EXACT Sciences Corporation

02/13/2026 | Press release | Distributed by Public on 02/13/2026 15:10

Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations
Objective
The purpose of this Management's Discussion and Analysis ("MD&A") is to better allow our investors to understand and view our Company from management's perspective. We are providing an overview of our business and strategy including a discussion of our financial condition and results of operations. The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. We have omitted discussion of 2023 results where it would be redundant to the discussion previously included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Form 10-K for the year ended December 31, 2024, which was filed with the Securities and Exchange Commission on February 19, 2025.
Overview
A leading provider of cancer screening and diagnostic tests, Exact Sciences Corporation gives patients and health care professionals the clarity needed to take life-changing action earlier. Building on the success of the Cologuard and Oncotype DX tests, we are investing in our pipeline to develop innovative solutions for use before, during, and after a cancer diagnosis.
Recent Developments and Trends
Merger Agreement
On November 19, 2025, we entered into the Merger Agreement with Abbott Laboratories and Merger Sub, providing for, among other things, the Merger on the terms and subject to the conditions set forth in the Merger Agreement. Upon the terms and subject to the conditions set forth in the Merger Agreement, at the Effective Time of the Merger, the separate existence of Merger Sub will cease, and we will continue as the surviving corporation in the Merger and as a direct, wholly owned subsidiary of Abbott. At the Effective Time, on the terms and subject to the conditions set forth in the Merger Agreement, each share of our common stock (other than certain excluded shares) issued and outstanding immediately prior to the Effective Time will be converted into and will thereafter represent the right to receive $105.00 in cash, without interest, less any applicable withholding taxes. Following the Merger, Exact common stock will no longer be publicly traded or listed on The Nasdaq Stock Market LLC.
Under the terms of the Merger Agreement, we are subject to various customary covenants and obligations, including, among others, until the earlier of the Effective Time and the termination of the Merger Agreement, the obligation to use commercially reasonable efforts to conduct our business in the ordinary course of business in all material respects and to refrain from taking certain actions without Abbott's consent, subject to specified exceptions. We do not believe the restrictions to which we are subject under the Merger Agreement will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs or capital expenditure requirements.
Consummation of the Merger, which we currently expect to occur in the second quarter of 2026, is subject to the satisfaction or waiver of certain conditions, including the Stockholder Approval, specified regulatory approvals and requirements having been obtained or satisfied and other customary closing conditions.
The Merger Agreement contains specified termination rights for Exact and Abbott, including, among others, the right of each party to terminate if (i) the Merger is not consummated by November 19, 2026, subject to extension in certain cases, (ii) any law or order restraining, enjoining, making illegal or otherwise prohibiting the consummation of the Merger is in effect and has become final and non-appealable, (iii) the Stockholder Approval is not obtained upon a vote taken on the adoption of the Merger Agreement at the meeting of our stockholders held for the purpose of obtaining stockholder approval or any adjournment or postponement thereof, or (iv) the other party breaches or fails to perform its representations, warranties, agreements or covenants in the Merger Agreement in a manner that would cause the conditions to the consummation of the Merger to not be satisfied and does not cure such breach or failure within the applicable cure period, subject to certain exceptions. If the Merger Agreement is terminated under specified circumstances, we may be required to pay to Abbott a termination fee of approximately $628.7 million.
The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is qualified in its entirety by reference to the copy of the Merger Agreement that was attached as Exhibit 2.1 to our Current Report on Form 8-K filed on November 20, 2025 and that is incorporated by reference as an exhibit to this Annual Report on Form 10-K.
Multi-year Productivity Plan
In August 2025, we announced our multi-year productivity plan. The plan is central to achieving our long-term financial goals. These initiatives are intended to drive sustainable growth, improve operating leverage, and amplify our ability to invest in innovation and serve more patients by delivering more than $150 million in expected annual savings by 2026. These savings are expected to primarily come from general and administrative efficiencies through external spend optimization, restructuring certain support functions globally, and building more automation in core operations.
