Exact Sciences Corp (EXAS) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2006 EXACT Sciences Corporation earnings conference call. My name is Menoshia, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of today's presentation. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Jeffrey Luber, General Counsel. Please proceed, sir.

Thank you. Good morning, everyone. Before I turn the call over to Don Hardison, EXACT Sciences President and CEO, I want to remind you that certain matters we will discuss today, including our expectations regarding our business and financial outlook, the performance and commercial strategies relating to our technologies and our and LabCorp's compliance with FDA requirements, future expenses and capital requirements and product development strategies consist of forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Words, such as expects, intends, believes and similar expressions identify forward-looking statements. Listeners are cautioned that forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statement. Any forward-looking statements we make should be considered in light of among others the risks and uncertainties contained in our periodic reports filed with the SEC.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. We undertake no obligation to update or revise the information provided in this call, whether it's the result of new information, future events, or circumstances or otherwise. I will now turn the call over to Don Hardison.

Thanks, Jeff, and good morning, everyone. The highlight of the first quarter of 2006 was the very good news that two of our research abstracts were accepted at the Digestive Disease Week meeting scheduled for May 21 through 25 in Los Angeles. These abstracts convey important information regarding the efficacy of stool DNA testing.

In the more notable of these two abstracts, Dr. [Stephen Hiskowitz], the principal investigator for Mount Sinai Medical Center in New York City, and his co-authors describe the results of a blinded multicenter study that tested a new formulation of our technology on 122 patients without colorectal cancer and 40 patients with colorectal cancer. This new version detected 88% of the colorectal cancers. As you probably know, 88% sensitivity is very close to the sensitivity that has been reported for colonoscopy.

Also, to remind you, that 40 cancer patients in this most recent study represent more cancer samples than we had in our multicenter study that was published in the New England Journal of Medicine. In the New England Journal of Medicine study, we ended up with 31 samples from asymptomatic patients. The Hiskowitz study, which has been submitted to a peer review journal, analyzed the patients' stool samples with the present PreGen-Plus marker set offered by LabCorp, as well as with a number of other market formulations that we wanted to study.

There are a few very important takeaways from this study. First, the high sensitivity was obtained by a new marker formulation, which only includes two markers, which is much less complex than the present version of PreGen-Plus, which has 23 markers. The two tumor markers were our proprietary long DNA marker that we called DIA and an aberrant methylation of the [vimitten] gene, a methylation marker for which we have an exclusive license from Case Western Reserve University School of Medicine. Second, DIA performed very well by itself and in combination with the other markers. In fact, DIA alone had 65% sensitivity in this study.

As you may remember, historically, DIA has been our most informative marker. However, in the New England Journal of Medicine multicenter study published in 2004, we didn't see the kind of sensitivity we were used to seeing with DIA. We later discovered that this much decreased performance was caused by sample handling that resulted in sample degradation. We subsequently published a paper in September of 2005 that described both the phenomena of degradation and the way to minimize it through the addition of a proprietary buffer to a sample.

All of the samples in the Hiskowitz study were collected with buffer, and the improved DIA results of this study I believe speak for themselves. The addition of the methylated [bimitten] marker also added substantially to the high sensitivity in the current study. In our view, the resulting specificity of 82%, as seen in this study when coupled with a very high sensitivity and a noninvasive test is precisely what is needed in the United States to raise screening rates and bring more mortality down.

In this country, we are at best only four out of every ten people are getting screened for colorectal cancer. The high sensitivity we have now achieved in a noninvasive test can give a very informative answer as to whether someone is experiencing molecular changes associated with colorectal cancer.

So, for example, if you had this test and it came back negative, you most likely are truly negative. If the test came back positive and you proceeded to colonoscopy and are found to be negative, you simply got the colonoscopy that many physicians would have wanted you to get any way. We believe that the high level of sensitivity seen in this study delivers the high negative predictive value that physicians want. We believe this type of highly-sensitive, noninvasive assay would most likely be preferred by patients and therefore could take people out of the long waiting line of colonoscopy. The result is that colonoscopy -- the result of that capacity could be freed up for colonoscopies for those who really need them.

