Exact Sciences Corp (EXAS) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EXACT Sciences fourth-quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Rod Hise.

Thank you for joining us for EXACT Sciences' fourth-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 fourth-quarter and full-year 2009 financial results. If you haven't seen the release, please go to our website 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 fourth-quarter financial results. Next, Kevin will provide comments about the Company, its 2009 accomplishments and its 2010 priorities. Immediately following our prepared comments, 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 strategy; our available cash and cash equivalents; and our business and financial outlook.

These forward-looking statement 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 the result of new information, future events or circumstances or otherwise.

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

Thanks, Rod, and good morning, everyone. We were really pleased with our financial performance in 2009. We were able to recapitalize the Company and focus on our key priorities while efficiently utilizing cash.

Fourth-quarter revenue increased due to the quarterly allocation from last year's licensing transaction with Genzyme. These non-cash allocations will continue for another four years.

During the fourth quarter, we continued to invest in the development of our patient-friendly stool DNA, or sDNA, screening test. We made outstanding additions to an already stellar R&D team. We also invested in several pieces of equipment necessary for our ongoing product development activities. These were primarily responsible for the year-over-year increases in R&D expense and the quarter-to quarter increase in cash utilization.

We ended the quarter with cash, cash equivalents and marketable securities of $24.3 million.

Our major focus in 2010 is our 2000-person preclinical validation study, which Kevin will speak to later. Based on our current plans, we expect to utilize approximately $14 million in cash during the year. And we plan to raise $20 million to $40 million in additional capital to continue to execute on our plan.

It is now my pleasure to introduce Kevin Conroy, EXACT's President and CEO, to review the fourth quarter and 2009 in more detail. Kevin?

Thanks, Maneesh, and to those of you on the call, thanks for joining us. This morning, I will provide an overview of EXACT Sciences, our market opportunity, timelines, 2009 performance and 2010 priorities. Afterwards, I would be happy to answer any of your questions.

First, colon cancer statistics. In 2008, about 150,000 people in the US were diagnosed with colon cancer. 50,000 people died of the disease. 600,000 died worldwide. Our mission is nothing short of making colon cancer eradication possible through an accurate and patient-friendly screening test.

A quick overview of EXACT Sciences. We have a test that detects -- a DNA test that detects both cancers and pre-cancers. This test meets a major unmet need in the marketplace, leading to a pretty massive market opportunity. We enjoy an exclusive IP position in this market, and we really have a strong management team here, with Maneesh, with Graham and Barry, who have experience in running clinical trials and, most importantly, in molecular diagnostics.

We enjoy a very strong balance sheet with $24.3 million in cash.

Colon cancer. Colon cancer is known by many as the most preventable yet least presented cancer. It takes 10 to 15 years for colon cancer to go from a pre-cancerous polyp to late-stage cancer. We have all the time in the world to detect and remove the precancerous polyps, but we are not doing it, mainly because we don't have a screening tool that people will comply with.

Taking a look at cancer mortality statistics, there is an interesting story here. With 50,000 people dying every year of colon cancer, which again takes 10 to 15 years to go from a precancerous polyp to death, compare that to cervical cancer, which takes about six to eight years to go from a pre-cancer to death.

In the 1940s, before the Pap test came along, deaths from cervical cancer were north of 30,000 a year. It was the second largest killer of -- cancer killer among women. But the Pap test changed that. And the little-known fact about the Pap test, it is only 50% to 70% sensitive.

So we think that we can do with an sDNA test for colon cancer what the Pap test has done for cervical cancer.

Our test will detect the precancerous polyps that lead to cancer, but it will also detect at a very high sensitivity stage one through four cancers. Today, the compliance is terrible; only about 25% of patients comply with current screening methodologies. And of those over the age of 50, half haven't been screened at all. Half haven't been screened at all. There is just a major opportunity here.

One of the reasons that people don't get screened for colon cancer is that the patient has to purge their colon before having a colonoscope. This means that the patient has to drink an entire bottle of liquid, eight ounces at a time, every five to 10 minutes for about two hours, and this is challenging for some patients to do. The next day, following sedation, they are confronted with a six-foot metal and plastic tube called a colonoscope.

There is a great deal of patient fear and discomfort around colonoscopy that we believe an sDNA test will, coupled with, will help lead to greater compliance. Poor compliance today leads to 63% of all cancers are detected at late-stage. They are detected through bleeding.

