Exact Sciences Corp (EXAS) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2005 EXACT Sciences Corporation earnings conference call.

My name is Jackie and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Harry Wilcox, CFO.

You may go ahead, sir.

Thank you.

Before we start, I'd 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 the Company's most recent Forms 10-K and subsequent filings.

Now I'll turn the call over to Don Hardison.

Thank you for joining us today.

I'm going to give you a state of the business then turn it over to Harry for a discussion of the financials.

And after Harry's remarks, we will glad to answer any questions you have.

Although we were happy to see our volume grow 19% in the second quarter versus the first, we are obviously not satisfied with the absolute number of tests sold in the quarter.

After the completion of and the evaluation of a number of sales experiments followed by several rounds of discussions with LabCorp management, both companies decided on a number of steps designed to help address the volume issue.

Let me be clear, while I believe the following changes are important for us to make, I also do not expect to see materially higher test volumes until PreGen-Plus is included in screening guidelines.

As I'm sure many of you are aware, virtually all diagnostic products have their own set of market catalysts that are preconditions to sales ramp, so this phenomenon is not unique to us.

In terms of the immediate steps, independent of guidelines, designed to help sales, last week, LabCorp announced a significant price decrease and the national rollout of a Medical Services Organization, which we call PreGen Cares, which has been shown to positively impact screening compliance.

We have also worked with LabCorp to simplify the sales message.

All of these steps are very important in my view in helping to remove sales barriers.

Another important event that will help remove sales barriers in my view is positive policy decisions by major payers, including Medicare.

As you know, we along with various advocacy groups and medical thought leaders submitted an application to CMS in December asking for stool-based DNA testing to be a covered benefit.

The application for a national coverage determination from CMS has not yet been deemed complete, as we have received a request for further information from CMS.

We have already responded to this request and although I will not go into the specifics of their request, you should know that we will work as quickly as possible to answer their questions and to get our application accepted.

We will, of course, let you know as soon as our application has been accepted.

That's when the clock starts for the review of the application, which we understand should take nine months.

In the meantime, we continue to receive positive confirmation that our technology meets a real need.

As evidence of that, we were pleased that we were notified last week that all four of our abstracts that we submitted to the upcoming American College of Gastroenterology meeting were accepted.

This is important because guideline writers typically base their decision on evidence.

Three of these abstracts show that the current test on the market today is saving lives, is a test that people are more likely to actually use, and that when coupled with a screening support system, PreGen Cares compliance rates improve even further.

This is information that we believe will be very hard to ignore, specifically, the first abstract is really on the clinical experience to date, which concludes that the commercial version of PreGen-Plus is detecting the approximate number of cancers that we would expect from an assay that with sensitivity of 65 to 70% when patient samples and follow-up colonoscopies are evaluated.

In other words, LabCorp is catching cancers with a commercial assay that are being confirmed by follow-up colonoscopies.

This is an extremely important point.

Most of these patients have never been screened before and yet, by using PreGen-Plus, their cancers are being detected and their lives likely saved.

The second abstract is patient experience with PreGen-Plus, which has been favorable.

These data include 1200 patients that have been surveyed to determine their experience with the commercial assay.

The vast majority of patients find the experience easy or very easy and 53% have never been screened before. 92% will likely or very likely use the test again if recommended by their physician.

Again, with more than 40 million people in America never having been screened before, the importance of this aspect cannot, in my view, be overstated.

There is a need for screening options that people will actually use.

PreGen-Plus is based on this abstract and other information of that kind of test.

The third abstract is the pilot Medical Services Organization results.

This pilot indicates that there was a significant increase in patient compliance following the implementation of a targeted patient compliance program.

This is the PreGen Cares program that is being rolled out nationally.

We believe that each of these abstracts further strengthen our case with all of our constituents, including practicing physicians, those responsible for guidelines, and the payer organizations.

If the objective is to get more people screened, then we believe that these abstracts add to our impressive body of data that suggest the stool-based DNA test has a significant role in making that happen.

We are in the process of combining the data from these three abstracts into a robust clinical experience paper that we will submit to a peer-reviewed medical journal in the next 30 days.

The fourth abstract that was accepted importantly validates our future direction.

First some background.

We have repeatedly made the case that because the analyte for PreGen-Plus is DNA, we know that by adding new markers and/or modifying the chemistries provide a pathway for improved performance.

