Exact Sciences Corp (EXAS) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 EXACT Sciences Corporation earnings conference call.

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

[OPERATOR INSTRUCTIONS]

I'd now like to turn the call over to Theresa McNeely, Investor Relations for EXACT Sciences.

Thank you, and good morning, everyone.

Thank you for joining us for today's call.

I'd 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 upon various important factors that could affect the Company's financial results.

These factors are set forth in detail in our 2006 10-K and subsequent filings.

I'm now going to turn the call over to Don Hardison, EXACT's President and Chief Executive Officer.

Don?

Thanks, Theresa, and thanks to you for joining us today.

I'm going to give you a brief update followed by Jeff's financial summary.

We will then answer some pre-prepared questions.

Then we'll open up the floor for any additional questions you might have.

First, an update on the guidelines.

Last week, we met with a senior official at the American Cancer Society's national office.

He confirmed that the ACS and the U.S.

Multisociety Task Force still expect to issue their revised guidelines for colorectal cancer screening this spring.

There is not an exact date of issuance, but it is clearly a priority for them to complete this important project as soon as possible.

Although this process is not over until the revised guidelines are actually made public, whether through posting on the ACS website or through other media or through the actual publication of the guidelines in the Journal, we can tell you that the conversation we had last week in Atlanta was very encouraging.

Obviously, if we hear anything different, we will communicate it immediately.

It is clear to us that new options are needed if there is to be any chance in substantially increasing screening rates and reducing mortality from colorectal cancer.

As we have stated numerous times, we believe that we have provided the Multisociety Task Force, which the American Cancer Society is a key part of, the information they need to make a positive decision about the inclusion of stool DNA into the revised guidelines as a new option.

Secondly, as you know, we have been involved with getting our national coverage decision memorandum accepted by the Centers for Medicare and Medicaid Services.

The obvious importance of that is that once an application is deemed complete, CMS has nine months to act on a coverage decision.

The Medicare population bears the brunt of colorectal cancer in terms of affected patients and cost.

Nearly 70% of newly diagnosed cases of colorectal cancer occur in people age 65 and older.

In fact, the problem is acute enough that the American Cancer Society and CMS have joined together to target colorectal cancer screening in the Medicare population and have termed increasing colorectal cancer screening as a breakthrough priority.

It is our belief that having stool DNA as an option will only benefit Medicare beneficiaries and prove to be a very effective screening tool that would be very cost effective in that population.

Given the importance of this to our business, and in order to move this process along, we have scheduled a meeting with CMS in May to discuss the status of our application.

Our objective is to arrive at a completed status as soon as possible so that we can enter the coverage decision process.

We believe that Medicare coverage can be one of the most important, if not the most important, catalysts in ultimately driving volume for the stool DNA technology, given the fact that the Medicare population represents 43 million out of the 87 million Americans over the age of 50 who should be screened.

So one customer with a captive audience of 43 million beneficiaries is obviously a big deal for us and would be a major value driver for our company over the long term.

Having the American Cancer Society and CMS focus special attention on this market can only help us if we are in that program.

You should also know that guideline inclusion for stool DNA would most likely be viewed in a positive light by CMS and therefore should aid us with our upcoming deliberations with CMS, as screening tests for colorectal cancer that are in the guidelines of the ACS have historically been covered by CMS.

Both of the items I just mentioned, guideline inclusion and Medicare coverage, set the stage for other important events that we believe should lead to the growth of stool DNA testing.

I won't cover all the positive things that could happen as a result of guideline inclusion and Medicare coverage but do want to touch on a couple of possibilities.

First would be the inclusion of stool DNA testing as part of the Health Plan Employer Data and Information Set, or HEDIS.

Now, we've mentioned HEDIS in the past, but I wanted to spend a minute and explain how it might work to benefit us.

HEDIS is a very important quality measure used by employers who are making decisions on which health plans to offer to their employees.

HEDIS is a tool created by the National Committee for Quality Assurance to collect data about the quality of care and services provided by the health plan.

As I said, employers look to the HEDIS scores of various health plans to determine how they measure up from a quality standpoint.

So how does this relate to us?

Well, colorectal cancer screening is one of the HEDIS performance measures.

