Exact Sciences Corp (EXAS) 2003 Q1 法說會逐字稿

Good morning.

My name is Erica and I will be your conference facilitator.

At this time I would like to welcome everyone to the EXACT Sciences Corporation first quarter results conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a question and answer period.

If you would like to ask a question during this time simply press star then the number one on your telephone keypad.

If you would like to withdraw your question, press star and the number two on your telephone keypad.

At this time, I would like to turn the call over to Ms. Amy Hedison.

You may begin.

Thank you, Erica.

Good morning, everyone and welcome to EXACT Sciences first quarter conference call.

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

Before I turn the call over to Don, I would like to read our Safe Harbor remarks and 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 affect the company's financial and operating results.

These factors are set forth in detail in EXACT Sciences's 2002 form 10-K and subsequent filings.

Thank you.

Don?

Good morning.

I'm sure that it won't come as a surprise to any of you that in the first quarter, our people and resources were focused on two primary areas, our Multicenter Study and continuing preparations for the launch of PreGen-Plus.

Let me talk about the study progress first.

The final patient was enrolled in the study on March 28, and enrollment is now closed.

The total number of patients enrolled in the study was approximately 5500 which we expect will provide us with sufficient samples to demonstrate a statistically significant result.

It is no small accomplishment that this very large study completed recruitment on time and on budget.

Let me remind you that the primary objective of this study is to show the superiority of PreGen-Plus over fecal occult blood testing for the early detection of colorectal and pre-cancerous adenomas with high grade dysplasia as well as carcinoma [INAUDIBLE].

We expect that we have more than enough cancer and pre-cancerous adenomas to properly power the study and to perform our analysis.

Since the study results remain blinded to us while patients complete their PreGen-Plus test, fecal occult blood tests, and colonoscopies and any follow-up we do not know the correlation between the cancers we have detected with PreGen-Plus and the ones found through fecal occult blood testing or colonscopy.

We will receive our final pick list of patient samples from ParExcel our clinical research organization in the early summer.

After we run these final samples our analysis will begin.

We expect the data from this study to be available in the fourth quarter.

A consistent question to us has been why it takes to long between the enrollment of the final patient and the completion of the sample process.

It's simply a function of how the study is conducted.

The last patient enrolled needs to provide a sample for our PreGen-Plus test and then go through the process for fecal occult blood testing and then schedule and undergo a colonoscopy.

Then the gastroenterologist has to file his or her report and if there is any tissue biopsy, the pathology report also has to be filed.

To date, our experience has been that this is approximately a 12-week process.

Once ParExcel has all the data, it provides a pick list of samples to us and we then process the last samples.

Again we expect that this will take place sometime in the summer.

When all the results from our lab have been sent to ParExcel, the data table generation can begin.

This is an important study as are all our studies.

We look at the Multicenter Study as a confirmatory study that adds to the growing body of information on PreGen-Plus.

It is certainly not our only data.

For instance, we expect to have the results of our clinical study conducted with Dr. Colte Sygore of Kaiser in over 50 cancer patients and over 100 patients with negative colonoscopies to be published in the May issue of Clinical Colorectal Cancer.

This study confirmed once more that 65 to 70% sensitivity of PreGen-Plus for early stage cancer as well as good sensitivity for advanced adenomas, while maintaining specificity at approximately 96%.

In addition we have six abstracts in our technology accepted at the Digestive Disease League meeting in May.

Three of these will be oral presentations, including one on cost effectiveness and one on compliance versus fecal occult blood tests and colonoscopy.

Our proactive approach to cost effectiveness and compliance are two prime examples of our intense focus on important factors that could affect demand creation and usage of Pre-Gen-Plus.

We believe that this attention to all the details should cast EXACT in a favorable light with our investors.

We are pleased with the favorable outcome of all these studies and the additional support they lend to the power of our PreGen technology.

We believe that a strong clinical program is a foundation on which we will build a strong colorectal cancer franchise, beginning with the introduction of PreGen-Plus with lab work.

We believe through the studies completed to date, that include almost 200 cancer patients and PreGen-Plus, had sensitivity for early stage cancer of 65 to 70% with extremely high specificity of approximately 96%.