So symptoms should not be cancer screening. With the modern, powerful DNA markers and tools that we have, we should be able to screen patients a lot better than we do today.

Patients that are detected late-stage have terrible survival odds -- stage three, only 54% and stage four, only 8% five-year survival rates.

With a powerful sDNA test, our tests will help lead to colonoscopies that are targeted to those patients who have either polyps, or hopefully, in the worst-case situation early-stage cancer. Because of the vast number of Americans, 90 million in total, over the age of 50, the market opportunity here for regular sDNA screening presents a pretty significant opportunity, in excess of 1.2 billion, and this only assumes 30% adoption of our test.

Now let's take a look at the competitive landscape. What you see here is colonoscopy as the gold standard, which we think will be a gold standard for years to come. It's very effective at detecting cancers, but it is at a high price point. And we are maxed up in this country in terms of capacity for colonoscopies -- screening colonoscopies -- at roughly 2 million per year.

The other key tests are the fecal blood test, fecal occult blood tests, and the FIT test. Now, these tests require a patient to modify their diet and typically require three days of collection, yet only have 20% sensitivity for pre-cancer. This just isn't good enough. And only up to 50% sensitivity for cancer.

Although the price point is better, and roughly 7 million of these tests are performed every year, they are not effective enough at detecting pre-cancers to make a significant impact on cancer prevention.

I think it is worthy of noting the blood DNA test that some companies are trying to pursue. These tests have demonstrated very poor sensitivity for pre-cancer. Here is a study showing only 18% sensitivity for pre-cancers, and another study that shows 50% sensitivity for cancer, including stage four cancers.

Let's take a closer look at our test it now. We want to share with you a development in our product strategy. In the past, we have talked with you about our powerful DNA markers, vimentin coupled with KRAS and APC markers. We have chosen to add FIT, or Fecal Immunochemical component, to our test.

FIT will enable our test to detect additional cancers without increasing its false positive rate. We will set the cutoff very high for this component of the test. Some people wonder about stool-based cancer screening, but there are 7 million to 8 million stool-based FIT tests performed every year, mostly by primary care physicians.

We believe that our strategy will have two benefits. Number one, it will increase performance, and number two, it will ease physician adoption of our test.

To recap the benefits of sDNA, it is noninvasive, it's accurate, it's patient friendly, there is no bowel prep required, no diet or medication restrictions. You can access this test through the mail. There is virtually unlimited access. It is affordable, and it detects both pre-cancers and cancer.

We enjoy a very broad patent stage, which I assure you is getting stronger by the day. And I am very happy to report -- and I will stress this -- that in 2008, the American Cancer Society, at the recommendation of the key G.I. societies, got behind sDNA as one of the preferred screening methods for colon cancer. This fact has triggered mandatory coverage in 12 states, and CIGNA has already made a national coverage decision. Now, there is a lot of work to be done in this area, but this is a good indicator that with the societies backing this test, that eventually we expect to be able to get payor to get on board.

You know our 2009 priorities. The first was a focus on product development. Second, on clinical trial planning. And third, on creating a real culture of performance at the Company.

Let me recap our 2009 performance. First and foremost, we simplified a collection device, taking it from a bucket down to a small vial that is both patient-friendly and lab-friendly. We have simplified the test, the markers and the lab workflow, making this test readily automatable on standard lab equipment. Let me say that again. Readily automatable on standard lab equipment.

We are utilizing what we believe to be a superior detection chemistry, the real-time qInvader detection chemistry, and we are seeing tremendous results in the lab with this chemistry.

We have developed detailed clinical trial plans, and we engage with the FDA, Medicare, the American Cancer Society, to refine our trial design and to get their inputs. Our goal is not to run two trials, one for the FDA and one for Medicare, but to get all of those inputs upfront. We are very, very happy with the engagement of those groups.

We have developed a budget. We've gone through an RFP process. We are down to two CROs that we will select the finalist pretty quickly here.

We've recruited top-tier investigators. Barry Berger has done a wonderful job here with clinical trial planning.

We've really created a culture of performance here. Maneesh has taken the lead internally. When we joined the Company, we did in-depth market research and developed strategic and operating plans. We hired Graham Lidgard, who really is a world-class Chief Science Officer. I can't overstate the contributions that he has brought to the Company in terms of product development.

