Exact Sciences Corp (EXAS) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Exact Sciences Corp. fourth-quarter and full-year 2010 earnings 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 program is being recorded.

I would now like to introduce your host for today's program, Ms. Cara Tucker. Please go ahead, ma'am.

Thank you very much and thank you for joining us for Exact Sciences fourth-quarter 2010 conference call. On the call today are Kevin Conroy, the Company's President and Chief Executive Officer, and Maneesh Arora, the Chief Financial Officer. Exact Sciences issued a news release earlier this morning detailing our fourth-quarter 2010 financial results. If you have not seen the release, please go to our website at ExactSciences.com or call 614-302-5622 and it will be provided to you.

Following the Safe Harbor statement, Maneesh Arora will provide a summary of our fourth-quarter financial results. Next, Kevin Conroy will provide a brief profile of the Company and product overview and a review of our 2010-2011 priorities.

Before we get under way, I would like to ask everyone to take note of the Safe Harbor paragraph that appears at the end of this news release issued this morning covering the Company's financial results. This paragraph states that any forward-looking statements that we make, one, speak only as of the date made; two, are subject to inherent risks and uncertainties, including those described in our most recently filed annual report on Form 10-K and our subsequently filed quarterly reports on Form 10-Q; and three, should not be unduly relied upon.

Except as otherwise required by the federal securities laws we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein or elsewhere to reflect any change in our expectations with regard thereto to any change in events, conditions, or circumstances on which any such statement is based.

It is my pleasure now to introduce our Chief Financial Officer, Maneesh Arora.

Thanks, Cara. Let's review our fourth-quarter financial highlights. The chief take away for the fourth quarter and all of 2010 is that we achieved several significant milestones including the completion of our validation study and beginning the preparation for our clinical trial while meeting our 2010 financial objectives.

We continued our investment in talented experienced people and the Company has grown to 42 employees. Three quarters of the team at Exact are focused either on product development or the clinical study. These investments are already paying dividends and will be particularly important as we continue to prepare for and execute our clinical trial.

While R&D increased during 2010, we worked diligently throughout the year to minimize cash utilization and our work paid off. We used just over $11 million of cash during 2010, below our guidance of $14 million. There were four key factors that drove this favorability.

There were a couple of unforecasted one-time events in stock option exercises and the government-sponsored therapeutic discovery project which the Company was the beneficiary of. Additionally, there was a shift in CapEx spending from 2010 into 2011. Finally and most importantly, we were able to drive operating efficiencies and run lean while achieving all of our business priorities.

Two stock offerings including a $64.7 million offering in November helped us end the year with $95.4 million in cash, cash equivalents, and marketable securities. In sum, we are well capitalized to execute on our priorities for 2011.

We will make our most significant investment in the clinical trial for our Cologuard product during 2011 and 2012. We will invest $20 million in the trial. As a result, we expect to use $29 million in cash during 2011. The investment we are making in the clinical trial represents the priority we continue to place on this important project and on creating value for shareholders.

It is now my pleasure to introduce Exact's President and CEO, Kevin Conroy. Kevin?

Thanks, Maneesh, and thanks, Cara. Thanks to the shareholders for joining us today. Before I get into a review of 2010 and a discussion of our priorities for 2011, let's first take a quick look at the problem that we are confronting and the opportunity that the Company has with our noninvasive colon cancer screening test.

Unfortunately due to the limited number of options, many of which are not patient-friendly, there is an unacceptably high colon cancer rate in the US and globally. In the US, there are 150,000 new cases every year and there are 50,000 deaths, 600,000 globally, and this is for a disease which is entirely preventable if detected early either as a precancerous polyp or in an early-stage treatable cancer. That's not what is occurring today.

On the whole, cancers are detected -- 60% of cancers are detected stage 3 or stage 4.

This slide shows that progression from small precancerous polyps to stage 4 cancer and the goal and our goal needs to be to detect precancerous polyps before they turn into cancer or at a minimum, to detect treatable stage cancer. That is why we are focused on a noninvasive test that will detect these precursor lesions or early-stage cancers to hopefully eventually reduce both incidence and mortality, something that is not driven today by current noninvasive tests in the market.

