Exact Sciences Corp (EXAS) 2003 Q2 法說會逐字稿

Good morning.

My name is Constance [ph] and I will be your conference facilitator.

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

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

After the speakers' 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, then the number two on your telephone keypad.

Thank you.

Ms. Hedison, you may begin your conference.

Thank you.

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

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

Prior to their comments, 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' 2002 Form 10-K and subsequent filings.

I'm now going to turn the microphone over to Don, who has a few comments and then John also has some comments and then we will open up the call for questions.

Thank you, Amy.

Good morning, everyone.

This is an exciting time for EXACT Sciences.

The introduction of PreGen-Plus is upon us.

As LabCorp and EXACT have both indicated in our press release, the introduction is now slated for August.

At this point, we anticipate that availability will begin in the first half of the month, however, as we have said before, the final decision about timing ultimately belongs to LabCorp.

Also, unless there is a dramatic change from this plan, we do not anticipate making any other public announcements about the launch date.

What I can tell you is that the entire LabCorp sales organization, all 800 of them, have now been trained to sell PreGen-Plus.

Our marketing team and our 10 directors of strategic accounts are also primed and ready to go.

I think it's fair to say that both groups are excited.

From the training sessions that I attended, I can attest to the enthusiasm and preparation of the LabCorp team.

As many of you know, I spent a few years in the clinical laboratory business leading sales and marketing organizations.

I have never seen a more excited group than what I've seen with the LabCorp sales team.

They're excited to be selling a proprietary test that can have a dramatic impact on a dreaded disease, excited to be selling a test that can give them a competitive advantage and excited to be selling into such a huge market.

For a sales person, it doesn't get much better than that.

Time will tell as to how that enthusiasm and preparation translates into sales.

What I do know is that they and we are ready and whatever day sales begin in August will obviously be a signature day for our company and our employees who have worked so hard for the past seven years to get this very important assay ready for market.

Upon the launch of PreGen-Plus, we will receive a $15m milestone payment that is associated with the launch.

In addition, as we stated on our first quarter call, we anticipate by the end of this year we will have received up to an additional $15m from LabCorp associated with several different milestones.

We continue to expect that between the financial terms of the partnership and our ability to execute our business plan we have the financial resources to fund our operations for the foreseeable future.

While operationally over the second quarter we were focused on getting ready for the launch of PreGen-Plus, we also had a very significant event on the research side of our business.

On Monday, July 14th, Tony Shuber, our Chief Technology Officer, was part of a panel at the annual meeting of the American Association for Cancer Research.

The panel topic was ``New Directions in Colorectal Cancer.'' Tony presented an overview of our PreGen-Plus assay, which included a discussion of our proprietary sample prep technology, which we call Effipure.

Effipure, which is part of the commercial assay that LabCorp will introduce, proves an hypothesis that Tony has held for a long time, that is, that by increasing the number of molecules of human DNA we extract from a stool sample, we also increase assay sensitivity.

That increase in sensitivity over the already solid performance of 65% to 70% that we have seen in previous studies is very good news.

We are extremely excited about this enhancement.

As I said, Tony suspected that Effipure would have a positive effect on the performance characteristics of the PreGen-Plus assay, but I think it's fair to say that we are all pleasantly surprised about the potential magnitude of the effect.

At this time, we are still contemplating how to quantify that effect through the appropriate clinical studies.

We do know that in the study Tony described we did pick up approximately one-third of the cancers that we had previously missed by employing Effipure.

Until additional clinical studies are completed all I can say is that the commercial version of PreGen-Plus, which does incorporate Effipure, has a sensitivity that is greater than the previously demonstrated 65% to 70%.

It is important to note that the technology being utilized in our multi-center study does not incorporate the Effipure technology.

We firmly believe that the assay has been improved since the start of that study and that the only ethical thing to do is to make the best test available to patients and physicians and that test is a version of PreGen-Plus that does incorporate Effipure.

The success of Effipure and the speed with which Tony and his team were able to increase the performance characteristics of the assay is, I believe, a circumstance that we're going to encounter again and again.

It is a testament both to our applied research model and the team that makes that model run.

When you take a creative and focused applied research group and pair them with an extremely versatile analyte such as DNA, you can expect important advances to be made in relatively short periods of time.

Over the next few years, we have aggressive plans to continue to improve the performance characteristics of PreGen-Plus.

Our objective is to continue to increase the sensitivity of the assay for cancer and, importantly, for adenomas, as well as to reduce the complexity of the assay, which will make it more efficient and even less expensive to perform.

These areas of research are already underway and I believe we have clear paths to achieve these goals.

