Exact Sciences Corp (EXAS) 2004 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Exact Sciences Third 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 "*" and then the number "1" on your telephone keypad; if you would like to withdraw your question press "*" and then the number "2" on your telephone keypad.

Thank you.

Ms. Hedison you may begin your conference.

Thank you, Amber.

Good morning everyone and welcome to our conference call.

Don Hardison, our President and CEO; and Harry Wilcox, our CFO will have some comments.

However, first before they do 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 2003 Form 10-K and subsequent filings.

Don.

Thank you, Amy.

Good morning.

I'd like to begin my remarks with a review of some very important scientific progress that we've made over the past few months.

Our science is what has driven us from the start of this company and continues to drive us; further what originally attracted me to Exact Sciences and continues to excite me about the Company is this unique ability to do research with a clear eye towards timely commercial application.

I believe the science efforts and results are phenomenal and our recent accomplishments once again prove to me what a core competency it is for us.

Now to those recent accomplishments.

In the beginning of October, our Chief Technology Officer Tony Shuber presented data at a colorectal cancer conference hosted by the prestigious Jackson Laboratory.

During that presentation, Tony discussed results of research on our second generation technology that includes new markers and some novel new chemistry.

He also discussed ways in which to preserve DNA stability in stool samples to optimize sensitivity.

The bottom line is that our applied research lab has produced tissue results adjusting potential substantial increases and sensitivity as compared to the current version of PreGen-Plus.

The research results show detection performance in tissue of over 90%.

The next step is to validate the performance in stool samples.

When applied to stool samples although the detection rates from that seen in tissues generally decreases, we believe these newer technologies show great promise in the area of increased clinical sensitivity and could serve as the basis for second generation PreGen-Plus test.

In addition, Tony reported that the reason that DIA portion of our assay did not perform as well in our multi-center study as we have previously seen across a number of studies was because of less than optimal sample handling.

It is important to know that based on the sample handling methods that LabCorp employees, we do not believe that the assay that is currently on the market is exhibiting the degradation that we saw in the multi-center study or that has affected the NCI study.

We were also very pleased with the publication of our Effipure research in the most recent issue of the Journal of Molecular Diagnostics.

Remind you Effipure is our novel process for capturing DNA and is incorporated into the assay on the market, utilizing the Effipure sample preparation methodology results in greater DNA yield from a stool sample, which can result in increased sensitivity for the PreGen-Plus assay.

In addition to our validation efforts on these technologies, we are continuing our applied research efforts in the area of sample preparation and DNA purification among other important projects that we believe can lead to higher sensitivity.

We believe that this work not only may lead to enhancements for PreGen-Plus, but may also allow us to develop proprietary -- additional proprietary assets with value to us and potentially others.

We will look forward to reporting on our progress in the future as our scientific efforts continue to drive us forward.

On the commercial side, at the end of September, we revised the PreGen-Plus accession goal for 2004.

Originally when we entered 2004 we decided that it would be appropriate to provide an accession goal for investors to provide some insight into how we were thinking about the market in the first full year of commercialization of PreGen-Plus.

That goal was based on estimating the impact of a number of factors including the effect of certain sales programs that we and LabCorp were putting at place at the beginning of the year.

Even though we lowered the numbers, from our perspective the fundamentals have not changed.

Too few people in a market of more than 80 million are getting screened for colon cancer.

Too few cancers are been detected at all or been detected at an early stage and the cost of treatment continues to rise.

Recent estimates based on new therapeutics from the market estimate treatment cost of late stage colorectal cancer of approximately $200,000 per patient.

We believe early detection is the key to reducing these costs and that the performance of ease of use of our test as compared to any test including fecal occult blood test holds the key to solving this significant healthcare problem.

To build this market, it is essential that we map out a plan for success and work in pursuit it.

Our relationship with LabCorp and our recent investment of more than $20 million in clinical studies in important applied research projects was both intended to serve as the first importance steps along our plan towards billing the market.

The next step focuses on the publication of the multi-center study and manuscript such as the recent Effipure paper, submitting our Medicare application and to speak guideline inclusion.

We have engaged the process and believe we have put the right elements in place for success.

We have tremendous resident knowledge at Exact Sciences that have consulted and will continue to use other expert and advocates the supplement and imbibe us to make sure we leave no stone unturned.

In addition, we continue to work the market place in advance of these catalysts to understand what we can do better to drive sales since the more the test is used, the more likely it is the guideline writing groups will act quickly and payors will react favorably.

Although we cannot always control the timing or even the desired result as it pertains to the important catalyst for our company, we can control the process that we undertake to increase the likelihood of success.