This combined with our continuing efforts to find ways to isolate more DNA from a sample provide a great opportunity to help push the sensitivity for non-invasive colorectal cancer detection even higher.

As LabCorp indicated on their call, they are interested in investing in the research to help support the next version of the assay.

Higher sensitivity for colorectal cancer detection is exciting in itself, but what is potentially even more exciting is that the data that was in the research abstract that was accepted at the ACG meeting showed the progress that we were making as we move into adenomas or precancers.

We have always believed that catching precancer with a completely non-invasive technology would be the ultimate achievement since an invasive procedure such as colonoscopy is the only way to do that today.

By developing a completely non-invasive technology to do this, we could in effect change the rules of the game.

This is just not our thought, it's the thought of many of the leaders in the colorectal cancer field.

We have been working diligently to develop technology that has potential for higher sensitivity for both early stage cancers and precancers.

As the ACG abstract indicates, we were able to pick up precancer in tissue at a rate of 94% when we used a novel marker formulation and advanced DNA scanning techniques.

That is exciting in itself, but the most important point is that we got this level of pickup with only one-quarter of the markers as previously used.

It's too early to tell what the actual formulation for the newer technologies will turn out to be until an evaluation of sensitivity and assay cost trade-off when these improvements are complete.

Although the next step is to validate these formulations in stool samples, it should be noted that 94% sensitivity in tissue that we observed in these research experiments compared to the 70% sensitivity in tissue that we saw in our earlier technology.

We are excited enough about these findings that we have signed an agreement with the Mayo Clinic to closely collaborate on this important project.

While we have always been proud of our ability to help detect early stage colon cancer, we are equally excited to pursue the next frontier with the Mayo Clinic, where we will look at new marker formulations and technologies designed to better target precancerous adenoma detection in addition to invasive cancer.

Being able to detect both adenomas and invasive cancer is in my view truly the Holy Grail of the prevention and wellness equation.

We will be using the stool bank that has been collected as part of the NCI-sponsored study that we have previously talked about and that Mayo currently leads.

This will allow us to validate these new markets and chemistries for precancer.

So the good news is that we continue to make important scientific progress and expect to have more to report to you toward the end of the year.

These scientific achievements and the promise of the future are exciting, but let me close with a story that occurred last week in one of the LabCorp training sessions that illustrates what we can do right now.

Bob Rochelle, our VP of Sales and Marketing, was presenting to a group of 35 LabCorp sales representatives in Burlington, North Carolina last week.

During a break, a very teary-eyed rep came up to him and gave him a hug.

She then told Bob that she was a breast cancer survivor and had inflammatory bowel disease.

Both put her at higher risk of colorectal cancer.

Colonoscopy is appropriate for, but not always the easiest thing for an IBD sufferer.

Therefore, she asked her physician for PreGen-Plus.

The physician ordered the test and it came back positive.

A follow-up colonoscopy found a late stage polyp.

She believed PreGen-Plus saved her life.

That kind of story and many similar ones that have occurred over the past couple of years are big reasons why we continue to work diligently to have stool-based testing included in screening guidelines.

It's also a reason we will continue to encourage payers to have policy for stool-based DNA testing as part of their colorectal cancer screening programs.

It's also a reason we will continue to work with LabCorp to establish the optimal way to sell this type of testing service.

We continue to believe that this research work is extremely important and if we don't do it, it will just not get done.

We also believe that it is already having a beneficial effect on the lives of real people like the person I just talked about, and has the potential to bring even more people into the screening fold and ultimately create an important business.

Now I'd like to turn it over to Harry to talk about the financials.

Thanks, Don.

Revenue for the second quarter of 2005 was $623,000 after we recorded a onetime non-cash adjustment, which resulted in a reduction of revenue of approximately 630,000.

This compares to revenue of 1.2 million in the same period last year.

For the six months ended June 30th of 2005, revenue was 1.9 million compared to 2.4 million with the same onetime adjustment accounting for the majority of the difference.

The 630,000 reduction in revenue was a onetime non-cash reduction in revenue which reflects the fair value assigned to the extension of the expiration date to August of 2008 of a three-year warrant originally issued to LabCorp in June of 2002.

The warrant allows LabCorp to purchase up to 1 million shares at $16.09 per share.

This accounting treatment is required by EITF 01-09, accounting for consideration given by a vendor to a customer.

Gross profit for the second quarter was also impacted by this adjustment and by a write-off of $96,000 of Effipure inventory.

