Exact Sciences Corp (EXAS) 2009 Q3 法說會逐字稿

Good day, and welcome to the Exact Sciences Corporation conference call for the third quarter 2009. This call is being recorded.

For opening remarks and introductions, I will now turn the call over to Rod Heist. Please go ahead, sir.

Thank you, and thank you, everyone, for joining us for Exact Sciences third 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 will be available to answer questions following their initial comments.

Exact Sciences issued a news release earlier this morning detailing our third quarter 2009 financial results. If you haven't seen the release, please go to our Web site at exactsciences.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 third quarter financial results. Next, Kevin will provide comments about the company and its priorities for 2009. Immediately following our prepared remarks, we will 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 provisions 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 strategies, 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?

Thank you, Rod, and good morning, everyone.

We continue to be pleased with our financial performance as we are utilizing modest amounts of cash from quarter to quarter. During the third quarter, the company utilized $850,000 net cash after receiving approximately $700,000 of cash from stock-option exercises during the third quarter. We ended the quarter with cash, cash equivalents, and marketable securities of $26.9 million.

Third quarter revenue increased due to the quarterly noncash allocation from the company's first quarter intellectual property transaction. These noncash allocations will continue for another 17 quarters.

On the expense side, during the third quarter, we built an R&D team and began our R&D collaboration with Dr. David Ahlquist and his lab at Mayo Clinic. These activities were the primary drivers of increased operating expenses.

We also recorded a year-over-year increase in noncash stock-compensation expense.

We look forward to continuing to make investments in product development while closely managing our cash utilization.

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

Thanks, Maneesh.

I'd like to begin with a brief overview of Exact Sciences.

Exact Sciences is focused on developing a test for the early detection and prevention of colon cancer. I emphasize "early detection" because, through early detection, prevention and even eradication is possible. There is a significant unmet need for a simple, patient-friendly, noninvasive test that detects both precancers and cancers. We believe the market opportunity here is in excess of $1.2 billion.

Exact Sciences is in the enjoyable position of possessing exclusive intellectual property around this market. We have had our test included last year as a standard of care in the American Cancer Society guidelines, which is not an easy task. We have a terrific management team with proven experience in clinical diagnostics and, importantly, oncology programs, and we have a $27 million -- or $26.9 million in cash reserves, which is significant for us to execute on our plan.

Now, about colon cancer, colon cancer is known as the most-preventable yet least-prevented cancer. Why is this the case? Well, colon cancer actually takes 10 to 15 years to develop. Most of that time is spent in the precancerous stage. If you can detect precancers before they become cancer, it can have a significant impact on the disease.

Colon cancer is the second-most-deadly cancer in the United States. Last year, 2008, 49,960 people died of colon cancer in this country. Let's compare that to cervical cancer. In the 1940's, over 30,000 women died from cervical cancer every year, and then the Pap test came along, and, over time, that number has dropped to less than 4,000, and most of the women who die of cervical cancer are women that are not effectively and regularly screened. So that is an example of a near-cancer-eradication story that we believe can be replicated.

So cancer arises -- colon cancer arises from polyps -- precancerous polyps. Our test will detect these polyps. Of course, not all polyps are precancerous -- actually, only about 2% of them are -- but with an effective sDNA test, you are able to detect those precancers before they develop into cancers.

Our test also detects cancers, and it detects these cancers, we believe, in excess of 85% of the time that they're present. So with an effective screening program, you're able to detect both precancers and cancers.

Today's screen -- is it effective? It's an important question, and the truth is that 75% of patients fail to follow current screening guidelines. Why is this the case? Well, the current main screening method is colonoscopy. In order for colonoscopy to be used -- to be effective, patients must spend the evening prior purging the colon with a gallon of liquid. That's one eight-ounce glass every five to ten minutes for over two hours. The next day, the patient, following sedation, is faced with a six-foot colonoscope. So this is not the most desirable broad screening tool.

The result of this poor compliance rate is that 63% of cancers are detected in the late stage, and we know what happens when you detect cancer in stage three or four. In stage three, colon cancer patients survive five years only 54% of the time, and stage-four patients only have an 8% five-year survival rate. These odds are dismal, and it doesn't have to be the case.

So with sDNA used as a front-line screen, followed by colonoscopy and removal, this leads to cancer prevention.

Now let's talk about the market opportunity for this test. It's actually quite massive.