By that I mean that for each important catalyst we have gone to great length to understand in detail the decision-making process, the people who are involved and all the steps that must be taken to the best of our ability.

We had challenged and rechallenged all of our assumptions both internally and with outside experts to make sure we had been thorough in our analysis what we had to do.

We believe that thoroughness will lead to a positive outcome.

We continue to believe in the great opportunity for the betterment of patient care provided by what we are doing.

We continue to hear up and validate cases in which colonoscopy refusers have received a PreGen-Plus test on account of positive result that completed the colonoscopy with a positive result.

Reports from their ordering physician and the patients are that this test worked and it is saving lives in early detection of colorectal cancer.

These physicians and patients are believers as are we.

We continue to believe that in PreGen-Plus we have a non-invasive DNA based test that has the potential to revolutionize colorectal caner screening.

We at Exact Sciences believe that we have a unique opportunity to create value for all our stakeholders.

Value creation is not a process that always happens quickly unfortunately, and it is certainly not for the impatient.

If you've invested in this company, you believe in our vision of capturing a large and growing market over the long term.

It is also a process that can happen in fits and starts and we know that as a company we must be prepared to take advantage of both situations.

We understand that it is important to conserve our assets during the slower time so that we can take advantage of the times when change is happening rapidly.

We also know that investment spending is just that, and we believe strongly in the investment that we're making.

We also believe that it is crucial to continually evaluate that investment and our strategies for maximizing value over the long term.

We're in this for the long hauls and our tactics will match that strategy.

To that end, one of our most important recent announcements was the appointment of Harry Wilcox is our Chief Financial Officer.

We're delighted that Harry has agreed to join the Company.

Harry has a broad experience in life sciences on both the venture capital and operating company side.

He is a strong strategic thinker with an operating mentality and a tough mindedness that should service well.

He also has an extensive list of contacts that has already been put to good use.

I'm personally very excited to have Harry here and looking forward to working with him as we bring Exact Sciences forward to the next critical stage.

I'll turn it over to Harry now for his remarks and then we'll answer some questions.

Harry?

Thanks, Don.

For the third quarter and the 9 months ended September 31, the Company generated a net loss of 4.4 million and 13.9 million respectively, compared to a net loss of 6.9 million and 22.6 million for the comparable period last year.

This translates into a loss of 17 cents per share for the current quarter compared to a net loss of 36 cents a share for the same quarter last year.

The loss of the first 9 months of this year was 56 cents compared to a loss of $1.20 last year.

The earnings per share numbers are affected by the fact that we issued 6.9 million shares on February 10, 2004.

If we were to exclude non-cash based stock base compensation, our net loss would decrease to 4.2 million for the quarter and 13.6 million for the first 9 months.

Our cash and marketable securities balance of the end of the quarter was approximately 55 million.

We are acutely aware of the need to be prudent with the way we manage the Company's cash.

In connection with our annual budget process we are reviewing activities of all departments with the objective of ensuring that all expenditures further the goals of achieving inclusion and treatment guidelines, receiving a positive Medicare determination and improving the sensitivity of our tests.

Although we are not yet in a position to discuss any changes we might make with a regard to our burn rate, we are focused on making sure that the resources in place -- that we have the resources in place to take advantage of the situation as the product catalysts are achieved.

I would like to turn the presentation back over to Don.

And what we are going to do is we are going to answer a few questions that we continually get and we'd like to handle those upfront and then we will turn it over to you.

Number one do you still think the timing of the multi-center study will be this year?

I would be kidding you if I didn't admit that I am as frustrated as anybody with the time it takes to get this type of publication.

But the fact is this is the way the system works and those of you who are familiar with the top peer medical journals know that they operate by their own rules and on their own schedules.

Exact Science's mission is not to change that system and I will in no way jeopardize acceptance of publication by going into a lengthy discussion of either the process or of paper.

We have already stated that we expect that the paper will be published by the end of this year, and we continue to believe that will be the case.

When we are able to provide you with additional details we will do so.

How about guideline inclusion?

The groups that write guidelines do not have set schedules for reviewing or updating the guidelines, but we know that all the key organizations are waiting for the publication of our multi-enter study data to complete the data package that they will first potentially review.

Even then however there is nothing that binds these groups to reviewing the data in a timely manner.

That is why as I have said before we are not sitting back and waiting.

We continue to work with these groups to keep them informed, and we also continue to work the marketplace to understand what we can do better to drive sales since the more the test is used the more likely it is that the guideline writing group will act quickly.

We want to create noise around the need for better non-invasive strategy, what's out there today is emphatically not working that's the message we would deliver very loudly.

