Exact Sciences Corp (EXAS) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 EXACT Sciences Corporation earnings conference call.

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

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

We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr.

Chuck Carelli, Chief Financial Officer.

Please proceed.

Thank you.

Good morning everyone and thank you for joining us today.

With me on the call is Jeff Luber, our President and Chief Executive Officer.

Before we get started, let me remind you that certain matters we will discuss today other than historical information consists of forward-looking statements relating to, among other things, our expectations concerning our financial results, cash preservation, our business outlook and strategies and similar matters.

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, 2007 and subsequent forms 10-Q.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today.

We undertake no obligation to update or revise the information provided in this call, whether as a result of new information, future events or circumstances or otherwise.

I am now going to run through the financial update.

Jeff will provide a business update after that, and then we will open up the call for your questions.

For Q3 2008 the company generated a net loss of $3 million compared to a net loss of $4.2 million for Q3 2007.

This translates into a net loss of $0.11 per share for the quarter ended September 30, 2008 compared to $0.16 per share for Q3 2007.

The decrease in net loss for Q3 2008 when compared to the third quarter of 2007 was primarily the result of a decrease of $2.1 million in operating costs driven by the cost reduction actions taken over the last year.

This decrease in operating costs was partially offset by a decrease in revenues of $800,000, driven by a charge to product royalty revenue of $1 million during the quarter related to a third-party royalty reimbursement obligation to LabCorp, which I will discuss in a minute.

Net revenues of negative $663,000 for the quarter ended September 30, 2008 were lower than net revenues of $113,000 for the same quarter of 2007.

Net revenues are comprised primarily of two elements; the first is non-cash license fee revenue related to the amortization of upfront license fee payments from LabCorp.

These revenues, which were consistent when comparing Q3 2008 with Q3 2007 represent the amortization of the initial $30 million upfront payment made to us by LabCorp.

The amortization of this upfront payment will continue through the end of our exclusive license period in December 2010.

The second source of our revenue is product royalty fees, which has been based historically on LabCorp sales of PreGen-Plus.

Effective with LabCorp's commercial offering of ColoSure in July 2008, our royalty revenues will be based on LabCorp's sales of ColoSure as PreGen-Plus is no longer on the market.

During Q3 2008 we continued to record an estimated third-party royalty liability to LabCorp as an offset to the royalty revenue line item in our P&L.

We began to record this potential liability in our financial statements during Q3 2007 and recorded charges of $1.2 million during fiscal 2007.

We accrued additional charges of $1.8 million during the nine months ended September 30, 2008, including $1 million during Q3 2008, increasing the total reserve related to this obligation to $3 million at the end of Q3 2008.

This accrual reflects our current estimate of the obligation based on sales volumes that we anticipate in light of sales to date and the reimbursement and regulatory status of our technology.

As we gain better insight into the level of revenues generated by LabCorp sales of ColoSure we will adjust this estimate as necessary.

As a reminder, the June 2007 amendment to our LabCorp license agreement included a provision under which we may be obligated to pay up to a maximum of $3.5 million over the exclusive license period if LabCorp's sales of tests subject to our license agreement do not exceed certain specified thresholds.

The ultimate amount of this potential liability is based on LabCorp's sales volumes of tests using our technology during three measurement periods within our exclusive license period which again ends in December 2010.

A significant increase in ColoSure sales volumes during any of the future measurement periods could reduce our obligations related to that period.

But test volumes consistent with historical PreGen-Plus sales levels would result in payouts by us to LabCorp for the full $3.5 million.

The first measurement period, which ends in December 2008, includes a maximum potential obligation of $1.5 million, which would be payable to LabCorp in January 2009.

Additional payments of $1 million related to the second measurement period and $1 million related to the third measurement period would be due in January 2009, sorry -- January 2010 and a January 2011 to the extent necessary.

LabCorp reported approximately 250 sessions for the period from July through the end of October 2008, including approximately 90 for the quarter ended September 30, 2008.

Total operating expenses decreased to $2.4 million for Q3 2008, down from $4.5 million for the third quarter of 2007.

Starting in Q4 2006 and through the end of Q3 2008, we continued to reduce our costs, to structure the company in a way that better aligns our resources with strategic imperatives.

These actions included reducing our R&D group at the end of 2006, eliminating our sales and marketing functions and reducing the amount of space leased at our corporate headquarters in Q3 2007.

And in July 2008 suspending the proposed clinical validation study of our Version 2 technology and eliminating an additional seven R&D positions.

Our chief medical officer and our vice president of R&D remain engaged with Jeff and I as we continue to pursue a strategic transaction for EXACT.

As a result of the July 2008 cost reduction actions, we recorded approximately $530,000 in restructuring charges in the third quarter of 2008.