To remind you, our research is really applied research.

That is, we are applying discoveries in genomics to the development of novel technologies and chemistries that have a clinical application today.

The task and wonderful challenge for our research team is to make these discoveries and technologies work for significant clinical purposes, while the challenge for our business team is to proactively prepare to commercialize any new applications.

I'm not going into any great detail about this work at this time, but I would expect that over the next 12 months you will be hearing much more about these activities from us.

One of the key messages behind the development of Effipure is that we are not standing still.

Over the past 12 months we have been focused primarily on preparing for the widespread commercial availability of PreGen-Plus through LabCorp.

However, we are also keenly aware that to truly achieve our company mission, we need to continue to make new breakthroughs.

We believe there is much more we can do in colorectal cancer and, perhaps, in other cancers.

We believe that eradicating the mortality from colorectal cancer will take more than just the launch of PreGen-Plus.

While I sincerely believe that PreGen-Plus in its current configuration will have an important medical and social impact, I also believe that the problem of colorectal cancer is so great that there is still a huge opportunity for us, even beyond this version of PreGen-Plus.

If we can develop a test with even higher performance characteristics that is able to reach a great percentage of the population, we should be even more successful in saving lives.

If we can develop a test that detects adenomas at a relatively high rate, we can then triage patients more effectively and we might be able to reduce the incidence of colorectal cancer itself.

While we are acutely focused on this important product introduction, we have not lost sight of the fact that our job is not finished.

The commercial launch of PreGen-Plus is exciting.

It's something we've been working on since our beginnings as a small laboratory at New England Medical Center.

The hard work of so many people will begin paying dividends shortly.

I can assure you that the future beyond PreGen-Plus is equally exciting.

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

Thanks, Don.

For Q2 and the first six months ending June 30th, the company generated a net loss of $7.9m and $15.8m, respectively, compared to a net loss of $7.9m and $15.5m for the comparable periods last year.

Pro forma net loss for Q2 and first half 2003, which excludes non-cash stock-based compensation expense, totaled $7.6m and $15.1m, respectively, versus a pro forma net loss of $7.3m and $14.3m for the same periods last year.

Pro forma net loss per share for Q2 and first half 2003 totaled 40 cents and 81 cents per share, respectively, versus 40 cents and 79 cents per share last year.

On an operating basis, almost all revenue recognized by the company in first half 2003 and 2002 was 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 in June 2002 for PreGen-Plus, focused on the average risk population for colorectal cancer screening.

With the successful completion of patient enrollment in our multi-center study on March 28th of this year, the bulk of the expense burden associated with the study is now behind us.

As a result, as I had mentioned in our January call earlier this year, I would expect R&D expense in the second half of this year to be less than the first half.

Conversely, with the launch of PreGen-Plus this quarter, I would expect sales and marketing expense to be greater in the second half of this year versus the first half.

Beyond this reminder of the comments I made in January, we are not providing any further financial guidance for the balance of the year at this time.

As of June 30th, the company had approximately $27m of cash and liquid investments on hand to fund our operation.

As we've indicated in our prior conference calls, we will receive a $15m milestone payment from LabCorp on the date of commercialization of PreGen-Plus, which we expect to occur in August, as Don just mentioned.

As a reminder, the revenue associated with this milestone payment will be recognized ratably over the roughly five-year exclusivity period of the agreement.

In addition to this payment from LabCorp, we expect to receive up to $15m of additional milestone payments and up to $15m in milestone payments in 2004.

Above and beyond this $30m of potential payments, there is an additional performance-based milestone program that could result in an incremental $15m in future significant LabCorp revenue thresholds.

Each of the milestone payments I just mentioned would be fully recognized into revenue at the time of payment.

Lastly, as a reminder, as part of the LabCorp agreement signed in June 2002, we issued to LabCorp a three-year warrant for the purchase of a million shares of EXACT common stock at a strike price of $16.09 per share.

If LabCorp decides to exercise this warrant over the remaining roughly two years of the exercise period, the transaction would produce another $16m of cash proceeds for the company.

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

Among other things, I described for everyone at that time our revenue recognition policy related to product royalty revenue, i.e., per-test royalty from LabCorp, for at least the balance of 2003.

As a reminder, until we have sufficient working history with LabCorp to allow us to confidently make monthly revenue accruals based on their accession volume, we will be recognizing product royalty revenue to EXACT on a cash basis.

I would hope to be able to convert to an accrual basis for this revenue line item by the beginning of 2004, but it is possible that we may not have sufficient commercial history by that time.