Do you still feel the same about the market opportunity?

Almost 60,000 people die every year from colorectal cancer in spite of screening tools and in some cases that's existed over 20 year.

Certainly millions of people do get some kind of screening already, most is in through the only other non-invasive test on the fecal occult blood test that looks for blood in the stool as an indirect marker of the presence of cancer and has a lowest sensitivity of any test on the market.

Even more concerning than its performance, however, is how the test is used.

It has been estimated that at least half of the people screened with the fecal occult blood test are screened as part of a digital retal exam, which has a sensitivity that's been estimated at 5% and has been specifically singled out by the Unites States Preventative Services Task Force as an unacceptable method of screening.

The new drugs on the market to treat late stage colorectal cancer have almost quadrupled triple the cost of therapy but extended survival time is only a few months.

In the current scenarios the need for an effective screening test that patients will use becomes a financial decision as well as a healthcare decision.

That being said we have no illusions about changing physician practice in the short-term.

There is a need for the kind of proof that our studies, guideline acceptance and Medicare inclusion will provide.

However, for those physicians who are screening for colorectal cancer, who recognize that not all their patients can or will get colonoscopies, in fact most won't, the data would suggest that PreGen-Plus is the best alternative.

The American College of Gastroenterology has put a similar statement in its recently published action plan supporting fecal DNA for those refusing colonoscopy.

Who are you working with to make sure you have the best chance for guideline and Medicare inclusion?

We continue to work with such group as the American College of Gastroenterology, the American Gastroenterology Association, The American Cancer Society, The American Academy of Family Practice, The American College of Obstetrics and Gynecology to mention a few.

We do not believe, however, that we should or can sit on the sidelines to wait for these groups to make it happen.

Although it is lustrous to stay visible with these organizations and to keep your leaders up to date with all of our scientific and clinical development, it is also key to build market awareness with practices of vision, consumers, employers and advocacy group as they too can have an influence on guidelines and obviously usage.

We also maintain close contact with the Centers from Medicare and Medicaid services and plan to submit our application for a national coverage decision to include fecal DNA testing as a covered benefit as soon as the multi-center study is published.

We believe we have a solid application with strong clinical, cost effectiveness and compliance data as well as a stellar group of co-requesters.

This does not in sure success but we were doing all we can to increase the odd.

The Medicare population is the most affected by these disease and we believe that we a better way to attack the problem of some very unattractive screening rates in that population.

Again what's available today is just not worthy.

When will you have another version of PreGen-Plus on the market.

Although we continue to make great progress as I reported we still have to validate and so and conduct the study to establish the performance characteristics.

Even though we do not think we need to do the kind of unprecedented multi-center study that we completed for our proof of concept version of PreGen-Plus, we do believe we will have to establish the performance characteristics of any new version.

Even if all goes according to plan it is unlikely that we will have a new version on the market until at least some time in 2006 or 2007.

But we have every reason to try and expedite that process.

I'll turn this last question over to Harry around the burn rate.

The question is do you have enough money to see this through commercialization and what are you doing to conserve cash?

And our present burn rate, we have enough cash to get us through 31 more months, which takes us out to March 2007.

The calculation is based upon the burn rates of the first nine months of 2004.

It ignores the potential positive impact of collections of cash related to product sales and the potential impact of milestones during this timeframe.

It also assumes that we make no changes to our expense levels during this period.

Currently, we are taking a hard look at all of the Company's expenditures and reviewing every expenditure from the perspective of what impact a given expense will have on near term revenue, inclusion in guideline, a positive Medicare decision and improvements in test sensitivity.

We believe it is important to have significant resources available to take advantage of the product catalyst we have been describing.

Thanks Harry.

Now we will open it up for you for your question.

This is operator.

If anyone likes to ask a question, please press "*" and then the number "1" on your telephone keypad.

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

Good morning.

Good Morning, David.

Just to stay with the -- can we just finish it with just on the burn rate, just in the short-term the quarter or next six months, you expect the burn rate to closely approximate the third quarter, are there any specific programs heading in next quarter that could accelerate the burn rate?

I think that were, we are really taking a good hard look at all the expenditures now.

We have identified some ways to conserve cash in the short term, and I think that the third quarter burn rate is a good indicator of the short term future.

Okay fair enough.

Don can you give me some review here what specifically was the sample handling in the MCS trial versus what specifically is the sample handling with LabCorp and why you are so confident that the issue is not repeatable?

