Exact Sciences Corp (EXAS) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second-quarter 2006 EXACT Sciences earnings corp. conference call.

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

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

We will be conducting 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. Don Hardison, President and Chief Executive Officer.

Please proceed, sir.

Thank you.

We are sorry for the delay.

Thank you for joining us on today's call.

I have a few prepared remarks and I will turn it over to Jeff Luber, our CFO, to provide an update on the financials.

After Jeff's report, I will follow with a few anticipated questions that I expect you may have and our responses to those questions.

We will then open up the call to address any additional questions that you might have.

I would also like to point out that any forward-looking statements made during this conference call are based upon current expectations and are subject to change based upon various and important factors that could affect the Company's financial results.

These factors are set forth in detail in our 2005 10-K and subsequent filings.

As you know, in June, we were notified by the colorectal cancer guidelines writers that they now intend to deliberate over the summer, meet again in September and issue their guidelines report as soon as possible following the September meeting.

I don't know whether we will hear the outcome of the September meeting prior to the publication of the report.

What I do know is that we believe that the evidence supporting stool DNA screening is compelling and justifies the technology's inclusion in screening guidelines.

We will continue to provide the guidelines writers with up-to-the-minute information regarding our technology and the evidence supporting stool DNA testing.

As an example of current evidence, we were notified last week that both abstracts on stool DNA testing that were submitted to this fall's meeting of the American College of Gastroenterology were accepted.

This is new information that we will now provide to the guidelines writers for their consideration as part of the broader package of evidence that we have already provided to them.

The first of these abstracts offered by Dr. David [Spratt] recounts the process and experience of stool DNA testing in an employer health fair setting in which 400 employees who declined colonoscopy chose to be screened with a PreGen-Plus test.

Within this group of 400, two individuals had clinically significant findings that suggested upon follow-up colonoscopy was advised.

Two out of 400 is about the detection rate one would expect for this size population.

There are two clear messages here.

One is that two people who refused colonoscopy were spared the pain and suffering associated with colon cancer and one could argue that most likely their lives were saved because of PreGen-Plus.

The second is that 398 other patients who had previously refused to be screened have now drastically reduced their chances of having colorectal cancer.

This is in my view a critically important message for guideline writers.

The American Cancer Society has set a goal for the year 2015 of ensuring that at least 75% of those who should be screened for colon cancer are getting screened by this time.

In my view and in the view of some of the country's leading physicians, prestigious clinical and scientific institutions, some notable self-insured employers, as well as advocacy groups concerned with colorectal cancer, stool DNA testing should absolutely be among the tools used to achieve this goal.

The second abstract that was accepted by the ACG describes LabCorp's PreGen-Plus care patient support program that has been in place since last fall and has shown a very favorable effect on patient compliance and screening.

In this analysis, a 73% compliance rate was achieved across more than 1400 patients as compared to a 40% compliance rate for screening in the general population.

In my view, this is further evidence that stool DNA testing and its component clinical support program can have a dramatically positive effect on health care in this country.

Now I would like to switch gears and talk to you a bit about the FDA.

We recently met with the FDA regarding potential submission of an application for approval for an in vitro diagnostic test kit in the future.

As a reminder, this meeting has nothing to do with LabCorp's PreGen-Plus test that is on the market today.

This meeting was an initial step toward understanding the regulatory path and likely resources necessary for our pursuit of FDA approval on a diagnostic kit that we or our partner may offer to others in the future.

This was a positive first step with the agency and we were pleased with the outcome.

There is still much to do on this front in terms of potential development, clinical study and regulatory approval but I am pleased that we are considering proceeding down this road in earnest and will update you more on our plans as our plans come into better focus.

The next several months are obviously an important time for EXACT on several fronts.

We intend to continue providing updated evidence to the guidelines writers as we look forward to what we hope will be a successful outcome for stool DNA screening.

We intend to continue to invest our time and energy in pursuit of a national coverage decision with Medicare for stool DNA testing.

