Exact Sciences Corp (EXAS) 2007 Q3 法說會逐字稿

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

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

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

We will conduct a question and answer session toward the end of this conference.

(OPERATOR INSTRUCTIONS).

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

I will now turn the call over to Mr.

Chuck Carelli, Chief Financial Officer.

Please proceed.

Good morning everyone and thank you for joining us on today's call.

Joining me on the call are Patrick Zenner, our Executive Chairman and Interim Chief Executive Officer; and Jeff Luber, our President.

Certain matters we'll discuss today other than historical information consist of forward-looking statements relating to, among other things, our expectations concerning our financial results, cash preservation and commercial and regulatory strategies.

These forward-looking statements are not guarantees of future performance and are subject to a variety of risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements.

These risks and uncertainties are described in our annual report on Form 10-K for the year ended December 31, 2006, and subsequent Forms 10-Q.

You all 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 as a result of new information, future events or circumstances or otherwise.

I'm now going to turn the call over to Jeff.

Thanks, Chuck.

I would like to introduce Pat Zenner, out Interim Chief Executive Officer.

In March of 2003, we were fortunate to have Pat join our Board of Directors.

Pat has devoted nearly his entire career to health care issues and today serves on the boards of several public and private companies.

He is a 32-year veteran of the pharmaceutical industry and the former President and Chief Executive Officer of Hoffman-LaRoche, Inc., North America.

Pat has been an important guide to the Company as well as for me during this time.

Pat?

Thank you very much, Jeff and Chuck, I appreciate the introduction.

I'd like to take this opportunity to introduce myself.

As Jeff said, I have been on the exec Board for the last four years and have been working closely with Jeff and his team over the past several months towards achieving the Company's near-term objectives.

In my role on the Board and in my newly expanded role with the Company, I continue to not only believe in the value of the DNA screening for colorectal cancer, but I remain committed to doing all I can to help move the technology and the Company towards market success.

Our ultimate success will be measured by stool DNA becoming a significant and widely used approach for advancing the early detection of colorectal cancer.

It will also be measured by our ability to provide a significant cost savings solution for the health care system; to be instrumental in catching cancer early, thereby reducing expense associated with the treatment of late-stage disease.

And above all, our success will be measured in lives saved with our DNA technology.

We have a lot of work ahead of us, but I firmly believe that DNA-based screening provides an opportunity for such success.

Importantly, I continue to believe in the ability of EXACT and is commercial partner LabCorp in their efforts to secure broad adoption of DNA technology as a patient-friendly non-invasive approach to colorectal cancer screening.

Toward this end, EXACT's many accomplishments have been no small feat.

This Company has been able to solve a very complex problem by figuring out how to isolate DNA from stool, developing a revolutionary technology that utilizes proprietary methods and markers to detect colorectal cancer, and then executing on a collaboration with LabCorp to further the development and commercialization of its DNA technology.

As we continue to try and attain the success that I referenced, my job in collaboration with the Board and the management team is to ensure that we are positioned to take advantage of the landmark events that could very well be within our grasp.

The seeds for this success have been laid over the past number of years and the fruits of these efforts have brought us to a critical point in the Company's development.

For instance, the announcement that the American Cancer Society's colorectal screening guidelines will be issued in November, we are hopeful that stool DNA screening, an entirely non-invasive approach, will be included among screening options for the average risk population.

We also intend to actively pursue a collaborative regulatory strategy with the FDA for our DNA screening technology.

We have a highly capable and sharply focused team in place, both internally and through strong relationships that we have cultivated over time.

They provide a strong foundation of knowledge and experience in the clinical, regulatory and commercial diagnostics landscape.

I continue to believe in the ability of Jeff and his team to help move this Company forward with such pivotal events ahead.

I would now like to turn the call back over to Chuck, who will take you through the financials, and then to Jeff, who will provide you an update on the business.

Thank you very much.

Chuck?

Thank you, Pat.

For the quarter ended September 30, 2007, the Company incurred a net loss of $3.6 million, or $0.13 per share, up from a net loss of $3.1 million or $0.12 per share for the quarter ended September 30, 2006.