However, the only colorectal cancer screening tests or procedures that count toward a positive score for a health plan are those that are included in the guidelines.

So our inclusion into guidelines would give plans an incentive to cover stool DNA testing as part of their colorectal cancer screening program, as it would help these plans improve their colorectal cancer screening scores and help to put them in a better competitive position.

It would be very important to our long-term success.

Now, if we're in the guidelines this spring, we would hope to be included in the HEDIS program in 2008.

You should also know that the HEDIS measure for colorectal cancer screening is a look back into previous years.

So any stool DNA test previously performed prior to 2008 could possibly count toward a positive HEDIS score for a plan.

This could create an incentive for a plan to offer stool DNA testing prior to the official entry as a HEDIS measure and certainly give us an incentive to make that case to these plans.

Secondly, 19 states now mandate coverage by payers licensed in their state for colorectal cancer screening tests and procedures included in the guidelines or otherwise deemed standard of care in that state.

Therefore, we would implement a concerted plan focusing on payers within these states in order to get them on board as quickly as possible.

Recent data compiled by the American Cancer Society showed that colorectal cancer screening rates are significantly higher in those states with these coverage laws.

So the opportunity offered by the millions of lives covered by payers in the mandated states could only be viewed as a positive for our future.

As I've stated, there are other positives that can flow from positive guidelines decisions and from Medicare coverage, but I'd also like to use the remainder of my time to discuss some other accomplishments.

We are very excited about the new version of our technology.

We continue with our final validations and improvements for this version that was subject of a study published in the January issue of Clinical Gastroenterology and Hepatology.

To remind you, that study indicated that a simplified assay containing just two markers was able to pick up nearly nine out of 10 cancers in the population that was studied.

This is exciting for noninvasive options such as stool DNA, particularly in light of recent studies that have reported on the many variables associated with performing colonoscopy.

The results of these studies have shown colonoscopy outcomes to be much less predictable and in a number of cases less effective than previously thought.

Although it is currently not our goal to compete with colonoscopy, it is our belief that stool DNA testing is the second best test available, and, importantly, a much less invasive option for patients.

As a result, stool DNA should be the first option for those who refuse or don't have access to colonoscopy.

Remember, there are between two to four million screening colonoscopies currently done each year.

That means that more than 80 million people over the age of 50 are either doing nothing or using an inferior screening test.

Given the performance characteristics of stool DNA testing, I believe we are well positioned to tap this very large market.

Given the high likelihood of a better, simpler assay and the potential to be included as a screening option in guidelines, we are updating our plans to pursue an FDA-approved in vitro diagnostic.

Obviously, FDA approval would provide us with the ability to market more broadly, sell and distribute our technologies to hospitals, laboratories and others.

You may recall last year that we developed and reviewed with the FDA a clinical plan and approach for pursuing potential regulatory approval for our new version of our technology as an in vitro diagnostic.

We intend to meet with the FDA again in the near term to update them on our progress as we move down this path.

You should remember that neither LabCorp nor any other third party currently has rights to offer an FDA-approved in vitro diagnostic based on our technology.

This is, in our view, an important asset of EXACT, and one we intend to leverage following a positive guidelines decision.

And, finally, I would like to mention that our stool DNA technology will be part of two oral presentations at the upcoming Digestive Disease Week meeting in Washington, D.C.

the week of May 20.

One presentation will address the possible use of a stool DNA assay in patients with inflammatory bowel disease, many of whom are at very high risk of developing colorectal cancer.

The other presentation will cover the use of an older version of our technology in a screening population.

We are excited about the future, both near and long term, of EXACT Sciences.

We are reviewing our marketing plans with an eye toward taking full advantage of what we hope is a positive guideline decision.

We believe that in the not-too-distant future we and LabCorp can have a better test on the market, potentially supported by guideline inclusion, Medicare coverage and reimbursement by other major payers and self-insured employers.

Obviously, none of this is automatic, and fully capitalizing on an opportunity of this size will not happen in a short period of time.

We're talking about an effort to build value over the long term, through key market catalysts that start with guidelines but can proceed through Medicare approval, HEDIS inclusion, major payer coverage, and ultimately becoming the standard of care among noninvasive options for colorectal cancer screening.

Our vision from the start was to successfully penetrate one of the largest underserved markets in diagnostic history, 87 million people.

