Exact Sciences Corp (EXAS) 2004 Q2 法說會逐字稿

Good morning. My name is Cheryl. I will be your conference facilitator. At this time I would like to welcome everyone to the EXACT Sciences second quarter 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. I would now like to turn the call over to Ms. Amy Hedison. Ms. Hedison, you may begin your conference.

Thank you Cheryl. Good morning everyone. Welcome to EXACT Sciences second quarter conference call. Before I turn the phone over to Don I want to remind you all 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 2003 form 10-K and subsequent filings. Don.

Thank you Amy. Good morning everyone. The second quarter showed strong growth in the number of PreGen-Plus accessions by LabCorp as compared with the first quarter of the year. Quarter-over-quarter growth was 75% to over 2,000 tests ordered in the first half of the year. We are really pleased with the percentage sales growth, even though the rate of tests fell off toward the end of the quarter due in part, we believe, to a seasonal decrease in well visits. One important thing we learned during the quarter is that the sales programs that LabCorp put into place in the beginning of 2004 appeared to have had an initial impact. In fact, certain of these programs have been reinstituted, which we believe will help to partially offset the summertime slowdown in well patient visits to physicians.

Now, am I satisfied with 2,000 tests to date? No, I am not. But you heard have me say before that I believe that with any new diagnostic, having the right conditions for sale in place are important to broad market momentum. I believe that, based upon our broad body of clinical data to date and with what is to come, these conditions of sale-or catalysts are within reach. While this may take time, we're talking about a potential market of tens of millions of people who do not, for a variety of reasons, get colonoscopies and for whom PreGen-Plus, I believe, offers a clear benefit.

Through June approximately 1,000 physicians have ordered the test. As would be expected, we have seen the majority of orders come from those areas in which LabCorp has a strong presence. Almost 40% of the physicians who have ordered tests have reordered with a handful of physicians ordering multiple tests. While we are encouraged by the numbers of physicians who have reordered the tests, there is still much more work to be done on this front. We and LabCorp continue to focus on this key objectives.

Some of the prerequisites we have to provide to physicians to make them comfortable that this new product provides clear benefits to their patients are such things as peer reviewed clinical results, guideline inclusion, positive statements by thought leaders, endorsement by their respective professional organization, coverage by payers, and an overall positive experience when they do order the test. We've mentioned these to you on any number of occasions. I would like to update you on our progress.

The publication of our multi [finish] manuscript in a peer-review journal is something we've all been waiting for. While we cannot predict whether publication in and of itself will increase sales, we believe it will serve as a triggering event for a number of other subsequent events that we believe will have a positive impact on PreGen-Plus' acceptance in the market. We continue to hope for the publication this year, but of course cannot predict the precise date of that publication. Publication of the multi-center study data will also allow us to complete our national coverage decision application to CMS for Medicare coverage. Inclusion into the Medicare program is obviously very important as the Medicare population is a very significant part of most primary care physicians' practices and virtually every Medicare patient falls into our target market.

Another motivator for physicians to order PreGen-Plus and for many payers to reimburse for it would be inclusion into the screening guidelines. To enhance the likelihood that PreGen-Plus will receive the consideration that we believe fecal DNA testing deserves from the various guideline-writing groups, we need the publication of the MCS results in a peer-review journal to broaden the data set.

In the meantime, other objective peer review support for PreGen-Plus' value and utility is becoming available this year. For instance, in the July issue of the American Journal of Gastroenterology, a study led by Dr. Randy Brant (ph.) from Northwestern proved that one patient sample is as good as three consecutive samples when using even the older prototype bead-based version of PreGen-Plus. Asking a patient to provide multiple samples most likely inhibits use of any screening product as is evidenced by the low percentage of fecal occult blood cards that are completed according to instructions. We believe that this study contributes valuable information that will further support the selling process and increase physician comfort with the performance of the product.

In addition a review article co-arthured by Dr. Doug Rex (ph.) from Indiana University was published in the June issue of the Cleveland Clinic Journal of Medicine. As you may know, Dr. Rex is the President of the American College of Gastroenterology. All the above we believe further enhance our story.