Well let me start with LabCorp, my experience in the lab business for a while is that a lab companies are rigorous about their collection techniques and if you read the sample handling protocol for PreGen-Plus with LabCorp and know in how closely people follow that, the facts are that the samples would be handled in a different way, they would be cooed more quickly, they actually get into the system more quickly than we probably had been into our own system with the multi-center study.

What we discovered from the multi-center study, David, is that there was a certainly a time lag between -- we don't know what the time lag between -- in either case between the time somebody defecates and they get it to the physician's office or the patient service center but we do know that some cases the samples did not get to us as timely as we'd like them to and they probably were not pulled the way they should have been pulled and some other things which I can go with you -- through with you offline if you'd like.

But the facts are that LabCorp does not seem to be seeing the same type of degradation that we saw in the multi-center study.

I wanted to know where I the degradation issue and how does the LabCorp specifically know that there's been this particular degradation, because how they can control the issue being that it's really human error?

How are they tracking the time and obviously multi-center study had very specific rigorous criteria into -- sample and get it to the laboratory, how is LabCorp controlling the patient essentially?

Well, how we are measuring it is really with the performance of the DIA portion of the assay.

We know in our multi-center study as well as the MCI study, the DIA performance has been much lower than what we've seen a across number of other studies, therefore we know that there is degradation in the samples.

To my knowledge right now, we are not seeing the same kind of -- we're seeing a better performance for DIA at LabCorp.

And that's the measurement we're using right now.

In addition to that, they really do have a more rigorous, in my experience, process of collecting samples, simply because it's not just our samples they are collecting, they collect final fluid and a number of rather very sensitive type samples and you're just more rigorous about it, that's the business they are in.

Okay.

In terms of barriers, Don, if you go back two years ago there were certain barriers you felt that were going to be barriers to market adoption, now looking today 2 years later with the stage you are in the launch right now, what are the barriers to adoption and how have they changed?

I don't know that they've change a lot, David.

There is obviously something that we've learned more about as we've moved along; one of them is just a noise in the marketplace.

You are out there a lot so you probably see this too, but if you going to division offices right now, the pharmaceutical companies are there in such large numbers that it's kind of hard to get through to a clear message to the doctor.

The good news is that when we make calls and -- I was out two-three weeks ago for five days making calls, we typically get a pretty long time with divisions -- 15-30 minutes which is not my experience when I was a pharmaceutical rep for sure.

So we get a lot of time with the doctor but as soon as we leave there area number of other companies banging on the door trying to talk about their own products and I think that's one of the things that we have got to find a way to get through this is just the noise level.

The other barriers I think have always been there.

There is this impression by a number of physicians that patients do get colonoscopy, the data suggest as you know that most patients never get a colonoscopy and the bigger data suggest that 57,000 people die each year, so we know people are not getting screened the they need to be screened, so the biggest barrier I have seen is that is not new but it has certainly become real for me recently was just the noise level in the physician's office -- a busy physician's office.

Okay.

Just one last quick financial question.

Effipure sales or product revenue were down -- had negative gross profit.

Can you just talk of what's driving that and specifically the relationship between product revenue and royalty revenue?

Sure I guess I will take this last part of your question first.

The royalty revenue is basically the amortization of the upfront payments that LabCorp made, so they are amortized based on time -- time of the exclusive period that LabCorp has to deliver the test.

The product revenue number is somewhat choppy because of the process that we go through to recognize revenue in -- LabCorp essentially builds the customer and goes through that process, and depending on what kind of customer, their payment history can run all the way out to 50 plus days, sometimes 70-80 days, and then they pay us after that.

So, we're still recognizing revenue on essentially a cash basis because we're not able yet to predict who's going to get reimbursed, and how much they are going to get reimbursed in the whole process of collecting that revenue through LabCorp.

As time goes on and we have more history there will be more predictability and there will be a more transparent process.

Can there be a build of Effipure at LabCorp??

I'm sorry, could you say that again.

Obviously -- we know that royalty revenues recognized on a time basis or a cash basis, but the only reason Effipure group could lag would be if you were to shift certain products to LabCorp and they were simply were not going to get recognize on a cash basis and royalty, do you create a negative gross profit?

I'm sorry, I misunderstood your question.

As far as the negative gross profits for Effipure in this quarter, it relates to an inventory write off that we had.

We wrote off some inventory that became obsolete because it has a given shelf life, and essentially the issue is that we buy some of the components from third parties and then sell them to LabCorp and in this quarter we did write off some of that inventory and that's probably going to be an ongoing issue that we're going to have to focus on until we get more visibility and can forecast the number of units more accurately.

Because it's been a related in this particular quarter, you saw declining volumes, some part -- in the mid part of the quarter or end part of the quarter, so shipped product to LabCorp, they did not basically perform any test and therefore the inventory had be written off?