This is why I joined the company in 2000, and it's why I remain enthusiastic and driven toward that important goal.

I view 2007 as an important build year toward that goal, and therefore the remainder of this year will be spent setting the stage for substantial growth in 2008 and beyond.

Now I'd like to turn the call over to Jeff for his financial report, and then we will come back and address your questions.

Thanks, Don.

For the quarter ended March 31, 2007, the company generated a net loss of $1.9 million, or $0.07 per share, down from a net loss of $4.2 million, or $0.16 per share, for the quarter ended March 31, 2006.

The decrease in net loss for Q1 2007 when compared to Q1 2006 was driven by lower cost of goods sold as well as lower sales and marketing and R&D costs, resulting from the cost reduction plan that we implemented in October 2006.

Revenues of $1.2 million for the quarter ended March 31, 2007 were flat when compared to the same quarter of 2006 and were made up primarily of the amortization of upfront license fee payments from LabCorp.

The cost of goods sold related to Effipure was zero during the quarter ended March 31, 2007, down from $584,000 for the quarter ended March 31, 2006.

As you may recall, it was during the quarter ended March 31, 2006 that we wrote off approximately $550,000 in excess Effipure inventory as a result of LabCorp's stated decision to discontinue using Effipure in processing PreGen-Plus tests on a long-term basis.

Because we wrote off our remaining Effipure inventory during 2006, the limited Effipure sales that we expect during 2007 will continue to be recorded at 100% gross margin.

Total operating expenses were $3.3 million for the quarter ended March 31, 2007, including $408,000 in non-cash stock-based compensation, compared to $5.1 million for the quarter ended March 31, 2006, which included $1.1 million in non-cash stock-based compensation.

R&D expenses were $1.3 million for Q1 2007, which was $683,000 lower than in Q1 2006.

This reduction was the result of personnel-related and other operating cost reductions realized by reducing our R&D headcount from 20 employees at March 31, 2006 to nine employees at March 31, 2007.

The R&D team continues to focus on the optimization and validation of our Version 2 technology.

Sales and marketing expenses were $495,000 in Q1 2007, which was about a million dollars lower than Q1 2006.

Similar to the reduction in our R&D expense, sales and marketing expenses were down as a result of reducing headcount in these functions from 17 employees at March 31, 2006 to five employees at March 31, 2007.

We also lowered our external marketing and promotional spending in the quarter ended March 31, 2007 when compared to the same quarter 2006.

Our unrestricted cash, cash equivalents and marketable securities balance at the end of Q1 2007 was approximately $18.6 million.

With a lower cost structure in place resulting from the cost reduction plan that we implemented during Q4 2006, our expectation is that at our current level of operations our cash will last until the first quarter of 2009.

Remember, this projection assumes no milestone payments from LabCorp and no material outflows relating to technology acquisition or third-party licensing rights.

We will continue to manage our spending levels and will adjust our operating plans accordingly as the guideline status becomes clearer.

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

Thanks, Jeff.

And what we're going to do right now is to answer a few questions that have been raised previously.

Number one, "Do you think the guidelines will be delayed again?" Well, based on our meeting at the American Cancer Society national office last week, we understand that the guidelines decision will be issued this spring.

We are naturally looking forward to this, as I know many of you are.

Given the decades of clinical evidence supporting stool DNA as a reliable source for detecting colorectal cancer, we remain confident that the guidelines decision will be favorable.

If we hear of any change in timing, we will communicate it to you.

Number two, "What is the status of your Version 2 development and launch?" We continue to optimize and validate Version 2 and are in discussions with LabCorp as reference to next steps toward launch.

That being said, I believe a decision by LabCorp to launch Version 2 will not come before the guidelines decision is issued.

Number three, "Why do accessions continue to decline if the unscreened population continues to rise?

Is this not a measure of demand or the market trend in CRC testing?" Well, we'd obviously like to see accessions growing.

However, we know from our discussions with LabCorp and our own market intelligence that not being in guidelines and not being covered by Medicare is limiting growth.

Couple that with the fact that many other payers will not cover stool DNA until we are in guidelines and maybe until we're covered by Medicare.

That creates barriers in the physician's office when the LabCorp representative is trying to get them to order PreGen-Plus tests.