From a third-party payer standpoint, we believe that this will also be acceptable as instead of potentially paying for screening colonoscopies on 100% of their patients to find 90 to 95% of the colorectal cancers, with a test that has 88% sensitivity and 82% specificity, they would only be paying for colonoscopies on 18% of patients to find 88% of colorectal cancers. The final piece of information is that the marker set used in LabCorp's PreGen-Plus commercial test version with Effipure, and this study had sensitivity of 72% when tested against the stool samples collected with buffer.

While we were pleased with the results in this study, we're continuing to work to validate other improvements in the technology with the objective that LabCorp could offer an even better commercial version going forward. I don't have a precise timing on when a new commercial version will occur, but getting the best test possible on the market is an obvious priority for us.

The next step [striker] was accepted for DDW again with Dr. Stephen Hiskowitz as principal investigator, describes a tissue study with the objective of determining if a panel of markers could detect alterations in colon cancers, arising in patients with ulcerative colitis. Ulcerative colitis related carcinogenesis is a major problem as many of the patients with colitis ultimately do develop colon cancer. In this study, the marker set selected produced sensitivity of 44%.

Clearly a great deal of work needs to be done in this area, but there is a real medical need for a noninvasive adjunct to colonoscopy in these patients. A noninvasive assay might be developed to supplement what is being done today to monitor and diagnose these patients. It further reiterates the potential breadth of applications for our technologies beyond screening for colorectal cancer.

There is also an additional abstract of interest that was accepted for the Digestive Disease Week meeting that you should know about. This one reported new data from a cost-effectiveness model by Dr. [Urie Litelbaum] of the University of California at San Francisco. It was a reappraisal of stool DNA testing in light of the evolving test performance characteristics reported by Dr. Hiskowitz with a new formulation of the technology. It also considers the ever-increasing cost of treating patients with colorectal cancer as a result of the use of new drugs, such as Avastin and Erbitux.

Dr. Litelbaum and his co-authors have developed a well-documented and well-published cost model. By using inputs in this model that reflect the increased sensitivity that can be achieved with the new markers described by Dr. Hiskowitz and the abstract I described a few minutes ago, the office concluded that a stool DNA assay with even 82% sensitivity and 82% specificity would result in a cost-effectiveness ratio of $13,000 per quality adjusted light-year save versus no screening.

Remember, that a technology is generally deemed cost-effective when it is under $50,000 per quality adjusted life year saved. This is the kind of well-documented cost-effectiveness information that we will provide for any guidelines deliberation, in which we also believe will be important in our discussions with payers and self-insured employers.

Digestive Disease Week will be an exciting venue for us, as this new data is rolled out to the gastroenterology community. We look forward to update you on our progress as we move forward on this better version of the technology.

I say this while proudly noting that LabCorp's PreGen-Plus test using the currently available technology has already gotten several thousand people, who had heretofore refused be screened -- into a screening program and has already potentially saved a number of lives as a result.

On the commercial side of the business, we continue our focus on payers self-insured employers, technology assessment groups and anyone that we believe can influence a positive outcome from the upcoming guidelines meeting. If we are successful in getting stool DNA technology in the guidelines, we want to try and have the most impact possible as quickly as possible. We believe that that will come through positive payer decisions from payers and policy decisions from payers and new offerings by employers. Our objective is to ease the way for the LabCorp sales organization.

Now, as far as the guidelines, we continue to believe there will be a meeting by midyear. We're doing all we can to give ourselves the best chance for a positive outcome in that process. While the delay in convening a meeting has been very frustrating for us and for you, it has given us more opportunities to publish information that we believe strengthens the case for inclusion of stool-based DNA testing.

To update you on the regulatory front, we believe that LabCorp is making progress on the issues raised by the FDA in their January letter to LabCorp. We believe that LabCorp has made a very reasoned response to the FDA issues, and we remain encouraged.

