong base of operations in the Bay Area, including a lab infrastructure in a state where the Medicare administrative contractor participates in a multi-Expo grand. This will help facilitate reimbursement of future blood base cancer diagnostics. Our combined teams and infrastructure will set a new bar in cancer diagnostics. We'll have broad, scale and reach and be able to more deeply engage with our provider and payer customers with a holistic offering for their members. Before I turn the call over to Jeff, I'll give you an example of the exciting path forward we see. We're developing a liver cancer test for high-risk individuals with cirrhosis and hepatitis B.

We can leverage Genomic Health's extensive clinical trial experience to generate evidence and to support guideline inclusion. We'll have a broader portfolio of products enabling deeper relationships with payers and industry-leading market access capabilities to support reimbursement for the liver cancer test. The combined company will also have expanded lab infrastructure and commercial capabilities to bring our liver test to more clinicians and patients globally.

And now I'll turn the call over to Jeff to talk about the transaction details and the results for the quarter.

Jeffrey T. Elliott -- Chief Financial Officer

Thanks, Kevin, and good morning, everyone. I'll first walk through the transaction terms and financial benefits followed by our second quarter results. Genomic Health stockholders will receive $27.50 in cash and $44.50 in shares of Exact Sciences' stock subject to a fixed value caller. This represents a 19% premium to the 30-day volume-weighted average price. Upon closing, Exact Sciences' shareholders are expected to own approximately 91% of the combining company with Genomic Health shareholders owning the remaining 9%. The combined company will have a stronger financial profile than Exact Sciences or Genomic Health independently. We expect to generate pro forma revenue of approximately $1.6 billion and gross profit of approximately $1.2 billion in 2020.

The combination is expected to generate approximately $25 million of annualized cost synergies within the third full year following close, primarily through reducing public company cost and purchasing optimization. We expect to have about $250 million of cash on our balance sheet upon transaction close and to be cash flow positive as a combined company during 2020. The transaction is expected to be completed by the end of 2019 subject to customary closing conditions and regulatory approvals, including the approval of Genomic Health stockholders. Now turning to our results. Second quarter revenue increased 94% to $200 million, and Cologuard test volume grew 93% to 415,000 completed tests. Cologuard growth was driven by increased productivity from our sales force, contributions from Pfizer, market access improvements and new sales and marketing initiatives.

Second quarter Cologuard cost of sales improved $2 to $123 per completed test. We expect third quarter cost per test to be in the high $120 range. We plan to start processing kits at our new lab during the third quarter and are expecting about $5 per test of incremental cost. We'll work to offset this with volume leverage and operating efficiencies. Second quarter gross margin was 74%, an increase of 30 basis points due to slightly lower cost per test. Second quarter operating expense totaled $182 million, below our guidance due to operating efficiencies and favorable timing. Selling and marketing included the Pfizer service fee of $19 million, which was about $7 million more than we had assumed in guidance. G&A included investments to support IT initiatives and additional personnel to support growth. R&D included sample collection and clinical studies to support our pipeline initiatives, including our liver cancer test and expanding Cologuard's label to age 45.

Excluding transaction-related costs, we expect operating expense to increase about $20 million in the third quarter, driven primarily by expanded selling and marketing efforts, including our peer-to-peer program and new GI -- and our new GI sales force and IT initiatives. Total second quarter capex was $51 million. For the full year, we expect capex of approximately $200 million. Second quarter cash used totaled $43 million. Cologuard generated $21 million of cash on an adjusted basis, excluding R&D on pipeline products and noncash expenses. We ended the quarter with cash and securities of $1.2 billion. Turning to our guidance. Based on our first half results and our expectation for the rest of 2019, we're raising our full year revenue guidance to $800 million to $810 million from our prior range of $725 million to $740 million. This assumes 1.66 million to 1.68 million completed Cologuard tests. For the third quarter, we expect revenue of $211 million to $216 million and Cologuard volume of 440,000 to 450,000 completed tests.