The increase in net loss for Q3 2007 when compared to Q3 2006 was driven primarily by lower non-cash license fee and royalty revenues in connection with the June 2007 amendment to our license agreement with LabCorp, as well as $617,000 in restructuring charges recorded in Q3 2007 related to the elimination of our sales and marketing functions in the third quarter.

These increases in net loss were partially offset by savings realized in our sales and marketing operations as a result of the elimination of those functions, as well as savings in our R&D operations as a result of the cost reduction plans that we implemented back in October of 2006.

Total revenues of approximately $100,000 for the quarter ended September 30, 2007 were lower than total revenues of $1.2 million for the same quarter of 2006.

Total revenues are comprised of three elements.

The first is non-cash license fee amortization revenue related to the amortization of up-front license fee payments from LabCorp.

The second is product royalty fee revenue on LabCorp's sales of its stool-based DNA screening tests which is based on certain of our intellectual property.

The third is product revenue related to sales of Effipure units to LabCorp.

As you may recall from our Q2 2007 earnings call, we outlined the accounting impact on our revenue from the June 2007 license amendment with LabCorp.

One provision of that amendment was to extend LabCorp's exclusive license period from August 2008 to December 2010, which extended the period over which the remaining unamortized up-front license fees paid by LabCorp will be recognized, resulting in lower non-cash license fee revenue as compared to prior periods.

Accordingly, our non-cash license fee revenue for the three months ended September 30, 2007 decreased to $338,000 from $1.1 million for the comparable quarter of 2006.

The June 2007 amendment also provided that we will be required to reimburse LabCorp for a certain third-party royalty up to a maximum of $1 million annually through the end of this new exclusive period if LabCorp's sales of PreGen-Plus do not exceed certain specified thresholds.

The ultimate amount of this potential liability is dependent on LabCorp's sales levels of PreGen-Plus through December 2010.

A significant increase in PreGen-Plus sales could reduce this potential obligation, possibly to zero, while PreGen-Plus sales consistent with historical levels would result in aggregate payments of $3.5 million over the exclusive license period, which is the maximum amount that we could be required to pay.

We began to record this potential liability in our financial statements during the quarter ended September 30, 2007, and accordingly, we recorded a charge of $250,000 as a reduction in the royalty revenue line item of our P&L.

This charge resulted in negative product royalty fees of $239,000 for the quarter ended September 30, 2007 compared to product royalty fees of $40,000 for the same quarter of 2006.

Unless and until sales of PreGen-Plus increase to a level that would reduce this potential obligation, we will record this maximum potential obligation under this provision of our LabCorp agreement on a quarterly basis as a reduction in our product royalty fee line item.

We will continue to assess this potential liability each quarter based on LabCorp's sales of PreGen-Plus, and to the extent that owe LabCorp any amount of this provision of our agreement, January 2009 would be the first time that an actual cash payment would be due to LabCorp.

Other payments would be due to January 2010 and January 2011 to the extent necessary.

The cost of goods sold related to Effipure was $45,000 during the quarter ended September 30, 2007, down from $99,000 for the quarter ended September 30, 2006.

We may incur additional Effipure maintenance costs of up to a maximum of $200,000 going forward, which is required under our license agreement with LabCorp, but we do not expect to incur any costs related to Effipure beyond these amounts as we believe that LabCorp is moving away from this technology.

Total operating expenses were $3.9 million for the quarter ended September 30, 2007, including $774,000 in non-cash, stock-based compensation compared to $4.5 million for the quarter ended September 30, 2006, which included $339,000 in non-cash stock-based compensation.

Our R&D expenses were $1 million for Q3 2007, which was approximately $700,000 lower than in Q3 2006.

This decrease was the result of personnel-related and other operating cost reductions realized by reducing our R&D headcount from 19 employees to eight employees during the period from Q4 2006 through September 30, 2006.

Our current expectation is that the R&D group will remain focused on validating Version 2 of our technology as well as other technology improvement projects.

These plans assume that we would not be required to conduct any additional studies in connection with any FDA filings and approval process for our DNA technology.

Sales and marketing expenses were $385,000 in Q3 2007, which is approximately $666,000 lower than in Q3 2006.