But to put this in perspective one more time, these data are well in line with sensitivities of other commonly performed non-invasive screening tests such as the pap smear, the PSA test, and the mammogram.

The specificities we have obtained and expect to continue to obtain are generally better than those of those well established tests.

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

I also want to reiterate that 200 cancers is a very large number of cancers in terms of statistical significance.

This total does not even include either of the previously mentioned 5000 new patients Multicenter Study for the 4000 patients in Mayo NCI Study which by the way continues to progress.

To ensure a coordinated and successful introduction of PreGen-Plus we have been working very closely with LabCorp on a number of important projects.

The first is the transfer of our technology to them.

This is going well.

If you asked Tom McMahon, LabCorp's CEO about technology transfers, he will tell you that in his experience they typically take about a year.

We signed our agreement with LabCorp in June of last year so we both believe we are on schedule.

Our marketing plans are in full swing.

As part of that effort we are gearing up for the training of the entire LabCorp sales force that will begin in the next several weeks.

By the time PreGen-Plus is made commercially available, all of LabCorp's 700-plus sales people will have been trained on PreGen-Plus.

We have emphasized in previous calls that this is not standard operating procedure in the laboratory business.

It is very rare to have all sales people taken out of the field and trained in the standard rigorous fashion for a single test.

We treat this launch and the training that goes with it just as a pharmaceutical company would treat an important product launch.

We have already trained LabCorp speciality sales forces and those teams are already out in the field with our strategic accounts team, profiling payers and important physicians.

I can assure you that the LabCorp field general management corps, field sales management and their sales people are extremely excited about the prospect of having a propriety, patent protected technology that differentiates them from their competition and solves a real medical need for the physicians on whom they call.

At the same time, the EXACT marketing team is putting a great deal of effort into physician education.

We continue to increase our presence at medical and scientific conferences and we continue to receive an outstanding reception at these conferences.

As an example, at a recent physician conference on the West Coast, primary care physicians paid $100 each to attend a seminar on stool based DNA testing for colorectal cancer.

Sounds vaguely familiar.

Started at 6:00 a.m.

In addition to the scientific presence we will have at DDW will be our significant marketing presence at that important conference.

We are also attending an American College of Obstetrics and Gynecology meeting this week where there is significant interest in our technology.

With that background, I do not have an exact date for the commercial availability of PreGen-Plus.

I continue to anticipate that it will occur around mid-year.

Both EXACT and LabCorp are in complete agreement that we would rather take a little extra time on the front end to meticulously prepare.

In the end, only LabCorp as the performing laboratory can decide when its team is ready.

I can tell you that both companies are determined to make PreGen-Plus commercially available on a widespread basis as soon as possible.

This product has significant importance to both of us.

Finally, despite all of the focus on the Multicenter Study and PreGen-Plus, we have also been moving forward in our scientific partnership effort as evidenced by the recent announcement of our exclusive licensing agreement with [BURT VOGELSTEIN'S] lab at Johns Hopkins.

This partnership with Burt ties us closely to the premiere molecular genetics research laboratory in the country.

This relationship should allow us to collaborate in a broad way on colorectal cancer screening technologies that might one day produce important enhancements to the current version of PreGen-Plus.

While we believe that these next generation enhancements will be important to further optimize the PreGen-Plus assay in the future, we believe that the current version that we will be launching soon with LabCorp will be an important tool in the fight against cancer today as it will be the most accurate, completely non-invasive test available.

I'm pleased with our company's progress in all areas.

We are quickly moving toward the next stage of EXACT's involvement, the commercialization stage.

We're all excited by this.

We will continue to revisit our marketing plans right up to the introduction date.

We are also reviewing our post launch marketing plans to make sure we explore all possible demand creation strategies.

We're making sure that we have tracking mechanisms in place to give us early information on what's working or what is not.

EXACT Sciences in the final analysis is a company that always had both a sense of destiny and a sense of urgency.

In my three years here, I have been continually impressed with the proactive nature of our employees.

They know they are getting ready for a tough but particularly rewarding race.

We are nearing the end of our pre-race preparations and are confidently waiting for the starting gun.

And I look forward to talking to you again once this important race is started.

Now I'd like to turn the call over to John McCarthy.

Thanks, Don.