The inventory write-off was due to the fact that as LabCorp works to reduce the cost of the test, they have determined that the use of certain plates in the DNA integrity assay are no longer necessary so they will stop using these components.

We view this as evidence that LabCorp continues to focus on reducing the cost of the assay.

With regard to operating expenses, we are able to report some progress reducing these expenses.

In the second quarter of 2005, operating expenses have declined to 4.7 million from 5.6 million in the same period last year.

During this quarter, research and development costs decreased by $765,000 or 29%, and general administrative expenses declined $304,000 or 21%.

These declines are only partially offset by an increase in sales and marketing expense of $227,000 or 16%.

The net loss for the second quarter of 2005 was $4 million or $0.15 a share compared to 4.3 million and $0.16 a share last year.

For the first six months of 2005, the net loss was 8.5 million versus 9.6 million last year.

As of the end of the second quarter, cash and short-term investments was $40.5 million.

As we mentioned on our January earnings conference call, we are operating under the basis that this cash will last for three years from the beginning of this year.

We intend to operate the business so that our current cash balances will last through the end of 2007.

I'll now turn the call back over to Don for questions.

If any of you have any questions, Harry and I will be glad to answer those now.

(OPERATOR INSTRUCTIONS).

Lee Brown, Merrill Lynch.

Just curious, in the Q1 call, you had mentioned about pulling three individuals and having them sell directly into LabCorp accounts.

You also had mentioned that you had hired some additional sales people internal to EXACT as opposed to LabCorp personnel.

How much of your testing volume was driven by your own sales force as opposed to LabCorp?

And what are your thoughts?

Well during the sales experiments you're referring to, Lee, our people actually -- I don't remember the precise percentage -- but it was a fairly significant percentage in those areas where they were selling.

But what we still believe is that in spite of the kind of people we hired, which we think are really, really good people, that this idea of having guideline acceptance as an example is a really key catalyst to making the sales process much easier.

What happens in a number of cases is the payers are -- even if they are paying for the test or the doctors are thinking about ordering the test -- guideline inclusion seems to be one of those things that we keep coming back to that is an absolute key to making the process much easier, making it more likely that physicians will order and that payers will establish policy.

So we are reasonably encouraged by what we saw from these sales experiments, but we haven't added any more people right now because we really want to see what happens with this guideline stuff.

No, I understand that, but I guess what I'm driving at is having put your own sales force in place, are you seeing that LabCorp is really kind of lagging in their performance of their duties?

Not really.

We believe that from what we got together with LabCorp on over the last month, that we -- one of the variables we had not looked at was the price change, and as Harry mentioned, LabCorp has found ways to lower the cost of the test and therefore lower (technical difficulty).

And we think that may have helped with physicians, although I think the help may be more, frankly with the guidelines people and the payers.

This Medical Services Organization also was something we were highly committed (ph) at the same time, we found that that really increased compliance.

So we've always thought that we had more demand for the product than we had kits coming back in.

And we proved that through some experiments we did and then we established this Medical Services Organization in some of these pilot areas and we noticed that our compliance rates went up pretty dramatically.

So now we and LabCorp have decided to roll that out nationwide.

You should also know that LabCorp over the past two or three weeks -- Bob Rochelle and some of the LabCorp people have been part of training sessions -- I think they're going to ultimately have 23, where this price decrease, the Medical Services Organization and the simplified messaging are being rolled out to the entire LabCorp sales organization.

So I don't think LabCorp has backed off from this at all.

In actuality, they seem to the even more enthused about trying to do something with it.

Okay, super.

I also just want to follow up on the Blue Shield of California and update post the CTAF (ph) recommendation this past May, what's the latest?

What we know right now, Lee, is that CTAF recommendation went to the foundation board, which is separate from Blue Shield of California, and has now been posted on their Web site, where we passed the criteria.

And as we said before, a lot of technologies never make it that far.

Blue Shield of California itself to our knowledge has not acted upon this in a policy manner yet, although we've been told they continue to pay for the test.

One of the things that we have been told by someone out there is that guideline acceptance has now become important to Blue Shield of California for a screening test such as ours, so we're trying to track down that and make sure that is in fact the case.

But that's why I keep coming back to this idea that guideline conclusion is going to be one of these triggers that really helps us with pay organizations.

And just -- you didn't ask this question, but let me just add one more point to it.