These expenses were down as a result of a result of reducing headcount in these functions from 17 employees to five employees during the period from Q4 2006 through June 30, 2007 and then further reducing sales and marketing staff to zero as we eliminated these functions in July 2007 in connection with the third amendment our license agreement with LabCorp, which was signed in August 2007.

As a result of the elimination of our sales and marketing function, we recorded restructuring charges of approximately $617,000 during the quarter ended September 30, 2007 related to onetime termination benefits to be paid to terminated employees under retention and severance agreements.

Our obligation to continue severance payments to former employees ends when and if they secure employment with another employer during their severance period, and accordingly, this component of our restructuring obligation could be reduced in future periods.

The August 2007 LabCorp amendment also added a milestone obligation of LabCorp to pay us $2.5 million if we achieved specified policy-level reimbursement approval for Medicare, inclusion of stool-based DNA screening and clinical practice guidelines and certain increases in sales levels of LabCorp's stool-based DNA screening test over a defined measuring period.

Our G&A expenses increased to $1.9 million for Q3 2007, up from $1.7 million for the same quarter of 2006.

This increase was mainly driven by an increase in non-cash stock-based compensation of approximately $300,000.

Our unrestricted cash, cash equivalents and marketable securities balance at the end of Q3 2007 was approximately $14.8 million.

We're not changing our cash guidance at this time and continue to project, based on our current cost structure, that our cash will last into the second quarter of 2009.

This projection assumes no milestone payments from LabCorp and no material outflows relating to the pursuit of FDA approval or technology acquisition or third-party licensing rights.

Obviously, the FDA filing and approval process, including whether we would be required to conduct additional research studies, could negatively affect this projection.

When we have more clarity on the regulatory requirements and the potential impact on our financials and business operations, we will certainly provide an update.

We also continue to explore opportunities to reduce our facility-related cost, which could generate additional savings.

Subleasing a portion of our current space could result in onetime short-term costs, but those costs would be more than offset by the potential for longer-term savings.

We will continue our efforts to manage our spending levels and will adjust our operating plans as we complete the validation of Version 2 of our technology and as the guideline status and regulatory path become more clear in the coming weeks.

I'm now going to turn the call back to Jeff.

Thanks, Chuck, and thank you everyone for joining us on today's call.

For those of you who participated on our call last week, you know that we are scheduled to meet with the FDA to discuss the regulatory path forward for our patent-protected DNA-based technologies for colorectal cancer screening.

That meeting is scheduled to occur very soon and we intend to present our proposed 510-K filing strategy to the FDA during this meeting.

We have retained several key advisers for this initiative with the FDA.

These include former senior employees within the FDA, and in particular within the FDA's division of Clinical Laboratory Devices.

These are people who know our business and the FDA regulatory landscape well and several with whom we have had long-standing relationships.

I believe that we have the right team in place that can help us achieve our goals with the FDA in a collaborative way.

Our goal is to leave our meeting with the FDA with general agreement on the regulatory path forward so that we can get an application on file with the FDA quickly.

Anyone who understands the near static annual mortality rates in our country from colon cancer, more than 50,000 deaths per year, and the continued low screening rate from the general population also understands the potential of our non-invasive technologies to help solve these problems for our nation's health.

We remain very encouraged by this opportunity, especially as we approach this regulatory path with FDA.

We intend to provide you with better information on the potential timelines associate with the filing once we have reached agreement with the FDA.

Following an agreed-upon approach with the FDA and the regulatory path forward, we intend to discuss our regulatory strategy with the Centers for Medicare and Medicaid Services.

Remember, CMS accepted our obligation for a national coverage determination in August based on the large body of clinical evidence and other information that we submitted in support of our application.

There is typically a nine to 12-month statutory window within which CMS may evaluate a national coverage decision.

We do not yet know what impact, if any, our FDA filing will have on this timing with CMS, but we will be working with Medicare to clarify this.

As I mentioned on our previous call, we also recently met with the payment and reimbursement side at Medicare to begin a dialogue on that front as part of the national coverage analysis.

The process with Medicare involved discussions with the Coverage and Analysis Group and a separate discussion with the Reimbursement and Payment side.