Product Opportunities
We estimate there are up to 55 million Americans that are not up to date with their colon cancer screenings. The capacity for screening colonoscopies in the U.S. is relatively fixed because it is dependent on the number of gastroenterologists available to perform the procedures. Health systems, payers, and health care providers are motivated to increase screening rates because they are measured as part of the HEDIS and Medicare Stars quality measure systems. More health systems and payers are recognizing the opportunity to partner with Exact Sciences to address their screening rates and related quality measures through large, organized screening programs including our care cap programs. We aim to partner with them to implement our Cologuard and Cologuard Plus tests within these programs as a solution for patients who infrequently visit their health care provider. Cologuard test utilization is increasing in this setting, helping us screen more Americans.
In June 2025, the U.S. Supreme Court affirmed that USPSTF members were constitutionally appointed and that the ACA Mandate that certain health insurers cover, without imposing any patient cost-sharing, evidence-based items or services that have in effect a rating of "A" or "B" in the current recommendations of the USPSTF, which includes our Cologuard and Cologuard Plus tests, in its decision in the Kennedy v. Braidwood Management case. The ruling did not disrupt coverage of our Cologuard and Cologuard Plus tests, reinforces the value of evidence-based preventive care, and solidifies our Cologuard and Cologuard Plus tests as valuable assets for payers in improving health outcomes.
We have an opportunity to impact even more lives by increasing adoption of Oncotype DX tests internationally, primarily through continued adoption in Japan. Breast cancer is the most common cancer among Japanese women, with about 45,000 new diagnoses of early-stage HR+, HER2- breast cancer each year. With reimbursement in place, we estimate our Oncotype DX test could help more than 100 women per day understand if their cancer is likely to recur and whether chemotherapy should be used in their treatment plan.
Macroeconomic Conditions
While factors such as increasing financial market volatility and uncertainty, inflation, exchange rate fluctuations, higher interest rates, government shutdowns, tariffs and geopolitical conflicts have not materially impacted our results of operations as of December 31, 2025, we are uncertain how these factors may impact our future operating results, including through the impact of consumer or medical provider behavior or by adversely impacting the operations of our suppliers.
Results of Operations
Revenue.Our Screening revenue primarily includes laboratory service revenue from our Cologuard and PreventionGenetics LLC ("PreventionGenetics") tests while our Precision Oncology revenue includes laboratory service revenue from global Oncotype DX and therapy selection tests.
(Amounts in thousands)
2025 2024 Change % Change
Screening $ 2,529,866 $ 2,103,868 $ 425,998 20.2 %
Precision Oncology 717,124 654,999 62,125 9.5 %
Total $ 3,246,990 $ 2,758,867 $ 488,123 17.7 %
The increase in Screening revenue was primarily driven by a higher volume of completed Cologuard tests, which resulted from increases in rescreen rates, care gap programs, and growth in new ordering providers.
The increase in Precision Oncology revenue was primarily due to an increase in the number of completed Oncotype DX breast cancer tests, both domestically and internationally. This increase in completed Oncotype DX breast cancer tests was led by an increased number of ordering providers outside the U.S., particularly in Japan. In addition, we recognized sublicense revenue of $7.5 million for year ended December 31, 2025 under a sublicense agreement executed in the second quarter of 2025 related to technology originally licensed from TwinStrand in the third quarter of 2024.
Adjustments to revenue recognized during the year relating to prior year estimates were less than 1% of revenue recorded in our consolidated statement of operations for the years ended December 31, 2025 and 2024. The impacts to revenue related to change in transaction price are a function of differences in realized collections compared to original estimates, which includes upward adjustments stemming from optimizations in our reimbursement operations and downward adjustments from things such as payer denials.
We expect continuing revenue growth for our Cologuard and Oncotype tests subject to seasonal variability, timing of care gap programs, and additional growth from our recent and upcoming product launches. Our revenues are affected by the test volume of our products, patient adherence rates, payer mix, the levels of reimbursement, our order to cash operations, and payment patterns of payers and patients.
