Exact Sciences Corp (EXAS) 2002 Q4 法說會逐字稿

Good morning and welcome to your EXAXT Sciences Corporation sponsored Fourth Quarter 2002 Year-end Earnings conference call.

At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments following the presentation.

At this time I would like to turn the floor over to your host, Amy Hedison.

Ma’am, the floor is yours.

Thank you, Karen.

Good morning everyone and welcome to EXACT Sciences Year-end 2002 conference call.

I have with me Don Hardison, our President and CEO and John McCarthy, our COO and CFO.

Prior to their comments, however, I will read my little spiel and then turn the floor over to Don, who will then when he’s finished turn it over to John, who will go over the financial results for the quarter.

Prior to their statements, I would like to remind you that any forward-looking statements made during this call are based upon current expectations and are subject to change, based upon various factors that could effect the Company’s financial and operating results.

These factors are set forth in detail in EXACT Sciences’ 2001 Form 10-K and subsequent filings.

Thanks.

Don?

Good morning, everyone.

I'm going to spend a few minutes discussing 2002 and putting that in perspective for you and then talk with you about 2003, which should be our most exciting year to date.

I believe that 2002, by any measure, was a terrific year for EXACT Sciences.

A year of meeting important business milestones, growing and developing our organization, amassing important clinical data, building our patent portfolio and establishing the business relationships that will be key to our success going forward.

It was also a year of intense preparations.

We went into the year wanting to accomplish numerous important objectives required to lay the foundation for the successful launch of PreGen-Plus, our novel assay for the detection of colorectal cancer.

I believe we certainly accomplished those objectives.

First and foremost among those objectives was to sign a partnership agreement with a clinical laboratory company that could make PreGen-Plus broadly available and help insure our financial future.

As you know, our partner is Laboratory Corporation of America (LabCorp).

We believe this partnership is unprecedented in the world of molecular diagnostics, both in financial terms and in terms of long-term commercial value.

It is probably the first instance where a diagnostic product deal will closely resemble the structure of a pharmaceutical deal in the large up front and milestone payments, as well as the royalty rates.

There is obviously a large, long-term upside for both EXACT and for LabCorp.

We believe that we have found in LabCorp a partner whose strategic objectives and culture are very compatible with ours.

I believe we’ve developed the kind of relationship that allows each company to leverage the others’ strengths.

Secondly, we made tremendous progress in optimizing the PreGen technology, as well as the operational logistics surrounding PreGen-Plus testing.

Both EXACT and LabCorp have worked diligently to fully understand all that goes into the making of a DNA-based assay like this one broadly available.

Careful planning has gone into every aspect of this process to help insure that patients, ordering physicians, and the involved departments at LabCorp have a positive experience.

We are pleased with our progress to date and continue to learn much that will contribute to the long-term success of PreGen-Plus.

Third, I’m happy to announce that we’ve now enrolled over 5,000 patients in our multicenter study.

We believe that this will give us the number of cancers we need, to have the necessary statistical power for our analysis.

However, we will continue to enroll until the end of the first quarter of this year to provide ourselves with an additional 500 patients.

This will give us more statistical power for some important subset analyses we want to do.

We believe that this study, which is one of - if not the largest - study of it’s kind in diagnostics history will provide important corroborating clinical information when the data become available in the fourth quarter of this year.

As you know, most clinical studies do not enroll on time or come in on budget, particularly one that is so large.

We are proud that through the work of Dr. Mike Ross, Joy Yucaitis and Kathy Morrell [ph] of our Clinical Affairs team and through the diligence of our CRO par excel, that we will meet both of these objectives.

In addition to our multicenter study, we continue to support the National Cancer Institute’s budget study of our PreGen technology that is being led by the Mayo Clinic.

There are also several other studies with leading academic and research institutions that were completed during the year, with the results presented at various important medical meetings and also submitted for publication.

These studies have generated over 180 known cancer samples and have provided us with strong performance data for our PreGen-Plus tech assay.

I should add that 180 cancers are a very, very large number of cancers and certainly increase our confidence in the sensitivity of PreGen-Plus for invasive cancer.

To remind you, the average range of sensitivity that we have seen to date for PreGen-Plus is in the 65-70% range for invasive colorectal cancers, with a specificity of over 95%.

These data are well in line with the sensitivity of other commonly performed non-invasive screening tests such as the Pap smear, the PSA test and the mammogram.

The specificities we have obtained are generally better than these tests.

