Exact Sciences Corp (EXAS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter and year end 2006 EXACT Sciences Corporation earnings conference call. My name is Annie, and I will be your 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 [Teresa McNeely], Director of Investor Relations. Please proceed, ma'am.

Thank you, and thank you everyone for joining us on today's call. I would like to point out that any forward-looking statements made during the conference call are based on current expectations and are subject to change based on important factors that could affect the company's financial results. These factors are set forth in detail in the 2005 10-K and subsequent filings. I am now going to turn the call over to Don Hardison, EXACT President and Chief Executive Officer.

Thanks, Teresa and I also want to thank all of you for joining us this morning. I am going to give you a brief recap of 2006 and what we expect in 2007. Then I will turn it over to Jeff Luber for his financial report, after which we will answer a few prepared questions that we have received and then open it up to you for any additional questions.

At the start of 2006 we wanted to achieve three major objectives that we felt would help set the stage for the ultimate success of stool-based DNA screening for colorectal cancer. Those three objectives were, number one, inclusion of stool DNA into the screening guidelines of the American Cancer Society and the multi-society task force; two, having our Medicare coverage application deemed complete by the Centers for Medicare and Medicaid Services or CMS; and three, the validation of a new version of our technology with higher sensitivity and the publication of a study describing that technology in a peer review journal.

We knew that going into the year that aspects of these objectives were within our control but certain aspects were not. We wanted to make sure that we accomplished 100% of the things that were within our control when they came to these objectives. For example, although we couldn't dictate the timetable for the guidelines committee, we could ensure that we provided them with the broadest body of medical evidence possible relating to stool DNA screening for colorectal cancer. This information has been provided and we continue to expect a decision from this committee in the spring.

Second, although we couldn't control the internal process of CMS and its review of new applications for coverage, we could provide them with the robust application for stool DNA screening demonstrating its utility for population-based screening. We have answered several follow-up questions from CMS regarding the application and have met with them. CMS has requested some follow-up information from LabCorp and once provided, we believe that the application could be deemed complete shortly thereafter. After which CMS has nine months under law to make a coverage decision. We believe that a stool DNA option is a great opportunity for CMS to get their population effectively screened. By the way, it was recently announced at the American Cancer Society is collaborating with CMS to help improve colorectal cancer screening rates among the 40 million Medicare beneficiaries. As a result of the ACS's efforts, CMS has designated colorectal cancer screening as a breakthrough priority.

As far as finishing the development of our new version of our PreGen technologies and validating it in a blinded multicenter study, we did control the timing to a great extent on getting that done and in our view have reduced results to make the case for stool DNA screening even more compelling. The results from this study show insensitivity of 88% for stool DNA screening, was published in Clinical Gastroenterology and Hepatology in December. This journal is a clinical journal of the American Gastroenterological Association devoted to publishing original research. We were thrilled with the outcome of this work, which had two major conclusions. First, is that the version 1 formulation of our technology that LabCorp has licensed and adapted for their use and has been offering commercially has a sensitivity of 72.5% in this study. Primarily because of enhanced performance of the long DNA marker that we call DIA. Confirming what we have been saying from the start, this stool DNA screening, even in its earlier technical version is robust, reproducible and reliable in terms of performance.

The second conclusion is that a new simpler formulation with two markers versus the 23 that are in the commercial version showed a sensitivity of 88% in this most recently published study. As you know, 88% is approaching the sensitivity of a colonoscopy and clearly establishes stool DNA technology as the most effective, noninvasive approach for colorectal cancer screening in an asymptomatic average risk population. These data also in our view prove the point that we have made many times in the past regarding our stool DNA technologies, that the scientific underpinnings of this technology allow for ongoing improvement and optimization by adding or changing markers in assay chemistries.