So as you can see here, there are approximately four million invasive procedures for colon cancer screening of average risk patients every year in the US. Those are patients primarily over the age of 50. That is the flexible sigmoidoscopy procedure and the colonoscopy procedure. So all together, there are about four million of those invasive tests.

There are 12 million, though, fecal blood tests. This is a combination of the older version, the FOBT test, which looks for a hidden or occult blood in the stool or the iFOBT or sometimes referred to as the FIT test, which is an immunochemical version of the same test looking for blood protein in the stool.

The problem with this test is cancer sensitivity is only 66% and that is weighted towards the later stage cancers. This test does not do a very good job. It has a very low precancer sensitivity rate. Our test will take aim at this fecal blood market. We intend to be a significant improvement over that noninvasive test and as you can see, there are 12 million of these tests performed every year.

Taking a look now at the opportunity -- if I can move this slide, there we go. The market opportunity here is significant. So with 80 million Americans eligible for screening today and target reimbursement of approximately $300 with repeat testing even achieving 30% penetration of this market leads to a $1.2 billion market opportunity. There are a lot of different ways you can get there. You can have lower penetration, more frequent testing, higher pricing, lower pricing. The general takeaway here is that this is a significant market opportunity. And to put this in perspective, this is larger than any current molecular diagnostic opportunity.

Our goal here is to execute operationally so we can get to this and to focus of the whole company and constituents on the opportunity that we face today with this noninvasive test.

This picture shows the current collection mechanism which will be used. There will be a paper collection device that goes under the toilet seat and a patient in the privacy of their own home can collect an eight gram stool sample, which is about the size of a grape, deposit it by injecting the white baskets directly into this 60 milliliter tube, which is a short tube, which contains a DNA preservative. So it's a very simple collection procedure and a very small sample.

There's no bowel prep required and one of the great things about this test is it can be simply mailed back to the clinical lab via the U.S. Postal Service. It is a very inexpensive collection device.

Now, let's talk about 2010. I am very pleased with the execution of the team in 2010 and the three priorities that we laid out at the beginning of the year, product development, clinical trial planning, and market development.

We faced a pretty significant hurdle in developing a test that vastly exceeded the prior versions of this test that the Company had developed in previous years and we achieved that goal. So we developed both extraction assays and detection assays which led to preclinical validation results that we were quite pleased with. We will talk about those results in more detail shortly.

We also developed a quality system which is critical as we head into a PMA clinical study. We are very happy with the progress that we made in defining the clinical trial study with the FDA. We've done all the work that you need to put the systems and people in place to begin enrolling by engaging a CRO and external clinical affairs team and we have begun the process of reviewing clinical trial sites. We've qualified well over 30 sites today and that process continues.

In terms of market development in the fourth quarter, we completed an initial go to market study which was an in-depth study, so we'll talk about that study later on in the call.

We also evaluated the ex-US market and we began the process of educating key opinion leaders, doctors, primary care physicians, gastroenterologists, labs, and payers. And so there has been a tremendous amount of work to be done to lead us into 2011.

Our 2010 validation study, a quick summary of that. There were approximately 1200 patients, both cancers, precancers, and normal samples and with a prototype product, we achieved strong sensitivity for cancer of 85%, precancer sensitivity of 64%, and 88% specificity. There are additional validation studies planned for 2011.

It is really important to note the increasing sensitivity of the test as the size of the adenoma increases. It is also important to note that the smaller the polyp, the less risk there is of colorectal cancer, so at a 1 centimeter polyp, there's less than 10% chance of that polyp proceeding to colon cancer. But today in colonoscopy, those polyps are removed.

A 3 centimeter polyp is almost certain to go to -- to progress to colon cancer, so what this shows you is our test fits very well as an adjunct to colonoscopy because we identify with an increasing level of sensitivity the more dangerous polyps so that they can go to colonoscopy and be removed.

