Exact Sciences Corp (EXAS) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter EXACT Sciences Corp.

earnings conference call.

My name is [Shenequa] and I will be your coordinator for today.

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

We will conduct 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.

Rod Heist.

Please proceed.

Thank you.

And thank you for joining us for EXACT Sciences' second quarter 2009 conference call.

On today's call are Kevin Conroy, the Company's President and Chief Executive Officer and Maneesh Arora, the Company's Chief Financial Officer.

They'll be available to answer questions following their initial comments.

EXACT Sciences issued a news release earlier this morning detailing our second quarter 2009 financial results.

If you haven't seen the release, please go to our website at EXACT sciences.

com or call me at 608-770-7850 and I can provide a copy of it to you.

Following the Safe Harbor statement, Maneesh will provide a summary of our second quarter financial results.

Next, Kevin will provide comments about the Company's priorities for 2009.

Immediately following our prepared comments we'll be happy to answer your questions.

Certain matters contained in this presentation other than historical information consist of forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, relating to, among other things, our expectations concerning the timing of potential commercial and clinical milestones, the efficacy of our technology, our commercial and FDA regulatory strategy, our available cash and cash equivalents and our business and financial outlook.

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 thereby.

Any forward-looking statements we make should be considered in light of the risks and uncertainties contained in our filings with the Securities and Exchange Commission, including but not limited to those contained in our most recent Form 10-K and subsequent Forms 10-Q.

We incorporate herein the discussion of those factors.

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 herein, whether as a result of new information, future events or circumstances or otherwise.

Now I'd like to introduce EXACT's Chief Financial Officer, Maneesh Arora.

Maneesh?

Thanks, Rod and good morning everyone.

Let's take a look at second quarter revenue, expenses and cash balance.

Second quarter revenue increased due to the quarterly noncash allocation from the Company's strategic relationship with Genzyme.

In January, EXACT entered into an intellectual property and equity investment transaction with Genzyme that generated $24.5 million in cash.

Of this amount, $18.2 million will be recognized as revenue over the next 18 quarters as a noncash allocation.

We are pleased with our financial performance in the second quarter.

The Company utilized just under $800,000 of cash in operating activities during the quarter.

Noncash charges had a significant impact on operating expenses for the quarter.

The Company incurred a $1.7 million noncash charge because of warrants issued as part of the Mayo licensing agreement in June as well as an increase of a half a million dollars in noncash stock compensation expenses.

We ended the quarter with cash, cash equivalents and marketable securities of $27.8 million, an increase of more than $20 million from our 2008 year end balance of $4.9 million.

The second quarter increase is due to the successful closing of an $8.2 million fundraising round during the quarter.

The Company also received a commitment for a $1 million loan from the State of Wisconsin as part of the Company's relocation from Massachusetts.

We will receive and record the loan amount during the third quarter.

The terms of the loan are favorable with no principal or interest payments due for five years, the loan is forgivable if the Company meets certain job creation milestones.

In conclusion, during the last quarter, we have enhanced the Company's capitalization, while reducing our structural operating expenses.

We're pleased with the direction we're headed financially and operationally.

It's now my pleasure to introduce Kevin Conroy, EXACT's President and CEO, to review the second quarter in more detail.

Kevin?

Before I begin my update I would like to welcome two new members to the EXACT Sciences team.

First, I'm very pleased to welcome Dr.

Graham Lidgard as EXACT's Chief Science Officer.

Graham brings a wide range of molecular diagnostic, product development and regulatory experience to EXACT.

He led Gen-Probe's R&D efforts beginning the mid- '90s that resulted in a menu of STD and blood screening products that generates today more than $400 million annually.

He also led efforts to build the company's automated molecular diagnostic systems, including the fully automated [Tigress] system.

Graham comes to us from Nanogen, where he was Senior Vice President of R&D, we're happy to have him on board.

I'm also pleased to announce that Dr.

[Han Ji Zhou] has joined EXACT as Director of Research and Development.