I will provide regular updates to everyone over the balance of the year as we develop commercial experience with LabCorp on this issue.

Aside from this temporary revenue anomaly, I will be providing everyone with LabCorp's PreGen-Plus accession volume as part of our regularly scheduled quarterly conference calls in the future.

That concludes my formal comments.

I'd like to now open the conference call for questions.

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

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

Your first question comes from Dan LeMaitre of Merrill Lynch.

Oh, hey, good morning.

Can you guys hear me OK?

Yes, Dan.

Yeah, I apologize.

I'm on a cell phone down at the AACC.

But just a couple of questions and I guess first and foremost, Don, can you characterize for us where you think LabCorp is and where you guys stand in terms of just an ability to process samples and if that, in any way, shape or form, could be a gating factor coming out of the gates here?

Well, I think we're in good shape, Dan.

I would probably refer you to LabCorp to talk to them about their own feelings about it, but we have been pleased with the way things have gone so far.

We have one of our people down there working-- actually, we have a number of our people who have been helping LabCorp with the tech transfer, which has gone pretty well, well enough for us to be able to launch the product in August.

So we're comfortable with it, but I would also encourage you to talk to LabCorp about it to get their thoughts on that capability.

All right and does Effipure do anything in terms of making the process itself either cheaper, faster, more cost-effective besides improving the sensitivity?

It actually does.

It started out probably being more of a way to increase purity and yield of DNA and dropping cost and one of the byproducts of it -- and I think Tony probably knew this all along -- was that it also would increase sensitivity.

We just didn't realize to what extent.

But it does drop the cost pretty dramatically in the assay and reduce some of the complexity of it.

Just-- just the last question, obviously the ability to extract more information from a stool sample or more DNA is intriguing.

I just wonder if you put this out there in terms of LabCorp's hands, since they would have this technology, do you-- how do you guys protect yourselves from any intellectual property kind of development that may stem from something like that.

Or is this just a tool that you assume that if they come up with every stuff, so be it and they get to develop whatever products that may come from something like that?

Well, first of all, Dan, we have a really strong partnership and I think we've said before -- it sounds trite, but beyond the piece of paper the contract's written on, there's a very nice trust level between the two companies.

There's also, in the contract, stipulations about invention from either side and joint invention.

So we feel very comfortable with the way things are now and we feel very comfortable that we have a partner that-- who's in it for the long run with us and will help us make this assay even better.

OK, great.

Thank you, guys.

Thanks.

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

Your next question comes from Darren Mac of Fulcrum Global Partners.

Hi, guys.

How are you, Darren?

I'm wondering if you could expand upon the time frame of any additional studies that would be needed to quantify the impact of Effipure on the sensitivity before you could claim that and-- or, I guess, LabCorp could put claims on an absolute sensitivity?

I think the ultimate, Darien, will be the latter, what you said, because the challenge of coming up with sensitivity numbers is having lots and lots of cancers and that will only come through commercialization of the product and running it over a period of time where you collect lots of samples.

On the other hand, we're looking at a number of different ways to prove out this Effipure technology in other studies.

We're comfortable that what's been done to date indicates an increase in sensitivity.

To quantify that more, there are other things we're looking at and we would probably try to do those in the fairly short term, if at all possible.

Will there be any information about the Effipure extraction technology on the product documentation at launch?

Not really.

I'm not sure I understand the question.

Oh, just-- just pointing to the fact that there is a new extraction technology, which you feel will improve the sensitivity over what's been demonstrated in the 5500 patient trial--

I don't think so.

--or prior studies?

No, I don't think there'll be specific discussion about that.

I mean, it's just part of an entire assay that happens to pick up mutations associated with colon cancer.

I don't think there'll be a lot of discussion about it separately from that assay if that's what you're asking.

Yeah.

OK.

Thank you.

Your next question comes from Tim Lee of Merrill Lynch.

Good morning.

Just a couple of questions here.

First, in terms of the large-scale 5500 sample study, any plans to go back retrospectively, since you do have the samples on hand, to go back with the Effipure technology or would that be something that would be cost prohibitive?

Well, it's something we're looking at, Tim.

We-- we're trying to weigh the cost and the timing of it, given a lot of other things we're doing.

I should go back and say we've always felt comfortable with the sensitivity we've seen for the assay, even prior to the multi-center study and even prior to Effipure.

So what we believe that we've seen from the research efforts of Tony and his group is an increase in sensitivity and we're just weighing all the different possibilities of how we-- how we should go about proving that to even a greater extent.

And we'll get back to you when we've made some decision about that.

Tim, this is John.