So, all in all, I'm very pleased with our research results and remain confident and excited about the next few months as we work on both validating our technology for a potential new assay and working toward the potential guideline inclusion. Now, I'm going to turn it over for to Jeff for his report, and then we will answer any of your questions.

Thanks, Don. As some of you know, for several years, I have served in the role of General Counsel for EXACT Sciences. As I will also be assuming the role of Chief Financial Officer after the filing of our upcoming 10-Q for this quarter, I will be providing the financial update today. For the quarter ended March 31, 2006, the Company generated a net loss of $4.2 million or $0.16 per share. This compares to a net loss of 4.6 million or $0.17 per share for the quarter ended March 31, 2005.

The decline in the net loss for Q1 2006 as compared to Q1 2005 was the result of reductions in our research and development expenses and reductions in sales and marketing expenses as well as the fact that the quarter ended March 31, 2005, included $600,000 in restructuring charges.

As you may recall, during Q1 of 2005, we decided to focus our R&D group on improving the performance of our stool-based colorectal cancer screening technology. We reduced our headcount and cost structure accordingly, resulting in the restructuring charge just mentioned. In addition, during Q1 2006, we reduced our sales and marketing spending. These reductions reflect a focus on spending, primarily on those initiatives that support technology improvement and the pursuit of guidelines inclusion.

These decreases in operating expenses were offset by an increase of approximately $1 million in non-cash stock-based compensation expense recorded in Q1 2006 as a result of the adoption of FAS 123R, the new accounting standard that requires us to record the fair value of our stock options and other stock-based awards in our P&L, effective January 1, 2006. As a reminder, this million dollars is a charge to expense but not a use of cash. In addition, included in the cost of product revenue for the quarter ended March 31, 2006 were charges of $547,000 recorded in connection with write-offs of excess Effipure inventory. LabCorp recently informed the FDA that they are working on changes to PreGen-Plus that will eliminate the use of Effipure in 2006. As a result of this decision, we wrote off Effipure inventory units that we do not expect will be used by LabCorp.

Our cash, cash equivalents, and marketable securities balance at the end of Q1 2006 was approximately $29.8 million. Our expectation is that at our current level of operations, our cash will last through the end of 2007. This projection assumes no revenue or milestone payments from LabCorp. Until we have clarity on the FDA regulatory front, and a decision on the inclusion of fecal-based DNA testing for colorectal cancer in screening guidelines, we do not believe it is possible to accurately predict the level of changes to our operations or capital requirements that may be necessary in the future. We have some flexibility to adjust our spending levels as the FDA and guideline status become clear. But, material cash outlays relating to these events could shorten the December 2007 cash projection I mentioned previously.

This concludes our formal comments. I would now like to open the call to questions.

(Operator Instructions). Victor Gezunterman.

What do you think caused the sequential volume decline in the quarter? Was that a seasonal change or maybe it's related to the FDA inquiry?

That's a great question. I think it's probably the latter. I think this FDA question caused all of us to kind of step back and think about how the product was being promoted and we just to be -- I think LabCorp wanted to be very careful about it. I mean, it's certainly much higher than what we saw the same quarter last year. But, as you indicated, it's certainly down from the fourth quarter of which we're not happy about that. But, I think it's probably caused by this FDA issue.

Then as far as the Effipure inventory write off, can you give us a little more color on that?

Sure. As you know, Effipure -- we have reserved for Effipure for levels above which we expect the LabCorp to use Effipure going forward. In connection with the discussions LabCorp has been having with FDA, they have made some decisions regarding Effipure that they believe will no longer require them to use Effipure at the end of '06. In connection with that, we have written off those amounts that we don't believe LabCorp is going to use beyond that point.

So, just to understand this better, so basically LabCorp will not use Effipure on a go-forward basis because of the FDA issue.

That's what they have notified the FDA of. They are currently working on changes to the assay to find a replacement for Effipure.

Okay this makes sense. I was also wondering if you could guys kind of update us, how you play into market the new data recently. Just describe a little more of the abstract that's in Digestive Week.