I'll now pass the call over to Brad for a review of Genomic Health's financial results.

G. Bradley Cole -- Analyst

Thanks, Jeff. I'll now review a few highlights from Genomic Health's second quarter and first half financial results release. In the second quarter of 2019, we delivered 19% top line revenue growth and twice the profit compared to last year. These record results were driven by the strength across our entire business with first half revenue growth of 13% in U.S. invasive breast cancer, 44% in U.S. early stage prostate cancer and 28% outside of the United States.

With this strong performance in the first 6 months of the year, a public reimbursement recommendation for our invasive breast cancer test in Germany and increasing private coverage for both of our prostate cancer tests, we are raising both our full year 2019 revenue and income guidance. We now expect to deliver full year revenue growth of between 14% and 15% and a full year profit of between $56 million and $60 million.

I'll now turn things back to Kevin for a few closing remarks.

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

Thanks, Brad. We're excited for this combination that we believe will create opportunities and benefits for patients, physicians, our teams, partners and shareholders for years to come. With 2 of the fastest-growing cancer diagnostic tests, a broad pipeline and extensive proven capabilities, the combined company is well positioned for long-term sustainable growth. Special thanks to the Exact Sciences and Genomic Health teams for the tremendous progress in Q2.

We look forward to together forever changing how cancer is detected and treated, and we're now happy to take your questions.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Brian Weinstein of William Blair Your line is open

Brian Weinstein -- William Blair -- Analyst

Hi guys. Good morning. Thanks for taking the questions same question, really, for Kevin and for Kim. Kevin, from your perspective, from your side, obviously, things are going very well. Cologuard had another very strong quarter. You've got a tremendous pipeline that you're building, capabilities that are expanding. And Kim, you guys just reported a very strong quarter as well, new products coming out. Why is this the right time for you guys to be combining? You guys both seem to have a lot of very good momentum in your individual businesses, so what's the rationale for the timing here?

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

I think there's no better time to do this than from a position of strength where we both have tremendous wind at our backs and teams that are in full stride. So from our perspective, this is an opportunity to change that patient journey from early detection to how treatment is guided, and that is what the power of this combination really delivers. Kim?

Kimberly Popovits -- Chief Executive Officer

Yes. I just will echo all of that and just say when we think about the complementary strengths of both organizations, our visions for the future, this is just a really exciting time to do this. And I think doing it with a record quarter coming from Genomic Health and optimism we have for growth going forward, this just makes that all the better. I think we really believe we have a 1 plus 1 equals 3 here, so we're very excited about it.

Brian Weinstein -- William Blair -- Analyst

Okay. And then, Kevin, for you, I know this transaction is transformative for you. I don't want to let the quarter kind of fall by the wayside here. Can you talk a little bit about the strengths that you're seeing to core Cologuard business? How to think about the productivity gains that you saw from your sales force? What the productivity was out of the Pfizer sales force? And whether or not we're kind of at the "inflection point" with the Pfizer reps finally getting up to full speed and showing kind of their muscle here?

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

Thanks, Brian. We're obviously pleased with the quarter. We still have a long way to go to go from 6% market share to a goal of 40%. I'll let Mark Stenhouse, President of Cologuard touch on this.

Mark Stenhouse -- President

Thanks, Kevin and Brian. Clearly, a fantastic quarter, driven not only by the additional reps we added last August but also the productivity from Pfizer. I would add that the commercial reimbursement strengthening is another key driver of success and the marketing, combined marketing talent between the 2 organizations, the productivity of the relationship is very strong. It continues to grow sequentially each quarter. So we do feel very, very positive about our partnership with Pfizer.