As Don said a little bit earlier to a prior question, the sort of dynamic nature of the product development has always been part of our planning process.

So Effipure-- the Effipure announcement that Tony made or the presentation he made is just, you know, one of probably a series of these type of product announcements or product improvement announcements and so it's just-- it's always been part of our planning process.

So to your question about the cost and challenge associated with that, it's really always been part of the-- you know, the internal process.

And then, just kind of following up on Dan's question, if I can just ask it another way, just any type of near-term volume capacity that you can share with us in terms of how much testing LabCorp can do out of the gate?

Well, let me put it this way.

We-- when we-- when LabCorp and we signed our agreement, LabCorp was-- basically took the models that you guys had come up with over the first three years and had gone to their board and their board has asked them to show that they had the capabilities and a plan to handle those kind of volumes.

So we feel comfortable that that challenge will be met and we'll be in really good shape that way.

OK, great.

Thank you.

Your next question comes from Bob Mitchell [ph] of Touchstone.

Good morning, gentlemen.

I was wondering whether you could update me on the status of sort of the reimbursement profile for your test?

That's a great question.

What we've done to date with LabCorp is that we have, both on the Medicare side and the managed care side and the self-insured employer side, we have put considerable effort into it.

We have a number of people from our company who work this-- these areas, as well as LabCorp.

I think there's probably a total of 45-50 people who are working on reimbursement.

What we've done to date is we've-- we have spent a great deal of time working with Medicare, trying to understand their process, to inform them of our clinical work, and to understand the process they will go through to consider a test like ours.

We feel like we have a pretty good handle on what that might look like.

We can't give you specifics about absolute timing, because I don't think anybody can.

On the managed care side, starting with self-insured employers, if you will, we're putting a full-court press on them.

We found that a number of the large employers out there are willing to pay for screening tests.

And on the managed care side, what we've done with LabCorp is there's a very active group, combination group, between the two companies that are in the process-- have been in the process of profiling every account and every contract that LabCorp presently has with the idea of making sure that the ones that allow payment in the very beginning, at launch, are informed and ready to pay for the test and also have been working with a number of these managed care plans on how to get PreGen-Plus into their policy, which takes a longer discussion.

But what we'd like to do is have every managed care plan, ultimately, to have a colorectal cancer screening program, of which fecal DNA testing every x number of years is part of that program.

That takes some time.

That won't happen the day that this thing's launched.

So I-- I think I understand your answer, which is that if I were to take this test three months from now or five months from now, at the moment if nothing changes, would I, in fact, be reimbursed by my insurance company?

I believe-- it obviously would be dependent on who your carrier is, but I think if you-- in that time frame you're talking about, I think it's a reasonable possibility it would be covered.

OK.

It just depends on who it is.

So some carriers have approved this test for reimbursement?

It's kind of a Catch-22.

They won't commit to these things until the products on the market.

So what we've done to date is to understand well the process they will go through, but there's no-- in the payer world, there doesn't seem to be any sense of urgency to cover a test or to commit to covering a test until it's actually out there on the market.

And what's the big hurdle at the moment?

Is it the fact that, for instance, if I tested positive, then I'd, in fact, have to have a colonoscopy anyway?

Or what is the insurance company's objections, to the extent that they articulate any?

Well, there hasn't been a whole lot of objection.

It's just the fact that it's not out there yet.

They-- I think insurance companies-- And every-- if you've seen one, you've seen one.

So it's no-- you can't take anything I say and project it out to all of them.

They're looking for good, strong clinical data.

We think we have as much clinical data or more than any diagnostic company's ever had for a product introduction.

They look for cost effectiveness studies.

We have some very good cost effectiveness studies.

They look at what the thought leaders are saying about the product.

They're looking for demand from their provider network and from their membership and they look at the unit cost.

And all those things have some weight into their decision-making process.

And we can certainly talk to about-- offline about how we've approached that, because it's a fairly lengthy process, but we feel very comfortable that we're making progress along those lines.

OK.

Thanks for your help.

Your next question is a follow up from Dan LeMaitre of Merrill Lynch.

OK.

Can you guys still hear me OK?

Yeah, it's fine.

Yeah.

Just, again, down here there's an awful lot of talk about some of the very, very expensive cancer drugs that are being developed, the need to identify responders, because you simply can't put $20,000 drugs into patients that won't work.

Colorectal cancer, I think in some stuff we saw, had the third highest number of compounds in development after solid tumors and breast cancer.

I'm just wondering if you guys have really started to be approached or if you're plugged into some of that development work and specifically if some of the things you're doing would, in fact, allow you to better predict responders to some of the very expensive drugs that are in the pipeline.