Having our application being complete by CMS is the next important step in this effort.

We will also continue our validation of the new version of our technology that utilizes fewer markers but delivers higher sensitivity.

LabCorp will also be performing their own validation in hopes of offering a version of the technology as their own commercial homebrew as soon as they deem it appropriate.

We also intend to keep our conversations with the FDA on the front burner as we seek to finalize with the FDA a clinical path and -- clinical plan and regulatory path for the potential commercial development of an in vitro diagnostic kit for stool DNA testing screening.

Finally, we intend to manage our expenses in a way that allows us maximum flexibility to achieve our business goals going forward.

Now I would like to turn it over to Jeff for his update on our financials.

Thanks, Don.

For the quarter ended June 30, 2006, the Company generated a net loss of $3.2 million or $0.12 per share.

This compares to a net loss of $4 million or $0.15 per share for the quarter ended June 30, 2005.

The decrease in net loss for Q2 2006 as compared to the comparable quarter last year resulted primarily from a onetime non-cash reduction in revenue of $630,000 recorded in the quarter ended June 30, 2005 in connection with the extension of the expiration date of a warrant issued to LabCorp in June 2002.

Revenues totaled $1.2 million for the quarter ended June 30, 2006 versus $623,000 for the same period of 2005.

Revenues for the quarter ended June 30, 2006 were made up primarily of the amortization of upfront license fee payments from LabCorp.

The increase in total revenue for the quarter ended June 30, 2006 as compared to the quarter ended June 30, 2005 resulted mainly from the onetime non-cash reduction in revenue of $630,000 recorded in the quarter ended June 30, 2005 that I just described.

Total operating expenses were $4.7 million in the quarter ended June 30, 2006, including approximately $700,000 of non-cash stock-based compensation.

Total operating expenses for Q2 2005 were also $4.7 million and included approximately $50,000 of non-cash stock-based compensation.

The increase in non-cash stock-based compensation of approximately $650,000 was due primarily to our adoption of FAS 123(R) on January 1, 2006 and was offset by lower sales and marketing spending in the quarter ended June 30, 2006 as compared to the same quarter of 2005 as a result of lower sales and marketing headcount and external promotional spending.

Our spending on R&D during the quarter ended June 30, 2006 was focused primarily on those initiatives that support improvements in our core technology and the pursuit of guidelines inclusion.

Our cash, cash equivalents and marketable securities balance at the end of Q2 2006 was approximately $27 million.

Our expectation is that at our current level of operation, our cash will last through the end of 2007.

This projection assumes no revenue or milestone payments from LabCorp.

We have some flexibility to adjust our spending levels and we'll have more visibility into our cash burn as the guideline status becomes clear and as the resource requirements become clear for the potential development and FDA approval of an in vitro diagnostic test kit.

That being said, if stool DNA screening is included in guidelines material cash outlays relating to sales and marketing initiatives as well as potential development and approval of an in vitro diagnostic test kit could shorten the December 2007 cash projection that I just mentioned.

Now I'm going to turn the call back to Don.

Yes, over the last couple of months, Jeff and I have been cataloging a number of the questions we have been getting from investors and we would like to answer some of those questions now.

Then we'll open up the floor for additional questions.

First question, why was the guidelines decision delayed from June to September?

Well my understanding is that the members of the ACS Multi-Society Task Force wanted more time to address multiple screening technology, including the immunochemical fecal occult blood testing, virtual colonoscopy, and newer devices used for endoscopic screening, as well as to review some of the approaches that are already in the guidelines as to their continued relevance.

Rather than issue multiple updates, it appears they've taken a broader approach at evaluating multiple technologies and issuing a single guidelines update in the fall.

Again, I don't know this for certain but it is my best estimate based on the information that we have.

The guidelines process, as I've said in the past, is fairly opaque as the task force does not make public its formal process for evaluating new technology.

Second question, what is the regulatory status of LabCorp's commercial version of PreGen-Plus?

As far back as 2005, the FDA raised questions regarding LabCorp's homebrew PreGen-Plus testing service.

