Exact Sciences Corp (EXAS) 2004 Q1 法說會逐字稿

Good morning, my name is Ameedras and I will be your conference facilitator.

At this time I would like to welcome everyone to the Exact Sciences first quarter 2004 conference call. [OPERATOR INSTRUCTIONS] Thank you.

Ms. Amy Hedison, you may begin your call.

Thank you.

Good morning everyone and welcome to Exact Sciences first quarter 2004 results conference call.

I have with me Don Hardison, our President and CEO who will provide a few comments and then we will be glad to answer whatever questions you have.

Prior to Don's remarks I would of course like to remind you that any forward-looking statements made during this call are based upon current expectations and are subject to change based on various factors that could effect the company's financial and operating results.

The factors are set forth in detail, in Exact Sciences 2003 form 10-K and subsequent filings.

Thank you.

Don?

Thanks Amy and good morning everyone and thank you for joining us.

We have three areas I would like to highlight before answering your questions today.

They are number one: our efforts in the quarter to gain increased market traction; number two: our applied research focus on the ways and means to increase PreGen-Plus sensitivity for detection of colorectal cancer and advanced adenomas and number three: a few statements about our financials.

As we continue to work to achieve certain key catalysts such as screening guideline inclusions and Medicare program acceptance, both of which we believe will have a positive impact on growth, we are encouraged by the very positive month over month sales we have seen for PreGen-Plus in the first quarter of 2004.

Based on the strong sales growth we have experienced since the beginning of the year, we believe it is reasonable to expect the quarter over quarter sales growth will average approximately 80 percent for the remainder of 2004.

Growth at this rate will result in a realistic expectation of approximately 10,000 tests being accessioned by LabCorp in 2004 and would mean that in December LabCorp would accession approximately 1500 tests.

I believe that this volume level is a significant accomplishment absent guideline and Medicare inclusion and positions us for a strong year in 2005.

We've learned a great deal about the dynamics of our marketplace and are pleased that Exact and LabCorp have been able to introduce new programs to take advantage of opportunities and to continue to improve our sales and marketing strategy and tactics.

This year is really a roll-out year for us.

We fine tune our sales and marketing strategies and messages and help LabCorp as it optimizes its sales strategies.

We must also do everything in our power to focus on the process associated with getting into guidelines, making sure we have done all we can with our application to CMS for inclusion into Medicare and utilize the publication of the multi-center study and the entirety of our clinical, cost-effectiveness and compliance data to create positive action by our various constituents.

I would look to 2005 for continued growth and ramp-up as we believe that several of these catalysts should either be in place or well on their way.

In one sense, getting to the 10,000 unit level this year would mark the end of our rollout phase and signal the start of our ramp-up phase.

Remember, we are essentially building a new market and I believe changing physician and consumer behavior for the better in the area of mass screening.

This is not a small undertaking and will take some time.

It's also important for you to understand that while we believe that reaching out and maintaining these growth rates would represent and important achievement in 2004 and is realistic, we will be doing everything we can to exceed that number.

Although the absolute accession numbers are still relatively small given the market potential before us, I am pleased with our current growth rate and how our efforts and those of LabCorp are apparently beginning to pay off.

We continue to believe that our goal of reaching a million accessions in the next 3-4 years is reasonable.

I'm also encouraged by the passion and expertise of our marketing and sales team under the leadership of Bob Rochelle.

This team along with the LabCorp sales and marketing team has implemented programs that are working rather impressively.

I believe that LabCorp's focus on product sales, particularly in the esoteric and genomics spaces is an important competitive advantage that will serve LabCorp and Exact Sciences well.

Their commitment to our product has never been higher and our relationship has never been stronger.

The truth is introducing a novel new product into basically a new market is a complex process.

In our case, several elements will continue to require consistent focus in pursuit of our objectives.

First there are the all important blocking and tackling associated with selling a product.

The right primary care physician needs to be targeted and called on regularly and often.

A simple, directive message must be delivered on a consistent basis to these physicians.

They have a great deal to remember as they interact with their age 50 and over patients who are our prime targets.

The more our companies can do to get the message of the importance of colorectal screening to them and the more we get a simple message to them on the effectiveness of a non-invasive screening test such as PreGen-Plus, the more we believe we should be able to positively affect sales.