Operator

Our next question comes from Doug Schenkel with Cowen and Company. Your line is open

Doug Schenkel -- Cowen and Company -- Analyst

Hey good morning guys and Congratulations on the deal. The shared mission of improving cancer care and outcomes makes sense, and clearly, both companies have been quite rigorous when it comes to regulatory and clinical development and advancement. With that said, I guess, what I'm struggling with here are the operational benefits, especially given that year 3 synergy target you provided is only $25 million. Just to frame this $25 million translates into less than 2% of what we were forecasting for combined operating expenses for Exact and Genomic Health combined. Financially, it just doesn't seem clear like your position is representing much more than 1 plus 1 equals 2, even though you described it couple of minutes ago as 1 plus 1 equals 3. Again, recognizing both of you have great products and you have great teams, can you actually spell out where there are synergies to be found, or if looking for synergies is kind of just not getting it to at least when you look at the financial models?

Jeffrey T. Elliott -- Chief Financial Officer

Thanks, Doug. This is Jeff. So clearly, the cost synergies are compelling here. And obviously, $25 million is a number that we hope to exceed. But fundamentally, this is a combination driven by the incremental growth provided by combining these 2 companies. Now to be clear, we haven't assumed any revenue synergies in the model, but we are confident it exists. Kevin touched on some of these in his remarks. One clear area is the international infrastructure that Genomic Health brings. Internationally, we hope that long term we can launch our pipeline test. Well, now we have a very strong foundation from which to build that. Within the U.S., there are also clear sources of revenue synergies based on the relationships that Genomic Health has commercially with oncologists, with breast surgeons, and their ability to generate evidence are very well-known in the industry. So there are clear, very meaningful revenue synergies here in addition to the cost synergies.

Doug Schenkel -- Cowen and Company -- Analyst

Okay. So just to be clear on that, Jeff, because that does makes sense, but recognizing that right now in terms of commercial products, Exact is Cologuard. You've made a pretty big investment and commitment to build out a pretty strong PPE commercial channel, and that's where most of Cologuard is going to funnel through at least in the U.S. So I don't see any real sales synergies there. So the way you described it, just to make sure I'm clear, just from a sales synergy standpoint, recognizing these aren't built into the financial targets, the fit here is going to be largely about the pipeline, is that correct?

Jeffrey T. Elliott -- Chief Financial Officer

That is correct. Although, on the Cologuard side, just note that Genomic Health does bring the international infrastructure and they're bringing the ability to generate evidence, they bring deep relationships to allow us to follow patients across the whole journey of cancer. So there are broad fits across both of these companies. It is a very compelling transaction.

Doug Schenkel -- Cowen and Company -- Analyst

Okay. And then just from a deal structure standpoint, running through the math a little bit this morning, the deal structure requires you to deploy a pretty big portion of your cash on hand. I may have missed this, but is there another financing step that's anticipated here?

Jeffrey T. Elliott -- Chief Financial Officer

Thanks, Doug. So we are very comfortable with the projected opening balance sheet, which we expect to include about $250 million of cash. Note that Genomic Health brings about $244 million of cash as part of this equation, so we do not need to raise any additional capital as part of this combination.

Doug Schenkel -- Cowen and Company -- Analyst

Okay. And if I could ask one more, and I guess one thing, I guess, as we look ahead to your 2020 pro forma revenue target, The Street was looking for stand-alone exact revenue growth of 44%, recognizing you just bumped up your 2019 guidance, if we moderate that 44% just down to 40% and then add in Genomic's revenue forecast according to consensus, I think you get above $1.6 billion, and again arguably, the Genomic Health number should be going higher coming off of a strong quarter. Why isn't the target for 2020 higher?

Jeffrey T. Elliott -- Chief Financial Officer

Yes. Thanks for the question, Doug. So this combination clearly creates a stronger company financially with greater scale and scope, higher gross margin, higher operating margins and significantly better cash flow. I would say as far as 2020, it is early. We'll provide more commentary on that as this combination comes together. I would say as far as 2020, it is early. We'll provide more commentary on that as this combination comes together.