After several months of correspondence and discussions with the FDA, we believe we have finally arrived at a solution that satisfactorily addressed the questions raised by the agency and that worked well for both EXACT and for LabCorp going forward.

Our objective was to ensure that the homebrew version of PreGen-Plus remained on the market and it has.

This outcome is very good news.

Even though the FDA does not issue certificates of home-brewedness, as it were, what we and LabCorp have received are letters that we believe help to clarify the regulatory status of the homebrew version of PreGen-Plus.

We plan to share these letters with the Centers for Medicare and Medicaid Services in an upcoming meeting to attempt to unstick our Medicare application.

Now separately, we are discussing with the FDA the potential filing of an application for clearance on an in vitro diagnostic test kit for colon cancer screening.

However, these discussions with the FDA have nothing to do with LabCorp's homebrew test and focus solely on our potential development of and filing for approval of an in vitro test -- in vitro kit.

Third question, when will LabCorp launch the new version of the assay?

A launch date has not been set.

LabCorp has expressed great interest in the new technology and continues to evaluate it against internal protocol and requirements for launching a new diagnostic test.

When I have more details on this, I intend to update you.

For now, details on specific launch dates and plans for commercial introduction will have to wait other than to say that both companies believe that an assay with even higher sensitivity is something we're both excited about.

What is the publication status of your [CV2] manuscript?

The manuscript detailing the study that demonstrated 88% sensitivity for a new version of our technology has not been accepted by peer review publication but we believe the chances for publication remain very good.

Fifth question, what is the status of your application with Medicare?

The application has been on hold for some time pending clarification of the regulatory issue with the FDA.

We have a meeting scheduled with CMS in the near term to discuss the regulatory status of PreGen-Plus in an effort to have the application deemed complete.

To be clear, we believe that the FDA is satisfied with the regulatory status of PreGen-Plus and we intend to communicate this to CMS.

Once the application is deemed complete by CMS, CMS has nine months under statute to issue its decision.

Sixth question, what will it cost and how long will it take to develop an IVD, in vitro diagnostic kit of your technology?

Well we are in the very early stages of developing our plans for an in vitro diagnostic kit and discussing this plan with the FDA.

We suspect that it will likely take several years and several million dollars to develop an in vitro diagnostic kit.

When we have more insight in what the FDA might require and more details on the resulting plan, we will be sharing those with you.

And the final question we have been getting is when do you plan to raise money?

At the end of June, we had $27 million in cash on hand, which at our present -- our current expense level will carry us through the end of 2007.

Beyond what I have already said, I'm not going to make any definitive comment or hypothesize publicly regarding raising money or trimming expenses to give us additional runway beyond the end of the year.

Now we would like to open up the floor for any additional questions you might have.

(OPERATOR INSTRUCTIONS).

Victor Gezunterman.

Just a question about the P&L.

I was looking at the Effipure line and it seems that the revenue actually grew sequentially, which doesn't make a lot of sense in light of the fact that you seem to have discontinued shipments of Effipure to LabCorp.

Yes, Victor, LabCorp is using the remaining inventory they have so there is going to be some trailing revenue related to Effipure usage, at least through the year end.

You certainly shouldn't see a dramatic pickup in that number but the Effipure sales will continue as their usage continues.

So we should basically lower it towards the end of the year to basically zero?

Well, LabCorp has indicated that they intend to discontinue use of Effipure by the end of the year.

That's what they told FDA.

Whether in fact it is an absolute cessation at 12/31, I can't say.

But I would expect it to trail off at that point.

Okay, this makes sense.

And also with regards to your application to CMS, you said you were going to have a meeting pretty soon.

So pending that meeting, is there any more information that CMS may need besides the regulatory status of the test?

Well we won't know, Victor, the honest answer is we won't know until after that meeting.

We're hoping that this regulatory question was their only question but we don't know that.

But our objective at this meeting is to have them deem the application complete so the clock will start ticking toward an approval for Medicare but we won't know until after that meeting.