Can you be a little more specific about marking the data? I want to make sure I answer your question.

Well, how are you going to go about marketing the new information? Obviously, it's very exciting.

Yes, well, what we hoped, the reason we haven't talked about it more is we made a press announcement back in January, where we indicated that we had a new formulation that generated sensitivities in the 80s and this is that data. It has actually came out to at 88%. We didn't want to talk about it a whole lot because first of all, we wanted to wait and see if they got accepted at Digestive Disease Week. Second of all, we are trying to utilize the Digestive Disease Week meeting in May as an event. So, our people are working to try to get -- make a reasonably big splash around it associated with Digestive Disease Week, which is only less than a month away. So, part of that May 21 to 25th meeting will be used to talk about this data. When it is finally published in a peer review journal, we will do more with it. Obviously, when a new test is offered by LabCorp using this technology, we will make another PR splash around this.

For your guidelines related to the meeting, which I think you mentioned is going to be held sometime midyear, will this data play a role in that as well?

Yes, it certainly will. We've been told that any data that we have that's been accepted into either meetings or presented at meetings or published in peer review journals is used as part of the evidence to for them to consider as to whether a stool-based DNA technology should be in guidelines. So, we are very excited that this data is out now. When you see the success it has, that kind of technology that has that kind of sensitivity -- and it really is close to that of a colonoscopy -- you have to believe that will be influential.

Maybe the last question. I know you guys didn't want to talk about it, but can you give us some very rough idea as to what the new timeline is for the -- not the new but the timeline is for the new generation PreGen-Plus product?

You know, we don't. We would love to be able to talk about it more. But, honestly, that's a discussion we need to have -- we are having with LabCorp and all I can say is that both companies want to get a good test on the market. The best test we possibly can on the market during the time we have this contract. So, we will have more to say about that in the future.

Larry Litton.

First of all, without the Effipure, what happens to the sensitivity of the test?

Well, we don't know right now. We have been working on a new kind of son of Effipure that actually is able to isolate even more DNA from stool and that's one of the possibilities as a replacement for Effipure. So, our goal is to certainly not lose any sensitivity as a result of whether Effipure is in the assay or not. We just don't have an answer for that yet.

What would it be about the substitute that the FDA would except that when they are upset about the current technology?

Well, it could be, and I can't -- I don't know if this is totally the way it would happen. But, we believe that the new formulation we are working on looks more like what we think the FDA would consider a homebrew, but we don't have an answer for that yet.

I was going to ask the same question that was asked previously, but I will ask it a slightly different way. In terms of the new test timing, was your goal to be to have a new test on the market this calendar year or next calendar year?

Well I mean our preference would be to have it this calendar year, but I can't tell you that's going to happen yet. We're still working on some validations. LabCorp certainly has some things they want to look at as part of this. But, when you start talking about a test that has this kind of sensitivity, it's only two markets markers, which is a much simpler test to run than the one they are running today. You have to believe that both companies have a desire to get this out there.

But, do you have a road map that certainly could get a new test on the market this year, or you don't have that road map?

We do. It depends on what other clinical work might need to be done with the assay. But, I believe yes, we could get it on the market this year. But, in the end, it's LabCorp, who is going to be offering the test though. It's really something we were discussing with them.

If I went to the doctor today, what's the possibilities as to what the price would be for this test today?

Well, the list price that LabCorp has is $495. What happens though is that your payer probably has a contract with LabCorp that may reimburse for something less than that. What's been happening to our knowledge is, most patients may have some co-pay, like they would with any other test. But, lots of patients -- in fact, most patients, it seems are not having to pay anything as long as they have insurance coverage with a company that has a contract with LabCorp.

But, could you quote me some of the reimbursement rates for the larger insurance companies -- HMOs?

Well, I think there is a range that goes from anywhere from 400 on up.

Okay, so 400 to 500 more less.

I think that over time, that has a likelihood of coming down. The reason I say that is historically with lab tests, reimbursements have always come down a bit. So, this is a test -- when you think about that 400 to $500 number we're talking about -- this is a test you wouldn't get every year. This is something you should get probably every 3 to 5 years.