We are convinced that this can be overcome by a positive guidelines decision and the resulting coverage by major payers such as Medicare.

"You mentioned in your last public filing that you were currently in discussions with LabCorp that could lead to an amendment to your agreement.

How are those discussions going?" As our strategic partner for the commercialization of our stool DNA technology, we frequently discuss with LabCorp activities that maximize the visibility and distribution of the product and promote long-term value for both companies.

At this point, I can't speculate on whether these discussions will ultimately lead to an additional amendment to our agreement with LabCorp or the specifics of any such agreement.

What I can tell you, however, is that we and LabCorp are very interested in ensuring that our relationship provides the best foundation possible for the product's long-term success.

And the final question I'll address is, "Have you considered broadening your product focus?" The answer to that is yes.

We regularly look at and consider other technologies that may complement our own technology or our business.

Having strong intellectual property around our stool DNA technology is a great asset, as is our ability to build consensus among thought leaders, secure a strong partner in LabCorp, and now, soon, we hope to have our technology endorsed by major medical organizations based on what we hope will be a positive guidelines decision late this spring.

With these things in place, there may be even more opportunities for us to leverage this success and grow our business in the near and longer term.

Now, what I'd like to do now is open up the floor to any additional questions you might have that Jeff and I can address.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Anthony Giallourakis with VSR Financial Services.

Hey, Don.

Hi, how are you doing?

There's a little bit of confusion, I've discovered, in the marketplace between the difference of an individual being DNA tested, their individual DNA being tested for a propensity to possibly have colorectal cancer, and your DNA test.

Can you explain in some detail the differences, please?

Sure.

Well, the main thing to remember, most of us are not predisposed to colorectal cancer.

And it's a much smaller percentage.

Most of us get colorectal cancer just by chance.

So our test addresses a much, much larger market and actually tells you whether you have these mutations that are associated with colorectal cancer.

Companies such as Myriad who offer these predispositional tests are for people who are of higher risk, such as patients who have something called hereditary polyposis colorectal cancer or some other forms of inherited cancer.

So it's two totally different kinds of markets.

And we're not involved with predisposition.

We're just -- we're going to tell you whether you have a mutation that is associated with colorectal cancer or not.

We're going to hopefully tell you whether you have it or not.

They're going to tell you whether you have a propensity to actually have colon cancer in the future.

Thank you.

You're welcome.

[OPERATION INSTRUCTIONS]

Your next question comes from the line of Larry Litton, with Second Line Capital.

Good morning.

Good morning, Larry.

Don, I got on the call just a little bit late, but with the IP on the second generation test, to what extent does LabCorp have some exclusive IP versus all the IP being EXACT?

Probably I'm thinking about as the relationship with LabCorp evolves, how that comes into play.

Well, our agreement with LabCorp is we've licensed them the intellectual property associated with stool colorectal cancer screening, so the IP is ours, and we've licensed it to them if they want it to launch another version of the assay.

But aren't they doing things independently in terms of developing either procedures or skill sets that are unique to them?

Do we have rights to all their knowledge that they've developed in terms of commercializing a second generation test?

Well, the main -- the answer to that is I'm sure they do develop know-how around performing these tests, but the primary patents around stool DNA -- isolating the DNA and the other things that are involved with this test -- belong to us.

Okay.

And maybe we could discuss a little more the May meeting with CMS.

Obviously, that's been a drawn-out application process.

It's not something that's involved telephone calls or letters going back and forth in terms of clarification of the application.

Now you need a sit-down meeting.

What's going on there?

Why is it not simpler to complete the application?

It's a very good question, Larry.

We actually requested the sit-down meeting, because we want to get exactly to your point.

We want to understand what needs to be done to complete this application and how we can move it along in the most expedited fashion, and therefore we requested a meeting to get this done.

So we're hoping with this meeting in May we can get the answers to that.

And can you talk about who you meet with at CMS, or --

I mean, I don't want to give the individual's name, but we meet with the policy people who are involved with these kind of decisions, national coverage memorandum decisions.

Okay.

And, lastly, I mean, I know these questions have come up before.

We all have different ideas of spring, summer and fall, depending on where we live.

But you seem to have a little more information here.