Now why is 88% sensitivity so relevant? First, we believe it further underscores why the guidelines committee should include stool DNA screening among the options available. In a field of screening options that include inferior methods that have simply failed to materially increase screening or reduce mortality over time, stool DNA screening offers an exciting and evidence supported option that can in the view of many change this paradigm for the better.

Second, in December the New York Times published an article on the results of the New England Journal of Medicine study that reported varying rates of colonoscopy effectiveness based on the amount of time devoted by the gastroenterologists to the procedure. While we support the belief that colonoscopy is the reference standard for colorectal cancer screening, this recent study demonstrates why additional screening options should be endorsed by the American Cancer Society and others in order to encourage physicians and their patients to have a dialogue to determine the option that best is suited for them.

So we made important progress in 2006, and I believe that 2007 will be the year that demonstrates whether our progress will bear fruit. We need to get to a positive guidelines conclusion in order to give us our best chance for success going forward. With that in mind, let me remind you why we believe we should be successful with the guidelines process. Number one, we have a technology that provides at least three important improvements over most other options. Clinically the sensitivity of the assay that is commercially available todate picks up around seven out of every ten cancers. That is better than any other noninvasive approach for colorectal cancer screening. As a point of reference, that sensitivity compares very favorably with the sensitivity of other commonly used screening tests for other cancers, including the Pap smear for cervical cancer, mammography for breast cancer and PSA for prostate cancer.

Additionally, we have proven through our most recent work that the already effective clinical results can be improved to where our new version of the technology can pick up virtually nine out of every ten colorectal cancers. The second improvement is although this technology is very cost-effective today, it will only get more cost-effective with these improvements. As you may remember, a technology is deemed cost-effective by most experts if the cost is below $50,000 per quality adjusted life year saved. Stool DNA is in the $13,000 to $15,000 per quality adjusted life year save range, and therefore very cost-effective. And there is some evidence that stool DNA could become comparable to colonoscopy with respect to cost-effectiveness. Today it is even more cost-effective than the Pap smear or mammography.

A final improvement is contained in the published data that indicates that stool DNA testing is more preferable to patients than either colonoscopy or fecal occult blood testing. Another reason we think we should be successful with the guidelines process is that there is new evidence from Health and Human Services that around 50% of those over 50 are being screened today. We would debate that as we suspect the number actually overstates the number of people being screened as it does not address the question of the quality of the screen. In other words, a onetime fecal occult blood test or fecal occult blood test performed as part of a digital rectal exam may be counted as a person screened, but I don't think anyone believes that this is an adequate screen. Therefore, although there may be some improvement in screening rates, there are still miles ago.

Number three, colorectal cancer still represents 10% of all cancer deaths and while deaths have fallen slightly in the latest figures from the American Cancer Society I believe that everyone agrees that the number of deaths is not falling dramatically enough. Remember this is a preventable disease. Further, over 60% of the colorectal cancers are still caught at later stages when the prognosis for survival is much worse than when the cancer is caught early.

Number four, a recent NCI funded study published in October of 2006 in the American Cancer Society's journal, Cancer, concluded that using traditional approaches, U.S. screening and mortality reduction goals cannot be achieved even in the most optimistic of scenarios. Let me repeat that. It concluded that using traditional screening approaches U.S. screening and mortality and reduction goals cannot be achieved even in the most optimistic of scenarios. The study group concluded that among three actions, risk factor modification, improvements in screening and colorectal cancer treatments, screening had the greatest impact and new technologies such as stool DNA are warranted.

And five, finally, we know from our own follow-up studies that over half the people who have used the PreGen-Plus assay offered by LabCorp had never been screened before. Therefore we know that stool DNA testing is helping to achieve exactly what the American Cancer Society and the other prominent medical societies want to achieve, get more people screened. It is clear that the present options available for screening are not doing the job up to the level needed. It is clearly time for additional options to be offered if there is to be any chance to demonstrating colorectal cancer through dramatic reductions and mortality that were achieved for cervical cancer with the advent of the Pap smear back in 1950. Mortality from cervical cancer has been virtually eradicated for a regular, acceptable, noninvasive screening strategy. Add all this together and you can see why we remain very hopeful that stool DNA will be recognized in the new guideline as an effective screening option.