To our knowledge, there are at least 17 states now that require payers licensed in their states to pay for tests that are in the guidelines of the American Cancer Society.

So we keep coming back to this idea that if we can get guidelines, it really helps our whole equation.

You had mentioned that the NCB (ph) filing or acceptance could take place within nine months.

And I realize that you filed that in Q1.

So could we expect a decision within the Q3 timeframe, as well as inclusion in the ACS guidelines by Q3?

No.

I think the -- we can't tell you when the guidelines would be.

But the Medicare thing, once you get an accepted application, by statute, they have nine months to act on it.

I don't want to mislead you and tell you they will do it in nine months, but that's what the statute says.

So we're waiting to get notice that we have a complete application, and then that's when the clock starts on the nine months.

So the earliest it would be is sometime next year, but we can't tell you precisely when.

Just for clarification, when exactly was that filed in Q1?

The national coverage determination application was filed in December of 2004, late December 2004, after the multicenter study publication.

I'm going to get back in the queue, but one last question.

An update on third-party payers and customer base?

The last numbers I had was about 200 third-party payers exiting Q4 and a customer base of 1600.

How has that ramped?

Well, the payer number is up into the high 200's, I believe now -- maybe 270.

I don't have the precise number there.

But again, what LabCorp seems to be experiencing is that when the payers are billed, they normally will pay.

There's not that many payers that have had any outright rejections to our knowledge.

And as far as the number of customers, it's certainly higher than that number now, but we're trying to track that number down too, because what we want to track going forward is not only the new orders, but the number of reorders we're getting from customers.

And we have some systems in place now that we think going forward will make that much easier for us to track and report on.

Okay, thanks, Don.

Thanks, Harry.

(OPERATOR INSTRUCTIONS).

David Lewis, Thomas Weisel Partners.

A couple of quick questions.

I guess, Harry, you mentioned that there are certain components of the DIF (ph) say they are no longer required?

Or did you say the assay was no longer required (multiple speakers)?

No, just certain components.

There used to be four different plates that were used in the assay and now there's two.

Okay.

So we talk about where we want the retail cost of the assay and more specifically, the cost of goods sold in the assay to go over time, so all of these cost efficiencies we continue to talk about, they're all driving to a certain point and I guess what is that economic point?

Where would you like to see this assay one day priced?

Or more importantly, the cost of this assay, where can we get to?

I think that that's a hard question to answer because we don't know what the cost is in LabCorp's hands.

They don't share the specific information with us about what the cost is.

My flip answer is I'd like it to cost as little as possible and I think the goals that we've set internally are for the assay to cost less -- on a cost basis, to be less than $100.

But again, we don't really have a transparency to LabCorp's numbers.

Okay.

But at some point you have to be working with them because Tony is in the lab working on ways of essentially getting to the same sensitivity and specificity or higher with lower markers or less markers.

So I guess what I'm trying to really get at here is when is this going to happen?

And when is this point when we could have a next generation of the assay available that is materially cheaper than the prior version?

Well I would say that the cost -- the price that LabCorp is changing has come down significantly with their announcement of lowering the price on July 1st.

So we view this as a big step down in the price of the assay and our belief is that the cost of the assay has come down significantly too.

David, also, on this next version of the assay, and a lot of this depends on both the sensitivity for cancer and for these precancers I was talking about.

If we just had a higher sensitive test for cancer, I don't know that that changes the price point up any at all.

But if you imagine a non-invasive test that had good adenoma detection as well as improved cancer sensitivity, it does, in my opinion and in the thought leaders I've talked to, changed the rules of the game pretty dramatically because then you are competing against colonoscopy or competing with colonoscopy, and that's a totally different pricing game than trying to show somebody you are better than a fecal or call it blood test and you are the second-best test after colonoscopy.

So there's no, as you know better than most, there's not a lot of history of the price of diagnostic products going up, but if you can change the rules, at least you have a chance to maintain your pricing.

But I personally am pleased with what LabCorp has done on this pricing decrease because it's down 35 to 40% before they do any kind of discounting at all, which I think is really significant.

Now what about the reorder rate?

Obviously, it looked like last quarter, the trend suggested there was not a material reorder rate.

Is there any metrics you can share with us in terms of what happened sequentially to the reorder rate?

Is there some contribution in the increase in volumes that's tied to reorder rate?

Or is this simply all incremental sales?