Cost of sales.Cost of sales includes the costs incurred to deliver our products and services including material and service costs, personnel costs including stock-based compensation, infrastructure expenses associated with laboratory testing services, shipping charges, depreciation, amortization of acquired intangible assets or license intangible assets related to products we have commercialized, and allocated facility and overhead costs. Cost of sales and gross margin consisted of the following:
(Amounts in thousands)
2025 % of Revenue 2024 % of Revenue $ Change % Change
Cost of sales
$ 984,235 30.3 % $ 840,150 30.5 % $ 144,085 17.1 %
Gross profit and gross margin 2,262,755 69.7 % 1,918,717 69.5 % 344,038 17.9 %
The increase in cost of sales for the year ended December 31, 2025 was primarily due to an increase in production costs, which was a result of an increase in completed Cologuard and Oncotype tests. Gross margin was consistent for the year ended December 31, 2025 compared to the same period in 2024, primarily due to efficiencies gained in our personnel and lab automation from increased Cologuard test volume, which was partially offset by an increase in volume from certain of our care gap programs. We expect that cost of sales will generally continue to increase in future periods as a result of an increase in our existing laboratory testing services and as we launch our pipeline products. We also expect to see a corresponding increase in personnel and support services associated with this growth.
Research and development, sales and marketing, and general and administrative expenses, including each item as a percentage of revenue, consisted of the following:
(Amounts in thousands)
2025 % of Revenue 2024 % of Revenue $ Change % Change
Research and development $ 522,996 16.1 % $ 431,210 15.6 % $ 91,786 21.3 %
Sales and marketing 1,050,183 32.3 % 894,125 32.4 % 156,058 17.5 %
General and administrative 888,674 27.4 % 781,825 28.3 % 106,849 13.7 %
Research and development expenses. Research and development expenses consist of costs incurred to develop new or enhance existing products and services, which primarily includes personnel costs including stock-based compensation, clinical study programs, materials and infrastructure costs, depreciation and amortization, and allocated facility and overhead costs. Research and development costs incurred for years ended December 31, 2025 and 2024 primarily related to the development of our colorectal cancer, MRD, and MCED tests. The increase in research and development expenses was primarily due to the upfront payment associated with our license deal executed with Freenome, which resulted in expense of $75.0 million in the fourth quarter of 2025. In addition, research and development expenses incurred to support our ongoing clinical studies increased primarily due to increased resources needed to support our pipeline tests as they approached and reached commercialization. The increase in costs incurred to support our ongoing clinical studies was partially offset by the termination of a license agreement with The Translational Genomics Research Institute, which resulted in the recognition of $25.8 million in the second quarter of 2024. We expect that research and development expenses will generally continue to increase in future periods as we continue to enhance our current products and invest in our pipeline.
Sales and marketing expenses.Sales and marketing expenses primarily include personnel costs including stock-based compensation and commissions for our sales force, marketing costs, customer-oriented support activities, depreciation and amortization expense, and allocated facility and overhead costs. Sales and marketing expenses increased primarily due to continued investment in high impact opportunities including our direct-to-consumer advertising campaigns and further development of large, organized screening programs. We anticipate sales and marketing expenses will generally increase in future periods as we reinvest in efforts to increase adoption of current products and support the launches of new products. We expect these expenses will decrease as a percentage of revenue over time, driven by the growth of Cologuard and Oncotype testing services.
General and administrative expenses.General and administrative expenses include costs associated with our corporate support functions, which primarily includes personnel costs including stock-based compensation, legal and professional service fees, depreciation and amortization, and allocated facility and overhead costs. General and administrative expenses increased primarily due to restructuring and business transformation related costs incurred as discussed in Note 15 of our Notes to Consolidated Financial Statements and an increase in certain incentive-based compensation arrangements. The increase in expenses was also attributed to the change in fair value of our outstanding contingent consideration liabilities. Refer to Note 7 of our Notes to Consolidated Financial Statements for further discussion of our outstanding contingent consideration liabilities. The decrease in general and administrative expenses as a percentage of revenue is primarily due to efficiencies gained in our personnel and information technology systems and a reduction in other discretionary spend as we continue to implement cost saving measures, which were partially offset by the factors described above. We expect general and administrative expenses will stabilize and decrease over time as we leverage efficiencies in our personnel, information technology systems, and the expected benefits from our multi-year productivity plan.