Dan, I'll give you my opinion, but it's really a question we ought to get Tony to talk to you about.

I-- my impression is that that's sort of an interesting market, but it's not our core competency, if you will.

And the reason I say that is because we're going after, as you know, a market that has 84 million people in it just to be screened for cancer.

If our product works, and people would comply with any kind of screening test, there'd be less likelihood you'd ever need one of these very expensive products you're talking about.

So we're not working at odds with those folks, but we're certainly trying to catch it earlier and keep you from ever having to pay $20,000 for a cancer drug.

But it's worth a conversation with Tony if you'd like to get more information about how we see that.

OK.

All right.

Great.

Thanks.

Your next question comes from Chris Donaghey of SunTrust Robinson.

Hi, good morning.

I was wondering if you could provide us any insight regarding the inclusion of stool-based DNA into the formal screening guidelines recommended by certain advocacy groups and gastroenterological societies?

Well, what are doing is we've talked to those groups about what they need to make that decision is they need clinical study work.

And so I suspect that at the conclusion of our 5500 patient study, when that's submitted for publication that, hopefully, that would be compelling enough for a number of these groups to consider favorably the inclusion of a fecal DNA test in those guidelines.

I think it's safe to say that the organizations who are out there who are interested in colorectal cancer know that there's a need for another very effective colorectal cancer screen.

The fact of the matter is, so many people are dying each year from this and most of the other tests are not being complied with very well and there's some-- at least some consideration that our test would be complied with at a higher rate.

Chris, this is John.

Let me just answer it also by reminding you what the end point of the multi-center study was, which was a comparison against FOBT, which is the primary-- as you know, the primary non-invasive screening test for colorectal cancer today.

So with the information that will come out in the fourth quarter of this year from the multi-center study showing our performance vis-à-vis FOBT, I think that'll provide pretty conclusive evidence to those guideline organizations to add our test to the guidelines.

As Don said, it's just a question of when, in the process that they go through.

OK.

And as a follow up to that, is there a percentage of payers out there who will not reimburse until a certain test is in a formal screening guideline provided by an advocacy group?

I don't know if there's a percentage, but there's certainly people who-- I don't know what that percentage would be, but there's certainly people out there who will use a number of different things to have to wait.

The-- there's just no need for most payers to commit to something up front.

OK.

They tend to wait until they're kind of forced into it.

There are-- there are a number of states that have provisions that say when a test is in the guidelines, for instance, in the American Cancer Society guidelines, that the payers in that state must pay for colorectal cancer screening tests.

So there's a lot of advantages, obviously, for having this thing into any testing guidelines.

It does become standard of care and people are certainly more likely-- they almost have to do something about it then.

OK, thanks.

Your next question comes from Mindy Hahn [ph] of Barrington Partners.

Good morning.

At this point are you able to provide more specific insight on PreGen-Plus pricing?

And second, what do you anticipate recommended testing frequency to be, in terms of like, for example, FOBT on an annual basis?

Our understanding-- LabCorp sets prices, but I suspect what they will be setting is a price of about $795 as a patient price and the client price is about $575, somewhere in that ballpark.

As far as the interval, I would suspect it's probably every three to five years for most people.

If you're of average risk with a slow-forming cancer like this, it's unlikely that you need to have this test done every year.

OK.

And also, if you could speak to, just in a summary version, what you're reasoning behind focusing your sales and marketing efforts, at least initially, on primary care physicians versus GIs or specialists?

Well, actually, what we did-- most of our focus, up until probably a year ago, was on gastroenterologists, with the idea that we wanted to make sure the thought leaders in gastroenterology were very much informed about what we were doing and were aware of our clinical studies.

And actually, a number of gastroenterologists helped to design our 5500 patient study or had input into it with our own clinical affairs group, led by Michael Ross.

Since that time, once we'd kind of gotten to most of the big gastroenterologists in this country, we have focused most of our efforts, our internal efforts, on the thought leadership in the primary care area, whether that's family practice, OB/GYN, general internists -- that area -- with the idea that if we can get those people very much familiar with what we're doing then when LabCorp goes out with their 800 sales people and calls on the primary care physicians, we would have covered all the bases.

When the primary care physician, your local physician calls up either the thought leader in primary care or in gastroenterology, they will at least be aware of what we're doing and be familiar with our product and technology.

That's been our thought process for quite some time now.

Great.

Thank you.

At this time there are no further questions.

This concludes today's EXACT Sciences Corporation second quarter results conference call.

You may now disconnect.