With a 30% adoption -- that is 30% of patients over the age of 50 -- if they utilize this test, the market size is 1.2 billion. There are a lot of people over the age of 50 in this country. Just in this country there are 90 million. Half of them have never been screened with colonoscopy. So we feel that our 30% adoption assumption is quite reasonable.

When you look at the prospective cost savings, you're seeing in excess of $10 billion, maybe up to $15 billion annually in treatment costs for colon cancer in this country. Seventy-five percent of that is borne by Medicare. These costs could be avoided with comprehensive screening.

Now let's take a look at the competitive landscape here. You have colonoscopy, virtual colonoscopy, and FOBT, which, together, are the three main forms of screening.

Colonoscopy, which we've talked about here, is -- the statistics show that only 30% of people over the age of 50 have had a colonoscopy in the last ten years. It has obvious limitations, including cost, time off from work, and patient dislike. One recent study found that 55% of patients felt that colonoscopy was either very unacceptable or unacceptable. This is in comparison to 13% general objections to colon cancer screening.

Virtual colonoscopy is not covered by Medicare, so that's a major impediment, and it has many of the same limitations of colonoscopy.

FOBT suffers from very poor sensitivity. For people with cancer, this test is only 40% to 50% sensitive on a good day and only 12% sensitive for precancer.

Now let's take a look at a new test of blood-based sDNA test and compare that -- or a blood-based DNA test and compare that with an sDNA test.

This comparison shows that sensitivity to the blood-based test is limited -- quite limited for early detection and not nearly as robust as sDNA-based screening in the later stages with sensitivity for advanced adenomas or precancers at 18%. This blood test will fail to reliably detect precancers and cancers, what the Cancer Society believes should be the primary goal of screening. Even at later stages, the sensitivity is suboptimal.

Although at Exact we continue to evaluate the possibility of offering a blood-DNA test, we believe this test will face serious hurdles in market adoption. First, it has inferior clinical results. Second, it has a high programmatic false-positivity rate. Third, we believe that it will face insurance-coverage challenges. However, we continue to evaluate this test. We just believe that there will be significant challenges in market adoption.

Now let's talk a little bit about the American Cancer Society's view of the world.

The ACS, in it's recent update regarding colon cancer prevention and early detection, specifically called out colon cancer prevention as the primary goal for screening. New methods for colon cancer screening may be developed, but unless they satisfy the Cancer Society's goal of prevention through early detection of both precancerous polyps and cancer, they're a utility, and we believe their ability to obtain insurance coverage will be limited.

Now let's talk briefly about -- or summarize the sDNA benefits.

First of all, this test is noninvasive. There's no bowel prep required, no diet or medication restrictions. There's unlimited access. This can be -- patient collected (inaudible). It's affordable, and it also detects precancers and cancers.

So that's the overview of the business.

Now, Maneesh, if you would please discuss Exact's 2009 priorities and our progress in the third quarter.

Thanks, Kevin.

product development, clinical trial planning, and creating a new culture of performance. Let's discuss our progress during the third quarter.

We made significant progress on our priorities this past quarter. We've rebuilt our R&D team, which now stands at eight, and it will continue to expand.

Our product development and target assay design were solidified during the quarter. Our target assay has been refined and simplified through the leadership of Graham Lidgard.

Our clinical trial planning is underway, and we will provide you with a more specific update on timing in just a moment.

We moved into new facilities for the company here in Madison at very competitive rates.

Importantly, we licensed the Invader detection chemistry, which we will couple with digital PCR to provide what, we believe, will be the most sensitive and specific colorectal cancer screening test available.

Let's turn now to our product-development milestones.

We've laid out an ambitious and achievable timeline for the development and commercialization of our sDNA-based test. We expect to see externally generated data in the second half of next year. During the second or third quarter of 2011, we anticipate beginning our clinical trial, and when the trial is complete, we will ready our submission, which we expect to make sometime during 2012. We look forward to providing additional detail and more guidance as we get to closer to each of these important events.

I'll now turn the call back over to Kevin to wrap up.

Thanks, Maneesh.

Before we conclude, I'd like to say a word about a decision I'm in the process of making. I'm actively considering a run for governor in Wisconsin and expect to decide soon. Should I run, I will remain as CEO until and unless I'm elected. I remain excited about our company and am committed to its success.