For the first quarter ending March 31, the company generated a loss of $7.9 million, compared to a net loss of $7.6 million for the first quarter last year.

Pro forma net loss for Q1 of this year which excludes non-cash stock based compensation expense totaled $7.6 million versus a pro forma net loss of $7 million for Q1 last year.

Pro forma net loss per share for Q1 of 2003 totaled 40-cents per share versus 39-cent loss per share for Q1 of last year.

As of March 31, 2003, the company had a approximately $35 million dollars in cash in liquid investments on hand to fund our operations.

As we've indicated in prior conference calls, we expect to receive a $15 million milestone payment from LabCorp around mid-year associated with the commercial launch of PreGen-Plus.

Additionally, as we've said in the past we expect to receive up to $15 million of additional milestone payments from LabCorp by the end of this fiscal year.

On an operating basis most of the revenue recognized by the company in Q1 2003 and Q1 2002 was associated with the amortization of up front payments related to our two LabCorps agreements.

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

As Don mentioned in his comments, we successfully completed patient enrollment in our large Multicenter Study on March 28 with a final patient enrollment census of approximately 5500 patients.

We expect to have completion of the final patients enrollment study to take roughly 12 weeks which represents our historical experience to date.

As a result, we would expect a complete processing, the final samples by the end of the summer with results of the study available by Q4.

Given the size, complexity, and uniqueness of the study since it was initiated in October 2001, we are extremely pleased with having completed patient enrollment both on time and on budget.

In terms of our commercial launch plan, of PreGen-Plus with LabCorp, we are aggressively implemented a comprehensive plan for a mid-year launch that includes as Don mentioned earlier senior management teams from both organizations.

As we've mentioned in the past, 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 audience for ordering PreGen-Plus.

We have the confidence in working closely with LabCorp we have the experienced personnel and resources at our disposal to make this commercial plan a reality and importantly as we mentioned many times before to do it right the first time.

In our January conference call, I gave a rather detailed description of various prospective revenue recognition and revenue categorizations considerations for 2003.

Given the significance of our commercial launch of PreGen-Plus later this year I would like to reiterate many of these for your benefit.

Starting from Ground Zero with the new product, there are a number of revenue recognition considerations I would like to remind everyone about.

One should expect the natural sales cycle time lag of same amount between commercial launch by the LabCorp sales force and tests ordered from physicians.

This may be further affected by the typically slower 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 the various payers, LabCorp can expect a typical cash collection cycle for payment.

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

EXACT Sciences which have no sales metric history with 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 volume.

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

Beyond product royalty revenue related to PreGen-Plus test volume, as I mentioned earlier, we expect to receive an additional $15 million license fee payment from LabCorp later this year related to the commercial launch of PreGen-Plus which will be amortized radically over the five year exclusive period of the LabCorp contract.

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

These milestone payments will be fully recognized under revenue when paid.

Post commercialization, I expect the detail reported quarterly revenue into three categories.

One, product royalty revenue, in other words, royalty per test from LabCorp.

Two, amortization of upfront license fees paid by LabCorp, the details of which I've described in prior releases and 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's product royalty revenue.

That concludes my formal comments.

So I would now like to open the conference call to questions.

At this time, I would like to remind everyone if you would like to ask a question, press star and then the number one on your telephone key pad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from David Lewis of Thomas Weisel Partners.

Good morning, guys.

Good morning, David.

First question, maybe for Don.

Don, can you discuss the technical relationship between Beck and Dickenson and how this differs from the [AFIGEN] relationship and what both guys will hopefully do for you in part of the process.

Well, Beck and Dickenson is actually assembling the Hypergel apparatus that will be used in the sample preparation for this PreGen-Plus test.

So they are -- think of them as a contract manufacturer for us. [AFIGEN] just supplies patents, we have some patents from [AFIGEN].

David this is John.

You remember you may recall about a little over a year ago we paid some money to acquire a patent portfolio from Mosaic related to some of the Hypergel intellectual property and [AFIGEN] was the acquirer ultimately of the Mosaic business.

And so what the [AFIGEN] agreement allows us to do is basically the license some of the side P directly in this case onto the parties that we have license it onto.

So it is all related to Hypergel.

Okay.