The shared challenge of Exact Sciences and LabCorp is to deliver a consistent message that can be clearly heard above all the other marketing noise that comes each and every day to a busy physician.

I cannot emphasize enough how important it is to see the physician and follow-up with his or her staff a minimum of four to six times just to get them to start to order the test.

Even at that point it is only the beginning of the sales effort in that calls still must be made until ordering PreGen-Plus becomes the physicians standard of care.

Secondly, the sales office is only going to be enhanced by the actual inclusion of PreGen-Plus's screening guidelines.

That probably will not happen until 2005 at the earliest, however, we remain confident that it will happen.

Once our multi-center study is published in a peer review journal, something we continue to believe will happen by the end of this year, we believe that we will have the data-set that will warrant inclusion.

We have proven beyond a shadow of a doubt that PreGen-Plus is much more effective at detecting colorectal cancer, particularly in the earlier, more curable stages than the most widely used fecal occult blood test on the market today, a method of screening that is considered a standard of care and is currently in screening guidelines.

According to the screening guidelines that were issued in 1997, this was the standard that had to be achieved for guideline inclusion and we believe we have demonstrated that PreGen-Plus meets that standard.

Third, the publication of the multi-center study also enhances the data we can present to payers as they consider adding fecal DNA testing to their colorectal cancer screening programs.

A peer-review publication will also be another tool in the bag of the salespeople of Exact Sciences and LabCorp as they call in physicians who may be looking for one more proof source before ordering the test.

Fourth, and finally, there is Medicare.

As you know, Medicare covers approximately 40 million Americans and we are not in that important program yet and cannot bill for a screening test.

Our application for a national coverage decision that would hopefully lead to PreGen-Plus being included in the program will be complete with the publication of the data from the multi-center study.

Our application is basically ready to go pending the publication of the peer-reviewed article.

We believe that we have a compelling value proposition for CMS.

Detection of colorectal cancer in its earliest phases should have a real appeal to them, as this is the group that bears the brunt of the billions of dollars spent in treating colorectal cancer.

Think about this for a minute.

It generally costs $50-75,000 a year to treat a patient with advanced stage colorectal cancer.

And that's before the introduction of the new therapeutics for advanced stage colorectal cancer from Genentech and ImClone.

There is already a great deal of attention focused on treatment, there would seem to be a large payoff to the public and to the healthcare system if there was greater attention on prevention and/or early detection.

From our perspective, the PreGen-Plus value proposition is clear, early detection saves lives and can save treatment dollars, offering a better screening test that is non-invasive we believe will have a broad consumer and physician appeal will encourage mass screening and will ultimately save more lives and healthcare dollars associated with treatment.

This is particularly true with the Medicare population.

I'd like to now shift gears and talk about the true backbone of our company, our applied research efforts and accomplishments led by Tony Shuber, our Chief Technology Officer.

We point with pride at the breakthrough technologies in assays developed by Tony and his team and the patents they've been able to put together that protect these achievements.

They have truly broken new ground in sample preparation techniques and in the early detection of colorectal cancer through non-invasive screening assays.

For most companies, the original d-based(ph) version of PreGen-Plus would have been enough.

For Tony and company, that was only the beginning.

I suspect you are aware that the commercial version of PreGen-Plus contains a number of improvements, one of which his the addition of epipure(ph).

Epipure allows more DNA to be isolated from a sample and we believe allows for higher assay sensitivity.

Tony will make an oral presentation on Tuesday, May 18th, at the digestive disease week meeting in New Orleans on the positive effects of Epipure on the sensitivity of PreGen-Plus.

Tony and his team are not finished with optimizing the technology underlying PreGen-Plus and developing new and improved assays.

They have a number of exciting programs at various stages in the lab that appear to further improve the sensitivity of PreGen-Plus for the detection of colorectal cancer and/or to improve the sensitivity of the assay for detection of advanced adenomas.

The new chemistries and the new markers including methylated markers are showing great promise.

There are no guarantees in science but we remain guardedly optimistic that our efforts in this area will pay off in the coming years.

We expect to have more to say about these efforts during the second part of this year.

And a word about our financial picture.

As you know, we were successful in raising an additional $43 million this quarter.

These funds further strengthen our balance sheet and provide us with a cushion we need to continue to invest in both the sales and marketing side of the business and in the applied research side.