Including approximately $250,000 in one-time cash termination benefits arising under retention and severance agreements with each of the terminated employees, and approximately $280,000 in non-cash charges resulting from the write off of leasehold improvements abandoned in connection with the reduction in force.

We continue to pursue efforts to further reduce our costs and may record additional restructuring charges related to such reductions.

R&D expenses decreased to $577,000 during Q3 2008, down from $1 million for the quarter end September 30, 2007.

This 42% decrease was the result of the continuing effect of our cost reduction efforts, which included lower personnel related and other operating costs.

General and administrative expenses decreased to $1.3 million for Q3 2008 from $2.5 million for Q3 2007.

This decrease was driven by lower non-cash stock-based compensation charges of $900,000, primarily resulting from stock option modification charges recorded in the third quarter of 2007 in connection with the company's July 2007 reduction in force.

As well as lower personnel and professional fees of approximately $300,000.

Due to the elimination of our sales and marketing functions in July 2007 we had no sales and marketing expenses in Q3 2008, which represents savings of approximately $200,000 when compared to Q3 2007.

We finished Q3 2008 with approximately $6.1 million in unrestricted cash and cash equivalents.

Based on our current cost structure and operating assumptions, which do not include funding for any FDA related studies, we expect that our existing cash will last through the second quarter of 2009.

Obviously any additional unexpected expenses could negatively affect this projection.

Finally, I wanted to provide an update on the status of EXACT's listing on the NASDAQ global market.

As you know, on July 10, 2008 we received notification from NASDAQ that we did not meet the market capitalization minimum to remain listed on the NASDAQ global market.

NASDAQ rules provided for 30 calendar days subsequent to July 10 for us to regain compliance with the market capitalization minimum.

Because we did not regain compliance during the 30 day grace period, on August 12, 2008 following our receipt of another letter from NASDAQ advising that our common stock would be subject to delisting from NASDAQ, we requested a hearing before the NASDAQ listing qualifications panel.

We participated in a hearing with the panel on October 2, 2008 where we presented the panel with our plan to regain compliance with the listing requirements.

We've continued to provide the panel with additional information following the hearing, and we are now waiting for a decision from the panel.

Until we receive a decision from the NASDAQ panel our stock will continue to trade on the NASDAQ global market.

Our success in remaining listed on NASDAQ will depend on our ability to demonstrate that we can regain compliance with the listing requirements for the NASDAQ global market or alternatively the NASDAQ capital market.

Unfortunately, the recent release that NASDAQ provided to listed companies with respect to the minimum closing bid and public float requirements does not provide relief to EXACT for the market capitalization minimum requirement that was the subject of the July 10 letter that we received from NASDAQ.

If we are delisted from NASDAQ, we plan to seek to have our common stock transferred to the over-the-counter bulletin board.

Now I am going to turn the call over to Jeff who will provide an update on the business.

Thanks, Chuck.

Good morning everyone.

Thank you for joining us on today's conference call.

This morning I will update you on our strategic process, LabCorp's launch of ColoSure and recent expansions to our intellectual property estate.

During the third quarter we took steps to significantly curtail spending in order to extend our cash run rate.

This decision was critical to preserving our flexibility on the strategic front.

Given recent market conditions, as well as a delisting notice from NASDAQ based on our market capitalization, we did not believe that raising capital in what would likely have been a highly dilutive transaction was in the best interest of shareholders.

Instead, we believed it made more sense then as we continue to believe now, to find a strategic partner whose infrastructure and resources we can leverage to better accomplish our product development and FDA approval goals to realize value for shareholders.

We continue to view executing on a strategic transaction as the most prudent shareholder protective way to proceed and the path most likely to provide our technology and our assets with the strong platform for success.

Our cost-cutting actions in the third quarter ensure that we will now have cash beyond the end of 2008 when we would have otherwise run out of money, given our prior spending levels.

We now have resources that we believe can carry us through the second quarter of 2009 as Chuck mentioned, assuming current operating plans and assuming no revenue or cash infusion.

Despite our decision to suspend our clinical study in the third quarter, it is important to remember that we reached several important milestones with the FDA in the development of our clinical strategy during the year; milestones that we believe will serve the company well.

First, we negotiated with the FDA to avoid a Version 1 study, which would have added significantly to the cost facing the company in addition to any study on our Version 2 technology.

Second, we established that the likely path forward with the FDA for our technology is a de novo 510-K rather than a PMA.

This was very important to understand for a completely novel technology like ours.

Third, we established with the FDA the minimum number of cancer samples that would be required for clinical study of our sDNA technology.

Finally, we established with the FDA the statistical performance ranges for sensitivity within which our technology must perform in order to obtain FDA clearance or approval.