Other operating and non-operating expense (income) items consisted of the following:
(Amounts in thousands)
2025 2024 Change
Impairment of long-lived and indefinite-lived assets $ 7,200 $ 869,460 $ (862,260)
Other operating income - (9,200) 9,200
Investment income, net (41,771) (39,558) (2,213)
Interest expense, net 39,361 27,016 12,345
Income tax expense (benefit)
4,061 (7,304) 11,365
Impairment of long-lived and indefinite-lived assets.The impairment charges recorded during the year ended December 31, 2025 related to certain of our domestic facilities and corresponding leasehold improvements. The impairment charges recorded during the year ended December 31, 2024 included impairments to our IPR&D asset acquired as part of our acquisition of Thrive and building leases and corresponding leasehold improvements at certain of our domestic facilities. The impairment of the IPR&D asset is further discussed in Note 6 of our Notes to Consolidated Financial Statements.
Other operating income. The income recorded for the year ended December 31, 2024 represents the remeasurement of the contingent consideration asset from the sale of the Oncotype DX Genomic Prostate Score test ("GPS test") to MDxHealth SA ("MDxHealth"). The sale of the GPS test is further discussed in Note 17 of our Note to Consolidated Financial Statements.
Investment income, net.The investment income for the years ended December 31, 2025 and 2024 was primarily due to gains recorded on our marketable and non-marketable securities.
Interest expense, net.Interest expense recorded from our outstanding convertible notes totaled $32.9 million for the year ended December 31, 2025. Interest expense recorded from our outstanding convertible notes totaled $22.3 million, which was partially offset by a net gain on settlement of convertible notes of $10.3 million, for the year ended December 31, 2024. The convertible notes are further described in Note 10 of our Notes to Consolidated Financial Statements.
Income tax benefit (expense). Income tax expense for the year ended December 31, 2025 was primarily related to current foreign and state tax expense. The income tax benefit recorded during the year ended December 31, 2024 was primarily related to current foreign and state tax expense offset by a U.S. deferred tax benefit.
Liquidity and Capital Resources
Overview
We have incurred losses since our inception, and have historically financed our operations primarily through public offerings of our common stock and convertible debt and through revenue generated by the sale of our laboratory testing services. We expect our operating expenditures to continue to increase to support future growth of our laboratory testing services, as well as an increase in research and development and clinical trial costs to support the advancement of our pipeline products and bringing new tests to market. We expect that cash, cash equivalents, and marketable securities on hand at December 31, 2025, along with cash flows generated through our operations, will be sufficient to fund our current operations through the expected closing date of the Merger, or, if the Merger is not completed or is delayed beyond our expectations, for at least the next twelve months based on current operating plans.
We may raise additional capital to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons, with certain of the foregoing actions, if we were to move forward with them, requiring Abbott's approval under the Merger Agreement. If we are unable to obtain sufficient additional funds to enable us to fund our business plans and strategic investments, our results of operations and financial condition could be materially adversely affected, and we may be required to delay the implementation of our plans or otherwise scale back our operations. There can be no certainty that we will ever be successful in generating sufficient cash flow from operations to achieve and maintain profitability and meet all of our obligations as they come due.
Cash, Cash Equivalents, and Marketable Securities
As of December 31, 2025, we had approximately $956.0 million in unrestricted cash and cash equivalents and approximately $8.7 million in marketable securities.
We liquidated our portfolio of fixed income investments in the fourth quarter of 2025. Prior to this, the majority of our investments in marketable securities consisted of fixed income investments, and all were deemed available-for-sale. The objectives of this portfolio was to provide liquidity and safety of principal while striving to achieve the highest rate of return. Our investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer.
Cash Flows
(Amounts in thousands)
2025 2024
Net cash provided by operating activities
$ 491,438 $ 210,536
Net cash provided by (used in) investing activities
195,121 (442,155)
Net cash provided by (used in) financing activities
(338,090) 231,874
Operating activities
The increase in cash provided by operating activities was primarily due to an increase in revenue, a decrease in our operating expenses as a percentage of revenue, and timing and magnitude of our cash outflows on our accounts payable and accrued liabilities including lower disbursements related to incentive-based compensation arrangements that were accrued as of December 31, 2024. This was partially offset by an increase in cost of sales to support the increase in revenue as discussed in the Results of Operations section above.