Investors have asked what improvements we've made to the prototype product that achieved strong performance and here are some of the highlights. We have locked down the marker panel for the tests. We optimized the multiplex methylation assays. We have improved the DNA catcher efficiently significantly. This gives you more starting DNA, which gives you a better chance of achieving the sensitivity targets that we have set. And we have designed and developed a collection device which is ready to go to manufacture.

Again, additional validation studies will be performed this year on the validation loss of reagents that are developed with a lockdown assay.

Now let's talk about our 2011 priorities. Again, our 2010 priorities, we had strong execution which puts us in a very strong position going into 2011, which is an important year for the Company, and we are focused on three things -- product development, the actually running the clinical trial, starting the clinical trial and running it, and market development. Under product development, we are very focused on doing all of the things that are required to start the clinical trial, developing a quality system, design control, making developments loss of reagents, manufacturing the collection device, conducting all of the analytical studies that are required -- that the FDA requires as part of a PMA submission. And also I'm pleased to report that we will have an automation program that will be relatively simple automation. It will not be sample in/result out, but very achievable automation that A, makes the test easier to run for our laboratory customers. And B, makes the test more reproducible and repeatable.

We are able to bring this automation program into our product development program which was not planned without extending the timelines, so we are pleased with the team's effort in that regard. We really have a strong automation team in place within the Company. We are excited about this new program.

The clinical trial infrastructure and enrollment, the goal here is to have a minimum of 30 enrollment sites up to approximately 60 enrollment sites and we will begin enrollment in the third quarter of this year.

I want to make it clear that although we have achieved the major agreement with the FDA on the principal points of the study, there is of course additional discussions that will be ongoing during the course of 2011 to refine the protocol and to better prepare to begin the study.

Market development, in the next quarter we plan to hire a senior vice president of commercial. We have retained Spencer Stuart and we are interviewing candidates currently. This person will be responsible for putting together the market development plan, which is important, although we are -- tomorrow is not the day that we begin to commercialize the test. We have to act like it is and do all of the things that are required by publishing additional validation studies and scientific papers, reaching out to the key constituents that will help us create this market, and conducting the necessary economic studies that are required to achieve the reimbursement levels that we plan to achieve.

Now let's talk about our pivotal clinical trial design. This is a study of average risk patients, so we are not looking at high risk patients. We are looking at the patients that will be in the intended use for this product, the average risk patients over the age of 50. Every patient in this study will receive three tests, the Cologuard test, which as you probably recall includes embedded in it an FIT test.

Also a distinct separate commercially available FIT test and those tests will be followed by a colonoscopy procedure. Subjects will be between the ages of 50 and 84 and it's important to note that Medicare has offered to do a parallel review, which is not common, but a parallel review of a national coverage decision which potentially gives the Company an opportunity to have FDA approval and national coverage by CMS at the same time. That would potentially save two years, which is the typical delay in achieving Medicare coverage.

Just as a side, Medicare covers about 50% of patients over the age of 50, so that is a very meaningful event should it occur.

A closer look at the numbers, the number of patients in the study would be in excess of 8600 up to approximately 12,000, a minimum of 30 enrollment sites, a minimum of 49 cancer patients hopefully up to 70 cancer patients in the study. Pre-cancer patients 400 to 600, timing about 12 months for enrollment, and you should think about another three months thereafter to put together the PMA and do the submission. So altogether, about 15 months from the start of the trial to submission to the FDA, and a cost of approximately $20 million.

The FDA has given us a lower bound of a confidence interval as the primary endpoint that we need to exceed, that is 65% again at the lower bound of the 95% confidence interval. What does this mean? Well, with 85% point sensitivity, we are well north of the 65% lower bound with even 49 cancers. Obviously we will seek to enroll as many cancers as possible so that those error bars are narrowed and we believe that this goal puts us in a very strong position to achieve the primary endpoint that the FDA has laid out, and it's a logical lower bound.

Today, we know from the Morikawa study, which is a long-term study of FIT screening, that showed a 66% sensitivity for the FIT test. So the FDA is saying we want to see you exceed that level of sensitivity at the lower bound for this noninvasive colon cancer screening test. We believe that this is again achievable and it's great to work with the FDA and to get this level of clarity.