Now let's turn to the four key takeaways about Exact Sciences. First, we are targeting a massive market opportunity; and, second, this bears a significant as the major unmet clinical need, we have an experienced management team with the capability of executing our plan, and all of the key elements are in place here for success. We are focused on executing on a straightforward plan.

Now, if you have any questions, we'd be pleased to answer them.

Thank you, sir.

(Operator instructions.)

We'll go to Quintin Lai with Robert W. Baird.

Hi. Good morning.

Good morning, Quintin.

Congratulations on all the work that you've got going, and now looking kind of at your milestones and timeline, can you talk a little bit about some of the costs that you think that you'll need to encourage and prepare for the clinical trial?

Sure, Quintin. We expect the clinical trial to cost between $15 million and $20 million, inclusive of the preparation as well as the clinical trial, and we expect to begin incurring those expenses, as we said, in Q2-Q3 2011.

Okay. So then, Maneesh, as you're preparing over the next -- 2010, should we be looking at kind of a burn rate that you're running at or accelerating as you add more people?

I think where we've talked about is we expect $1 million -- approximately $1 million a month, and that will ramp slightly in 2010 as we add people.

Okay. Super. And then with respect to Invader, I mean, it certainly kind of caught our eye that you grabbed -- accessed Invader. Could you talk a little bit about instrument platform? Is there a potential to leverage a future install base from potentially Hologic come 2012, or do you think that somewhere down the road that you'll need to also develop your own instrument platform?

Well, we will develop our own instrument platform that -- we will benefit from the experiences, clearly, that we had a Third Wave, and the instrument platform that would commonly utilize the Third Wave was the Tecan platform, and we expect that platform -- either the Tecan platform or one will like it that does automatic -- automated pipetting will be a platform that we use in the future.

In terms of the specific platform that Hologic is rolling out, obviously, it's a different sample that's collected, and so they're going to be different design configurations, and I don't believe that Hologic has specifically laid out what their platform configuration will look like. So, this is something, Quintin, that we'll provide more clarify on as time ensues.

And then my final question, and then I can always jump back into the queue. Appreciate the extra color that you've gone through with the slide deck about your opinion on blood-based detection. Have you gotten any feedback from some of your industry contacts about what they feel about blood-based detection and in terms of -- you said that you think that the payers may not look favorably on that? Just to try to get a little flavor or why you think stool-based -- just a little more color on why you think stool-based is the way to go.

Yes, so we have had -- there are people with very strong views in the industry, and if you take a look at the sensitivity for precancer of a blood-based test, it's 18% but with a false-positive rate of 10%,. That 18 -- 10% of those 18% points are just false positives. It's -- so it has an extremely low -- well, first of all, let me take a step back.

We would love to see a blood test and be part of a blood test, and we've looked at that very closely since day one. But if you can't detect precancers, and if you only detect stage-one cancers 36% of the time, we don't understand how the American Cancer Society would ever get behind this test, and if the American Cancer Society doesn't get behind this test, we don't see how we could get CMS to get behind this test, and without CMS getting behind this test, we don't understand how you can have a market. So we really struggle.

The other thing to look at -- and I mentioned this briefly -- is programmatic specificity -- or programmatic false-positive rates. If somebody gets a blood test every year and they have a 10% chance of having a false-positive and a much lower chance of having actually a true-positive, then what you end up seeing is a massive over-referral to colonoscopy. So that's another challenge that we see. And this isn't criticism of those companies who are putting in R&D efforts into developing a test. We applaud those efforts. We just don't understand how a test with such low precancer detection rates and stage-one detection rates can be commercially viable in the long term. And you have to remember, that test is not an inexpensive test. Today that test looks like a $300-plus test, and we know the costs associated with those tests are pretty significant. So if -- we don't see how that test could ever be a $25 to $50 test.

So, hopefully, that answers your question but we'll -- I'm sure we'll talk about this more in the future.

Thank you very much.

We go to next to Ram Selvaraju with Hapoalim Securities.

Hi. Thanks very much for taking my questions. Can you hear me?

Yes. Hi, Ram.

Could you provide some more clarity on two things. The first is how the regulatory interactions are likely to be conducted as you move the test into formal clinical development and what the specific, sort of, gating items might be on the regulatory front? Secondly, what the pathway would be for formal regulatory submission of the test once clinical development is concluded.

And, lastly, if you could just comment on if you, Kevin, decided to take up the position as governor of Wisconsin, with what sort of timing could we expect to transition in management and how that might be affected.