Investing activities
The increase in cash provided by investing activities was due to allocating more funds to money market accounts and reducing our investments in fixed income securities, allowing us to meet our liquidity needs for financing activities for year ended December 31, 2025, as further discussed below. In addition, we received a payment of $28.0 million in the second quarter of 2025 in settlement of a portion of our contingent consideration receivable related to the sale of intellectual property and know-how related to our GPS test to MDxHealth. These inflows were partially offset by an upfront payment of $75.0 million as part of our license deal with Freenome in the fourth quarter of 2025. Additionally, we made a payment of $50.0 million as part of the note purchase agreement that we executed with Freenome in the third quarter of 2025. We also made a payment of $45.0 million for our license of intellectual property from TwinStrand during the third quarter of 2024.
Financing activities
The increase in cash used in financing activities was primarily due to payments of $249.2 million on settlement of our previously outstanding convertible notes due in 2025 ("2025 Notes") upon maturity in January 2025 and a cash payment of $19.0 million in settlement of the contingent consideration liability related to our acquisition of Ashion Analytics, LLC. In comparison, we received proceeds of $266.8 million from the issuance of convertible notes in the second quarter of 2024. In addition, we made a payment of $86.5 million related to the net settlement of equity awards associated with Company's acceleration of certain awards in the fourth quarter of 2025 as further discussed in Note 13 of our Notes to Consolidated Financial Statements. The increase in cash used in financing activities was partially offset by a payment of $50.0 million in settlement of our previously outstanding accounts receivable securitization facility upon maturity in 2024.
Material Cash Requirements
Convertible Notes
As of December 31, 2025, we had outstanding aggregate principal of $2.35 billion on our convertible notes with maturity dates of March 15, 2027 (the "2027 Notes"), March 1, 2028 Notes (the "2028 Notes"), March 1, 2030 (the "2030 Notes"), and April 15, 2031 (the "2031 Notes" and collectively, the "Notes"). The 2027 Notes have an outstanding principal balance of $563.8 million. The 2028 Notes have an outstanding principal balance of $589.4 million. The 2030 Notes have an outstanding principal balance of $573.0 million. The 2031 Notes have an outstanding principal balance of $620.7 million. The 2027 Notes, 2028 Notes, 2030 Notes, and 2031 Notes accrue interest at a fixed rate of 0.375%, 0.375%, 2.0%, and 1.750% per year, respectively, which is payable in cash semi-annually in arrears each year until the maturity date. See Note 10 of our Notes to Consolidated Financial Statements for further information. Until the six months immediately preceding the maturity date of the applicable series of Notes, each series of Notes is convertible only upon the occurrence of certain events and during certain periods. The Notes will be convertible into cash, shares of our common stock (plus, if applicable, cash in lieu of any fractional share), or a combination of cash and shares of our common stock, at our election. If the notes are not converted prior to the maturity date, the principal amount will be settled in cash upon maturity.
Lease Commitments
We act as lessee in our lease agreements, which include operating leases for corporate offices, laboratory space, warehouse space, vehicles, and certain laboratory and office equipment, and finance leases for certain equipment and vehicles. As of December 31, 2025, we had minimum operating and finance lease payments of $246.2 million and $13.0 million, respectively. Of the outstanding operating lease obligations, $43.2 million matures in 2026, and the remaining $203.0 million will mature in periods subsequent to 2026. Of the outstanding finance lease obligations, $6.3 million matures in 2026, and the remaining $6.7 million will mature in periods subsequent to 2026. See Note 14 of our Notes to Consolidated Financial Statements for further information.
Contingent Consideration
Certain of our business combinations and asset acquisitions involve potential payment of future consideration that is contingent upon the achievement of certain regulatory and product revenue milestones. A liability is recorded for the estimated fair value of the contingent consideration on the acquisition date for business combinations. A liability is recorded when achievement of a milestone becomes probable for asset acquisitions.
As a result of the acquisition of Thrive in January 2021, an additional $450.0 million would be payable in cash to Thrive's former shareholders upon the achievement of two discrete events, FDA approval and CMS coverage, for $150.0 million, and $300.0 million, respectively, in relation to the development and commercialization of a blood-based, MCED test. The projected fiscal year of payment range is from 2030 to 2031. See Note 7 of our Notes to Consolidated Financial Statements for further information.