No, is actually inventory that we maintain here in anticipation of shipments for LabCorp, and we have third party vendors that are producing components of this inventory for us, and it's really the process of balancing the shelf life of those components rather than it getting backed up at LabCorp in any way.

Okay, thank you very much.

David one thing I did -- I should have mentioned to is that the Tony and his group are doing other experiments on the absolute optimal way to handle these samples going forward, which would mean -- will have an important meaning for us as we go forward and we will keep updating people as we move along with that.

There is more to come on this sample degradation issue.

Okay.

The next question comes from Lee Brown (phonetic) of Merrill Lynch.

Hi, good morning everyone.

How are you?

Good morning Lee.

Hi, Lee.

Just want to follow-up with that gross margin question so is this going to possibly be a recurring of that where as you better understand your inventory levels until you learn more about that process you might have negative variance with respect to Effipure going forward?

I think it's possible -- it's clearly an issue of managing the level of inventories through our vendors and through the LabCorp.

And so that given that there is an -- there is a shelf life on some of these components, we are going to how to manage it very carefully going forward.

It is something that we are heavily focused on but until the volumes get larger it's going to be difficult balance those inventory needs because we have to give some of the vendors minimum levels of commitments for them to produce these components.

Okay and the second -- I am sorry go ahead.

That was it.

Okay just a little reverb there, I am sorry.

Secondly on the cash collection, it appears that you've collected on just 900 to a 1000 test year-to-date of this 3300 plus, and I was just wondering if you develop a better sense for cash collections, and how much -- how many tests are older than 270 days?

I don't have the numbers of half of the aging of those receivables, but I wouldn't -- I don't think we've seen any indication that to-date reimbursement has been a problem, that LabCorp is getting reimbursed at a very high rate for this test and I think it's more a timing issue of that working through the various billing systems at LabCorp and then being reported to us rather than a collection issue.

I understand that.

I guess what I am just trying to better understand is obviously our pro forma numbers advance with the sales ramp that becomes increasingly important, maybe not so much at present but it is increasingly important as we go forward to better understand how much of that sales ramp is going to translate into cash on hand, and so at present it looks like you're collecting anywhere between 25-30%, and hopefully that's going to ramp considerably, but I was wondering what your feedback is on that?

Yeah.

I think we would expect that it's going to be much higher than the 25-35%, and from what we've seen on the reimbursement statistics it is much higher than that already.

But again I think it's difficult to model and have transparency because of this time lag and various payment sources.

Okay.

Thank you.

Once again if you would like to ask a question, please press "*" then the number "1" on your telephone keypad.

The next question is from Michael Miscoff (phonetic) of MRM Capital.

Regarding first of all your shares outstanding this quarter it seem like it went down a million from last quarter, how did that happen, fell on 25 million versus 26,081]?

Shares outstanding for this quarter are 26.38.

That's just the weighted average calculations so that because the shares won't have -- they were -- all the shares were outstanding for the third quarter they haven't been outstanding for the full 9 months because they were issued in February, so the calculation is based essentially on an average outstanding during those two different time periods.

Okay, so it's 26138

Yes.

Regarding -- in your press release you talk about the Company expects a paper describing a positive impact of PreGen-Plus will be published in the first quarter of '05.

Can you tell me where you expect that paper to be published?

No we can't.

We just -- we have a policy of not revealing that.

Okay.

And a regular FOBT price versus your PreGen-Plus what is the cost for each?

Well imagine fecal occult blood ranging anywhere from $5 to $30 and our test is built out at 7.95 and being reimbursed from either that price or some slight discount from that.

Okay.

Last question people may be concerned with the cash levels but you still have many years to go before you would run out of cash and I am sure things will happen in between that will make things settle out.

I would wonder if you guys would step up to the plate and have some insider buying across the board by insiders, Directors -- what have you to show a lot of confidence because down at these levels when you're trading that cash per share I just think that the stock prices is ridiculous but I guess other people are waiting for certain things to happen.

So I just wanted you to comment if you guys aren't stepping up -- I know you may own a lot of stock, but at these levels it's got to be a sure confidence to Wall Street -- at least I would hope so.

Michael, I understand the point there.

I guess the only thing I can say right now there are many times during the year when management cannot buy for various reasons.

We have a very conservative trading policy and I can probably talk to you about it better off line somewhere.

Okay.

Point receive but.

Okay.

Thank you.

Thank you.

At this time there are no further no question.

Thank you very much everyone.

Thank you.

This concludes today's Exact Science Third Quarter Conference Call.

You may now disconnect.