So [AFIGEN] still remains a technical relationship where PBX remains a manufacturing relationship.

Exactly.

Don, you mentioned strategic accounts.

I assume some of these strategic accounts that you're selling here with LabCorp, some are potential users and some are potential payers.

Can you walk us through maybe on a percentage basis how much of these strategic accounts are payers versus users and who is bearing the larger piece of the burden here for selling new managed care relationships?

The bulk of people we're talking to right now David are payers simply because LabCorp will sometimes just prior to launch, some specified period prior to launch which I can't give you right now will start doing a message with all of their accounts, it is basically a coming soon message.

So that will be how they start getting to their targeted accounts.

They are going through a process now in some of their divisions of compiling lists of the most likely early adopters of PreGen-Plus technology.

So most of our efforts to your question have really been around major payer organizations, some employer groups because we think self insured employers could be a big influence on this, and we continue to call on quite a few of the [INAUDIBLE] leaders both in the gastroenterology world and in the world of primary care physicians including OB/GYNs, and family practices, things like that.

I would say right now, although LabCorp has a lot more people on the managed care side, they probably have 30 to 35 people working on this, we have 10 people in the field ourselves, plus a few people here in marketing who also are spending a good deal of their time out on the road with the LabCorp people, with these various payer accounts including one of our physicians, Barry Berger who spends a lot of time with the medical directors of these organizations.

So right now even though they have more people at LabCorp involved with this I would suggest that the burden has been pretty well evenly split.

How soon after commercialization would you expect to start updating the street with announcements regarding commercialized or covered lives?

Or is it too soon to tell that?

It is too early to tell, David.

You can believe if we have good news about this stuff, we're going to not hold back on it.

It would be very important to us, as you well know to get this news out as quickly as possible.

So I guess we don't know yet but as quickly as we could after we had some successes.

Okay.

Thank you very much.

Your next question comes from Timothy Lee of Merrill Lynch.

Good morning, guys.

Good morning.

Couple questions follow-up on the reimbursement, just kind of give us a sense of how the conversations have been going, I mean are they -- are the payers okay with kind of the price points that LabCorp is talking about?

Can you give us a sense of where that stands in terms of level of reimbursement?

I think I would characterize the discussions as going very well.

The challenge we have, Tim, is that most payers are not going to commit one way or the other about whether they will cover a test prior to it being on the market.

They -- the conservative nature of payer, they don't do it quite that way so the way the calls have been going have typically been a discussion of the clinical results we have to date, they are certainly interested in the Multicenter Study and when that will be available but a number of them like the data we have already.

They are very interested in various [INAUDIBLE] leaders in the field are saying about the technology, and we're fortunate that way that we have a number of [INAUDIBLE] leaders who feel very strongly in a positive way about PreGen-Plus.

There is a cost effectiveness study that will be presented in an oral study at DDW that I think can be helpful to what we're doing.

And as more and more physicians become aware of this, and we kind of get enough of the advocacy groups to really start talking about this which we feel very positive about, I think in the end, all those things will put pressure, good pressure on payers to make decisions in our favor.

As we've said over and over again, the thing that most payers are facing is this idea that they may end up paying for screening colonoscopies for large populations of their people which may not be the best way to go.

And they know that the facts about how many people are dying from colorectal cancer every year in spite of the other products that are on the market.

So we're very encouraged by them.

But we don't have any illusions about how tough it is to get some of these people to make decisions.

Follow-up on one question on the clinical front.

Just remind us kind of what the expected rates of sensitivity were in terms of the FOBT arm and then the PreGen-PLUS arm and the type of improvement you're expected to see in your enlarged 5500 patient study.

The assumption was for fecal occult blood 25 to 30% I believe was the number and for us was around 65% or so.

Thanks.

Again, at this time, if you would like to ask a question, please press star and then the number one on your telephone key pad.

You have a follow-up question from Timothy Lee of Merrill Lynch.

One last quick question here, Don, you touched on this briefly.

You can just kind of give us a sense of the time line?

Is enhancing the sensitivity of the PreGen-Plus test from the 65 to 70% range to something higher?

Tim, I -- we tend to think of things in a conservative manner so I'll give you two to three year time frame.

We -- what I will tell you is that Tony Shuber and his team have a number of paths they're reviewing now as to how to improve the sensitivity of the assay.