License Agreements
We license certain technologies that are, or may be, incorporated into our technology under several license agreements, as well as the rights to commercialize certain diagnostic tests through collaboration agreements. Generally, the license agreements require us to pay single-digit royalties and sales-based milestone payments based on net revenues received using the technologies and may require minimum royalty amounts or maintenance fees.
In August 2025, we entered into a Collaboration and License Agreement with Freenome. As a result of the Collaboration and License Agreement, we could pay up to $700 million upon the achievement of certain development and regulatory milestones, including a $100 million payment upon first-line FDA approval of the first version of Freenome's CRC blood test. Freenome submitted the final module of the premarket approval application to the FDA for the first-version test in mid-2025.
The timing and amounts of any such royalty or milestone payments is unknown due to the uncertain nature of product development and associated net revenues using these technologies. Refer to Note 11 and Note 17 of our Notes to Consolidated Financial Statements for further information.
Capital Expenditures
We expect to continue to invest in capital expenditures to support the growth of our existing products and our research and development activities. Our current projects primarily include the build out of certain lab automation projects at our existing facilities in Madison, WI. These projects are expected to be completed in 2026 and beyond. We also have assets under construction related to laboratory equipment, leasehold and building improvements, and software projects.
Sources of Cash
In January 2025, we entered into a senior secured revolving credit agreement (the "Revolving Credit Agreement") with JPMorgan Chase Bank, N.A., which provides us with access to $500.0 million on a revolving basis, including a letter of credit sublimit. The Revolving Credit Agreement also provides for uncommitted incremental facilities in an amount up to $200.0 million plus an unlimited additional amount so long as we are in pro forma compliance with certain financial covenants. The Revolving Credit Agreement expires in January 2028. The Revolver and Revolving Credit Agreement are further described in Note 9 of our Notes to Consolidated Financial Statements.
We believe that our anticipated income from operations, cash and marketable securities on hand, and borrowing capacity under our Revolving Credit Agreement will be adequate to meet our commitments through the expected closing date of the Merger, or, if the Merger is not completed or is delayed beyond our expectations, for at least 12 months from the issuance of this Annual Report on Form 10-K. However, we may need to raise additional capital to fully fund our current business plan and meet all commitments discussed above. We continuously evaluate our liquidity and capital resources, including access to external capital, in light of current economic and market conditions and our operational performance.
As of December 31, 2025, we had no off-balance sheet arrangements.
Net Operating Loss Carryforwards
As of December 31, 2025, we had federal, state, and foreign net operating loss ("NOL") carryforwards of approximately $418.6 million, $66.9 million, and $10.9 million, respectively. We also had federal and state research tax credit carryforwards of approximately $93.4 million and $43.2 million, respectively. The net operating loss and tax credit carryforwards will expire at various dates through 2041, if not utilized. The Internal Revenue Code of 1986, as amended, and applicable state laws impose substantial restrictions on a corporation's utilization of net operating loss and tax credit carryforwards if an ownership change is deemed to have occurred. Additionally, tax law limitations may result in our NOLs expiring before we have the ability to use them. The Tax Cuts and Jobs Act (H.R. 1) of 2017 limits the deduction for NOLs to 80% of current year taxable income and provides for an indefinite carryover period for federal NOLs. Both provisions are applicable for losses arising in tax years beginning after December 31, 2017. As of December 31, 2025, we had $310.4 million of NOLs incurred after December 31, 2017. For these reasons, even if we attain profitability, our ability to utilize our NOLs may be limited, potentially significantly so.
A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before we are able to realize their benefit, or that future deductibility is uncertain. In general, companies that have a history of operating losses are faced with a difficult burden of proof on their ability to generate sufficient future income in order to realize the benefit of the deferred tax assets. We have recorded a valuation against our deferred tax assets based on our history of losses and current uncertainty as to timing of future taxable income. Given the future limitations on and expiration of certain Federal and State deferred tax assets, the recording of a valuation allowance resulted in a deferred tax liability of approximately $5.8 million remaining as of December 31, 2025, which is included in other long-term liabilities on our consolidated balance sheet.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that are believed to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 1 of our Notes to Consolidated Financial Statements, we believe that the following judgments are most critical to aid in fully understanding and evaluating our reported financial results.