This is, in part, why we and many leading experts continue to believe that PreGen-Plus will play an important role in colorectal cancer screening for the tens of millions of people over the age of 50 that remain largely unscreened today.

Tony Shuber and his research team continue to make important progress in evaluating new chemistries and technologies that could ultimately lead to increased sensitivity for our PreGen-Plus assay, as well as lead us into other cancers.

We also strengthened our patent portfolio and now have 27 issued patents.

Next, I would be remiss if I didn’t mention the wonderful progress we've made through our marketing activities.

Through the leadership of Bob Rochelle, who heads our strategic sales and marketing efforts and his team and with the assistance of many others on the EXACT team, we increased our knowledge of our targeted market on an almost daily basis.

Bob and his team have developed a host of communication and educational materials to be used in the launch and to assist in the training of the LabCorp sales organization.

By the way, Bob will personally be involved with the training of the entire 700-person LabCorp sales team.

This is an indication of the importance LabCorp is placing on PreGen-Plus.

On a personal note, I recently attended a sales meeting at the LabCorp Northeast Division, one of their six divisions.

I walked away from that meeting extremely impressed with the sales team and with the enthusiasm they have for the PreGen-Plus assay.

We will be conducting a planning meeting with the leadership of all six LabCorp divisions in February.

We also continue to make progress with the thought leadership in the gastroenterology community.

We now believe that a large portion of the gastroenterologists are aware of our technology through our contact with them on a one-on-one basis or through various scientific meetings and through the publications we had in 2002.

We also recently strengthened our already impressive Scientific Advisory Board with the addition of the renowned Dr. Sidney Winawer of the Memorial Sloan-Kettering Cancer Center in New York.

Dr. Winawer is widely regarded as the father of colorectal cancer screening.

As we continue to focus on the gastroenterologists, we also turned up the heat on the primary care sector of the market.

These Family Practice, OB/GYN, and General Internists will be the primary prescribers of PreGen-Plus.

We make tremendous progress with these groups through our continuing education efforts, convention attendance, speakers training and numerous one on one calls.

As we move forward to launch we will continue to focus on this area through our own efforts and through those of the LabCorp sales organization.

We were also pleased with our efforts with the important advocacy groups concerned with colorectal cancer.

These groups are a direct line to many of the patients in our target markets.

We have narrowed our focus to the 15 or so groups that we believe to have the most influence, including the American Cancer Society, the Nation Colorectal Cancer Research Alliance - this is Katie Couric’s group -, the Colorectal Cancer Roundtable, and the Colorectal Cancer Network.

We assigned key people to work with each of them and received much positive feedback about PreGen-Plus and our approach to the markets.

Finally, in the reimbursement area, we continue to make important progress in understanding the processes that both government and non-government payers will use to assess our technology.

We called on most of the major payers in 2002 and provided them with important clinical information on PreGen-Plus.

There was also a study completed that will provide payers important cost effectiveness information on PreGen-Plus, which has been submitted for presentation at the upcoming Digestive Disease Week meeting in May.

We have mapped out each of the major payers’ decision-making processes and have actively engaged with a large LabCorp managed care organization to plan tailored strategies for each of these organizations.

There were many, many other accomplishments in 2002, but let me switch to 2003.

I believe that EXACT Sciences, through our PreGen-Plus assay, will be introducing a really disruptive technology that has the potential to change the way medicine is practiced and more importantly, save thousands of lives through early detection.

Think about it for a minute.

This has the potential to be one of the first really important outputs to come out of the genomics revolutions.

Preventative medicine, screening medicine is not the norm in the United States, with the notable exceptions of the Pap smear for cervical cancer, mammographies for breast cancer and the PSA test for prostate cancers.

But the technologies associated with these tests are not what we’re talking about with PreGen-Plus.

PreGen-Plus is a DNA-based test and fundamentally, cancerous disease of the DNA.

At launch, it will be the only DNA-based cancer screening assay available.

EXACT and LabCorp will be truly plowing new ground.

With that understanding, both companies know we have a huge educational and marketing task in front of us and will undoubtedly encounter a few unknowns along the way.

With that in mind, our plan is to launch PreGen-Plus when we and LabCorp are absolutely ready to do so.

Both companies are working hard for a mid-year launch, but we’ll keep you informed of any changes as we move closer to that time.

Bob Rochelle likes to say that we use 2002 to narrow the confidence intervals around our entire knowledge base of our targeted markets.

In 2003, we will continue to narrow those confidence intervals.