But spring would be May, it seems to me.

Is that the idea, that this should not fall into June/July?

Well, Larry, what we've asked the individual we talk with at the American Cancer Society is spring ends, I think, officially June 20, and we gave him several opportunities to say it would be after that date, and he kept saying, "We plan to have these guidelines issued in the spring." So we take that to be before the official end of spring, June 20.

I'm not telling you that can't change, but that's certainly the indication this person gave us, and certainly the indication he was getting from the upper management at American Cancer Society.

Okay.

And, lastly, I mean, you've been optimistic for a long time, and you've certainly been optimistic as we've gotten more data over the past six and nine months.

Are you any more optimistic today than you were three months ago?

Has there been anything you've learned in the last three months that makes you more optimistic, or are we just steady state here?

About guidelines?

Yes, guidelines inclusion.

Well, I think we've always been optimistic, Larry.

I don't know if we're any more optimistic.

But we feel like we've -- the kind of data we have against this huge problem of people not being screened and the mortality, the actual mortality from colon cancer not decreasing by any measurable amount, is a pretty compelling argument for us.

And then when you counter -- you couple that with some of the recent studies on colonoscopy that are -- make it not look so favorable, we feel like we will be in the guidelines.

Okay.

But there's no feedback from the movers and shakers that you're necessarily hearing more on the grapevine how this process is going?

It's still completely opaque?

Unfortunately, it's still opaque.

Yes.

Okay.

Thank you.

Your next question comes from the line of Leah Hartman, with CRT Capital.

Good morning, gentlemen.

Good morning.

Good morning.

I was hoping you could give me a little more color about the upcoming conference on the Digestive Disease Weekly.

Who will be doing the oral presentations?

One of them will be done by Dr.

Steven Itzkowitz, from Mount Sinai Hospital in New York, and the other will be done by David Ahlquist, from the Mayo Clinic.

Okay.

Thank you.

Steve will be talking about the use of a stool DNA assay in patients with inflammatory bowel disease.

As you may know, those patients have a high likelihood of transitioning to colorectal cancer, and what they typically have to do today is get multiple colonoscopies in fairly short periods of time.

And a number of gastroenterologists have looked for ways to supplement colonoscopy or complement colonoscopy with another test, and maybe stool DNA would be one of those opportunities.

The other presentation is actually a presentation on the study that was originally funded by the National Cancer Institute that was looking at an older version of our technology in patients with what they call screen-relevant neoplasia, which is cancer, adenomas and a number of other things, so it's kind of old news.

So it was actually kind of interesting to us it even got accepted as an oral presentation.

When's the last time the stool DNA concept and the potential use in screening has been presented in an oral format at a conference, that you're aware of?

Oh, it gets presented on a regular basis at almost all the gastroenterology meetings and a number of the other meetings around the country.

So the last gastro meeting was in October of last year, so it's on a fairly regular basis.

But we could be seeing some good attention coming along in the press, given that that's six or seven months later.

Well, I think the biggest --

Right.

-- the biggest thing you'd see in the press, obviously, is if we are included in the guidelines as a screening option.

That would be the biggest news.

That would trump any kind of clinical study, because that's basically saying your clinical data has been sanctioned by these organizations and therefore you're now kind of a de facto standard of care.

I'm just -- I'm looking for every headline I can find.

That would be a big one there.

And also --

But I understand that --

-- you know, we're not minimizing an oral presentation, but it's more important to us right now, quite frankly, to get this guidelines thing behind us.

It sounds good.

We wish you good luck.

Thank you.

Your next question is a follow-up from the line of Larry Litton, with Second Line Capital.

Don, I know you can't speak for LabCorp, but if you look at some of the elements in getting to the Version 2 test, there's a decision about a commercial launch which they're going to defer until guidelines, but there's a core technology issue and then there's a process issue.

Is this thing ready to go, just that they're waiting for the right time?

Are they still wrestling with technology issues?

Are they still wrestling with process issues?

Well, the main thing is to get guidelines behind us, but we are actually finishing up some optimization and improvements here before we even transfer it over to LabCorp.

Once it's transferred to them for their own validation, I don't think that will take an awful amount of time for them to make that happen.

And there's some intellectual property negotiations they will have to be involved with.