We have rebuilt a strong R&D team. We entered into a collaboration with the Mayo Clinic, which we think will pay dividends for years to come. We've strengthened our intellectual property portfolio, which we continue to do, and our balance sheet.

Now let me discuss our 2010 priorities. First and foremost is product development. We will and we must develop a patient-friendly, highly accurate test that is easy to use in a clinical lab. Today, we are focusing on refining the extraction and detection assays, and we are seeing tremendous progress.

In the back half of this year, we will run a pre-clinical validation study at an external site, at a very credible lab, that will prove out -- we believe will prove out the performance characteristics of our test.

We will then focus on completing a quality system and developing -- running all of the tests and documentations that are required for any successful diagnostics company.

Our second priority is clinical trial planning. We will shortly here engage a CRO, finalize our FDA study design, engage clinical trial sites and secure IRB approvals.

Third, market development. Though commercializing our test is a short while off, we think it is very important to develop a go-to-market plan. In doing so, we will engage key GI, primary care physician, lab and payor leaders.

We also plan to study the tremendous successes of CITECH and Digene with their ThinPrep and HPV tests. We believe those cases studies are very, very important to understand and to learn lessons from.

Finally, we will evaluate and deeply understand the ex-US market.

Our product milestones; again, in the second half of this year, we will publish data on 2200 patients, both normals and cancer subjects -- so roughly 2000 normals and 200 cancer subjects -- which will establish the performance characteristics of our test, both sensitivity and specificity. This is a very well-powered study that should give investors and it certainly will give the team tremendous confidence heading into our clinical trial, which will commence next year.

We will also submit to the FDA -- we anticipate submitting to the FDA in 2012 and launching a product after FDA approval.

The key takeaways here is that, first and foremost, there is a significant unmet need here, and we believe that a powerful sDNA test meets that need and creates a significant market opportunity. There is a very reasonable FDA approval path that we see. And we have an experienced team, very focused on execution.

Finally, I would like to thank all of our outstanding employees at EXACT Sciences. I appreciate your deep commitment and passion for our mission here. And now, I would be happy to take any investor questions.

(Operator Instructions) Quintin Lai, Robert W. Baird.

Thanks for taking the question. With respect to the adding FIT to the sDNA, does that change anything with respect to timing of the start of the preclinical trials?

No, not at all. Those tests and technologies are available in the marketplace, as you know. Immunoassay tests are pretty easy to develop and to run in a clinical lab, and that is in progress as we speak.

So then as you envision the test, Kevin, it will be two separate tests run. And then does that then go into kind of a scoring mechanism?

No, not all. So if any component of our test is positive, there is a positive test result. So some patients may not have one of the biomarkers or that biomarker is not detected -- or DNA marker may not be detected. But there may be blood in the stool, in which case that patient needs to go to colonoscopy. So it is really any of the markers being positive will lead to colonoscopy.

And I know it is really, really premature, but in terms of pricing, do you anticipate stacking the two tests together or kind of an all-in-one test price?

It will be an all-in-one price. Certainly, stacking will apply up until the point in time that we have our own code and own price for the entire test. And significantly, this adds to the overall value of the test, which payors will look to when they set prices.

And then Maneesh, as we look out to the year, you kind of guided to a $14 million cash usage. Should we kind of stagger that out, and as the pre-clinical trial gets rolling, then ramp it up as the year progresses? Or I guess how should we be looking, especially on the R&D line?

Yes, that is consistent with what we've said. The R&D line and expenses in R&D will continually grow into the back half of the year, so it will be a steady ramp.

All right. Thank you. I'll jump back in the queue.

Elemer Piros, Rodman.

Thanks for the overview. In order to be able to start this 2200 sample preclinical study, you would have to have the assay locked down. At what point do you anticipate that? And at that point, would you communicate how -- what the assay looks like, how many markers you use, etc.?

We will lock down the assay and run that assay against the samples in the back half of the year. But let me take a step back.

What we are doing right now is we have engaged with the Mayo Clinic, which, as you can imagine, performs a few colonoscopies every year, to collect 2000 samples from patients who have had no findings with colonoscopy. So all of those samples should come back with our test with a negative result. In other words, that is our specificity study. That will tell us the false positive rate.