Having $65 million in the bank provides us with an important level of flexibility and resources.

Given some of the positive trends we're seeing, we've made a decision to strategically invest to take advantage of those programs that we believe can drive sales growth and set the stage for accelerated growth into 2005.

Therefore we are increasing our expense guidance for the year from $24 million up to $26 million.

These additional investments will be made incrementally and prudently in a way that helps build greater product awareness and capitalizes on market momentum.

As we learn more about which programs were best, we might decide to invest more into those programs in order to either drive sales in 2004 or set the stage for growth in 2005.

Finally, I will be remiss if I did not mention how excited we are at Exact Sciences, and I know the same is true at LabCorp, that we have been able to detect several cancers and adenomas in patients tested with PreGen-Plus.

We are also very pleased with the market research that shows that over half of the patients tested with PreGen-Plus had never been screened before and nearly 2/3s of those who had been previously screened had received a fecal occult blood test.

We have known for sometime that one of the reasons many people do not get screened for colorectal cancer was that they or their physician was not pleased with the options available to them.

I believe this is very important market research data and that it proves that we are attracting new people to the system for screening.

These two points, catching early stage cancer and advanced adenomas and getting more people into the system and more effectively screened are in a nutshell what it's all about.

When all is said and done we will not be successful in our mission clinically or commercially if we don't get more people screened and if we don't find colorectal cancers at their earliest stages.

While the patient sample may be relatively small, the results today suggest we are succeeding on both counts.

I firmly do believe that when a company's product can make a measurable difference in reducing mortality and morbidity associated with a dreaded disease such as colorectal cancer, the numbers will usually follow.

So thank you.

We'd like to now open this up to questions from here.

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

Your first question comes from Jessica Safalipo(ph) with Thomas Weisel Partners.

Good morning.

A couple of quick questions on timing of re-imbursements with LabCorp.

When you talk about accessions, how does that translate into the number of tests (inaudible) in the quarter?

It typically takes about at least 90 days for LabCorp to start run the test, build the test, be reimbursed for the test, and we get paid after that happens and 90 days is probably a reasonable timeframe to think about from the time of accession.

OK.

Alright, great, that's helpful.

And then, how do you expect pricing to fair with volume as you reach that 10,000th accession?

I don't-what we've seen so far is actually been very encouraging.

LabCorp, as they bill, and I can't get into all the details of it but I can tell you that we've been very, very pleased that in almost all cases LabCorp has been reimbursed either at the list price or a discount off that that's not that dramatic.

As you probably know, LabCorp has contracts with many, many payers out there and in some cases there's a negotiated rate for the CPT codes that are being billed but we have not seen price be an inhibitor to growth right now.

I think the main thing we hear from physicians is that they want to make sure before they order a test that there's a high probability of it being reimbursed, or, better said, they don't want their patient to have a very large outlay of cash from the patient.

And so far that seems to have been borne out through the first few hundred tests that have been billed.

All right.

Thank you.

Our next question comes from Dan R. G. Ulrich(ph) with UBS.

Good morning.

A couple questions.

First question: If you back into the volume number based on what you have reported the day (inaudible) of the test, is it safe to assume that volumes in the quarter were pretty similar to the prior two quarters combined?

It's actually quite a bit higher than the two quarters combined.

If you remember better, we launched in the middle of August and so we had August and September for the third quarter and October, November, December and the volume we've had in the first quarter this year is probably 70 percent more than those two quarters combined.

OK, OK, fair enough.

So, I'm just trying to get a sense, I know you discussed pricing a little bit answering the prior question but has the price been relatively flat, has it come down a little bit sequentially, I mean I guess the reimbursement level that LabCorp's seeing, has that been pretty stable?

It's actually been very, very stable.

Again, it's their billing so I can't get into all of the details.

I will tell you that we've been very pleased about what's happened and we sort of knew this going in, we had a tough time convincing other people how we thought it was going to work, but the facts are that LabCorp has the contracts as you know with many, many payers.

These are negotiated by CPT Code and they have notified these payers they're going to bill them and as they bill those CPT Codes they get paid at the rate of the negotiated rate.

So we have not seen any deterioration in price at all.

OK.

: That's held up great since the very beginning.

OK.

OK, great.

And then one additional question.