Further, in terms of 2007, we will continue to achieve the key objectives previously mentioned and intend to focus on areas to further broaden our technology and its applications over time. I am obviously thrilled that stool DNA technologies offer such potential to a market of 80 million people for colorectal cancer screening, but I believe we can do more in other areas, as well. We continue to evaluate opportunities, and we will seek to find opportunities to complement our current offering while keeping us appropriately focused on screening.

Now I'd like to turn it over to Jeff Luber for his report.

Thanks, Don. For the quarter ended December 31, 2006 revenues of $1.2 million were essentially the same when compared to the same quarter of 2005 and were made up primarily of the amortization of upfront license fee payments from LabCorp. The Company generated a net loss of $2.4 million or $0.09 per share for the quarter ended December 31, 2006. This compares to a net loss of $2.7 million or $0.10 per share for the quarter ended December 31, 2005. A decrease in net loss for Q4 2006 when compared to Q4 2005 was driven by lower R&D and sales and marketing costs. Total operating expenses were $3.9 million for the quarter ended December 31, 2006, including $561,000 in non-cash stock-based compensation compared to $4.1 million for the quarter ended December 31, 2005 which included $232,000 in non-cash stock-based compensation.

R&D expenses were $1.2 million for Q4 2006, which was $661,000 lower than in Q4 2005. Sales and marketing expenses were $624,000 in Q4 2006, which was $696,000 lower than Q4 2005. These reductions were primarily driven by our decisions to reduce headcount in October 2006, focus our research efforts in spending on the optimization of validation of our version 2 technologies and lower overall sales, marketing and promotional spending during the year. The decreased operating costs in the R&D and sales and marketing areas were partially offset by an increase in total non-cash stock-based compensation of $329,000 in the quarter ended December 31, 2006 as compared to the same period of 2005 as a result of our adoption of FAS 123(R) on January 1, 2006.

As you may recall from our last call, in October 2006 we announced a restructuring plan to reduce our cost structure in order to maximize our cash position to capitalize on key catalysts going forward. This restructuring plan included the termination of 21 employees across all functions of our company, and we recorded charges of $671,000 during Q4 2006 in connection with onetime termination benefits provided to these employees. We continue to review our facility needs and may incur additional restructuring charges in the form of write-offs, fixed assets or other facility related costs in the event we consolidate our current facilities or move to a new a facility. Our cash, cash equivalents and marketable securities balance at the end of Q4 2006 was approximately $21.9 million. With a lower cost structure in place resulting from the actions I just mentioned, our expectation is that our current levels of operations, our cash will last into the first quarter of 2009. We will update this spending guidance if our operating plans materially change. Remember, this projection assumes no milestone payments from LabCorp and no material outflows related to technology acquisition or third party licensing rights. We will continue to manage our spending levels, and we will adjust our operating plans accordingly as the guideline status becomes clearer.

Finally, several of you have asked if we're going to raise capital in the near term. As Don mentioned on our last call, if we're going to raise capital in the future, we would obviously like it to be on the most favorable terms possible following positive news. We realize that you don't always have that luxury, but we also believe that our recent restructuring puts much of the control over our future, back in our hands in terms of our cash needs. Now I'm going to turn the call back to Don.

Thanks, Jeff. What we're going to do now is we've gotten a number of questions from you since our last call, which we would like to answer first, and then we will open up the floor to any additional questions you might have. First question.

You mention in your last public filing that you were currently negotiating an amendment in your agreement with LabCorp. How are those negotiations going?

Out of fairness to our partner, LabCorp, we are not going to comment on the specifics of the negotiation beyond what is in our public filing. That being said, we are very interested in arriving at amended license terms that promote long-term value for both LabCorp and EXACT and makes sense in the context of the catalyst that could occur this year.