We believe that we have developed a business model and a plan that can take advantage of this huge untapped market and that, with each passing day, we gain more knowledge that increases the likelihood of our long-term success.

Here are just a few of the important things that we’ll focus on this year.

On the scientific technical clinical side of the business, there are numerous challenges associated with any tech transfer of a complex, high volume DNA test.

We are confident we have a solid plan, reasonable timelines and the right people leading the effort and working the plan.

The majority of our 90 employees are involved with this important effort for our continuing efforts to develop and provide supporting clinical data.

On the demand creation front, we will be helping to prepare the LabCorp sales organization, over the next few months, to really hit the ground running.

As I stated earlier, I can attest firsthand to the excitement within the LabCorp sales organization over this PreGen-Plus opportunity.

For a laboratory sales or service rep to have an exclusive, patent-protected, value-priced product like PreGen-Plus that has a target market of over 84 million people, it just doesn’t get any better than that.

The good news is that we and they are consistently getting feedback from interactions with physicians on an individual basis, as well as at medical conferences, that there is a widespread knowledge of our product.

Our broad marketing goal is that by the time PreGen-Plus is widely available the LabCorp salesperson, meeting with an important targeted doctor, will find that that physician already has some knowledge of the product.

We will also continue to spend a great deal of time with the advocacy groups, those that focus on the patient perspective and those that are instrumental in writing screening guidelines.

I can tell you that all of these groups are familiar with our technology and the results that we have seen across all of our numerous clinical studies.

Once the test is available on a widespread basis and most likely, following the availability of the data from our multicenter study, our hope is that these groups will be able to act quicker to make decisions about PreGen-Plus, because of the groundwork that we will continue to lay this year.

As you might expect, reimbursement is one of the areas on which we and LabCorp will continue to spend the most time, because it is so crucially important in the long-term.

It is also one of the most complicated, because it’s so multifactorial.

We know that it will be important that we provide strong clinical data to support our efforts and we also know that it’s crucial to have thought leadership support, strong position in patient demand, as well as compelling cost effectiveness data to positively influence reimbursement.

We will continue to work on these areas.

We continue our numerous meetings with the important payers, including Medicare.

We have also turned up our efforts on large employer groups.

We believe this is a potentially important target market, as self-funded employers represent close to 50% of the insured markets.

In many cases, they can make coverage and reimbursements decisions on their own and certainly have important influence over payers.

All of these meetings have gone well from the perspective of interest.

At this point we do not have any policy commitments from any group, but we wouldn’t expect to.

It’s unlikely that anyone will make that decision until the test is commercially available.

We do know, however, that in the early stages of the launch, when the volumes are likely to be lower, there are accepted CPT codes for all steps in the testing process that can be billed and paid by many of the payers.

All that being said as a person who’s been around a fair number of product launches both in the pharmaceutical side as well as the diagnostic side, calling the uptake on any new product is at best a guess.

We tend to take a conservative approach on uptake, as there are always unknowns, particularly in the world of healthcare.

I will tell you that we’re putting in rapid feedback mechanisms in place with LabCorp so that we can proactively adjust quickly to things that are working, or conversely not working, after we launch.

Rest assured that both EXACT and LabCorp have been focused on limiting the unknowns and preparing our plans in a way that we believe will insure the long-term success of PreGen-Plus.

I want to make the strong point that this is not a sprint for either company.

It’s a marathon.

As focused as we are on 2003, we are also intensely focused on 2004 and beyond.

What we do this important year will allow us to really begin to realize the promise of PreGen-Plus and EXACT Sciences and we will not let anything get in the way of that longer-term view.

In the end, as we’ve said numerous times before, it all comes down to execution.

Therefore execution will be our primary focus for 2003.

It’s trite to say, but with execution the devil really is in the details.

You have my promise and our management team’s promise that the people of EXACT Sciences will continue to focus with what I call fanatical attention to details.

We will make PreGen-Plus commercially available.

We will start this marathon and collectively, EXACT and LabCorp will do our absolute best to get out of the gate as fast as humanly possible.

But I will tell you that both companies are more interested in making sure that, when the starter’s gun goes off, that we have done everything - and I mean everything - we can do to insure the long-term success of this potentially groundbreaking product, PreGen-Plus.

Thank you and now I’m going to turn the call over to John McCarthy.

John A. McCarthy, Jr: Thanks, Don.