Now, aside from the evolutionary dynamic of a decreasing price, if and when the new test gets on the market, which is much simpler order of magnitude, what is the cost savings? What would be the price savings? Are we talking about slicing the price by 20 or 30% or possibly 50% or more?

Well, we haven't gotten to that discussion. That's really going to be -- when LabCorp offers the test, that will be their decision. I have a vested interest I believe in valued pricing. I think a test like this with the kind of sensitivity we're talking about is not competing against [fecal or cold blood]. It's really a test that people can clearly say I either want this test or a colonoscopy. That would be the goal.

In terms of the cost of doing -- the cost of the lab procedure, could that drop?

That could drop significantly. I don't want to quote you a number here, but it could drop significantly.

(Operator Instructions). Larry Litton.

One more question occurred to me. Again, I realize it's an incredibly indeterminate process, but the FDA steps and milestones, what is that and what is possible there in terms of full resolution? What do they need and when are the next meetings and how does that work?

Larry, I don't want to be evasive, but this is a discussion that LabCorp is having with the FDA and I don't want to talk too much about what they may be doing. All I can say to you is they have had correspondence with the FDA. They've made a proposal to the FDA that I think hopefully meets the FDA's concerns. The good news is the test is on the market being offered. So if there was any change in that, you would know about it immediately. The fact that there's not I think is indicative that the FDA and LabCorp are working well together on this. I hope it's the resolve in the very near-term, but I don't have a timing on that.

My last timing question, you said upcoming guidelines meeting by midyear. We're getting very close to that. Is this a secret society that you don't find out about this until 6 hours before the meetings? Wouldn't we know about a meeting that is formally planned at this point?

We've been told that there's going to be a meeting. We probably shouldn't say anymore than that about it. We have been told there will be a meeting by midyear. You are right; midyear is almost here. So, we're pretty confident there's going to be one. We've been spending a great deal of our time trying to influence the convening of that meeting and now that we know there's going to be one or have been told there's going to be one, most of our efforts have been around providing as much data and information as we can to anyone that we may think may be either involved with the meeting or influential to people who are involved with the meeting, including working with advocacy groups and local chapters of the American Cancer Society or anyone else who could be an advocate for our kind of technology being offered as one of the options for screening guidelines.

Remember, all we're trying to do is be another option. We had a study that was done recently that was interesting. A group called Harris surveyed 1,200 people out there and found out that maybe one out of four people are being screened on a regular basis for colon cancer. Most people are not being screened because they don't want to have a colonoscopy. They are not being -- screening is not being discussed with them.

When you look at the reasons why they don't want to get colonoscopies, it's because it's invasive and you have to do the bowel prep and all the other things. You don't have to do any of that with our kind of technology. Also, people said in this survey that they were 3.5 times more likely to be screened if screening did not require some kind of bowel prep and 3 times more likely to be screened if the test is noninvasive. So, things like that we believe we want to make sure people see that information because we believe that our test is the second-best test out there to colonoscopy.

Just so I understand, with the guidelines meeting though, is that basically a private meeting effectively, or does it eventually formally get announced and people are aware of it?

It formally -- it's a fairly private group. You won't see any press announcement going out that they are convening this meeting. But, they will get together again we think before -- by midyear. What typically happens as a result of that is -- it's not the day after but sometime after that meeting, new guidelines are published if there's a change in the guidelines.

So, it's a process. The first step in that process is to have this meeting, which they have not had in quite a while now. The reason for that is because there has not been anything new for colorectal cancer screening in quite some time until we came along. Then right after us, virtual colonoscopy came along. So, there's just been no real need to get together on a regular basis to consider new technologies.

It's not like an FDA review group, where everybody kind of knows the date and it's a public meeting and all that. That's not the way it's done. That's been part of our challenge in communicating these things to our investors. We can't say a lot about it. Sometimes, we know more than we can say but we also don't want to inhibit a meeting in any way.