Now let's turn our attention to just selected highlights from our market research. We conducted over 300 interviews with primary care physicians, with gastroenterologists, with payers, with patients, with OB/GYNs, all the key constituents that you really need to understand their mentality going into developing a go to market strategy.

One of the things of note was that 87% of physicians stated that they would recommend sDNA testing for at least some portion of their average risk patients and those physicians believe that Cologuard could become the primary adjunct to colonoscopy screening. 80% of surveyed patients favored Cologuard over FIT because of test performance and 50% of FOBT tests today are being done in improperly. That is known by physicians. It's known by payers.

There is a very low physician awareness of the differences between FIT and FOBT but the problem they have is that there's no great alternative for patients who simply refuse to go to colonoscopy. So hopefully we can address that unmet need.

Currently there isn't a major player willing to invest in FIT marketing in a major way because there is such great fragmentation among the FOBT/FIT market.

So elective feedback from our market research shows OB/GYNs understand that the whole goal here is to identify precancerous lesions in a noninvasive way. GIs have said the same thing. Intervention is critical before the polyp turns to cancer.

Large payers have acknowledged that FOBT is not being done correctly now and we need to highlight that in our marketing efforts as we go forward. An average risk patients when presented with the sensitivity of precancerous polyps with potential stool DNA tests indicate that if the population knew this, they would be very open to a stool DNA test.

Now coming back to 2011 guidance, we want to reiterate our guidance that we believe our test will meet or exceed 85% cancer sensitivity and greater than 90% specificity. We will have in excess of 9000 normal patients if the specificity calculation is performed on. That is a huge number of samples, so that will have extremely tight confidence intervals and with the improvements that we have made to the test, we think that will help achieve both of these goals.

Our clinical trial enrollment again will begin in the third quarter of this year and we plan to enroll a minimum of 8600 patients. FDA submission is anticipated in 2012.

Key milestones, these basically haven't changed from 2009 forward. We laid out these milestones and the team has done a great job of executing on them.

In conclusion, we as a team are totally focused on execution. We know that a PMA study is all about the details. We are very pleased with the validation results that were achieved last year. We plan to commence this FDA study, which is a major prospective study which we believe will garner significant attention in the colon cancer screening facility community. And our research shows that there is a significant unmet need that can be addressed leading to one of the largest markets in molecular diagnostics.

Finally, I would like to thank the team at Exact Sciences. We now are over 42 employees and the team has done just a tremendous job in 2010 and has started the year off strong in 2011. Thanks for all of your efforts.

And now I would like to turn this over to shareholders for any questions.

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

Question, when you start to put together the enrollment for the clinical trials, normal asymptomatic -- does that -- I guess do you assume that you are not going to get a whole lot of stage 4 or is there any way to exclude stage 4 from that clinical trial?

That is something that we have to discuss with the FDA, whether it's really a decision that they need to make as to whether stage 4 patients should be included in a screening population and whether that's part of the intended use of the test and that's one of the discussions that I referred to earlier that we still need to have with the agency.

Could you give us an update on kind of the test? Because the test that you did for the preclinical trial had to use kind of a modified FIT for the frozen samples. Give us a little update on using I guess the FIT that you desire for the tests going forward on fresh frozen stools and kind of your expectations for -- sensitivity.

Sure, one of the important things to note is that the [hemaoccult] test, which is the male version and a 25-year-old version of the fecal occult blood test didn't perform very well on the samples that had been stored for up to seven years in a buffer. So they didn't meaningfully contribute to cancer sensitivity.

We will be using a FDA-cleared FIT test that will be embedded as a part of our test and that will give us the ability to we believe achieve a greater level of sensitivity. Unfortunately these FIT tests don't work with a stool that is stored in the DNA buffer, so that will have to be a side-by-side collection as part of our test. That's no problem whatsoever because the FIT test is such a simple collection, it is basically like a pinprick. And we will combine that FIT tests, which we believe will give us room for improvement on our cancer sensitivity.