Additionally on the scientific front, I am pleased to inform you that Mayo and EXACT are currently discussing a new protocol for the Mayo NCI funded study to include newer of EXACT's technologies and potentially new markers in order to yield more clinically relevant and current information. As you will recall, the current Mayo study is based on our older, now obsolete, bead-based technology. This study was originally conceived several years ago for the purpose, among other things, of building a stool bank of average risk asymptomatic individuals that could be used by researchers. The primary endpoint of the study being screened, relevant neoplasia, which includes both cancers and adenomas. In moving to newer technologies in the study, we and Mayo Clinic reviewed preliminary study data across approximately 150 samples in the primary endpoint, which showed that EXACT Sciences performed twice as well as hema cult II (ph.) against this primary endpoint. In addition, in a very small subset of cancers, which were not a part of the study's primary endpoint, hema cult II and hema cult sense-it appeared to have performed better at a preliminary stage than the older bead-based version of our test. By closely looking at the results from our own multi-center study, the preliminary data from Mayo NCI study, as well as results from other completed studies, our scientists made an important discovery regarding the relationship between sample collection techniques and achievement of optimal sensitivity. Our research showed that the older sample collection protocols used in these studies impacted sample stabilization and adversely affected the performance of the assay in these two studies. In other words, this discovery better helps us understand better why we saw a lower sensitivity in our own multi-center study using the bead-based technology than we had seen in previous studies employing that same technology. Having strong protocols and procedures around sample collection such as LabCorp currently employs is important to this concept of DNA preservation.

We will have oral presentations highlighting some of our recent research findings on the stabilization issue and on other progress we are making in research towards a higher sensitive version of PreGen-Plus at conferences over the next several months including this week's American Association of Clinical Chemistry meeting in Los Angeles and the American Association of Cancer Research meetings in Bar Harbor, Maine in early October. There are also abstracts submitted to other important meetings that discuss new technologies as well as the concept of optimal DNA stabilization. All of these things are important to a company and applied research team that is pushing the envelop in developing a state-of-the-art non-invasive method of detecting colorectal cancer early as quickly as we can.

We continue to believe that the opportunity for PreGen-Plus is significant. Our challenge is to capitalize on that opportunity through our strategic marketing and applied research efforts and to help reach millions of colonoscopy refusers and those who are currently either being inadequately screened or aren't being screened at all today for colorectal cancer. In fact, we are beginning to get reports indicating that our test has caught several colorectal cancers and/or adenomas and therefore may have helped to save people's lives. For us and for me personally there is nothing more gratifying than making a difference for patients. While this very important living metric of lives saved may not have a bottom line implication right now, I believe that over time this metric will have a substantial impact and to help drive this company to the success we all believe is possible.

That is the end of my statement. Now we'll open up the floor to questions from you.

At this time I would like to remind everyone in order 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 question and answer roster. Your first question comes from David Lewis with Thomas Weisel.

Good morning. A couple questions. First of all, talking about the Mayo protocols, I am a little confused on what your expectation is at the endpoint. Is there going to be produced material out of that? Or do you think the most significant revelations have already happened?

First of all, the only reason we are even aware of this preliminary data is that the Mayo went to the NCI to get an extension on their timing and also to switch the technology over to Effipure and some other things we might want to look at. At that time the data monitoring committee chose to take a look at the results to date. That is when we became aware recently of this information. It has been helpful to us in isolating this DNA stabilization issue that we have suspected from looking at our other studies as we tried to figure out why the multi-center study had a different result than what we've seen in the past. The plan to date is for this study to continue to recruit patients through-into 2005. We're not sure when in 2005 it will finish recruiting, but at the end of that time, it obviously would be the release of the full data, which could include these new markers or Effipure data or whatever else we agree to with the Mayo Clinic to include in that protocol.

OK, so looking at the multi-center study, one of the reasons we think sensitivity was lower was the result of the stabilization issue. Are these fixable issues? Couldn't one argue that in clinical medicine average daily use, you are going to have these types of collection issues when you recruit samples from across the country?

The thing that is interesting to us-that's an excellent point - is that LabCorp in their collection technique is not seeing the same issue. The reason that we know that they are not seeing it is because the long DNA marker, DIA, is actually performing in their assay quite well. At least they are having pickups of DIA. What we did not see in our multi-center study was the kind of informative-ness we had seen with DIA in other studies. DIA is a marker that will degrade if the sample is not collected and stabilized in the most optimal way. The reason we thing the MCS was lower was because DIA didn't perform as it normally had. What we are seeing in LabCorp is that they are getting the DIA pickup. So their technique is more rigorous in collecting samples than what we had used in our protocols that went back to 2001. We've learned a lot since that time. Is that clear?

Yes, that's clear. On revenue, [inaudible] that you did from launch to first quarter about 1,000 accessions and then second quarter about 1,000 accessions. We're having a difficult time computing your actual revenue looking at those accession numbers. To us it looks like revenue would have had a drop fairly dramatically. I imagine that is an issue of timing or DSO lag at LabCorp. Can you talk about-has something changed in terms of the amount of time it is taking to get paid? Was there significant onetime payments for larger customers? Did something happen that we're unaware of?

There are a couple things. First of all, we continue to do this on a cash basis, as you might expect. We get paid-we recognize the revenue when we get paid. What's happening with LabCorp is that there is quite a bit of time lag between the time a payer is billed and LabCorp gets paid. Then there is a time lag after that that we get paid. In order for us to recognize the revenue, the test has to be completed, reported, and we have to receive-LabCorp has to receive reimbursement. Then we are paid after that fact. We realize this may be hard for you right now. We're trying to work on ways to make it a smoother thing. Right now we think the cash basis that we do-doing it by a cash basis is the most appropriate thing for us to do.