And the same thing happened when we launched Version 1, and all those things were accomplished in a timely manner.

So when are you hoping to be able to transfer the optimization improvements to them?

When will we finish our work?

Well, this summer would be our best guess right now.

Okay.

And what's the current pricing on the test in the market today?

The list price is $495.

LabCorp would get reimbursed something less than that based on whatever contract they had with a plan.

But do you have the average prices or something, in terms of actual reimbursement or something?

Think of a $350 to $400 range.

And any further clarification on the Version 2 test in terms of how dramatic a cost or price reduction there might be?

No, you know, we're not that far yet, Larry.

I don't know.

I don't know how they'll price that.

Okay.

But no question it'll be a much more cost-effective test, in terms of their own cost to do it.

The test should cost less to run.

Let's put it that way.

Yes.

Correct.

So what it would ultimately be charged out at in the marketplace you could make the argument that the value's still the same.

No question.

But is anyone doing studies in terms of a tipping point, in terms of if this test got to a price it would just -- it would change the dynamic of the way the doctors look at it?

We've certainly looked at that in the past and continue to look at it.

I don't know -- the thing you have to understand about DNA testing is, in a perfect world, you'd want a very, very, very inexpensive test, like a fecal occult blood costs you $5, $10.

Right.

[Inaudible] happen with this kind of technology.

Not in its present state.

It's going to cost more money to process just by its nature.

But it's more accurate, also, much more accurate.

Right.

I was just [inaudible] once you get below $300 or below $250 that's a whole different mental set financially than $400 to $500.

Well, it could be.

But the thing about it is you have to understand that this is not a test that gets done every year.

Right.

It probably should be done every three to five years.

So it's not an annual cost, anyway.

Right.

Okay.

Thank you.

Yes.

Your next question is a follow-up from the line of Anthony Giallourakis with VSR Financial Services.

Can you talk to the actual marketing of this test, if and when you get into Medicare and approved by the ACS guideline folks?

What type of expense structure will you have, do you see, going forward, assuming those things happen?

Do you generate a cooperative program with, say, somebody like LabCorp, assuming they continue to be your partner, and how will you help drive this awareness?

You mentioned that you don't think they have any problem getting to the doctors.

And, by the way, who will be your primary target?

Will it be the family doctor, the primary physician, or will it be specialists?

Thank you.

Hey, Tony, this is Jeff, and Don can add his color, but in terms of the expense side, obviously we have our own internal marketing plans and approaches that we've got detailed.

LabCorp, you know, you'd have to ask LabCorp specifically about their own.

That being said, you know, if we get into guidelines, I'd expect that our expenses would increase.

Certainly the sales and marketing category suffered the greatest reduction when we did our cost reduction last year as we were waiting out this guidelines decision.

But once that answer comes in I would expect those expenses would increase.

The specifics around that is not something we're going to get into at this point in time, but I think generally that would be something you could expect.

Just to build on what Jeff said, just so we're clear, what we see 2007 being, assuming guideline acceptance and having a Medicare completed application, is that we would spend the remainder of this year working basically on policy-type things, getting into the -- becoming a HEDIS measure -- we know the process you have to go through with that; talking to major payers in those mandated states, because there's millions of potential lives there, and we want to be included in that.

But we also want to take advantage of [any] guidelines decision, because this stuff kind of rolls out to other medical societies.

As just one example, the American College of Obstetrics and Gynecology does not typically do their own guidelines review.

But they do normally accept the guidelines as drafted by this U.S.

Multisociety Task Force and the American Cancer Society.

So part of our goal would be to have them adopt these same guidelines and roll these out to all the ob-gyns around the country, which is a very powerful primary care organization who tends to follow their college's guidelines.

So we have plenty of things to do that don't necessarily cost a lot of money in 2007 that hopefully can lead to what we think can be a ramp year in 2008 and beyond.

Thank you.

You're welcome.

There are no further questions in the queue.

I'd now like to turn the call back over to Don Hardison for closing remarks.

Well, thanks so much for being with us this morning.

Obviously, if you have any questions, please call Theresa, Jeff or myself.

We'll be more than happy to talk to you about them and try to answer your questions, and hopefully we'll have some good news sometime in the not-too-distant future about guidelines.

Thanks.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.