Second question, what impact do you believe the version 2 paper will have on the guidelines process?

We believe the guideline's writers already have a copy. We know they already have a copy of this paper. While we are excited about this data, and what it says about the evolution of stool DNA testing, we believe that the near decade of clinical evidence supporting our version 1 technology is likely to be more impressive to guideline writers given the data's sheer breadth and depth. That being said, this new data sends a clear message that stool DNA testing works very well and is based on science that allows for regular improvements in both performance and in simplification that can lead to lower cost.

Third question, can you provide more detail on the Medicare process and the next steps?

In terms of the next steps with Medicare, once Medicare deems our application complete, there is typically a nine-month window for public comment on the application and deliberation by CMS prior to a decision. The most recent request for information from CMS relates to information that has got to be provided by LabCorp. Once CMS receives this information from LabCorp and is satisfied with their responses, the next logical step is for the agency to deem the application complete. The agency can always ask for additional information, but we believe we are close to application acceptance at this point.

Fourth question, what is the status of your IBD product and FDA plans?

Whether we choose to develop an IBD test kit for stool DNA testing will depend in large part upon whether stool DNA is included in screening guidelines. There is obviously much expense and management time required to pursue development and regulatory approval of an FDA approved IBD kit. Until we have a guidelines answer for the home group version of the test on the market today I don't think it makes sense to invest a whole lot of time and energy on the product side just yet. We will, however, continue to talk with the agency to understand what would be required for our approval. Our current thinking is once we have more clarity on guidelines we will adjust our plan accordingly around an FDA approved kit version of the technology.

Number five, is there any update on when LabCorp intends to launch the PV2 assay, the next version of the assay?

A certain date, a date certain has not been set but LabCorp has expressed great interest in the technology and continues to evaluate it against its internal protocols and requirements for launching the 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.

Sixth question, do you think the guidelines writers will delay the decision again, and can you provide more color on why you think they delayed the decision from September?

The guidelines process as we've said in the past is fairly opaque. That being said, we've had numerous discussions with people close to the process, and we believe the committee will arrive at a decision no later than late spring. I also expect based on their June correspondence to us that they will move to publish their guidelines decision as soon as possible thereafter. In terms of the reasons for the delay following the September meeting in Washington, D.C., my understanding is that the members of the American Cancer Society and multi-society task force wanted more time to address multiple screening technologies, including immunochemical fecal occult blood testing, CT colonography or virtual colonoscopy and newer devices used for endoscopic screening. Rather than issue multiple updates at various times throughout the year, they have apparently taken a broader approach in evaluating multiple technologies and seeking to issue a single guidelines update instead. While this makes logical sense, it is also obviously frustrating for us and for the many companies affected by this delay. We should also not forget that 150 people a day are dying from colon cancer in the U.S. alone and the delay in the inclusion of new technologies like ours into the guidelines only perpetuates in our view this tragic rate of mortality.

And the final question is have you considered broadening your product focus beyond what you have today? The answer is yes, we regularly look and consider other technologies that might be a complement to our business. That being said, as we've said in the past, we know that in the health care field having good IP protected technology is only one piece of the puzzle. You need to build consensus among thought leaders, have a solution for national infrastructure to deliver and sell your product, and you need to be endorsed by the relevant organization or regulatory body. For all of these reasons that is why the promise of PreGen-Plus makes so much sense to us. We will obviously continue to evaluate other technologies and business opportunities but will never lose sight of what it really takes to build a sustainable business in health care.

So with that we will open up the floor to any of your questions.

(OPERATOR INSTRUCTIONS) There are actually no questions.

Okay. Thanks a lot for joining us. If you have any questions, please call us here and we would be glad to talk to you about it. Thanks.

Thank you for your participation in today's conference; this concludes the presentation. You may now disconnect, and have a great day.