Sure. Okay. So let's take the regulatory question first. It's a pretty straightforward path. We have said publicly that the FDA believes that this is a de novo 510(k). We are planning as if it will be a PMA, even though we don't think it will end up as one. We have had numerous meetings with the FDA, and those meetings will continue. We are really focused right now on putting together our clinical trial plans. Obviously, the more planning you do, the more successful you'll be once you actually start the clinical trial.

So to kind of recap that, robust discussions with the FDA, bringing in the best external minds available to help look through -- look at those -- at our clinical trial plan, and really kick the tires of the plan. So we believe the more input you have upfront, the more likely you'll have of being successful in the future. And if you look at our experience with the HPV test, Roche and Gen-Probe were ahead of us in announcing their HPV programs, and we got through that clinical trial well in advance of either of those companies, and we did it by focusing on what the FDA really expected, listening to the FDA, and then designing a clinical trial with those thoughts in mind. So that's the regulatory piece.

In terms of leadership, this company has -- we built a great team over the last six months. This team is exceptionally capable with Maneesh and with Graham and with Barry, and I feel very comfortable and the board feels very comfortable that I will be able to remain as CEO while we execute on our product-development and clinical trial plans. And in terms of success planning, I think it's a little premature to talk about that. Should I decide to run, it won't be premature, and the board will clearly be focused on that, and we will articulate that succession planning more clearly. But the leadership team here is a strong one, and I feel very comfortable. And, frankly, I wouldn't make this decision if I didn't feel comfortable in their ability to execute on our plan.

Do you have any color at this point as to when you would make a decision and when we would have some more clarity on that?

It will be in the very near future.

Thank you.

We go next to Michael Moskoff with MRM Capital.

Questions answered.

And, again --

Thank you.

Sorry, sir.

(Operator instructions.)

We'll go next to Phil [Koburowsky] with TCS Financial.

Good morning, gentlemen, and congratulations on the progress you have made so far.

One just quick follow up on that last question that was asked as far as a decision on whether or not you're going to run for governor. Is that going to be announced in an 8-K?

I'm sure that we will do that, yes.

Okay. Some of my previous questions are already answered, but one I can think of, in the past, the accuracy of the test Exact has been developing seemed to have been often -- had its accuracy validated by the use of colonoscopy to determine if the person of a particular stool sample actually had cancer. Considering the fact that colonoscopy isn't necessarily a perfect measuring stick, as I understand especially in regards to precancers and early stage and flat lesions, how -- what type of testing is done to validate the accuracy of this -- of the test?

Yes, that's a great question. The way to look at this is that there is no perfect gold standard so colonoscopy has a published roughly 90% sensitivity. So colonoscopy misses some precancers. It probably doesn't miss a lot of cancers. So, if colonoscopy misses and an sDNA test is positive, it would be included as a false positive, and we think that that may increase a false-positive rate by, call it, 2% or 3%.

Okay.

And -- but that -- directionally, you will see sensitivity and specificity numbers that are awfully accurate by comparing to colonoscopy.

Okay. Another question. I think a while ago you were kicking around a number of $150 as a potential test price, and helping us with our models, how would we calculate, I guess, what kind of net earnings that comes back to Exact as far as what of that test price would come back reimbursed to you and then what kind of royalties you would have to pay out of the technology that you've licensed?

Well, actually, we think that this test will garner reimbursement of $300. Our assumptions, which I think are very conservative, is that we would see $150 of that. The truth is I think that there would be an opportunity to see more of that. And we have also articulated that our gross margins would be in excess of 65%. So that is the rough way we think to look at that. Does that answer your question?

Yes. Sure does.

Okay.

All right. Well, thank you very much.

Thank you.

(Operator instructions.)

We'll go to Jim Kennedy with Marathon Capital Management.

Hi, Kevin. Hi, Maneesh.

Hi, Jim.

Hi, Jim.

Two things I just wanted to clarify, Kevin. Number one, again, the trial timing you're anticipating starting approximately when?

Q2-Q3 2011.

Okay. Q3 2011. And you feel like in 2012 we'll have whatever results we need to at least attempt to go to market at that point.

Yes. And, now, one important thing to drive home is that by, call it, the third quarter of next year, you will see -- and we will see -- externally validated results of our test. So we will know heading into this clinical trial what the sensitivity and specificity parameters will be before we start the clinical trial. So that's a very important milestone that is not very far away.