Dr.

Zhou comes to us from Dr.

David Alquist's lab at Mayo where he focused on sDNA colon cancer testing and clinical trials.

He is a great addition to the EXACT team.

Let's turn now to a review of the second quarter.

We've been together as a new team since April 2nd and in our first 90 days we focused on three 2009 priorities, assay development, clinical trial planning and building a Company with a culture of success.

We had a strong initial quarter as a new team, executing well on the priorities that we set at the beginning of April.

Here are the most important second quarter accomplishments.

We surveyed more than 150 physicians to take a critical fresh look at what product attributes will be required in the colorectal cancer screening test.

Our findings confirmed that a stool DNA test that is sensitive and specific for the detection of colorectal cancer and cancer precursors will be in great demand by both primary care physicians and gastroenterologists.

We have put significant effort into optimizing the markers that will be used in our sDNA test.

We also have been exploring the optimal platform for the test that will enable it to achieve the appropriate sensitivity and specificity for both precancer and cancer.

We had a productive meeting the FDA and we continue to feel positive about our planned clinical trial design.

We completed both our strategic and operating plans, which were approved by our board last month.

As I already mentioned, we successfully completed our CSO search and are thrilled to have a leader of Graham's caliber join us on our mission.

We completed an important strategic transaction with the Mayo Clinic.

This collaboration has jump-started our product development and clinical trial programs.

We will discuss this collaboration in greater detail.

We raised $8.2 million received $1 million forgivable loan from the State of Wisconsin.

We are well capitalized to execute on our plans.

We are pleased with the progress we made in Q2.

Let's turn now to an overview of EXACT Sciences.

Our mission as a Company is to reduce colon cancer deaths through the early patient friendly detection of both precancer and cancer.

We believe that our focus on precancer detection through a proprietary molecular diagnostic screening test presents a significant opportunity to create value for customers, patients, and shareholders.

First, our sDNA screening product will be launched into a large market and that market will continue to grow as our product improves screening compliance.

Second, our team has the experience to develop, gain approval of and launch a colorectal cancer screening test.

Third, we exclusively own the intellectual property around sDNA screening for colon cancer.

We will be bringing a differentiated, well-protected product to market.

Fourth, we are sufficiently capitalized to execute on the product development and clinical trial planning objectives.

Let's look at colon cancer in more detail now.

Colorectal cancer kills nearly 50,000 Americans every year.

It is the second leading cause of cancer deaths in the US.

Colon cancer typically takes 10 to 15 years to progress from precancer to stage four cancer and death.

Survival rates drop precipitously for patients diagnosed in the later stages.

Detecting precancer and early stage cancer can and will prevent and reduce deaths from colorectal cancer but there remains a significant unmet need in the marketplace.

Less than 25% of the 90 million Americans who should be screened comply with today's screening guidelines.

Half of those age 50 and older haven't been screened at all.

Traditional screening by colonoscopy is uncomfortable, inconvenient and costly.

Detection of precancer add know mas and early stage cancers has been proven to save lives and money.

Almost two-thirds of colon cancer diagnoses are made in the disease's late stages, when the five year survival rate declines to nearly one in ten.

While survival rates decline through these late stages, treatment costs increase dramatically to as much as $250,000 per patient.

Early detection will save lives and money.

It is a moral and economic imperative that we succeed.

Only 37% of the diagnosis today are made at stage one or two when survival rates are high.

Treatment costs are as much as 85% lower than those diagnosed in the late stages.

While detecting cancer early is important, the most compelling screening tool will detect precancerous polyps.

Millions of Americans have precancerous polyps known as advanced adenomas.

By detecting and removing these precancers we will help save lives and reduce healthcare costs.

Let's turn now to a look at the competitive landscape and why sDNA's base screening is compelling.

Here, you see the landscape of currently available screening methods compared to our sDNA test.

All of today's methods are constrained by some combination of poor sensitivity, poor compliance, and cost.