For the fourth quarter and full year ending December 31, 2002, the Company generated a net loss of $7m and $29.9m respectively, compared to a net loss of $6.6m and $23.5m for the comparable periods last year, reflecting our accelerating transition into a commercial operation.

Pro forma net loss of the fourth quarter and full year 2002, which excludes non-cash stock based compensation expense for the periods, totaled $6.6m and $27.8m respectively, versus a pro forma net loss of $5.8m and $19.7m for the comparable periods last year.

Pro forma net loss per share for Q4 in full year 2002 totaled $0.36 and $1.51 per share respectively, versus $0.32 and $1.12 per share for the comparable periods last year.

As of the end of December 2002, the Company had approximately $44m of cash and liquid investments on hand to fund our operation, $15m of which resulted from the execution of the PreGen-Plus contract with LabCorp at the end of last June.

On an operating basis, most of the revenues recognized by the Company for both Q4 and full year 2002 were associated with the amortization of up front payments related to our two LabCorp agreements.

The first signed in the summer of 2001 focused on the HNPCC market and the second signed this past summer for PreGen-Plus focused on the average risk population for colorectal cancer screening.

In last quarter’s conference call, I detailed the revenue recognition issues associated with the various payments to be made by LabCorp, related to the PreGen-Plus contract.

If there are any remaining questions on this subject, I’d be glad to address these in the Q&A session at the conclusion of my comments.

As Don mentioned in his comments, earlier this month we surpassed as significant corporate milestone with the enrollment of the 5,000th patient in our multicenter study.

Which was our stated patient enrollment goal, all within the timeframe and budget and we originally established at the initiation of the study in October of 2001.

For reasons previously discussed, we will continue to accrue patients into the study through the end of March.

As a result, from a financial perspective, incurrence of most multicenter study-related expenses, which were considerable, are expected to conclude in the first half of 2003.

In terms of our commercial launch plan of PreGen-Plus with LabCorp, we are aggressively implementing a comprehensive plan that includes the senior management teams from both organizations.

The plan includes, among other things, full technology transfer to LabCorp, large scale operational support and infrastructure to address a broad-based nationwide screening application, and a comprehensive and fully integrated sales and marketing plan that educates and reaches a diverse audience in the most effective and efficient means possible.

The sales plan also includes a comprehensive training program for LabCorp’s entire 700-person sales and support team, focused on primary care physicians who we believe represent the primary target for ordering PreGen-Plus.

We’re confident that, working closely with LabCorp, we have the experience, personnel, and resources at our disposal to make this commercial plan a reality and importantly, to do it right the first time.

This being said, as Don mentioned earlier, we are working diligently with LabCorp to effect the commercial launch of PreGen-Plus around mid-year 2003.

Given this projected product launch timing, there are a number of points I’d like to highlight, which I hope will clarify our financial guidance for 2003.

Let me first begin with a brief discussion about revenue.

As with any new product launch, especially one in the healthcare industry, we can at best only speculate about the commercial acceptance of PreGen-Plus over the short-term, despite the considerable sales and marketing initiatives undertaken to date to validate our belief in the long-term demand for the product.

As a result, to date we have not offered any formal revenue guidance beyond generalized comments about research analyst projections.

Starting from ground zero with a new product, there are a number of revenue recognition considerations I’d like to remind everybody about.

One should expect a natural sales cycle time lag of some amount between commercial launch by LabCorp sales force and test orders from physicians.

This may be further effected by the typically slow summer months for diagnostic sales and actual doctor visits.

Once the tests are processed by LabCorp and the requisite paperwork is submitted for reimbursement to various payers, LabCorp can expect a typical cash collection cycle for payment.

As a reminder, EXACT Sciences per-test product royalty fee from LabCorp is based on a percentage of LabCorp’s average reimbursement price, with a minimum floor to EXACT.

Moreover, since EXACT will have no sales metric history for PreGen-Plus with LabCorp for some time after launch, we expect to recognize product royalty revenue from LabCorp on a cash basis through much of 2003.

Or until such time as we feel we have sufficient history to give us confidence in making monthly revenue accrual estimates based on monthly LabCorp test volumes.

I would expect that by early 2004 we would begin to recognize revenue based on an established accrual per LabCorp test process.

All of these typical timing considerations must be factored into any new product launch and, as you would expect, will obviously normalize over time.

Given the factors I just described, we believe it would be premature at this point to provide any specific PreGen-Plus test volume projections or associated product royalty revenue until we have sufficient commercial history upon which to provide meaningful revenue guidance.