So if you think of those tests at even configured at a 99.9% specificity cut off, if it picks up an incremental 50% of cancers and assuming that bleeding is independent from methylation status, that that will give us several additional points up to let's call it between 3% and 7% incremental points of sensitivity for cancer over what we saw previously. That gives us the ability to tune the cutoff to either improve sensitivity or specificity.

Long answer, but it's an important question and the FIT test is not a research project. It is a test that will be simply incorporated into the collection process and the instrumentation offered to the clinical lab.

So then final question and I will hop back into the queue. So when you talk about the lower bound of 65%, I'm assuming that that's 90% specificity. And then if that's the case, what if you decide to let's say put the cut up to let's say 95% specificity? Would that change the lower bound that you have to go up against?

That would not change the lower bound, so what that would require us to do is to better power the study. But there's still obviously a -- because there's not significant fall off in sensitivity in a major way if you increase the specificity to between 93% and 95%, we're still very comfortable with that 65% lower bound.

Excellent, thank you.

Bill Quirk, Piper Jaffray.

Good afternoon, everybody. It's actually Dave Clair here for Bill. Not good afternoon, good morning. Anyway, can you give us some additional color on the validation studies that you are planning for 2011? And when should we expect to see any data? How will this differ from the prior validation study?

Thanks, Dave. We are enrolling patients today through 14 collection sites to collect as many cancers as possible, so our target is approximately 300 additional cancers at 14 different enrollment sites. That will give us an opportunity to both A, conduct additional product development testing internally and also do validation study testing. Mayo Clinic is also enrolling in two of its sites in Arizona and also in Minnesota precancer subjects so that we will have a sufficient number of samples to conduct additional validation studies.

Unlike last year, we are not going to provide guidance as to when that validation study will be done because our main goal is to focus on the priorities that we have laid out and we don't want to create a major external set of expectations around this. Suffice it to say the studies will be done and they will be done on both cancers and pre-cancers and the numbers will be determined in the months ahead. But it's not something that we would like to guide to at this juncture.

Okay, then just a real quick question on the P&L for the quarter. [Asset] sales and marketing expenses were a little bit higher than what we were looking for. Is that kind of a run rate that we should think about going forward? What was behind the spike there?

No, Dave, the sales and marketing, you should not look at that as a run rate item. One of the priorities that Kevin alluded to earlier was the market study, the initial US go to market study, and the vast majority of that expense was incurred in Q4.

So you should not look at that as a run rate. It was a little bit higher than the earlier quarters. You won't see it go back to Q2-Q3 levels especially as Kevin alluded to, we will be bringing on a leader ahead of commercial, so we will see it inch up but not at Q4 levels.

Okay, fair enough. And then just a real quick one, I know that you had talked a little bit in your prepared remarks about automation. Can you give us a little bit more color on what exactly that entails? Anything you can provide there would be great.

Sure, one of the key things that we want to automate is DNA extraction and there are obviously a lot of platforms out there that are robust and very good at that. We don't want to or we don't intend to at this point in time to automate all of the steps involved, so there will still be manual interaction with an instrument.

There will also -- we are also looking at automation for plate set up, that is depositing the reagents, the probes, the primers, and the enzymes, which automates the pipetting, which reduces some variability, which makes us more confident in the performance of the test. Manual pipetting can cause variability and with that variability comes more variability in performance. So we would like to reduce that as much as possible.

We will talk about this more as we progress forward. There's still a lot of work that needs to be done, but we are not trying to bite off too much here. We're trying to do the minimal amount necessary to make life a lot easier for our customers and more reproducible for our end customers patients.

All right, thanks a lot.

Brian Weinstein, William Blair.

Good morning, everyone. Question for you. You've talked about the 65% cut off as what FDA is looking for in cancer detection. Have they ever said what they want on precancer detection?

That is not their main concern, in part because there's no other noninvasive tests that detects precancers at any significant level. So if you take a look at the other noninvasive tests, you'd see precancer sensitivity in the 20% range.