These methods stand in contrast to the highly sensitive patient friendly characteristics of our sDNA test.

Our sDNA test combined with today's standard of care, colonoscopy will provide the most powerful and cost effective early screening tool.

The screening model here is straightforward.

Cancer cells have unique molecular signatures that can be detected even before the cancer is visible.

By detecting precancers and cancers early with our sDNA-base test, these patients can be referred to colonoscopy where a polyp or lesion can be removed.

This model can significantly reduce colon cancer deaths.

The earlier you detect, the greater the reduction in mortality.

Our focus on early detection of colon cancer presents a sizable market opportunity that could change significantly and quickly through the use of an sDNA-based screening test.

The population of those who should be screened, based on age, medical history and other factors, is roughly 90 million.

Based on three and five year screening interval assumptions and assuming an achievable 40% penetration rate, the annual colon cancer screening market is more than half a billion dollars.

The total addressable market for sDNA-based screening is between $2.5 billion and $4 billion at five and three year screening intervals respectively.

We feel confident in our market estimates and that the noninvasive nature of our sDNA screening test has the potential to increase patient compliance.

And with that, the early detection of cancer.

No other known screening approach has the opportunity to make this significant of a reduction in colorectal cancer mortality.

Let's turn now to our plans to create customer, patient and shareholder value from this market opportunity.

In order to create the kind of value we believe we can for customers, patients and shareholders, we will keep EXACT lean and focused on aggressive but achievable priorities.

We'll achieve our priorities within the following strategic framework.

One, our focus is to develop IVD kits for sale to clinical labs.

Two, the Company's infrastructure will consist of a small research and development and regulatory team for the foreseeable future.

These teams will work together to finalize the test, complete our clinical trial planning, supervise the trial and secure FDA clearance for the test .

Third, we will not deploy a sales team until we are close to receiving FDA clearance.

Let's turn now to the road map we're following to commercialization of our sDNA-based screening test.

We are executing a focused strategy that is guiding us through, refining and developing a robust test and test system, taking the product through a clinical trial, securing insurance coverage and reimbursement, and commercializing the FDA-cleared product.

Before turning to our product design characteristics, let's take a look at the progress that's been made on key product characteristics.

Many people have asked us, what is the difference between the EXACT Sciences of five years ago and the Company today.

The most important answer is that our test performance has improved significantly.

Sensitivity for both precancer and cancer detection has increased dramatically.

Our panel of DNA markers now covers nearly all cancers.

Previously the selected markers could not detect 100% of cancers even with a perfect detection platform.

Digital technology also enhances the sensitivity and specificity of our test.

Finally, the use of a sample preservative has made a meaningful impact on test performance.

We have identified key milestones along the path towards developing a commercially superior sDNA test kit that will be widely accepted in the market.

Bringing a molecular diagnostic product through a clinical trial and a commercialization is never easy.

The list of milestones you see here are the general product development milestones that must be completed before we bring our patient-friendly sDNA based screening test to market.

Once the clinical trial is complete, we will make a follow-on submission regarding automation of the test.

As we prepare for and, execute our clinical trial, we will be drawing on our team's prior experience with successful clinical trial design and execution.

Rigorous trial management and contingency planning are important factors in achieving success.

When we successfully execute on these milestones, we believe we will have a screening test with four important characteristics.

The test clinical superiority is paramount.

Precancer sensitivity is imperative.

Our product must also be easily adopted by any clinical reference lab and readily available to patients.

Cost, ease of use, through-put and system footprint all must be balanced to ensure wide laboratory adoption of our test.

The product will be protected by a broad patent portfolio.

This patent estate broadly protects our position in the market including our platform technology, methods and biomarkers.

We are very pleased to have expanded our IP estate through our collaboration with the Mayo Clinic.

We also previously licensed on an exclusive basis Johns Hopkins digital PCR and BEAMing technologies for colon cancer detection, as well as Case Western's important (inaudible) DNA [methylation] marker.

Our IP portfolio positions EXACT as the sole player in the sDNA market.