We don't disagree. I guess what I'm saying is all things being equal from the first quarter to the second, do we then change our methodology and rebuild in a pretty significant lag? As you get to the second quarter, those methodologies that worked in the first, don't seem to be working in the second. I am asking, did revenue from the test remain stable quarter-to-quarter-price per test?

It could be related to that. Price per test has been virtually flat, I believe. We're not seeing a big difference. LabCorp continues to be reimbursed at approximately the same rate month-to-month.

One last question, then I'll jump back in queue. In terms of the burn rate for 2004, what is the company forecasting?

We were at $26m.

Is that what you think you will burn in 2004?

2004, yes.

OK. Thank you.

Your next question comes from Benner Ulrich with UBS.

Good morning Don. A quick question on the cost structure. Clearly operating expenses-I guess for the most part SG&A was a bit lower than we had been looking for. How should we think about those items going forward?

Repeat the question one more time, please. I am sorry I was having trouble hearing.

I'm sorry. Can you hear me now?

Yes, now it's fine.

Just a question regarding the cost structure. Specifically SG&A was a bit lower than what we were looking for. R&D fell off a little bit as well sequentially. I know it's probably hard to project, how should we think about those items for the balance of the year?

It's really the timing of the programs. We've finished the multi-center study, so we don't have a lot of clinical studies ongoing. We do have a number of experiments we're doing in the second half of the year probably that will be on the SG&A side. That could be things like direct-to-consumer pilots that we are attempting to do in different parts of the country as we deem fit. I can talk to you offline more about it. That is where we are today.

OK. One additional question on the product revenue, which I assume is basically Effipure units, it looks like you sold a bit more than you did in the first quarter and also more than we have been looking for. Clearly you'll continue to sell those to LabCorp going forward. Do you have a sense for what that is going to look like as well?

We don't right now, no.

OK. Thanks.

Once again, 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 recompile the Q&A roster. Your next question comes from Timothy Lee with Merrill Lynch.

Good morning. In terms of your order pattern, do you have any visibility? Is it coming from a handful of docs that are ordering a bunch? Or are we getting some broad-based acceptance? Is it geographic in terms of where these orders are coming from? What is working from-any sense of what is working that is driving the tests as opposed to some areas that may not be getting as many orders? Can you comment on any of that?

A couple of things. We certainly see more orders coming from areas where LabCorp has a stronger presence. That would be number one. There are certain sales representatives from the LabCorp side who have been very successful in getting doctors to order more than one time. As I've said earlier, we're certainly not satisfied 2,000 accessions to date this year. We're looking at all the ways we can to support having people to continue to reorder the test. What I think we're getting right now is some of the early adopters of technology who will try things once. Our challenge is to continue to go back to those people-to speak to the obvious - over and over again to get those same physicians to continue to order. We have had success as I mentioned earlier on having some doctors - not all of them, obviously - to order multiple times. They seem to like what they're seeing from it. We've got to make sure that we continue to give them a consistent message and visit them on a consistent basis to make sure they continue to make this happen. I think the things that most of these people are waiting for are these catalysts we talk about. Evidenced-based medicine is such a big thing now, as you know. They are waiting to see the publication of this multi-center study. Even though they know what the results are in some cases, they want to see it peer reviewed, accepted, and published. They want to see it in guidelines. They want to see it in Medicare. All those things are, in my opinion, keeping some physicians from reordering and reordering. They wanted to try it a few times, but then they also want to wait to see if it's, in effect, standard-of-care.

Can you give us a sense of what the customer base went from? Do you have that level of granularity in terms of number of docs ordering the first quarter to the second?

We do have it, but I don't have it off the top of my head. If you want to call me after, we can talk to you about it.

Sure. That's great.

We're seeing growth in that. One of the things we've been really pleased with is the level of support we're getting from the LabCorp sales organization and their management. We have a call with them most every Monday morning. It is attended by the field of management of LabCorp plus some of their headquarters management. It is one of those things that seems to be working very, very well. We talk about successes the week before. We problem-shoot things that are getting in the way. We try to fix them for the coming week. Then we have another report the next week. From that standpoint having a graphic response back to us about things that are working and not working, we feel very, very good about.

One last one, then I'll jump back in the queue. In terms of the customer mix, is it GIs? Or is it the general practitioners that are ordering?

It is more the primary care physicians.

OK, great. Thank you.

There are no further questions at this time. Are there any remarks?

No. We thank you for joining our call. If you have any questions you'd like to talk to Amy and me about, please call us here in the office. Thanks.

Thank you for participating in today's teleconference. You may now disconnect.