Beyond product royalty revenue related to PreGen-Plus test volume, as we described in prior conference calls, we expect to receive an addition $15m license fee payment from LabCorp later this year, related to the commercial launch of PreGen-Plus.

Which will be amortized ratably over the 5-year exclusive period of the LabCorp contract.

Additionally, we expect to receive up to an additional $15m in milestone payments in 2003, most likely in the second half of the year, related to a number of other EXACT deliverables.

These milestone payments will be fully recognized into revenue when paid, as I’ve described in prior conference calls.

Post-commercialization, I would expect to detail reported quarterly revenue into three categories.

One, product royalty revenue, in other words royalty per test for LabCorp, two, amortization of up front license fees paid by LabCorp, the details of which I’ve described in prior releases in conference calls and three, milestone payments from LabCorp, again, detailed in prior public communications.

In addition to providing product royalty revenue on a quarterly basis, I would expect to report LabCorp PreGen-Plus test volume, as well as the related test volume used in calculating exact product royalty revenue.

Let me now turn to gross margins (GM).

Consistent with our past guidance, we are comfortable at this point with a GM estimate of between 80% and 85% on product royalty revenue.

As a reminder, cost of sales for product royalty revenue represents certain royalty arrangements related to various third party licenses we maintain or made [technical difficulty].

Additionally and importantly, there is no cost of sales factor for any up front license fees for milestone related revenue.

Lastly, I would expect total operating expenses to be in the $33m to 34m range for full year 2003, with roughly an equal distribution between SG&A and R&D for the year.

Across the quarters, I would expect total operating expense to be roughly equal each quarter, although the mix between SG&A and R&D may change among the quarters as the multicenter study comes to closure and our sales and marketing initiatives ramp for PreGen-Plus commercial launch.

Several additional factors are worth keeping in mind.

Given the commercial launch of PreGen-Plus in 2003, sales and market expenses and therefore SG&A expense will be significantly greater in 2003 versus 2002.

On the other hand, with the completion of patient enrollment and sample processing associated with the large multicenter study, in the first half of this year, we expect R&D expense in the second half of the year to be less than the first half.

Beyond the financial guidance I just described for 2003, I do not anticipate providing any further financial guidance until we have some meaningful commercial experience with LabCorp, which likely won't occur until at least the second half of 2003.

As an important reminder, EXACT’s business model is neither people nor capital intensive.

As a result, with most of the expense related to variable programatic spend, we are able to control our burn rate very quickly and efficiently.

Additionally, as we stated in prior conference calls, we believe that the LabCorp contract, together with our current cash resources, provides us with the capital necessary to attain cash flow breakeven without that need to access the capital markets, if we are able to successfully execute our business plan.

That concludes my formal comments, so I’d like to now open up the conference call to questions.

Are there any questions from anyone?

Thank you.

The floor is now open for questions.

If you do have a question or a comment, please press the numbers 1 followed by a 4 on your touch-tone phones at this time.

Please hold while we poll the list for questions.

Thank you.

Our first question is coming from Ivonne E. Marondel of Gerard Klauer (Mattison) Medical.

Hi guys.

Hi Ivonne.

John A. McCarthy, Jr: Hey Ivonne.

Good morning.

Morning.

A couple of questions, the first one is actually to clarify.

Did you say that the cost effect of the study results will come out at the DDW in May?

Well, we submitted it, Ivonne, for an abstract and possibly an oral presentation for DDW, yes.

Okay, so this would be the complete analysis of the study?

Well, it would be certainly a partial analysis.

We’re waiting to see what would be accepted.

Okay and then I have a question with regard to the timing of the launch.

As I remember, I thought the previous timelines had been around the second quarter of 2003.

Remind me if I’m wrong here, but it seems like there now has been a change towards more the middle of 2003 and I was just wondering why this more conservative outlook now.

And, if you could, maybe run through some of the efforts that have to be done and you’re currently undertaking of prior to the launch, such as technology transfer etc?

I understand, I mean, since this is more an intellectual property and not capital expenditures out there, I just wonder why it is taking almost a year since you signed the deal with LabCorp.

Well, first of all, it’s a complex DNA assay that we’re trying to have prepared to do in large volume, in volumes that exceed anything that’s every been done before.

So, that in itself is not a trivial task transferring that kind of technology to LabCorp or anyone else.

So, what we’ve tried our absolute best to do is make sure that the day we pull the trigger on the launch, whenever that is and again, we’re working as hard as we can toward a launch toward mid-year.