Doug Schenkel -- Cowen and Company -- Analyst

Okay thank you

Operator

Your next question comes from Derik De Bruin of Bank of America Merrill Lynch.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Hey good morning, Congratulations on the transaction. A couple of questions. I guess the first one would be just -- I'm curious, if you could talk about the R&D pipeline of both companies. And obviously, I think that's one of the more intriguing potentials here. I guess, obviously, you're producing -- you're progressing the liver cancer test. And I'm just sort of wondering if you could talk a little bit more broadly about what you see as potential synergies in the R&D process and also various -- that Genomic Health is working on doing some liquid biopsies with assays based on the Biocartis technology? I'm just curious if you like, do you see opportunities worth sort of expanding that way? Just talk a little bit more broadly, Kevin, about the R&D opportunity.

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

Our liver cancer test is a great example, Derik. Liver cancer is the #2 cancer killer globally. Exact Sciences presently lacks a commercial infrastructure to deploy the liver cancer test globally, and the Genomic Health team has a proven capability. We'll be able to expand that over time. And as you know we have a deep relationship with the Mayo Clinic, which has been the underpinning of our pipeline strategy, having identified biomarkers, accurate biomarkers, across the top 15 cancers. This combination accelerates our ability to bring those tests to physicians and patients globally. It also accelerates, in our view, the ability to deliver many of those tests here in the U.S. Today, as a cancer diagnostic company, we lack an oncology sales force.

And not only are we combining with a company with an oncology sales force, we're combining with the company with the best oncology sales force, the longest relationships, the most compelling relationships with those oncologists, along with evidence-generation capabilities that unquestionably are second to none. And we have admired all of those capabilities of Genomic Health for years, and that's why we're excited with our pipeline and moving that forward on a combined basis. As it relates to the Biocartis platform, that is an exciting opportunity for us to look at, to see if that platform would be suitable for many of the tests that we intend to commercialize globally. And there will be more to report in the future there.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

And as one follow-up, how soon do you think you can sort of expand into the O-U. S. markets with Cologuard, based on this combination?

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

We haven't provided any color around bringing Cologuard through the international markets. We think that there may be an alternative version of Cologuard that would be very amenable for the global opportunity. I think we need to think of it a different size and scale of the product itself to make it more amenable and at a lower cost of goods basis for an international offering. A real upside to this combination is to bring our colorectal cancer screening capabilities globally where colon cancer screening is vastly underpenetrated relative to the U.S.

Operator

Your next question comes from Brandon Couillard of Jefferies your line is open

Brandon Couillard -- Jefferies -- Analyst

Thanks for my question, a two-part question. I guess, the first for Kevin. Can you sort of speak to how long this has been under consideration and potential other alternative avenues you perhaps considered in terms of maybe building out some of these capabilities, some of this muscle yourself internally rather than buying it? Then Jeff, can you sort of speak to the mix of cash and stock and why that's the optimal mix?

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

I'll say that I have known Kim for at least 10 years, maybe longer. And we have not only admired Genomic Health but really modeled our approach to clinicians and patients off of the Genomic Health model. They innovated. They were the innovator in having a specialty diagnostics central lab model in the U.S. And so we've known each other for a long time. We think this is the optimal fit to be able to achieve this goal of bringing our pipeline test and other tests too that we may partner through a combined commercial organization of 1,000 people total that we think have a huge impact in changing cancer diagnostics forever.

Jeffrey T. Elliott -- Chief Financial Officer

Brandon, this is Jeff. We've chosen to finance the transaction using a combination of cash and stock to maintain flexibility as well as appropriate leverage. This works out to be an about $1.1 billion in cash and about $1.7 billion of stock. What this does is this allows us to maintain that flexibility and leverage the strong position from which both companies are operating and really set this up for long-term sustainable growth and value creation for shareholders.

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

Thank you

Operator

Your next question comes from Patrick Donnelly of Goldman Sachs. Your line is open

Patrick Donnelly -- Goldman Sachs -- Analyst

Great. Thanks guys, maybe just one on the Pfizer partnership. Can you just talk through the impact from this deal? Are you able to leverage things like the marketing rates for something like Genomic? Are things grandfathered in when you acquire? Maybe just talk through any impact so we could see from that.