Let's take a closer look at our strategic collaboration with Mayo which we announced in June.

Our collaboration with Mayo significantly expands the relationship we've had with Dr.

Alquist and his lab.

In addition to securing the Mayo IP we just discussed, we have established a direct product development program under Dr.

Alquist and his lab.

The collaboration with Mayo also provides us with access to more than 3,000 characterized patient samples.

This will enable us to accelerate our product development activities.

The Mayo relationship is part of a series of collaborations that gives the Company access to intellectual property and know-how from internationally recognized leaders in colon cancer research.

These collaborations include direct active relationships with Dr.

Burt Bogelstein at Johns Hopkins and Dr.

Sandy Markowitz at Case Western.

Dr.

Bogelstein is an sDNA pioneer and is among the most widely cited cancer researchers in the world.

Dr.

Markowitz is an internationally known cancer genetics expert.

Both of these world class experts and their labs will continue to generate technology, methods, and content to which EXACT has exclusive access.

In addition, they'll continue to play key roles in the development of our product.

We hope you'll remember through key take-aways from today's call.

First, we are targeting a massive market opportunity.

We believe that our patient friendly screening test has the potential to increase patient compliance in early detection.

Second, EXACT has secured exclusive IP for colon cancer screening that positions it as the only player in the sDNA screening market.

Third, successful product development and clinical trial execution will enable us to enter the market with a powerful precancer and cancer screening test and create value for shareholders.

We are now happy to answer your

(Operator Instructions) You have a question from the line of Quintin Lai of Robert Baird, please proceed.

Hi, good morning, guys.

Good morning.

Now that you've been there for a few months and you've had a chance to do this survey, has anything changed with how you think that this test will be ultimately positioned in the market and -- or maybe in terms of what you guys need to do in order to develop a commercially viable product?

Yes, Quintin.

With the work that we have done over the last three or four months and more importantly the work that has come out of the Vogelstein lab and Dr.

Alquist's lab at Mayo, we now are in a position to detect precancers at a high rate.

This is important, because precancer detection can actually lead to eradication of this disease and there are no known techniques other than colonoscopy that effectively detect precancers.

We have made a shift in the positioning of the product and that shift is focusing the product more heavily on precancer detection.

As you know, in the early studies, the precancer detection rate was quite low, around 20%.

Today, we believe that we will be able to show well in excess of 50% precancer detection, with the technology that we ultimately launch into the marketplace.

So that's really the change in the positioning of the product and it's exciting for us.

It's very exciting to the GI community that has actually followed the Company pretty closely and as they looked at the new version of the product, they consistently say with precancer detection at a high rate, this is a breakthrough product.

Interesting and with respect to that survey, was that mainly a domestic survey or did that include European oncologists as well?

No, we really want to focus in the US where the largest market opportunity is immediately.

So we focused in the US, both with primary care physicians and gastroenterologists.

Okay.

And then finally, I guess with respect to what's being talked about with healthcare reform and the push to personalize medicine, as you've had your discussions with clinical trials, any kind of feedback with respect to the FDA on maybe looking more favorably towards approaches like yours?

We'll try to avoid commenting specifically on our discussions with the FDA, but healthcare reform clearly is focusing on prevention.

One of President Obama's tenants for healthcare reform is prevention and this product is a product that not only saves lives, but it also saves money.

So this is -- has been good news for us.

We have spent time on Capitol Hill, working with Congress to make sure that they are aware that there is a new paradigm in colon cancer screening and we have received very positive feedback.

We have some targeted initiatives there along with the healthcare reform bill and we think that where the Company is today, where the product is today, will be beneficial to what is happening in DC at this time.

Great.

Actually, I do have one more question.

Through this earnings season we've heard some other companies talk about the adoption of KRAS in terms of therapeutic decision making.

So kind of further downstream in colon cancer decision making, I know that you're focused on precancer and cancers, might be way too early but I guess in your longer, longer term vision, how does that fit in your strategy?