I think it is, David, and we haven't had a really good system to track that the way we want to, but we understand that there is going to be a way to track that going forward that we can be more forthcoming with that kind of information, because we would be very interested in it.

What we do believe is that in the beginning, we had a lot of doctors who would try the test once or twice and if they had a good experience, they would continue to order.

In the beginning, we had some operational issues that cause the turnaround time to be longer than anybody wanted it to be, and some other issues which caused the experience not to be as good as we like.

And I think what we ended up having to do about this time last year is between EXACT and LabCorp, go out and get a whole new set of orderers, and the performance of the test has been really well.

The turnaround time is exactly the way we have always wanted it to be.

And we feel like there's a totally different product to sell out there today.

So we think reorder rates going forward will be a more meaningful metric than they have in the past because we think we can get doctors to order many times over versus just try it a few times.

But again, I keep coming back to this thing about guidelines.

I don't know where for our product if there is any other catalyst that could occur in the near term that would have as big an effect as potentially guideline inclusion could have.

And I'm basing that on what happened with tests like cystic fibrosis and HPV, and you know all the products that those things happen to.

So our hope is that sometime before the year is over, there will at least be a meeting on guidelines and that we'll have an opportunity to be considered for that.

Okay.

Thank you very much.

(OPERATOR INSTRUCTIONS).

Doug Fisher, Matador Capital.

Just quickly -- perhaps I should know this -- but can you refresh me as to what the cost of the test is currently?

You mentioned it being cut by LabCorp at the beginning of July and how that influences the economics to you.

And also, on this next generation test that's showing the very good sensitivity in tissue samples, you mentioned the higher cost of the assay.

Can you give me any kind of feel, even order of magnitude, how much of a more expensive test that is likely to be relative to the commercial version?

Well let me go first, then Harry can jump in here.

The list price on the present -- on the original assay -- was $795, was the retail price and $595 was the wholesale price.

I think I've got wholesale price right.

LabCorp dropped those prices by approximately 35, 40%.

So that's what the new list prices are.

And then based on the relationship they had with the account and a lot of other things, there is a possibility of a discount further off of that.

How that affects our economics, we've always had -- we've never really given out what we received, but it's been modeled out at around 18, 20%, and we've never argued with that.

So whatever LabCorp is reimbursed, we get approximately that amount back, the 18 to 20%, and there's a floor on it.

In other words, if it gets down to a certain level, we still receive a minimum payment that again has been modified, modeled out at around $55 (ph), but we've never argued with that number either.

As far as the new assay, we don't know what the retail or wholesale price would be, but what we're trying to do is come up with an assay, if we can, that has higher sensitivity for both cancer and much higher sensitivity than we have today for adenomas because we've never really gone after adenomas until now.

And we're hoping to keep the cost of the test, the cost of testing, no more than it is today.

And again, as Harry said a few minutes ago, we're not totally clear on what LabCorp's cost of testing is, but we do know that they are looking at several technologies that they believe can lower the cost of the present assay and then we'll just have to figure out how to also lower the cost in the future of the assay we're working on today.

And again, we haven't proven this out in stool samples yet, but we're really encouraged with what we're seeing.

And tissue cups (ph) is much higher than what we've seen before.

And the PreGen Cares organization, you mentioned the higher compliance rate that you've soon in the pilot studies.

Can you put any numbers around that?

Yes, we have seen in those pilot areas that the compliance went up from let's say 30%, 40% -- somewhere in that ballpark, up until 60%, in some cases, 80%.

So it's at least doubled and in some cases, it depends on what the account -- in some accounts, it's gone up as much as threefold.

So we're encouraged about that because we were having to do that ourselves.

We had a few of our own people making those calls and they were doing that on nights and weekends and now what's going to happen is that a professional organization is going to be engaged to make that happen.

And just lastly, how are the costs associated with that organization going to be split between the two parties?

Well, we're still negotiating that.

Right now, LabCorp is doing the contracting with the third party and I suspect somewhere along the way, we'll chip in too, because we had put aside -- to us, this is a marketing expense that we'd put aside money to look at anyway.

But we haven't worked that totally out yet.

Okay, thank you.

(OPERATOR INSTRUCTIONS).

At this time you have no further questions, so I'll turn the call back over to management for closing comments.

Thanks a lot to everybody joining the call today and if you have any questions, please call Harry or me and we'll be glad to address those.

Thanks a lot.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a good day.