Okay. Yes, and what I wanted to -- if you -- to the extent you can share it, what I wanted to know is from now -- I mean, we're looking at approximately two years until the point at which you begin a trial. Can you sort of -- for us laymen out here -- walk us through the key efforts or milestones you feel that you have to tackle between now and then? That seems like a lot of time. What are the major steps you feel you have to tackle or get over that are going to take 18 to 24 months?

Yes. In molecular diagnostics, it's easy to -- it's -- I shouldn't say "easy to design to an assay," but it is relatively easy to design an assay. It is quite challenging and time-consuming and resource-consuming to take that assay through the paces to make sure that that assay is robust and reliable and, importantly, complies with the regulations around developing a medical device -- all of the quality-system regulations and documenting the product-development process.

So the first step in developing an assay -- and we've really gone back to square one to say we're going to develop an assay that is the strongest assay possible at detecting precancers and cancers. The first step is designing and optimizing the target assay.

The second step -- so, after you've gone through a process of optimizing every one of the individual assays that detect different mutations -- and there are obviously multiple mutations that you're detecting -- and there's also a sample-extraction process to develop -- you then run that assay against known positive and negative samples -- blinded, but known positive and negative samples. You first do that with what's called a "test set" -- I'm sorry. You first do that with a training set, and then you, secondly, do that with a test set. You publish that data. So that will occur we hope in Q3 -- roughly Q3 of next year and the back half of next year.

You then have to run that test through -- and in this case it will be in excess, we guess, of 50 -- interfering substances. So now you need to run this test against all of the known potential substances that could inhibit the test.

Finally, you need to fulfill all of the quality-system requirements around documentation in order to be prepared to start a clinical trial.

Now, there's no doubt that we hope to start a clinical trial even before Q2-Q3, but as you know, in product development, things happen, and we want to be prepared for that. So we feel very strongly that this is doable in the timeline that we've laid out.

The other thing that you do during this process in parallel with product development is plan for the clinical trial, and we believe that there will be 20 to 30 clinical trial sites, and so you need to not only design the clinical trial but go out, enroll those sites, hire a CRO, make sure that you are completely prepared to very rapidly enroll up to 10,000 subjects.

So, hopefully, that provides a little bit more color.

Absolutely. Thank you. And final question, you know, I'm a big believer in "Whatever you do, do it right," and I would guess, if you're going to run for governor, that you're going to do it the right way, and I'm also guessing that that's probably a full-time effort if you do decide. Do you have any thoughts, if you do decide to run, approximately how much of your schedule will be devoted to that run for governor?

I think that's something that I'd rather discuss if I ultimately make this decision to get in, but it is certainly a fair question, and I plan to articulate how much time and effort. I think the most important thing, though, is ensuring that you have a CEO with the requisite experience and leadership skills to get an important product like this to market, and I certainly feel that it would be more disruptive to shareholders -- because, obviously, if I run, there's no guarantee that I would win, but if I do this, I don't want to cause disruption about whether -- or any questions about whether I would come back to the company. So that's something that is important, and I want shareholders to be very comfortable with the fact that we can develop a product and take that product through a clinical trial with this leadership team.

Okay. Thanks for your answer. Thanks, guys.

Thanks.

(Operator instructions.)

We'll go back to Michael Moskoff with MRM Capital.

What did you say the gross margin rate would be with the reimbursing $300 and then $150?

Our target is in excess of 65%.

And the burn rate you guys had mentioned going into 2010 would be $1 million a month starting in the -- in Jan of 2010 or --

It will average that in 2010, and it will ramp slightly during the year.

Okay. Okay. Great. Thanks, guys.

And at this time we have no other questions. I'd like to turn the call back to the President and CEO, Kevin Conroy. Please go ahead, sir.

Well, thank you for joining the call. We are very pleased with the progress that we've made so far this year. We have really a terrific and enthusiastic team that is deeply involved now in the product-development efforts. In the last six months, not only have we built this terrific team but we've redesigned the target assay, we've entered into a very significant collaboration with the Mayo Clinic, we have planned for -- or we're in the process of planning for an important FDA clinical trial, we have funded the company for success, and we plan to close out 2009 at or ahead of our plan, and we really look forward to talking to you in early 2010 about the progress that we made full-year 2009. So thanks again for joining, and we look forward to talking to you.

And, again, that does conclude today's call. Again, thank you for your participation.