Quintin, realistically, that exceeds the five year plan that we laid out to our Board of Directors.

It is something that is interesting but truthfully, the size of the KRAS market pales in comparison to what we're focused on today.

As you know from observing how we have worked in the past, we really adhere to the principle that if you have more than three priorities, you really have none.

And we believe that by executing perfectly, we can create immense value for shareholders here and that is by executing perfectly on the opportunity that is at hand.

This is not a short-term execution opportunity.

This will take time to develop a system that really can handle not only a strong analytical performance that is strong sensitivity and specificity, but also be able to handle millions of samples a year.

So we need to focus on not only building the assay, but the test system and if we try to do too many things at once we don't believe that we'll be able to effectively create value for shareholders-- or as effectively create value for shareholders.

Thanks.

Congratulations on the progress.

Thanks, Quintin.

(Operator Instructions) Your next question comes from the line of Bill [Korowsky] of TCS Financial.

Please proceed.

Good morning, gentlemen.

Thank you for taking my call.

Good morning, BIll.

I also want to congratulate you on what looks like a good bit of progress since taking over the helm at EXACT.

I have two questions or two clarifications on some of the things that you've said this morning.

One, when you were going over the potential size of the markets, you gave out two potential figures, one was a $500 million number and another was a $2.5 billion to $4 billion.

What was the difference?

Was one like a domestic number, one a global number?

No, what we -- we really try to do, Bill, rather than talking in terms of total available market, we try to talk in terms of an achievable market.

And so north of a $500 million achievable market is our worst case assumption.

And that is based upon a five year screening interval for the test, and 30% market penetration.

Okay.

Now, we believe this test will be utilized more frequently than every five years and we believe that we will be able to you achieve more than 30% market penetration.

And as a touch point for that, you can take a look at the HPV market which today is at 34% market penetration and that's a product that is for a disease that today is nearly been eradicated in the US and two, there's already a strong product end market, the Pap test.

So there's really a wide range of market sizes that you can look at and the slide that we laid out there and will be available really details our thinking as to how we get to the $700 million market at the low end to a $1.6 billion achievable market at the high end.

The $1.6 billion at the high end assumes a three year screening interval and a 40% market penetration.

And you could argue that those assumptions are conservative.

But somewhere in that range we think is a very realistic market opportunity for EXACT.

Okay.

Thank you for describing that.

I haven't seen the slides.

That's why I was confused.

On your other comment about how the tests have improved greatly, you made a comment about how now you have markers to detect virtually all cancers.

Did I understand that correctly?

Yes, that's correct.

Could I ask you to elaborate more on how you plan on implementing this technology with all these different markers.

Will you do like one stool test that will test for everything or use markers to detect different types of cancer besides colorectal cancer in different tests?

Or lease that technology?

Well no, our markers are going to be focused on colon cancer detection.

I'll give you an example, the [Vimentin] marker alone covers about 75% of all colorectal cancers.

When the Company went through its initial product development and initial clinical trials back in the early part of this decade, their mix of markers together achieved about 80% coverage for colorectal cancer.

So [Vimentin] alone covers nearly as many cancers or as many potential cancers as all of those previous markers combined.

We haven't yet articulated publicly which marker combination we will ultimately include in the test.

But really just the advance in the world of research has led us to markers that we now have exclusive access to, which are much more powerful biomarkers.

Okay.

All right.

Well, thank you very much and I wish you God speed in achieving your milestones and getting a test out there.

Thank you, Bill, I appreciate it.

Your next question comes from the line of Jim Kennedy of Marathon Capital Management .

Please

Hey, Jim.

Couple questions for you, Kevin and forgive me if I missed it in your earlier conversations.

I just wanted to touch on, number one, your funding needs.

You said early on that you had enough funding, you used the word, for your planning objectives.

Does that include running the full-blown trial?

We are not planning -- our current plans would require a capital raise at some point in the future.

A lot of that depends, though, Jim, on the clinical trial design.