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

There's no direct impact on the Pfizer partnership, which is focused on Cologuard and colorectal cancer screening. Obviously, Pfizer has deep reach not only in the primary care setting but in oncology, and we certainly will talk to our partner about some of the opportunities that we think exist over the long term. There is no impact at all on our partnership with Pfizer as it relates to Cologuard.

Patrick Donnelly -- Goldman Sachs -- Analyst

Okay. And maybe one for Mark Stenhouse, just on the sales team synergy. Maybe just talk through your approach as we look to bring these products onboard, how you'll structure the sales team? Any, again, potential spillover in terms of synergies? It would be great to hear and see your perspective.

Mark Stenhouse -- President

Yes. Certainly, I think it's premature to really talk about the structure of the sales force going forward. I think what is clear is that the combined -- each independent company has a best-in-class offering for the channel that they manage. As it's been previously mentioned by Kevin and Kim that the Oncotype team is best-in-class, and I would submit, in primary care cancer diagnostics, you could say the very same thing about Exact Sciences and our partnership with Pfizer. We bring really strong capabilities across both channels. I think what you see within our quarter is the benefit of the partnership with Pfizer, with Cologuard, to drive real value. And we're really starting to see the combination of the marketing capabilities and the sales synergies play out.

Operator

Your next question comes from Tycho Peterson of JPMorgan. Your line is open.

Tycho Peterson -- JPMorgan -- Analyst

Thanks, Congrats on the deal. I want to go back to Derik's question earlier on the pipeline. Just curious, Kevin, from your perspective and maybe we could hear from Kim as well, what Genomic Health is bringing to the table here on the liquid biopsy front. The obviously had an effort at one point and kind of pulled back on that. So just curious, from your perspective, what they're bringing around liquid biopsy in particular?

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

Certainly, the work that Genomic Health has done in liquid biopsy and focused and deep understanding of the need for breast cancer recurrence test is something that is attractive to us. As you know, we're a deep believer in not only the early detection of cancer initially but also the early detection of recurrent cancer. And so we think that together as a company, we are uniquely positioned to have an impact on the early detection of recurrent cancer that makes us excited. Kim?

Kimberly Popovits -- Chief Executive Officer

Yes. I might just add that we think this really allows us to accelerate some of the development that we're already doing. I think, as you know, we've been interested for a while in the area of minimal residual disease. We're doing some work in late-stage breast cancer recurrence, all of which would be in the liquid space, and continuing to do additional work in both renal and bladder. So there's a number of things that we have been working on, and we'll continue to work on. This will allow us to think in a much bigger way, to let that come to fruition. And then as we think about some of the...So go ahead, Kevin.

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

Yes. Tycho, one of the really important things as we think about developing MRD and recurrence test is the ability to partner with top oncology participants. And one of the things that those folks look to are companies with great stability and global reach. And so we think as a combined company, over the next decade, we'll be in a leading position to partner with oncology companies to advance the early detection of recurrent cancer.

Tycho Peterson -- JPMorgan -- Analyst

As then as we think about the non-Oncotype products, like AR-V7, how interesting are those in the kind of collaboration and scheme of things here?

Kimberly Popovits -- Chief Executive Officer

Well, certainly, I think I can chime in to say it should be interesting from the perspective of the growth potential for the entire urology franchise. So we remain very committed. You saw nice growth rates this quarter. We expect that going forward. So I think it will make a significant contribution.

Tycho Peterson -- JPMorgan -- Analyst

Okay. And then just lastly, I guess, Kim, as you think about the Biocartis collaboration, do you envision that stage to impact? How do you think about that playing out?