These are all important data points that we believe will have relevance toward the approval of existing and future versions of sDNA technologies.

This will also be especially helpful information given the pace of technical improvements in sDNA testing, even since the suspension of our study.

A good example of this is the highly sensitive BEAMing technologies that we exclusively licensed from Johns Hopkins University, which demonstrate a 92% sensitivity for colorectal cancer detection in the August publication of Gastroenterology.

Imagine the power of an FDA label associated with a completely noninvasive screening test, which can perform as well as colonoscopy in the detection of early cancers and precancerous adenomas.

Consider the global value that a test of this nature at these performance levels could command in a market of millions who today avoid invasive screening.

A strong strategic partner is, in our view, the best route forward for realizing the promise of this vision.

Shifting gears, let me update you on ColoSure and LabCorp's single marker test which is based on certain aspects of our intellectual property.

In terms of sales to date LabCorp received 250 samples for testing from July through October 30.

While this level is clearly disappointing to us, the product appears to be growing albeit slowly.

LabCorp received two samples in July, 30 in August, 60 in September and more than 140 in October.

We are told that sales collateral has been distributed to the sales force and that most sales personnel have now been trained on the test.

We understand that the feedback they are receiving from the medical community and the perception of the test among physicians and patients has been good, and LabCorp indicates that they expect the test usage will increase over time.

LabCorp has a publicly stated goal of seeking to achieve 35% to 40% of their revenue mix from genomic and esoteric testing in general over the next three to five years.

I believe that tests like ColoSure with the right sales and marketing efforts behind it, can and should be an important part in helping LabCorp reach that goal.

However, as we have previously indicated, we do not expect revenues from royalties on LabCorp sales of ColoSure in the near term to meaningfully supplement our cash position, further supporting our belief in the need to focus on strategic alternatives for the company.

Also related to LabCorp and its esoteric testing business, you have likely heard that OvaSure, LabCorp's ovarian cancer screening test has been removed from the market by LabCorp following its receipt of an FDA warning letter.

And you may wonder whether this is likely to affect LabCorp's use of ColoSure.

LabCorp has informed us that in their view a comparison between the two tests is really apples and oranges.

On LabCorp's earnings call on October 23rd, Dave King, LabCorp's CEO, indicated that LabCorp views the FDA's response to OvaSure more as a one-off response to a particular test offering and to particular data that the FDA had some questions about rather than an overall philosophical change in the FDA's view of laboratory testing.

He went on to indicate that LabCorp doesn't see the experience with OvaSure as changing anything fundamentally in the way they look at test development and test launching.

From EXACT's view, we do not believe there is a basis to view ColoSure and OvaSure in the same risk profile.

The follow-up for a false positive on OvaSure is surgery.

A false positive test result on ColoSure leads to a colonoscopy, a positive behavior in consumer healthcare.

The risk to the public health with a false positive test result therefore is completely different with the two tests.

We believe that there is also disagreement between LabCorp and the FDA on whether OvaSure is a laboratory developed test, over which the FDA has historically exercised enforcement discretion.

This is not dissimilar from the questions with which we have wrestled in the past, not to mention those of many in the industry in terms of where the lines are drawn between in-house developed tests versus those not qualifying for FDA enforcement discretion.

LabCorp is one of the largest clinical laboratories in the country with hundreds of tests and broad resources.

They also have many regulatory experts to help guide them on questions regarding FDA regulation.

Suffice it to say the regulatory landscape regarding in-house developed tests has not always been crystal clear to many in the industry over the past several years, even among the largest, well resourced companies in the field.

You do the best you can with the information you have and react accordingly.

Shifting gears to the strategic front, over the last several weeks with the assistance of Leerink Swann we have continued our discussions with a variety of entities with respect to potential strategic options for the company.

We have reached out to more than 40 companies since this process began and continue to be in discussions with a number of third parties regarding a variety of potential strategic transactions, particularly around the breadth of our intellectual property portfolio.

These discussions have involved a range of potential transactions, including M&A, codeveloper collaborations and licensing transactions.

One example of how the breadth of our IT can be relevant to certain types of strategic discussions, we recently engaged in a series of discussions with a major medical institution relating to a potential expansion into aerodigestives involving a collaboration agreement, intellectual property license and equity issuance by EXACT in exchange for access to certain assets and resources of this institution.

This is only one example of the types of different discussions in which we have been engaging.

I single out this aerodigestive cancer screening discussion, not because I think this path has the greatest likelihood of success among the alternatives we are considering, nor because these discussions are more or less significant than any of the other discussions we are having, but because these discussions serve as a great example of the breadth of our intellectual property portfolio and how it can potentially add value in a variety of potential transactions.