Lastly, I recognize you have a great collection of data for that meeting. But, is there anything else going on right now that is significant from a research standpoint or future publication standpoint studies that are taking place that we could look forward to or are we kind of done with that?

No, we actually have some interesting things that we are either working on -- I can't talk about them yet. Also, we're pursuing some very interesting collaborations that we hope we are able to talk about sometime in the not-too-distant future that I think are going to be -- could be very important to us.

Could there be additional significant incremental meetings for the guidelines meeting at this juncture or basically they have their portfolio of information?

They should have most of the information, the vast majority of the information they are going to have about us. We continue to try and collect information from the commercial version of the assay. In other words, we try to find out people who have gotten positive results from our test and fallen trying to get permission to call their gastroenterologists to see what happened when that patient got a colonoscopy. Now, some of that work has already been published.

Dr. Barry Berger on our staff and Dr. Myla Goldman from LabCorp and others published a study not too long ago on that data. So, it's almost like a Phase IV study. We continue to pursue that because it's nice to have all these research studies. But, we want to show how this test and LabCorp's offering works in real life. What's happening, it is catching cancers in people who had refused to be screened. You have a number of case studies that we're pursuing where patients have called us and told us they do not want to be screened. They got our test. They were positive on our test. They got a colonoscopy, and they were found to have cancer.

A propos that, there are a number of people who are positive on PreGen and then negative with a colonoscopy. What is the interpretation of that?

Generally what would happen in that situation is, the patient probably would be followed more closely over the next few years just to make sure that it really was a negative. Because, remember, we are picking up molecular changes with our assay, the assay LabCorp's offering today and a colonoscopy is not 100% sensitive. It's somewhere between probably in various reports 85 to 95% sensitive. So, it's limited by how good the colonoscopist is. It's limited by how good the bowel prep was the night before. It's limited by the patient's ability to tolerate the procedure. It's a number of factors that go into how well the colonoscopy is done. So, we could be picking up something that a colonoscopy could actually miss theoretically.

No, but I understand that, but is that the interpretation that you are actually picking up a cancer that is being missed or you are picking up a cancer that is not a cancer.

Well I think what would happen is somebody would just call it a false. In our test and our studies, we call it a false positive. Whether it is or not, we call it a false positive. Because you're only going what the colonoscopist report says. But I think in the case of those people who have been negative on the colo, they would be asked to be tested on a more regular basis until they were sure that it was not cancer.

But, as we get more Phase IV information, it may turn out that there are no false positives.

Well, I think there will always be some false positives. But, the thing that the medical societies would like for all of us to do if you are over 50 is to get a colonoscopy. Unfortunately, the data suggests most of us will never do that.

Well if the false positive has been retested with PreGen and they continue to be positive, or do they turn up negative when they are retested?

I don't think we've had any data on that.

Victor Gezunterman.

Just a quick follow-up. What is the progress you guys are making with your application to Medicare for [LCD]?

Victor, that application is kind of being held up right now because it's being held up waiting for this FDA issue to be resolved. The reason the FDA issue came up was because CMS when we applied to Medicare asked for the regulatory status of the assay for the technology. We petitioned the FDA to give us an answer to that, and that's when they sent a letter to LabCorp. So, we're hoping when this FDA issue is resolved with LabCorp and the FDA, then CMS would then deem the application complete and the process could start. Now, I can't tell you that CMS will not have more questions. But, that's the hold up right now.

Once that application is complete, how long will it take CMS to review the application?

Well, the law says 9 months. But I don't think there's been a lot of -- the new Medicare law says 9 months. I don't know that there are a lot of test cases yet that indicate how long it would take. So, I would say it's probably a minimum of 9 months knowing how CMS probably might work. However, when we do get word that our application is complete, believe me, we will be putting on a full court press with everybody we know to try to make that process go as quickly as possible.

Gentlemen, you have no further questions at this time.

Thanks a lot for joining us. Please give us a call if you have any questions.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Everyone, have a wonderful day.