Kimberly Popovits -- Chief Executive Officer

Absolutely. Very excited about that opportunity. It certainly opens up the global markets for us. With the announcement of the reimbursement decision in Germany, it's just a really incredible starting point to bring that platform to major markets in Western Europe, and we'll see how we can expand it from there. But also it could have implications for the future pipeline of the combination here.

Tycho Peterson -- JPMorgan -- Analyst

Thank you

Operator

Your next question comes from Dan Brennan of UBS. Your line is.open

Dan Brennan -- UBS -- Analyst

Great thanks. Have a multipart question. Just a quick one on the quarter first. Did you guys say what the compliance rate was in the quarter? Just trying to back into what the cash utilization number was since that's been a key focus for us.

Jeffrey T. Elliott -- Chief Financial Officer

Dan, this is Jeff. It was 67% during the quarter, and we expect it to be about that same range in the third quarter.

Dan Brennan -- UBS -- Analyst

Great. And then, Kim, just a question for you. Obviously, the stock has done well post TAILORx, but you are selling out for less than a 20% premium on, I guess, the trailing 1-month basis for a company that's been around obviously for many, many years. Maybe, I know you discussed earlier, this 1 plus 1 equals 3, but possibly, could you give us a perspective on your decision to sell out here? And then, as we think about the tangible synergies that you think you can generate combining with Exact, kind of what are those?

Kimberly Popovits -- Chief Executive Officer

Well, let me just comment on, going forward, how we view this. We love the way the transaction has been organized from a shareholder perspective. So while we have a combination here of both stock and an ability to share in the upside and we believe in the future growth, we're looking at a potential combined market opportunity of $20 billion total, of which less than -- well, less than 10% of that is penetrated today. So I think, together, we're very excited about the opportunity that brings for growth for our shareholders. And we think this is the ideal time to do it. We're clearly coming in with the position of strength. We've got momentum with TAILORx on the breast side, and we've got significant momentum building on the urology side.

Dan Brennan -- UBS -- Analyst

And then, I know...sorry, go ahead.

Kimberly Popovits -- Chief Executive Officer

Sorry, go ahead. It's fine, go.

Dan Brennan -- UBS -- Analyst

And I was going to toggle along to Kevin and Jeff, just sort of a final follow-up there. I know there's been number of questions on this topic. But just wondering, Kevin, it does sound like the synergies that you're envisioning, even though Jeff I know is pretty emphatic that the near-term opportunities is largely pipeline related, so frankly, is this something we look out -- call it 3, 5 years plus is when you really see the tangible benefits from the Genomic Health transaction really accruing to the actual shareholders, not that there wouldn't be things more near term but in terms of the real bigger benefits of really pipeline related, I just want to be clear about that. And congrats.

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

Dan, we see clear benefits for the combined shareholder base started almost immediately. So next year, we expect over $100 million of incremental adjusted EBITDA, including synergies. On top of that, we expect about $40 million of tax benefits related to the NOLs. In longer term, that's when the revenue benefits really kick in. So again, this is a combination primarily based on the incremental growth that can be contributed by bringing these companies together. That said, there are significant benefits we expect to accrue really from the start.

Operator

Your next question comes from Catherine Schulte of Baird. Your line is open

Catherine Schulte -- Baird -- Analyst

Hey guys thanks for the questions and Congrats on the nice quarter and the deal. Kevin, you've mentioned several times the fact that this gives you a nice international infrastructure. Any time lines for potential international launches on your liver test or just plans for international studies?

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

No time lines at this point. We will certainly talk about those in future calls, and we'll have more data to present on our liver cancer test. We are really excited about the progress we're making there in the clinical studies that are under way to validate the performance of the test clinically.

Catherine Schulte -- Baird -- Analyst

Okay. And then for Kevin or Jeff, any change to your investment priorities following this transaction? It sounds like you can accelerate some pipeline programs, but what are your thoughts on future Cologuard sales force expansions? And does this deal have any impact on that? And then separately, any incremental investment you think should be made on the Genomic Health side?