And the clinical trial may be a smaller clinical trial than has been previously articulated, in which case our capital needs would be lessened.

One of our main goals is to always be financially well capitalized so that we're never in a position that we have less than $10 million of capital, so we would rather be over-capitalized than under-capitalized in the world that we live in today.

Right.

And we'll provide more clarity to this as we go forward but we don't shy away from the fact that at some point the Company may need additional capitalization.

Certainly, we don't expect that to occur in the next 12 months and you can see from our current run rate, we won't need that.

But we want to be very cognizant of the fact that what we are doing here is -- will require significant amounts of capital to be successful.

Got you.

And I just wanted to touch base on the trial design.

Can you talk a little bit about that at this point or there's not enough information yet or decided upon for you to disclose that?

Sure, we can talk about that and we have talked about this previously.

In order to properly power a study in which you are seeking claims for the sensitivity and specificity for detecting cancer, in contrast to precancers, you need roughly 8,000 to 10,000 subjects to find 40 to 70 with cancer.

Because there's about a 0.7% cancer prevelance rate in the US.

So 8,000 to 10,000 is what we have discussed publicly.

If instead we ended up focusing on a product that was a product that detected both cancer and precancer and didn't differentiate between the two, so what we would call screen relevant [neoplasias], you need a much smaller clinical trial because the prevelance of screen relevant [neoplasias] is significant.

5% of -- roughly 5% of people over the age of 50 have a screen relevant [neoplasia], that is an advanced adenoma or precancerous polyp or cancer.

We need to think carefully about how the product will be positioned in the marketplace.

That clinical trial is a smaller clinical trial and we thing has some benefits in terms of how we position the product and launch the product into the marketplace.

If it were the latter, is there a standard of care for the latter now that you would compare it to or would it just be a blind trial, if you will?

Well, the trial -- the comparator that the FDA cares about is colonoscopy.

So that colonoscopy would be the gold standard in the trial, in either trial, a larger trial or a smaller trial.

Colonoscopy is really the only definitive way today of detecting both precancers and cancer.

And design-wise, would you anticipate in a trial, then, that someone would volunteer, give you a stool sample prior to a colonoscopy, in conjunction with?

The stool sample has to be collected before a colonoscopy could by and that is what the Company has done in the past with nonFDA clinical trials or clinical studies that they have participated in.

And getting to 10,000 subjects will probably take anywhere from 12 to 18 months, depending on execution of the clinical trial and the selection, the appropriate selection of clinical trial enrollment sites.

You could shorten that appreciably if you end up focusing on a narrower product claim.

Okay.

And then logistically, would you actually be collecting samples in a controlled environment or would you leave it up to the patient to deliver something to you?

Now you're getting into the fine aspects of the clinical trial that we need to hammer out with -- both internally with -- and with the FDA.

Okay.

But most likely it would be a patient provided sample, in the same way that they would provide a sample in the real world.

You could probably expect that that would be the case.

Last question, in terms of timing, can you give us some ballpark time frames about when you would expect to begin a trial?

You've already said that 12 to 18 months if it's a full blown trial and then I'm assuming after that we've got some digestive phase to get the data together, submit it to the FDA and then they've got a period of time that they look it over.

We put together those plans actually before day one and we're internally -- we have a time frame.

We haven't discussed those publicly yet.

For the main reason that we just brought on-board a Chief Science Officer who actually has to build a product before we start the clinical trial and out of respect to Graham, we don't want to give him a date until he can come back to us and tell us whether it's realistic.

Can you anticipate starting something by year end?

A clinical trial?

Yes.

No, we will not start a clinical trial by year end.

Okay.

So I think this is an important point.

Developing a -- product development has to be complete before you start the clinical trial.

And so product development will not be complete by year's end.

All right.

Thanks, guys.

Appreciate it.

Thanks, Jim.

There are no further questions at this time.

I would like to turn the call back over to management for closing remarks.

Thank you very much for joining us on today's call.

Have a good day.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.