And how soon is the meeting?

Can you give us some time line?

It's in the very near-term, I will just say that.

I'm sorry but I was late for the beginning of the call.

You just discussed two abstracts.

Have they been published, made public at all?

They were accepted at the American College of Gastroenterology meeting, which is in Las Vegas in October and we just got notified last week that they were both accepted.

So I'm not sure when they become public.

Probably not until October or close to the meeting itself.

(OPERATOR INSTRUCTIONS).

Larry Litton.

Just a clarification.

So the Effipure is trying to replace that by the end of the year and that gets replaced by [B] technology I believe.

Is there a question about that transition and the ability for the [B] technology to be effective and work?

Could there be a lapse in terms of the service or is that kind of a non quantity?

I don't think it's an issue, Larry.

We used to run the assay with B technology.

We're looking at a different technology now that also is B-based.

But LabCorp also is looking at other options and we're not sure how they plan to run the test.

But one thing I am sure of is they are not going to have a test on the market that performs any differently than the one they have on the market today.

And then in terms of the new test, you don't know the timing but do you know what hoops have to be gone through maybe to get it there?

What are the biggest challenges?

Well there are some things that we have to finish up on our own validation side.

And then LabCorp, like all other laboratories, has their own internal validation that they might want to do, they will want to do, just to make sure that the test, the technology works as well in their hands as it did in our hands.

So they are the main things that need to be done.

There may be other things that come up along the way but there's nothing major between now and having that test on the market in my opinion.

So is it fair to say the test is basically complete and now it's a question of it being successfully validated?

That's pretty close.

We have got a couple of things we are working on to try to improve a bit but they're not major.

And then LabCorp will do their own validation.

So I don't see these as big hurdles.

And is the cost component of the test in place?

Or is that also a major challenge that the cost has to be brought down further?

No, I think cost of this assay has the potential of being less than the one that LabCorp is running today simply because the assay requires fewer markers and -- it's just different.

I think if LabCorp obviously has a chance to get the cost down further between what the cost of the test is today and what this new version is, I think there's a substantial ability to get the cost down.

What is the current cost of the existing test now?

I assume it's stayed the same, but what is the number now?

You know, Larry, we don't know.

You would have to ask LabCorp about it.

I'm not being cagey about it;

I just don't know the answer to that.

When we ran it in clinical studies, our costs are certainly different from LabCorp simply because we don't have the buying power they do and other things.

You really need to address that to LabCorp.

And order of magnitude in terms of the new test, the [potential] might be lower the cost by 20% or 30% or 40%?

What order of magnitude?

I really don't have a good answer for you.

I think it's significant but I don't know precisely what the number is.

It's just that it's such an important question because in the guidelines review, even though our test is so effective, the cost is such a critical element.

So if the cost came down substantially, it would change the whole guideline interpretation.

The cost of running the test is one side of it, obviously.

The price of the test, cost aside, is probably what you're really talking about.

Yes because they are tied together to some degree.

So we believe that there is a possibility over time of getting the price to (indiscernible), let's say it that way, down to a number that is less than $300 over a period of time.

And that is not $300 a year.

We think the interval for this test is every three to five years.

And when you plug those kinds of numbers into a cost effectiveness model, it comes out to be very, very cost-effective.

And actually will become even more cost effective over time as more and more new drugs come out to treat late stage colon cancer to make the PreGen-Plus or any variation of PreGen-Plus look very cost effective for the future.

Lastly, I understand you can't and don't want to comment on LabCorp's timing but in terms of EXACT's validation of the new test, when would you hope to have your validation complete?

We will have our validation complete by the fall.

(OPERATOR INSTRUCTIONS).

There are no further names in queue, sir.

Okay.

Thank you for joining us.

If you have any questions, please call Jeff or me.

We would be glad to answer them for you off line.

Thank you.

Ladies and gentlemen, thank you for your participation in today's call.

This concludes the presentation.

You may now disconnect.

Good day.