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

I'll take the first part or take the first stab at answering that question. We just expanded our Cologuard sales force in the GI setting, adding 60 people this month, that we're really excited about that team. The majority of those team members were promoted from within. We're really excited about the experience that they bring and the conversations that will begin in the GI setting. We remain open to adding additional salespeople in the primary care setting over time. The team is doing a tremendous job presently.

Jeffrey T. Elliott -- Chief Financial Officer

Catherine, this is Jeff. We believe the right way to drive long-term sustainable value for shareholders is to continue to focus on the top line, investing in growth. So Kevin talked about the sales force investments. In the prepared remarks, we talked about the R&D investments we plan to make next year. We think that is the right set of priorities. That has not changed for us. So we will continue to invest in growth.

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

The one thing I would add is that at 6% market share, heading to a goal of at least 40% market share in the U.S. alone, that is about a $7 billion opportunity with Cologuard. And I assure you, we won't take our eye off of that ball.

Jeffrey T. Elliott -- Chief Financial Officer

Great

Operator

Your next question comes Puneet Souda of SVB Leerink. Your line is open.

Puneet Souda -- SVB Leerink -- Analyst

Thank you, Kim and Kevin, congrats on the quarter and the transaction. So my first question is really around the position here in screening oncology and the metastatic adjuvant oncology settings. Kevin, you have focused acutely on CRC screening and that's really driven a remarkable growth here. And obviously, Oncotype has been a fairly mature product now, but at the same time, the practice is changing and the standard of care in oncology under Kim and the leadership there. So as you look at priorities ahead beyond liver maybe in the pipeline, could you elaborate to us more broadly -- what are some of the things on your list -- combined list? And then my second part of that question is around biopharma partnership. Do you think -- do you plan to have closer biopharma partnerships or relationships and drive biopharma trial revenue in the near term or the longer term with this combined strength in oncology?

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

Puneet, we're awfully excited about our pancreatic cancer technology. Earlier this year, data was presented by the Mayo Clinic at the DDW Conference, highlighting on a liquid biopsy basis, the ability to detect 92% of pancreatic cancer at a 92% specificity across all 4 stages of cancer, leveraging the very technology platform that underpins Cologuard. That's one example. Esophageal cancer data has also been presented and then across the top 15 cancers, including breast cancer, so I think that's an area that we will be doing deep dives as our teams come together, our R&D teams start spending time together to explore how can we have the biggest impact on the patient journey. In terms of biopharma relationships, again, this is an opportunity we believe because of the strength, the financial strength, the scientific strength, the evidence generation strength and our proof -- each of our individual proven abilities to partner with other organizations. Of course, at this time, we wouldn't provide any color or projections on potential partnerships there.

Puneet Souda -- SVB Leerink -- Analyst

Okay. Great. And then if I could ask briefly on the 45- to 49-year-old expansion in Cologuard 2.0. I was hoping if this changes anything in your view or it maybe potentially accelerates things now with MolDx and both of the companies having significant experience with FDA here. We'd would appreciate some thoughts on that.

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

We've guided to FDA approval for the 45- to 49-year-old label change in the first half of next year. Nothing changes at all, other than we're awfully excited about the 19 million Americans who are not only amenable for screening but need to be screened. American Cancer Society recommended screening in this age group because the incidence rate in this population has recently doubled. And we believe Cologuard is the best fit for busy people aged 45 to 49 who really do need to get screened. So we're excited about that and gearing up to bring Cologuard to those individuals.

Operator

Your next question comes from Mark Massaro of Canaccord Genuity. Your line is up.

Mark Massaro -- Canaccord Genuity -- Analyst

Hey guys. Congratulations on this nice transaction. I guess my first question is, I think most investors on this line probably are not very familiar with Biocartis. And I'm trying to ascertain how important this Genomic Health relationship with Biocartis is with this particular transaction? So I know in the Genomic Health 10-K, there's an option for Genomic Health to expand its collaboration to include additional tests in oncology. So can you just speak to whether or not, as you're thinking about this deal coming to fruition, that in addition to Genomic Health's breast and prostate test, that perhaps Cologuard could be someday run on the Biocartis system to be decentralized across the world?