Which, to us, is toward the end of the second quarter, maybe even early in the third quarter, is when we get this thing out, we want to make sure that the demand we’ve created can also be handled by the laboratory.

And the logistics of getting the samples in and all of that, which may sound cheesy when you look at it on a piece of paper, are quite complex when you think about all the ramifications of it, are tied up as tightly as we possibly can do that.

So, we have a lot of things that we’re delivering to LabCorp, but in the end it’s LabCorp’s decision when they feel comfortable with all of this, so we’re very reluctant to specify a specific date right now.

John A. McCarthy, Jr: Ivonne, this is John.

The other thing, as both Don and I mentioned in our comments, is that our orientation has always been towards 2004 and beyond in terms of preparedness here.

So, when we actually launch is less important than making sure that we launch the right way the first time to handle not the demands in the first month or two, but the demand over the next 18 to 24 months.

And so that’s always been our orientation and so I don’t think, from our perspective, our launch date expectation really has changed.

It’s just that as we’ve gotten closer to it, we want to make sure that we do it right the first time and tie down all the details.

I think, Ivonne, if we were launching a small market test that really was not going to have that much effect, then we wouldn’t have the same desire to make sure everything is just absolutely ready to go and nor would LabCorp.

But this has potential, as John said, in 2004 and beyond to be a really large volume test and we have to do it right the first time.

Right, understood.

Speaking of the large volumes, can you just maybe run through some of the efforts that are done for automation of this process and how much automation is there, actually?

Well, I’ll give you a general answer and then maybe we can handle it off line a little bit.

We’re trying to automate as many of the parts of the assay as we can prior to the launch.

But I will tell you one of the reasons we signed an agreement with LabCorp is our core competency is really developing the technology itself and, we think, the strategic marketing thereof.

We’re counting on LabCorp to find ways to further automate the assay once they get it in their hands, so we’re doing some things, but they will be doing other things once they have the assay in their hand, because that’s what they’re more expert on.

John A. McCarthy, Jr: And Ivonne, it’s needless to say, as you probably know, it’s a continuous process improvement both at their end as well as at our end, so that’s been the plan all along.

Very good, thank you.

John A. McCarthy, Jr: Uh-huh.

Sure.

Thank you.

Our next question is coming from David Lewis, Thomas Weisel.

Morning, guys.

Hello David.

John A. McCarthy, Jr: Hi David.

You mentioned that for kind of increasing the number of patients who are in the trial, you’ve always said 5,000-6,000 patients, but it’s an addition of 500 patients.

You’ve cited various subset analyses.

I wish you could tell us what type of analysis we’re talking about here.

Is it just all studies, other indications, or merely a cushion statistically?

Well, let me give you one real live example, David.

There’re a number of things we’d like to analyze, but one of the promises of this product would be in our ability to pick up carcinoma insitu high-grade dysplasia.

And by getting an additional, potentially 500 samples, we would probably pick up an additional 5 to 10 of those kinds of samples, which gives us more statistical power as we do that analysis.

That would be an example.

So, it could potentially allow you to move from just invasive cancer to general hyperplasia?

Is that the goal?

It could.

I mean, we have to see the data first, but we’re trying to move -- early detection is the name of the game, as you know and then the earliest detection would be the carcinoma insitu high-grade dysplasia.

Okay.

And when you think about commercialization with LabCorp, maybe you can give us a little more granularity in terms of the pieces of that commercialization?

Obviously the tech transfer component out of the sales and marketing component and then there are obviously the very large logistic hurdles to overcome.

Where are the areas of the commercialization where you think LabCorp is further along and where are the areas that they’re still working on?

Well, let me speak to the marketing side of this thing first, because it’s probably easier for me to see at times.

They are starting train and we’re starting to help them train their CMBP reps, their specialty reps that come out of their Center for Molecular Biology and Pathology.

They are training their managed care reps, we’ve helped with that, but they still have training to do for probably about 600 other people, 550 to 600 other people.

And what we’re doing now is we’re setting up the training timelines for that.

Now, what we don’t want to do is train those people months ahead of the launch.

We want it to be kind of just in time training for a number of reasons.

One is the data is more familiar in your mind, although we’re doing it module by module.

We send out a module every once in a while to update, but what we also don’t want to do is have anybody out there talking about this product until they are trained.

And we certainly don’t want to be talking to a physician months ahead of the launch, or even 2 or 3 weeks ahead of the launch, unless the representative’s ready to go.