We've now engaged with both sides in connection with our filing and will continue to provide them with relevant information throughout this process.

You should also know that we plan to provide CMS with the results of our Version 2 study that we will be announcing this quarter.

It is important to remember that screening rates in the Medicare population of 43 million people remain exceedingly low and nearly 70% of our all colorectal cancers occur in the Medicare population.

The need for new screening options that people will actually use is clear and our technology we believe can offer CMS a much needed solution.

This important fundamental has not changed.

Regarding the guidelines process in the United States, last week our Chief Medical Officer, Barry Berger, discussed the FDA matter with a key member of the Guidelines Committee from the American Cancer Society.

At EXACT, we have always tried to maintain an open and collegial relationship with the American Cancer Society and U.S.

Multisociety Task Force for Colorectal Cancer Screening.

Barry told the American Cancer Society what we know, that we're meeting with the FDA and that we intend to get an application on file with the FDA quickly.

While we believe that an FDA strategy should ultimately benefit our position in the screening market for colorectal cancer, we still do not know what impact, if any, the FDA matter will have on the guideline committee's decision or its timing.

Once we have an agreed-upon approach with the FDA, we plan to update the American Cancer Society regarding our next step.

As I mentioned on our call last week, we do not believe that regulatory status is a key factor in the Guidelines decision as the Guidelines Committee has historically focused on clinical approaches and processes supported by validating clinical evidence.

The focus has been on the use of colonoscopy and fecal occult blood testing, for example, not the regulatory status of a particular Version of colonoscope or FOBT test.

Also, the 1997 Guidelines document stated that new technologies would be considered on the basis of performance, patient preference and cost-effectiveness.

We've conducted studies that demonstrated the value of stool DNA screening in each of these areas.

The 2004 New England Journal of Medicine study of our Version 1 technology reported that stool DNA screening was four times superior over the fecal occult blood testing to which it was compared, a method of testing that is already included in screening guidelines.

We continue to believe that the large body of clinical evidence for stool DNA screening, the requirements that are clearly set forth in the 1997 guidelines and the continued low screening rates and high mortality from colorectal cancer in the United States merit stool DNA's inclusion in the Guidelines to the American Cancer Society and U.S.

Multisociety Task Force.

Again, this is a fundamental that has not changed.

The problem of low screening for colorectal cancer continues to persist in this country and in the world community.

Over the last decade, EXACT Sciences has helped move DNA-based screening for colorectal screening from the laboratory to the world stage as evidenced by our inclusion as a new test option in the international screening guidelines of the World Gastroenterology Organization.

Think about that for a minute.

This world body comprised of leaders in gastroenterology around the globe, including several members who sit on the United States Guidelines Committee as well, came together and decided that our DNA-based technology, a technology that did not even exist 10 years ago, is now an appropriate screening tool for those in high resource areas who do not wish to use more conventional tests.

I believe that the recognition by this world group speaks volumes about the power, validity and utility of our technology.

Also, when I consider the recent public comments made in response to our Medicare application, in particular those that were made in support of stool DNA technology by various luminaries in the U.S.

at top institutions such as the Mayo Clinic, Johns Hopkins University, Dana Farber Cancer Institute and others, many of whom are on the front lines in the battle against colon cancer, I am reminded why our charge at EXACT Sciences remains so critically important.

Their support also crystallizes for me why our long-term goals at EXACT have not changed and why we remain focused on bringing our non-invasive technology, again, a technology that we believe people will actually use, to the 65 million individuals in the U.S.

over the age of 50 who remain inadequately screened for colorectal cancer.

Now I would like to address a question that I suspect you likely have regarding the regulatory approach.

What type of FDA regulatory filing do you intend to submit, and what are the timelines and costs associated with each?

As I mentioned last week, we intend to file a 510-K in the coming weeks, but until we meet with the FDA it does not make sense for us to comment on what will be required for approval or clearance of our technology.

I don't think that would be fair to you and I don't think it would be fair to the FDA.

The FDA could require a PMA or maybe comfortable with what is known as a de novo 510-K, which is similar to a 510-K with a likelihood of additional studies.

The timelines all vary and can be relatively short in the case of a 510-K, or longer with a PMA.