So enrollment has started. We have begun to collect those samples. And that will ramp up over the next few months.

And then in the back half -- and also, we will have -- we already have 200 characterized samples of positive subjects, both pre-cancers and cancer. Now 200 is a big number, so that will -- we will have a very well-powered study. This will occur in the second half of the year. So we should finish the collection of the samples and the development of the assay at the same times.

In terms of telling the world what markers will be involved in the study, that will probably occur upon completion of the study. It's actually a pretty good question. I don't think that we will disclose the various markers that we will test. And we will test more than just vimentin, KRAS and APC. And we will optimize the assay if we see one marker performing better than another marker and potentially include those.

So that is our general approach to this preclinical validation study. And we already have enough data, and this is important. There have been a lot of studies performed to date. We know how these markers perform, and we know how they should perform in aggregate. So hopefully that answers your question.

Yes, certainly it does. Thank you very much.

Isaac Ro, Leerink Swann.

Thanks for taking the question. It's actually Justin for Isaac. So looking at -- I think you said you have about $24 million in cash on the balance sheet, and you're going to burn about $14 million this year and looking to raise a little bit more.

As we look into next year and the start of the clinical trial, how should we look at cash burn and how much you're going to raise? Are you guys going to need additional cash beyond the raise you talked about on the call, or that should be enough to carry you over the next couple of years?

The range we provided on the call will get us through FDA clearance. And the way to think about it is, we know the clinical trial will cost between $15 million and $20 million, and the rest of the math, you can do. We feel very comfortable that will get us to clearance.

Okay. That's helpful. And then looking at the release of the data, talking about later this year, would you look to some type of scientific conference or something, or would it just be from a press release from you guys?

We really hope to have this study in a major publication and presented by our collaborators at a major conference. The timing on that is always a bit of a challenge, because we want to get that data out as quickly as possible. So it really depends upon when that data is available.

All right. So it will be more when the data is available in terms of which conference you would use?

That's correct.

All right. Thanks a lot, guys.

[Michael Moskoff], MRM Capital.

Just some clarification -- regarding the clinical trial planning that you mentioned, when is that going to start?

The clinical trial planning started last year, with a really heavy focus in the fourth quarter. And now the clinical trial execution begins this year. In terms of signing up, the investigators by and large have already been signed up. We've already had a major investigator meeting. And we are going through all of the IRB processes and steps to get IRB approvals. We are engaging a CRO. We are refining the trial design. All of the things that really determine clinical trial success.

As you know, running a clinical trial, Murphy's Law does apply, and the more you focus on areas of risk now and mitigating those arrests, the more likelihood that you won't run into challenges later on.

But you guys said that your goal was to submit to the FDA by 2012, correct? That is what you said on this call?

That's correct.

Okay, so the money you are looking to raise in conjunction with this year, it will get you to FDA clearance. So assuming you raise the $20 million to $40 million in 2010, that will get you to 2012?

No, $40 million would take you all the way to clearance. $20 million would get you through the results of a clinical trial. And our modeling always assumes that we have -- we never go below $10 million in cash.

Okay, so the clearance is really the submission to the FDA, is that correct?

That's correct.

Okay. All right, great. Thank you, guys.

Phil Kobierowski, TCS.

I'm wondering if you could take me a little bit through the thought process or the things that you considered when including an FIT component in there with the test.

Sure. It was both scientific and medical. The scientific component was really driven by Graham Lidgard, who, having 30 years of experience in developing diagnostic tests, looked at all the data and said, look, if you include an FIT component to this test, but you set the specificity, or the cutoff, really, really high, so that you minimize any false positives from the FIT component, you will add to the sensitivity without taking a specificity hit.

Okay. So that made sense. So we ran that idea by leaders at the American Cancer Society, Mayo, key GIs, and the resounding response from the medical community was this is a no-brainer, and we hope you do it.

The next consideration was a strategic marketing consideration. That consideration says, hey, look, doctors are already performing 7 million to 8 million FIT tests a year, 75% or more of which the results are generated right in the doctor's offices. So if we can offer an FIT test coupled with a really powerful DNA test, we believe that we will have greater adoption and faster adoption, because it is a component that physicians today are already very familiar with.