There’s also a consumer angle to this thing we’re looking at, not necessarily direct to consumer, but with the advocacy route that Amy Hedison and others have worked so much on.

We want people to walk into a physician’s office and ask for PreGen-Plus and we think by taking some time to spend even more time with these advocacy groups, that’s going to be important.

And the final thing there is, actually, the reimbursement side.

We understand almost on an individual basis what each payer will require, but the time we’re spending now to work with them is invaluable time.

In the early stages, as both John and I have stated, getting paid, I don’t think, is as big a deal as it is when the volumes get larger and larger, because in the early stages you’re billing CPT codes that probably will be accepted by most payers.

But making all that stuff happen, as easy as it is for us to talk about, takes some time and that’s some of the effort that’s going over the next couple of month.

John A. McCarthy, Jr: David, I would just probably add to Don’s comments, from a preparedness standpoint, with LabCorp more on the operational side, they are extraordinarily engaged in this.

You know as Tom MacMahon talks about in his comments on a pretty regular basis, about the importance that EXACT Sciences has to his strategic vision, that permeates the organization.

And, as we mentioned some time ago, after we signed up with the LabCorp contract, the assay, while complex, really from a component standpoint, is very familiar to the LabCorp technicians and operational folks.

The reagents and components and the equipment that’s used are all standard commercial lab equipment and from a logistical standpoint, they certainly have the infrastructure in place to handle many, many, many thousands of samples.

But again, doing it on sort of a nationwide basis and getting it done right the first time, as opposed to the third time, has really been the focus.

And then, John, maybe lastly you could just -- then I’ll just back in the queue.

In terms of reimbursement, it sounds like you’re not going to be giving some of the specific reimbursement fraction’s only going to happen post commercialization.

But I wonder do you have certain internal targets tied to the number of covered lives that you expect by the end of 2003, by the end of 2004, that you’d share with us?

John A. McCarthy, Jr: Not at this point, David, because we really would hate put numbers out there to backtrack on, because we just don’t have enough experience, at this point in time, with LabCorp.

I can tell you from a planning standpoint, we know who we’re going to go after coming out of the chute and we’ve timelined all that.

But to provide you any kind of that guidance at this point would be really misleading.

In terms of, I think, one of the questions you asked about pricing, remember that this is because it’s a home brew test, we at EXACT Sciences don’t price.

This is LabCorp’s price.

I think Tom MacMahon has been pretty explicit with folks about what he thinks the price range is going to be and I think they’re sort of triangulating on that.

Which has been sort of consistent with what we’ve talked about.

I think a $500 to $600 price point is what I've hear Tom talk about and that’s sort of consistent with what we’ve talked about.

Okay.

Thank you very much.

John A. McCarthy, Jr: Yep.

Thank you.

Our next question is coming from Timothy J. Lee, Merrill Lynch.

Hi this is Lee Bryn on behalf of Tim Lee.

Can you give us an update on the timing, with regards to reimbursement?

Well, what we’d say about it is that there’re at least two parts of reimbursement that are important.

One is getting paid and what we’re doing, just so everybody is clear, is the process of testing that we use has CPT codes associated with it that are regularly accepted by payers, so in the early stages, we’ll be billing or LabCorp will be billing those CPT codes.

And there’s some probability that the majority of payers will pay for those, provided the managed care contracts are built that way.

The other part of reimbursement, however, is getting coverage decisions and policy written by the managed care payer, if you will.

And with that, which typically goes like this, you would receive a letter as a member of a plan saying we know offer colorectal cancer screening for our over-50-year members and physicians would also be notified of that.

In other words, the managed care plan is encouraging screening.

To have that done, they’re probably going to wait until after the multicenter study is out there and the cost effectiveness studies are available and that sort of thing.

So, in the early stages, we don’t see this being a major problem, but in the longer-term as volumes build within any one pair, we will be pushing for coverage decisions.

And that’s going to be after launch.

Okay and one quick followup.

Any updates on using EXACT technology in other cancers?

Well, we’re optimistic that over time we can look at other cancers, but honestly, for 2002 and 2003, what we’re focusing on is getting PreGen-Plus for colorectal cancer on the market.

We’ll give you more guidance on those other things later on, but our clear focus for our employees right now is to make sure we do this first thing right.

Okay and lastly, just a follow up.

What are the current gating factors that we should be concerned about with regards to the launch?

I don’t think there are things you could be concerned about that are not normal course of business.