Since timing and costs are tied directly to the specific regulatory process, it would not make sense for us to speculate on specifics of either right now.

I would like to open up the call now to take a few of your questions.

(OPERATOR INSTRUCTIONS).

Leah Hartman, CRT Capital Group.

I had a question with respect to the data release expected yet this quarter on the -- I believe it's Version 2.

You said, again, that it is this quarter.

Are you anticipating having the release come through you?

How are you going to make that announcement?

And would there be an expected Journal inclusion or a presentation or a poster at any of the upcoming conferences?

Thanks for the question, Leah.

We [all] remained excited about talking about our Version 2 technology data results that we do expect to release this quarter.

Again, the principal investigator for that study is Steve Itzkowitz of Mount Sinai School of Medicine, so any release of the data obviously needs to be in coordination with Dr.

Itzkowitz and along the lines that doesn't compromise a journal or publication that he's going to want to pursue.

So were obviously in touch with Dr.

Itzkowitz and are going to take the appropriate steps along the appropriate clinical lines to get that information out when the time is right.

So he's in control of the timing, and as soon as you can, you will let us know when it's out and what the prospects are for broadening the reach of that data?

That's right.

(OPERATOR INSTRUCTIONS).

Anthony [Gialocci], VSR Financial Services.

Is it possible -- I think I remember you seen a while back, or maybe it was [Don], that the Version 2 test probably wouldn't be available in quantity by LabCorp for some time in the first half of 2008.

Was that correct?

We had previously disclosed that the intended launch for Version 2 was the first half of '08, that was our prior disclosure.

But there wasn't any specific, like which quarter or which month, it was generally just 2008, first half?

Right.

Is it possible that you could resolve your issues with -- possible that you could resolve your issues with the FDA prior to the time at which you were planning on launching Version 2 anyway, actually getting it out into the market?

Do you see that as a possibility?

That's a good question Tony.

Obviously, the Version 2 technology for this Company is, given its sensitivities that have been reported, is the future of this Company.

We would like to obviously see that available to patients sooner, rather than later.

The timelines associated with any regulatory filing with the FDA can be, in certain instances, relatively short, or relatively long.

So I can't -- it's hard for me to calibrate exactly what that timing would be, so I suspect anything is possible.

But I don't want to assign a probability to it until after we speak with FDA.

Since the FDA did not issue a cease and desist on Version 1 with LabCorp, is it possible that they allow you to pursue this filing in parallel with the rollout of the product and the existing sales of Version 1?

Is there any precedent for that in the past that you are aware of?

Tony, I appreciate the question, it's an excellent question.

Obviously the technology was launched in 2003, has screened an awful lot of people who had never been screened for colorectal cancer before.

It has caught cancers.

So we obviously would like to see a situation where the technology is available to patients on an ongoing basis.

That said, I'm not going to comment or speculate on what approach the FDA will or should take.

That's up to the FDA.

We are looking forward to a discuss with them and we are looking forward to moving forward in a way that we -- the FDA feels is appropriate, and we're going to pursue a filing in that vein.

Dr.

Robert [Lenfert].

I know there is a lot on your plate, but simultaneously, are you planning to do regulatory effort overseas in Europe while you're doing it here in the U.S.?

Thanks for the question.

We established relationships with two companies -- OncoMethylome Sciences and NorDiag abroad.

Those are both companies who took nonexclusive relationships -- I'm sorry -- nonexclusive licenses to our technology abroad.

I think quarter the international guidelines, that may present some further opportunities for us overseas.

But I don't want to make any mistakes.

Our focus is and continues to be the U.S.

market.

Okay.

I just thought that since Europe is such a large market and this is such a good test, certainly if there is any regulatory approvals, would they be in charge of it?

I suspect it would be a collaborative effort between the two of us.

It's obviously a different process overseas than it is in the U.S.

But our focus, in terms of time, energy and resources, is going to continue to be in the U.S.

for the foreseeable future.

There are no further questions in the queue.

I would like to turn the call over to Jeff Luber for closing remarks.

Thank you everyone for taking the time today.

We look forward to getting you caught up when we have more information on the FDA front, and we will do that at the earliest appropriate opportunity.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a good day.