Could you perhaps elaborate a bit on some of the things you're doing in the R&D area, some of the technologies you're working on, to increase sensitivity and perhaps any milestones that we could keep our eyes open for, associated with those technologies in terms of timing and when we might see some data and when we might ultimately see those incorporated in the tests?

Well, we've - kind of in a general sense, we've said to a number of people that we would like - I mean, our goal was to push the sensitivity of this test as high as we can over time.

And what we'd like to in tissue this year - in tissue, prove that we can get to a higher level than we are today.

And Tony and his team have a number of programs that include new chemistries and/or new markers for looking at larger sections of genes, larger portions of genes that we believe can push the sensitivity up to the kind of levels we've stated before.

What you're going to see this year, then, are a number of things.

First of all, Tony will make the presentation at DDW about Effipure and the effects of that.

Well, he also has another couple of presentations that are already scheduled, one in July, I believe, and one in October, where he'll be able to talk more extensively about our results to date on some of these new programs.

The only caveat I would add to it, which I think he'd like me to add to it, is that science is not perfect, so we don't always know what's going to come out.

But we are very pleased with some of the results - he is very pleased with some of the results he's seen from the research that's been done here, and we remain reasonably confident that some of these things will bear out where we can introduce an even higher sensitivity test sometime over the next two or three years.

We can't promise you that, but we're very, very encouraged by it.

By the way, the presentation Tony's making in July is at the AACC meeting in Los Angeles.

OK, great.

Thank you very much.

Our next question comes from Darren Mac with Fulcrum Global Partners.

Good morning, Darren.

Hi, guys.

I had a couple of questions on the guidelines inclusion.

Is the American Cancer Society still planning on meeting in the third quarter to go over the technology?

I can't honestly answer the question, Darren.

I don't know.

We talked tot hem as recently as last month, probably four or five weeks ago we met with one of their people to show them some of the data that we had and review some of the data we had already sent to them.

And we were encouraged that they were certainly going to look at new technologies we hoped sometime this year.

And we believe that with the advent of the virtual colonoscopy and our test and other things that might be out there, there's probably more impetus for them to do something now rather than wait until later.

But I can't tell you for a fact they're going to do that in the third quarter.

That would be great if they would.

OK, it's just that your comments on the hope of getting into guidelines in '05 at the earliest seems to be a pushback on timing.

Is there anything that's come up that's led to that?

Not really.

I think we've been saying for - correct me if I'm wrong, I think we've been saying for a long time that we didn't know exactly when these folks would be meeting.

Both the American Cancer Society and the GI Consortia (ph) have not had an annual process for reviewing new technologies.

I think that's changing.

The reason they didn't have it before was not because they didn't' want to do it.

It was primarily because up until the last year or so, there actually were no new technologies for colorectal cancer screening.

So from the people we talked to, both on the GI side and on the American Cancer Society side, there seems to be more reason to look at new technologies, and this idea of the American Cancer Society taking a look at this in the third quarter, we don't know that for a fact, but it's one of those things that would be encouraging to us.

But we've always suspected it would be in 2005.

OK, thanks.

Our next question comes from Lee Brown (ph) with Merrill Lynch.

Good morning, Lee.

Hey, good morning.

I just wanted to have a quick question about the goal of 10,000 tests for the full year.

It just seems a bit conservative given the 800 sales reps that LabCorp has.

By my math, that's just one test per month per rep, which seems like an awfully low hurdle bar.

Well, what we're encouraged by is the growth rate, which we think is pretty impressive, even when you're working off small numbers.

We're not saying that we would be satisfied with 10,000 tests.

What we're saying is that given what we've seen to date, we want to give people a realistic goal.

Our expectation and our work will be to try to drive that to a higher level, as I'm sure LabCorp wants to drive it to as high a level as they can.

What they do know is that if you look at other tests such as cystic fibrosis testing, or HPV, inclusion in the guidelines were true inflection points for those tests, even after they'd been on the market for quite a while.

So we'd rather take a conservative approach.

We'd rather think about it that way, but we're going to be - as we said, we're increasing our spending in the quarter for the rest of the year to try to do some things that will move this even through higher, through some timing investments.

OK.

I understand the point with regards to reimbursement, but given that you have plans that have been reimbursing, that cover, I think, 30 million lives, it seems that the 10,000 target is still low.