Revenue Recognition.We recognize revenues when we release an approved patient test result to the ordering healthcare provider, in an amount that reflects the consideration we expect to collect in exchange for those services. The amount of revenue we recognize is based on the established billing rates less contractual and other adjustments, which yields the unconstrained amount that we expect to ultimately collect.
We determine the amount we expect to ultimately collect using historical collections, established reimbursement rates, and other adjustments. The expected amount is typically lower than, if applicable, the agreed-upon reimbursement amount due to several factors, such as the amount of any patient co-payments, out-of-network payers, the existence of secondary payers, and claim denials. A change in the estimated transaction price derived by the aforementioned inputs would ultimately impact the amount of revenue recognized during the period. We have historically recognized an upward or downward adjustment to revenues from a change in transaction price representing approximately 1% of prior year revenues. A 1% change in our estimated transaction price for revenue recognized for the year ended December 31, 2025 would result in an adjustment to revenue of approximately $32.5 million in 2026.
In the case of some of our agreements, the right to bill and collect exists prior to the receipt of a specimen and release of a test result to the ordering healthcare provider, which results in deferred revenue. The deferred revenue balance is generally relieved upon the release of the applicable patient's test result to the ordering healthcare provider. We believe this point in time represents our fulfillment of our obligation to the customer.
The quality of our billing operations, most notably those activities that relate to obtaining the correct information in order to bill effectively for services provided, directly impacts the collectability of our receivables and revenue estimates. As such, we continually assess the state of our order to cash operations in order to identify areas of risk and opportunity that allow us to appropriately estimate receivables and revenue. Upon ultimate collection, the aggregate amount received from payers and patients where reimbursement was estimated is compared to previous collection estimates and, if necessary, the transaction price is adjusted. Finally, should we later determine the judgments underlying estimated collections change, our financial results could be negatively impacted in future quarters.
Tax Positions. We record a valuation allowance to reduce the deferred tax assets 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.
We compute our provision for income taxes based on the statutory tax rates and tax planning opportunities available to us in the various jurisdictions that we operate. Judgment is required in evaluating our tax positions and determining our annual tax provision.
We have incurred significant losses since our inception and due to the uncertainty of the amount and timing of future taxable income, it may be necessary to record an allowance to reduce the tax assets we have recognized.
Management has determined that a valuation allowance of $736.0 million and $708.8 million at December 31, 2025 and 2024, respectively, is necessary to reduce the tax assets to the amount that is more likely than not to be realized. Due to the existence of the valuation allowance, future changes in our unrecognized tax benefits will not impact our effective tax rate.
Acquired Intangible Assets. We acquire finite-lived intangible assets through our business combinations and asset acquisitions, which primarily consist of developed technology. As of December 31, 2025, our developed technology intangible assets have a carrying value of $391.5 million. Key assumptions used to value developed technology under the income approach include projected revenue growth, projected gross margin and operating expenses, discount rate, tax rate, and obsolescence factor. We believe that the estimates applied are based on reasonable assumptions, but the estimates are inherently uncertain. As a result, the actual results may differ from the assumptions and judgments used to determine fair value of the assets acquired, which could result in material impairment charges in the future. Determining the useful life of the developed technology also requires judgment and actual useful life may differ.
Certain of our acquisitions include the acquisition of indefinite-lived IPR&D. There are major risks and uncertainties associated with IPR&D due to the regulatory approvals needed, which rely on the success of clinical trials that demonstrate product effectiveness. Key assumptions used to calculate the fair value of the IPR&D asset included inputs such as projected revenues, projected gross margin and operating expenses, discount rate, tax rate, obsolescence factor, and probability of commercial success. We believe that the estimates applied are based on reasonable assumptions, but the estimates are inherently uncertain. As a result, the eventual realized value of the IPR&D project may vary from its fair value at the date of acquisition, and material IPR&D impairment charges may occur in future periods. As a result of the acquisition of Thrive, we recorded an IPR&D asset of $1.25 billion in January 2021. As of December 31, 2024, the carrying value of our IPR&D asset was reduced to $420.0 million as a result of the impairment charge discussed in further detail below. As of December 31, 2025, the fair value of our IPR&D asset exceeded the carrying value, and accordingly no impairment charge was recorded. Further changes in key assumptions made in determining the fair value of the IPR&D asset in 2025, including the discount rate changing by 1% or the total after-tax discounted cash flows changing by 5%, would not have resulted in an impairment charge. Refer to the Impairment of Indefinite-Lived Assets section below for further discussion of the IPR&D associated with the acquisition of Thrive.