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

Thanks, Mark. The Biocartis platform is a platform that enables one test -- one patient sample at a time to be tested even in a physician's office. And that is a technology that we will have an opportunity to learn a lot more about and assess its applicability for some of our pipeline tests. It is a proven technology that is deployed outside of the U.S. presently and has applicability for both the breast and urology tests that Genomic Health presently offers. So that's an opportunity that we'll continue to look at and talk more about in quarters to come.

Mark Massaro -- Canaccord Genuity -- Analyst

Great. And then maybe a financial question. I know Genomic Health has sort of elite, best-in-class 83%, 84% gross margins. I know you've talked about the combined, I believe it's a 75% gross margin target for 2020. I guess, Jeff, can you clarify your comments around profitability? Clearly, Genomic Health has been profitable and increasingly is more profitable as they continue to execute. But can you clarify your comments on when you think you'll be able to achieve profitability?

Jeffrey T. Elliott -- Chief Financial Officer

Next year, I expect us to generate a nice positive level of free cash flow. Long-term profitability, our targets have always been at least 80% gross margin and at least 40% operating margin. This combination accelerates the path to those longer-term targets.

Mark Massaro -- Canaccord Genuity -- Analyst

Excellent. Congrats, guys.

Operator

Your next question comes Bill Quirk of Piper Jaffray. Your line is open right

Bill Quirk -- Piper Jaffray -- Analyst

Thanks. Good morning and Congratulations to everyone on the line on the deal. A couple of questions. I guess, Kim, starting off, given the disclosure a few years ago regarding looking at strategic alternatives, can you share some details in terms of how the deal came together? In other words, did Kevin approach you? Or had you gone out and approached others?

Kimberly Popovits -- Chief Executive Officer

Yes. Bill, I'm not going to comment on past discussions in that regard. I'll just go back and reiterate, we're very excited about this opportunity. It has been reviewed by our Board and our team, and we've been working together on this for a bit now. So it's just some exciting time today to announce this and bringing our visions together for a bigger and more compelling future.

Bill Quirk -- Piper Jaffray -- Analyst

Got it. And then just kind of, I guess, a potential leverage question for both Kevin and Kim. I know you've both rolled out some interesting targeted marketing campaigns. Can you talk a little bit about maybe some of the lessons learned and those that can be applied to the future to accelerate both platforms?

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

Well, Bill, I know speaking from our perspective, we really admire the targeted educational campaigns and very successful campaigns at Genomic Health as innovative. And we're going to learn a lot from the Genomic Health team and we can't wait to get started.

Operator

There are no further questions at this time. I will now return the call to our presenters.

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

Thanks to all, and we look forward to having conversations in the future. I just want to reiterate, tremendous work by both the Exact Sciences and Genomic Health teams, and we look forward to having more conversations with all. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Kimberly -- Chairman of board

Megan Jones -- Associate Manager of Investor Relations

Kevin T. Conroy -- Chairman of the Board, President and Chief Executive Officer

Kimberly Popovits -- Chief Executive Officer

Jeffrey T. Elliott -- Chief Financial Officer

Mark Stenhouse -- President

G. Bradley Cole -- Genomic Health, Inc. -- Analyst

Brian Weinstein -- William Blair -- Analyst

Doug Schenkel -- Cowen and Company -- Analyst

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Brandon Couillard -- Jefferies -- Analyst

Patrick Donnelly -- Goldman Sachs -- Analyst

Tycho Peterson -- JPMorgan -- Analyst

Dan Brennan -- UBS -- Analyst

Catherine Schulte -- Baird -- Analyst

Puneet Souda -- SVB Leerink -- Analyst

Mark Massaro -- Canaccord Genuity -- Analyst

Bill Quirk -- Piper Jaffray -- Analyst

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