Is there maybe some concern that there's still some outstanding issues with physicians concerning the technology and sensitivity and that's what maybe is causing the pushback?

I think it's more of a function of, Lee, of the number of calls you have to make to a physician just to really spur the sales effort.

And I've been - my experience even on the pharmaceutical side goes back, says that you need to make minimum four to six to a physician for most products.

Some products take even more - to kind of be heard over all the other noise that is in the physician's office.

When you think about the kind of physicians that we're targeting, they're the same doctors who are ordering lots of - there are lots of therapeutics and stuff.

They're the busiest doctors out there.

They tend to be visited by numerous pharmaceutical companies over the course of a day, as well as LabCorp and/or Exact Sciences, and it just takes a while to get above all that marketing noise.

OK, thanks, Don.

And one last question, if I may.

The accounting - I recall in the Q4 conference call the intentions were that you were going to shift to an accrual basis, and now in the press release it said that you're going to continue on a cash basis.

I was just wondering why the change in direction and maybe why that wasn't intimated earlier.

Well, it's a good question, but what happened - after we reviewed the historical billing and payment information that we'd gotten since we the launch, we just thought it was more conservative and fiscally prudent just to continue cash accounting for the royalty revenues right now.

Just to give you some scope, at this point, any revenue accrual would be like $20,000 to $30,000 and it would have an immaterial effect on our operations to date.

We're just trying to take as conservative approach as we can take until we really get our arms around on how to properly accrue before these tests.

And part of it's a function of just the number payers are left and bills and all the other noise that goes into that business, and we want to be very, very comfortable around it before we start an accrual process.

But you're right, our intention was to do that.

We backed off from that after reviewing the data we have so far.

Perfectly understandable, just in realizing it's not that big of an impact looking back.

But certainly going forward there's a considerable adjustment to be made.

Would you suspect that you would keep on a cash accrual - cash accounting basis throughout the remainder of the year?

I think we will.

It's safe to assume we will do this through 2004.

OK, thanks, Don.

Your next question comes from Larry Relisen (ph) with (inaudible) Capital Management.

Thank you.

Don, a couple of months ago, there was a reworking of the arrangement with LabCorp in terms of milestones and such, and now you're talking about increasing expenditures, principally for marketing, a couple million dollars.

How do you break it down, if you will, between why LabCorp's not spending the money that you feel should be spent, and, secondly, is there any marketing directly to patients as opposed to just physicians?

Well, first of all, Larry, LabCorp is spending a lot of money on this product.

We are very pleased with their effort in here, so this has nothing to do with what they're doing.

What we're doing, to go to - the second part of your question is yes.

We're going to do some targeted, direct-to-patient, direct-to-consumer test markets, starting in probably June.

I don't want to talk a lot about them right now, because we're still getting our strategy together around them.

But in our relationship with LabCorp, we've always been responsible more for the strategic marketing side of the enterprise.

LabCorp has been more involved with the sales expense side of it.

So they are utilizing their sales organization to go out and sell, and they have spent a lot of money to make that happen.

So we're just - we're seeing some positive trends that we want to be supportive from a strategic marketing side to the LabCorp sales organization.

So it's actually a really good thing.

OK, and a separate issue.

The German study that was being published, or is being published with different markers, is that a potential competitor threat or potential scientific collaboration, or where does that stand?

I think the study you're referring to was the study that used the methylated markers.

We're also looking at methylated markers ourselves.

One of the problems that study has and most studies have that use methylated markers is you can get reasonably high sensitivity, but you typically get a very, very big falloff on specificity.

In other words, you get a lot of false positives.

And therefore, methylated markers have not been utilized in tests before.

I will tell you that Tony Shuber and his team are doing some work with methylated markers, different ones from these people, and we're having some pretty good results from them, although the results are preliminary.

But, no, we don't see that as a competitor right now.

I think the other thing is the way those samples were collected in that study leave a lot to be desired, and I can talk to you offline about that, but I don't think it's a reasonable way to collect a sample for a screening test.

Thank you.

[OPERATOR INSTRUCTIONS]

At this time, there are no further questions.

Thank you, everyone, for joining us, and enjoy the rest of your day.

Thanks.

Thank you, ladies and gentlemen, for participating in today's teleconference.

You may now all disconnect.