Contingent Consideration Liabilities. Business combinations may include contingent consideration to be paid based on the occurrence of future events, such as the achievement of certain development, regulatory, and sales milestones. Contingent consideration is a financial liability recorded at fair value at the acquisition date. We remeasure the fair value of outstanding contingent consideration liabilities at each reporting period.
The estimate of fair value contains uncertainties as it involves judgment about the likelihood and timing of achieving milestones as well as the present-value factor. A change in the assumptions made for probability of success, projected fiscal year of payment, and present-value factor could have a material impact on the estimated fair value. Our contingent consideration liability is primarily due to our acquisition of Thrive, which resulted in a contingent consideration liability of $352.0 million upon acquisition. Due to changes in macroeconomic conditions, the weighted average present-value factor decreased from 6.2% as of December 31, 2024 to 5.5% as of December 31, 2025, and the fair value of the contingent
consideration liability was remeasured from $262.5 million as of December 31, 2024 to $289.0 million as of December 31, 2025. Further changes in the key assumptions made in determining the fair value of the contingent consideration liability recorded related to the acquisition of Thrive could result in a change in the estimated fair value of up to the amounts shown in the following table:
Assumption
Unit of Measure Change
Fair Value Impact (In Thousands)
Probability of success 5% $ 16,100
Projected fiscal year of payment 1 Year 15,100
Present-value factor
1% 13,800
Impairment of Indefinite-Lived Assets.We test indefinite-lived assets for impairment on an annual basis during the fourth quarter, or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Based on the qualitative assessment, if it is determined that the fair value of indefinite-lived intangible assets is more likely than not to be less than its carrying amount, the fair value will be calculated and compared with its carrying amount and an impairment charge will be recognized for the amount that the carrying value exceeds the fair value. Determining whether impairment indicators exist and estimating the fair value of our indefinite-lived intangible assets if necessary for impairment testing requires significant judgment. We performed our annual goodwill assessment using a qualitative assessment and concluded there were no impairments. Qualitative factors considered in this assessment included industry and market conditions, overall financial performance, and other relevant events and factors. For the year ended December 31, 2024, after performing our qualitative assessment on our IPR&D impairment test, we determined that the carrying value exceeded the fair value and recorded an impairment loss of $830.0 million. Key assumptions used to calculate the fair value of the IPR&D asset for the quantitative assessment included inputs such as projected revenues, projected gross margin, projected operating expenses, discount rate, tax rate, obsolescence factor, and probability of commercial success. For the year ended December 31, 2025, we elected to bypass the qualitative assessment and performed a quantitative assessment for our annual IPR&D impairment test and concluded that there were no impairment.
Impairment of Long-Lived Assets.We evaluate the fair value of long-lived assets, which include property, plant and equipment, leases, finite-lived intangible assets, and investments in non-marketable securities, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. The review of qualitative factors requires significant judgment. 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. We recorded impairment charges totaling $7.2 million, $39.5 million, and $0.6 million during the years ended December 31, 2025, 2024, and 2023, respectively, related to certain of our domestic facilities and corresponding leasehold improvements. We utilized the income approach to measure the fair value of the building leases and associated leasehold improvements, which required management to make estimates including cash flow projections and discount rates. We believe that the estimates applied are based on reasonable assumptions, but the estimates are inherently uncertain. As a result, the eventual realized value of the impaired asset may vary from its fair value.
Recent Accounting Pronouncements
See Note 1 of our Notes to Consolidated Financial Statements for the discussion of Recent Accounting Pronouncements.
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