From their point of view, it won't be a complete switch. It will be taking what they are already performing, which they know the failings of, and adding a powerful, modern [SDA] component to it. So those were the three main considerations, scientific, medical and strategic marketing.

Okay. I appreciate those details, and you kind of answered my next question. It was going to be addressing the false positives that come from FIT, but I think you've answered by saying you're going to set the threshold marker very high for high specificity. Is that what I understood?

Yes. And the other piece here is we took it to clinical laboratorians and said, what do you think about this. And they said this is barely going to affect the workflow. These tests are easy to run with simple instruments that already exist and are FDA cleared. And so they really see the benefit of this strategy as well.

Is it going to require any more preparation on the part of the -- or restrictions, dietary restrictions, on the part of the patient to go through this test, as a result of including the FIT component?

No, the FIT test doesn't require that same type of dietary restriction, fortunately, and setting the high cutoff is significant here.

All right. Thank you very much.

(Operator Instructions) Quintin Lai.

Thanks for taking the follow-up. Could you kind of give us an update on your lab buildout? You kind of alluded to it a little bit on the prepared remarks. What do you feel like that your R&D facilities are, and then kind of any CapEx expectations in 2010.

Our lab facility is up and running, and we are actually very excited about the progress we have made there. And the CapEx expectations are incorporated in the guidance we provided, and they are just not significant. We actually have in place in the fourth quarter many of the standard live instruments that we need to run product development. So from a CapEx standpoint, you should expect approximately $1 million in 2010, which is incorporated into the guidance.

And then I missed it, Kevin. Did you mention how many FITs are run in the US per year?

Combined FOBT, plus FIT -- and let me explain this. The FOBT test is the older version of the fecal blood test and it is less sensitive than FIT.

Combined, there are 7 million to 8 million a year, and that mix is starting to move away from FOBT towards FIT. There are some market dynamics at play there which may impede that transition. But it is 7 million to 8 million tests a year.

Now, even if you get 1 million of those 7 million to 8 million at the outset, you have an awfully strong business here. And we believe over the long haul that we will be able to capture a significant chunk of those FOBT and FIT tests.

Thank you very much.

Steve Laken, Cephos Corporation.

My question has to relate to the uptick of the test, and the use of FIT. So one of the things that you discussed is the use of the physician taking FIT in the office. But the problem with that is that it is a very small amount and the sensitivity and specificity of the FIT taken in the office isn't nearly as good as a triple card.

The second thing is that the rates of occult testing have gone down, but the rate of colonoscopy or sigmoidoscopy have virtually remained the same over the last 15 years.

And the question I have is there needs to be a fundamental shift in people wanting to get screened for colon cancer, which hasn't changed for 15 years despite all the rhetoric that has been told about how important it is. How was it that EXACT is going to convince the 75% of the people that have never been screened or don't want to get screened or don't want to think about cancer to get screened?

Yes. You know, that's a great question, and that is the question that is the $100,000 question. And you have to go back to taking a look at the products that are on the market. The reason that people don't -- more people don't want to get colonoscopies [is obvious]. The reason that more people don't get FOBT is in part because it is a test that isn't accurate. If you interview primary care physicians, what most of them will tell you -- the 60-year-old primary care physicians will tell you that they've run FOBT tests their entire career and haven't saved a life. It's -- these tests aren't very effective. So they are not really pushed by primary care physicians, who know that they are not very effective.

So in order to really drive compliance north, you either need to make colonoscopy patient-friendly, which, if you figure that out, then you are in -- you will make a lot of money. But also if you -- you need to engage physicians and show them a test that detects pre-cancers and cancers at a high rate. You also need to educate patients.

And I would like to take people back to an HPV test. Now, an HPV test is enjoying today north of 30% adoption among women over the age of 30. But there was already a great test in market, the Pap test. The reason they were successful is because they were -- Digene was brilliant in their marketing strategy. They engaged both physicians and patients simultaneously to get the adoption rates. That will be a challenge for the future.

(Operator Instructions) I am showing no further questions in the queue. I would like to turn the call back to Kevin Conroy, President and CEO.

Well, again, I would like to thank you for taking the time to sit in on our fourth-quarter conference. And I want to reiterate the fact that this team is hyper-focused on one thing, and that is developing and getting approval for and then marketing an effective and powerful stool DNA cancer screening test. Thanks for joining us, and we look forward to updating you in the future.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.