So we don't think it's a matter of whether we can or not.

It is just a matter of timing that when we can get it done.

So we are -- as soon as this launch is started, Tony will refocus his efforts and his team's efforts on looking for these improvements.

One of the reasons we're excited about the Burt Vogelstein collaboration is that to play into this in some way and we have a number of areas we're looking at right now that are very, very exciting to launch and in some cases we have some preliminary data in some cases but we're not ready to share that data yet.

But we're very confident that over the next two three years we can make this happen.

Our goal is to push the sensitivity up as high as it possibly can be done biologically and technically.

Great, thank you.

Your next question comes from Bob Parente of Leerink Swann and Company.

Thank you, ma'am.

Hey, Bob.

Good morning.

Two quick questions, by what date to you expect to have all of the 700 LabCorp reps trained?

What is your target date to have everyone geared up?

We'll certain have them trained by launch date.

I guess that's the best way I can answer it right now.

All right.

Just trying to back you into --

I know.

We know.

And what percent of the payers have you had some introductory conversations, your target payers, I should say?

Well the target payer, that's 100%.

We talked to between -- ourselves and LabCorp, any major payer out there we've had a conversation with.

There's probably some smaller ones that we have not gotten to but I can tell you that our group is on the road all the time with LabCorp people, and again, I mentioned Barry Berger's one of our physicians.

Barry just completed a two-week stint on the road just visiting payers so there is a number of -- all of the major payers we've already hit.

All right.

Thank you very much, Don.

Again, at this time, I would like to remind everyone in order to ask a question, please press star and the number one on your telephone keypad.

Your next question comes from Brian Kiss of Kettle Hill Partners.

Yes, hi, good morning.

I was wondering if you could update us on the -- what discussions have you had with any of the advocacy groups?

Have they said anything lately?

The advocacy groups?

Yes.

Amy actually has done a lot of work with the advocacy groups so she may want to comment.

I will make a general comment.

We always believe that consumers would be a big driver for this product, could be a big driver for this product, but as you probably know, it's very expensive to get to all consumers, but we chose to date the advocacy route because we thought they could get a third party message, a non-biased message to more consumers in a very quick period of time than we could do.

So Amy and group have kind of narrowed the list down to what, Amy, 15 or so.

We're focusing on about 15 or 16 of the original -- I mean the original list was as high as 84 groups out there.

I mean there are a lot of groups that have an interest in colorectal cancer screening that aren't necessarily colorectal cancer groups.

We're focusing on the groups that are more -- that their main mission is colorectal cancer and both helping survivors, most of these groups have as their main mission increasing the number of patients who are screened over the next, you know, pick your year, X year, you know, 99, 75 and 15, all sorts of slogans.

I would say of the major groups that we deal with, they are all very, very interested in PreGen-Plus because they really see this is a cancer that doesn't need to happen.

And if we could get more people screened effectively we would actually get rid of the cancer.

So we're really pleased with the reception we get from these groups.

Great.

Thank you.

Your next question comes from Timothy Lee of Merrill Lynch.

Just a real quick financial question for John here.

With enrollment now completed in the 5500 patient trial, should we expect to see the R&D levels to go down, tick down on an absolutely level going forward?

Yeah, I think, Tim what I mentioned in the January call is that I think in the second half of the year, it is reasonable to expect that R&D as a percentage of total operating expenses will be lower than the first half of the year.

The Multicenter trial has several big components to it.

The cost, the most significant of which, is what we end up paying ParExcel, in terms of professional fee, and related expenses to ParExcel from an enrollment standpoint.

Needless to say, as the enrollment has completed, as of the end of the first quarter, we'll no longer be absorbing that expense.

We will, however, continue to process the samples through the summertime, but on a proportionate basis that is a relatively smaller portion of expense versus the enrollment accrual that we had, so that being said, the second half of the year I would expect to be lower than the first half.

Great.

Thank you.

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad.

At this time, there are no further questions.

And I would like to turn the call back over to the speakers for any closing remarks.

We want to thank everybody for joining us on the call.

We look forward to talking to you again in the future.

Thanks a lot.

Thanks.

Thank you for participating in today's conference.

You may now disconnect.