I believe this to be true for potential transactions both within and outside of oncology.

As I have consistently stated, no option is off the table.

At this point, there is nothing definitive I can disclose.

However, we are committed to informing investors as soon as possible.

Although this does not mean that we will be successful in consummating a transaction, we are committed to moving quickly as we are aware of our cash requirements and runway through Q2 2009.

We believe that our intellectual property is a significant and undervalued asset of EXACT that has potential application into a variety of diseases and condition.

Some of our broadest and earliest patents, for example, describe methods for conducting certain quantitative analyses regardless of platform and regardless of disease type.

Couple this with our 114 issued patents worldwide, important in licensed IP from Johns Hopkins and others, and we believe this greatly expands the types of companies that may serve as logical partners for EXACT as we think about strategic alternatives.

Continuing in this vein, you should also know that we recently expanded our license relationship with Johns Hopkins University in several ways.

First, we added four additional patents to our exclusive portfolio from Johns Hopkins University for colorectal cancer detection.

Two of these patents relate to JHU's discovery of new genes potentially associated with colorectal cancer.

These genes may prove to be useful biomarkers for colorectal cancer detection in the future.

We also added two patents relating to improvements to JHU's BEAMing technology, which evolved from digital PCR and can be used to perform a wide variety of quantitative analyses, including detection of rare molecular events.

You may recall that we already maintain exclusive worldwide rights to JHU's digital PCR technology for any field of use, even beyond colorectal cancer and have now added additional BEAMing patents to our estate as well for colorectal cancer detection.

These new patents are particularly important in light of the August publication I mentioned earlier in gastroenterology demonstrating very high detection for colorectal cancer using BEAMing and superior performance over blood-based nucleic acid detection for colorectal cancer.

Finally, our expanded intellectual property rights with JHU also now include an exclusive option for exclusive worldwide rights to JHU's BEAMing technology in certain fields relating to reproductive health, specifically the noninvasive detection in blood, serum or plasma of Down's Syndrome or trisomy 21, and Edwards syndrome, or trisomy 18, two common fetal chromosomal abnormalities.

Approximately one in 800 live born infants will have Down's Syndrome, and one in 7500 will have trisomy 18.

We believe that significant aspects of our existing patent portfolio, which is broadly directed to the detection of allelic and chromosomal imbalances regardless of technical platform, as well as these new rights from JHU have broad potential applications to this important field of reproductive health.

As we continue to navigate through an extremely volatile economic environment, we continue to believe in the strength and value of our intellectual property and its potential breadth of application to fields in which various strategic partners may have an interest.

To be clear, all options remain on the table on the strategic front including potentially raising money.

That said, we continue to believe that finding a strategic partner whose resources and expertise we can leverage on behalf of shareholders is the best alternative for shareholders based on what we know now in order to promote value over the long term.

We welcome other suggestions or alternate views from shareholders and are committed to giving them serious consideration.

We also understand the frustration expressed by some especially given our stock price, and continue to seek ways to navigate this environment in a positive way on behalf of shareholders.

We also believe that our current stock price continues to be undervalued given the breadth and importance of the assets of the company.

The decisions we make at EXACT as a management team and as a board are motivated by our commitment to build shareholder value.

As in most small biotechnology companies the road to achievement of this goal is not always linear and not always clearly marked, but is a path we pursue in earnest, in good faith and with much deliberation and careful thought toward execution.

Our eyes remain focused on successfully executing a strategic transaction for EXACT Sciences that will allow us to optimize the value of our promising assets.

I continue to remain excited by the potential for our technology and broad intellectual property rights that we maintain.

As I step back and consider our assets, it is easy to remain enthusiastic about our company.

We have core intellectual property on a novel technology for one of the largest underserved diagnostic markets in history.

We have American Cancer Society endorsement as a standard of care in the United States and international guidelines inclusion for markets abroad.

In vitro diagnostic test kit development and pursuit of international markets can offer exciting opportunities as well for the future.

We have seen the latest detection techniques like BEAMing evolve to performance levels previously unheard of in noninvasive screening.

And we believe that our broad domestic and foreign intellectual property estate has potential application in a number of potential markets within and outside of oncology which we believe can be of strategic interest to a variety of entities.

I look forward to continuing our discussions along all of these dimensions with a variety of potential partners as we move forward in seeking a strategic transaction.

I am now going to turn the call back to the operator for questions.

(Operator Instructions) There are no questions.

I will now turn the call over to Jeff Luber for closing remarks.

Thank you very much for joining us on the call, and a reminder that we are presenting at the Rodman & Renshaw conference next Wednesday.

Our presentation is at noon.

Thanks.

Thank you for your participation in today's conference.

This concludes the presentation.

Everyone have a great day.