It is a home brew assay, a DNA test and it’s not a kit that LabCorp is going to be running, so in itself there’s some complexity to it.

It’s not complexity they’re not used to, but it is complex.

It is a stool sample that we've got to get in to LabCorp and you’ve asked questions about reimbursement and all those things.

They’re all gating factors to success.

They’re not gating factors to getting on the market, but they are gating factors for long-term success.

And as I’ve said in my remarks and John in his, we are much more interested in long-term success than we are in some precise launch date just to get something out on the market.

That won't work for us.

Okay.

Thank you very much.

Thank you.

Our next question is coming from Brett Holly [ph], CIBC World Markets.

Hi.

I had a question about the $15m payments.

You mentioned two this year.

One is upon commercialization.

Uh-huh.

What’s the trigger for the payment of that?

You say commercialization, is that going to be realized in the third quarter?

Well, we haven't really provided any specific comments on the actual trigger, but you ought to assume that it’s related to the commercialization, let me put it that way.

So, I think it’s safe to say that the quarter on which we launch is roughly the quarter on which you can expect the $15m payment.

Okay.

You said an additional $15m payment would be due in the second half of the year?

Is that a hypo --?

Well, to be clear, what I said is, as we’ve described in prior calls, is part of the agreement with LabCorp had up front license fees, $15m of which we already got paid.

The other $15m we expect to get paid around the commercial launch and there are, in addition to those payments, there was another $45m of milestones that totaled the $75m figure that we’ve talked about.

And what I said in prior calls is that, of those other milestone payments, it’s reasonable to expect that roughly $15m incremental to the other $15m would be paid by LabCorp in 2003 and roughly $15m in 2004, as we sit here today.

All of those, by the way, are based on milestones that are essentially exact deliverables so, in many cases, completely in our control and so that’s the guidance we’ve given to this point.

Okay.

Second question, I guess a little bit more science, like, oriented.

Is there a timeline for adding extra mutations to the tests to PreGen to increase the sensitivity?

That is a great question.

We don’t have a specific timeline now.

I will tell you that Tony Shuber and his team are certainly looking at ways to create Version 2 of PreGen-Plus and we think we have some very good ideas of things that would make that work and make the sensitivity even higher.

But I would not -- that’s not going to happen, that product will not be on the market this year, I can tell you that.

We have to get this first one out and then, while we’re working on that, Tony’s research team will be working on new versions of PreGen-Plus.

Our goal is to push the sensitivity of this product as high as biologically and technically possible over the next three or four years.

John A. McCarthy, Jr: The other piece that I would add to that, just because it’s important from a timing standpoint as well as a resources standpoint, is all of the stool samples from this multicenter trial are banked here in our minus-80 freezers.

Which what that means is it allows Tony and his team to continuously optimize and improve the assay with existing samples, so that means that we don’t have to go out and recruit a lot more patients here to further improve the assay going forward.

And that’s a significant piece and frankly, one of the justifications for the amount of money we’ve spent with the multicenter studies.

And as investors and friends, we’ll be more than happy to show you these 5,000 samples if you’d like to take a look at what they look like.

Great.

Thank you very much.

Okay.

Thank you.

Our final question is coming from Matt Osbourne [ph], Leerink Swann.

Good morning guys, Matt Osbourne in for Bob Parente, just a quick question on the operating loss.

I know you mentioned your targeting to $33m to $34m, if you could just repeat the comment on the [LIT] and the mix between SG&A and R&D?

Sure.

Matt, I think what I said -- well, I know what I said.

What I said about the $33m to $34m is that you can expect that the total operating expense for the quarters would be roughly equal, okay.

And that the mix may change among the quarters, because for example, the multicenter study concludes in the first half of the year.

I mean, the expenses associated with the multicenter trial concludes in the first half of the year, so it’s reasonable to expect that R&D expenses in the second half of the year would be lower than the first half of the year.

Conversely, sale and marketing expenses as you move into a commercialization phase, it’s reasonable to expect would likely escalate over the year.

So, I think those are the comments that I was trying to make about the operating expenses.

Great.

Thank you.

Once again, the floor is open for questions.

If you do have a question or a comment, please press the numbers 1, followed a 4 on your touch-tone phones at this time.

There appear to be no further questions at this time.

That’s great.

Thank you, everyone.

Have a good day.

Thanks.

Thank you.

This does conclude today’s conference.

Please disconnect your lines at this time and have a wonderful afternoon. 14