So the FDA had zeroed in on the cancer sensitivity. They are obviously concerned about cancer misses, which is why they are focused in on the lower bound of the cancer sensitivity. And that's where we are with that.

So if you were to achieve the cancer sensitivity of 85% but show something less than 65% on precancer, you don't think that that would necessarily be a hurdle to approval?

That is correct. We hope to have in the package insert what the precancer sensitivity was in this study, but that is not at this juncture a critical item. It certainly will be something that the agency looks at and obviously the agency looks at all of the factors of the study. And again, we believe that we will be over 50% cancer -- precancer sensitivity and putting that in perspective, that's in the ballpark of where the pap test is today, which is obviously approved and quite effective on an interval screening program, a regular interval screening program.

So should we somehow fall short of 50% precancer sensitivity, we don't think that would affect approval, but obviously that's the FDA's decision not ours.

Okay. And then do you guys want to comment at all about what the final marker set looks like?

Not at this juncture. At the appropriate time, we will, but for competitive reasons, we are not going to discuss specific markers that are in the final panel.

Okay, great. Thank you.

(Operator Instructions) Stephen Unger, Lazard Capital Markets.

Thanks. Kevin, just a follow-up on that. As far as the validation studies, are you using the same markers set that you used before and just a different fecal blood test?

We are not adding any new markers, Steve. As you know, the marker selection here has been extremely rigorous starting with the sequencing study moving to a tissue study with quartz assays, moving to a stool DNA study. There is really nobody who was ever conducted such a significant study and its -- what Graham Lidgard and his team has done has been very impressive. I think we know more about the effectiveness or validity of methylation markers than anybody up until this point in colon cancer screening.

And so we will talk about those additional markers. We're just not ready to do that quite yet for competitive reasons.

Then what does the addition of the fecal blood test to the product do for you? Does it add more sensitivity or -- and maybe reduces specificity? Is that correct?

Think about it this way, Steve. If we achieve 85% sensitivity without a fecal blood marker in our product, then theoretically assuming that there is very little correlation between methylation status and the blood being present in the stool, which is really a mechanical issue, then this test should -- then the FIT test should contribute approximately 50% incremental improvement over that 85%.

So if there is -- you get half the way to the goal line additionally with the FIT tests. If it's 50% sensitive, half of 15% would be 7.5%. We try to be conservative and think, well, let's say that that really means an additional 3 or 4 percentage points of sensitivity, but anyway you look at it, it improves cancer detection sensitivity and gives you the ability to increase the cut off slightly to potentially increase your specificity. Does that help?

Yes, okay. And then as far as the original validation study using FOBT, what would adding -- if you have used FIT instead, that would have given you greater sensitivity then?

Yes, and again the reason we couldn't do that is because these samples had been stored frozen in DNA buffer that degrades the blood protein and they had been stored for up to seven years.

So as part of our FDA study, we believe that the FIT test will incrementally help us. It certainly can't hurt especially if you set the cut off at 100%. So investors should feel very comfortable that there's upside here by adding the FIT component, very little if any downside to doing so, and it's a very simple collection procedure.

Again, it's basically a small stick that you just collect a very small amount of stool and put into a very small -- about a 10 milliliter tube.

That would come in the same kit, right, for customers?

Exactly, it would come in the same kit. The sample is right there. Easy to do, easy to put into the mailer, easy to send back to the lab, and very easy for the lab to run that immunoassay test.

Great. And then just one question more on what is the European marketing plan at this point?

Sure, so Europe is a complicated market because it's not one market. It's a whole bunch of markets and you have different reimbursement hurdles and different go to market strategies and distribution strategies for each of those markets. As a result, our takeaway from our EU study is that although we need to now start to think about that market, we need to prioritize the US market, which is larger, better reimbursement, easier to access the whole market.

We will continue to look at the EU market especially after we get ahead of commercial on board, but the main focus will be on the US market, Steve.

Great, thank you.

Thank you. This does conclude the question-and-answer session of today's program. I would like to turn the program back to management for any further remarks.

We have no further remarks. Thank you very much for attending today.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.