Exact Sciences - Earnings Call - Q1 2010

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to your Exact Sciences first quarter earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions on how to participate will be given at that time. If anyone requires operator assistance during today's call, please press star then zero on your touch-tone phone. As a reminder, today's call is being recorded. At this time, I would now like to turn the conference over to your host, Mr. Rod Heiss. Sir, you may begin.

Rod Heiss (Head of Investor Relations)

Thank you. Thank you for joining us for Exact Sciences first quarter 2010 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 first quarter 2010 financial results. If you haven't seen it, 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 first quarter financial highlights. Next, Kevin will provide comments about the company and its 2010 priorities. 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 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 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 here in 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. Now, I'd like to introduce Exact Sciences' Chief Financial Officer, Maneesh Arora. Manish.

Maneesh Arora (CFO)

Thank you, Rod, and good morning, everyone. We remain pleased with the progress we're making. There are two key highlights from the first quarter financials that I'd like to point out. First, we continue to invest significant resources in research and development in anticipation of running a preclinical study in the second half of 2010 while efficiently managing our general administrative and infrastructure expenses. Our headcount has increased to 28, with the bulk of our people deployed in research and development. The second highlight, our cash utilization is on track with expectations, and our balance sheet is strong. We ended the first quarter with cash, cash equivalents, and marketable securities of $22.4 million. We used $1.9 million in cash during the first quarter. In April, we completed a stock offering of $17.6 million, bringing our cash balance to approximately $40 million.

At the time of the stock offering, our share price was a full $2 higher than it had been late last year, and we took the opportunity to secure capital for our clinical trial while minimizing shareholder dilution. In summary, we believe the company is on track to deliver on the priorities for 2010 and we're well capitalized to execute on our plan. Now, my pleasure to introduce Exact Sciences' President and CEO, Kevin Conroy. Kevin.

Kevin Conroy (CEO)

Thank you, Maneesh. Before providing an update on the progress towards our 2010 priorities, I'll provide a quick overview of Exact Sciences. Exact Sciences is developing a patient-friendly cancer and precancer screening test that we believe will lead eventually to the prevention of cancer, of colon cancer. Our test detects certain DNA markers inherent in both cancers and precancers. This test will meet a major unmet need. It's a huge market. There are over 100 million people in the U.S. over the age of 50 within the current screening guidelines. We have a very strong and exclusive intellectual property position in this field. I'm pleased that we have a strong management team with significant experience and $40 million in cash upon the close of our recent offering. A little bit about colon cancer statistics.

There are 150,000 new cases of colon cancer every year in the U.S., 50,000 deaths in the U.S., and 600,000 deaths globally. This is despite the fact that colon cancer is widely known as the most preventable, yet least prevented cancer. Colon cancer takes 10-15 years to go from a precursor cancer lesion to full-blown metastasized cancer. There is a significant amount of time to detect and remove the precancer. The mortality rate for colon cancer is shocking: 50,000 deaths per year in the U.S. Cervical cancer, it is interesting to note, used to be in a similar position. Back in the 1950s, cervical cancer was the number two cancer killer among women, leading to approximately 30,000 to 35,000 deaths per year.

That number has been decreased almost 90% through the advent of a very simple and not that sensitive screening test, the Pap test, which is historically shown to be about 50% sensitive. Our test hopefully will have a similar impact on colon cancers that the Pap test has had on cervical cancer. Our test will detect the precancers and cancers. We believe that the performance of the test will be in excess of 50% sensitivity for precancers and in excess of 85% sensitivity for cancer. Today, unfortunately, compliance with the current main screening methods is poor. The largest cause of this is probably due to the fact that patients have to go through a very uncomfortable follow-up prep before colonoscopy. There is also significant fear around colonoscopy. This poor compliance leads to 60% of all cancers being detected through symptoms in late stage.

This leads to very low five-year survival rates. Our test will be a combination of very well-characterized specific DNA biomarkers that are markers for both precancer and cancer, combined with a current test called the FIT test, which is a fecal blood test. In combination, we expect that our test to have very strong sensitivity and specificity characteristics. We believe that this will lead to a new screening paradigm that patients that are detected as positive with our test will lead to colonoscopy and removal, hopefully, of a polyp if caught early, which will then lead to cancer prevention. The market opportunity is significant. In the U.S. alone, the total available market defined as people over the age of 50, if they all used our test, the market would be approximately $5 billion. With only 30% adoption, the market exceeds $1 billion.

Taking a look at the competitive landscape, what you see is colonoscopy, which is very sensitive for precancer and cancer detection, but it has weaknesses of high cost and poor patient compliance. Again, we think the combination of our test with colonoscopy will lead to a much better cancer prevention paradigm. The fecal blood test, while inexpensive, has very low cancer sensitivity and precancer sensitivity. It is ineffective at precancer detection and therefore cannot lead to cancer prevention. The overall benefits of the Exact Sciences approach is that it detects precancers and cancers. It is non-invasive. It does not require bowel prep. There are no diet or medication restrictions. There is virtually unlimited access. You can mail the kit out to patients, and patients can mail the tube in a special kit back to the clinical lab. It is affordable, and it is already included in American Cancer Society guidelines.

Now, a quick review of our 2010 priorities. During the first quarter, we made solid progress on each of our priorities. We are on track with our product development efforts. We have made significant improvements in our DNA extraction method, our biomarker assays, and we are on track with our validation study plans. I'll discuss both in more detail in a moment. Our clinical trial planning is also on track. We've engaged our CRO and have our complete clinical trial team in place. We've assembled the same strong team that successfully completed and secured approval of the Cervista HPV test at our former business, Third Wave Technologies. That clinical trial was a highly complex and rigorous clinical trial that led to the only HPV test approval in the last nine years. During the quarter, we continued our conversations with the FDA regarding the clinical trial design.

We've also made progress with our market development efforts. We continue to assemble our go-to-market plan. We also are undertaking studies of the top payers regarding reimbursement of our screening test in the U.S., as well as evaluating our go-to-market strategy in the European Union. Let's talk about the progress we've made in assay development and DNA extraction methods. I'm happy to report that we continue to make great strides with assay development. We have developed a full panel of DNA biomarker assays, which we continue to test and refine. It's important to remember that our assay will consist not just of vimentin, but other DNA biomarkers combined with FIT. Dr. Barry Berger, our Chief Medical Officer, presented data earlier this week at the World Organization of Digestive Endoscopy on one of the biomarkers included in our assay, methylated vimentin.

In tissue, methylated vimentin alone demonstrated 73% sensitivity for cancer and 87% sensitivity for precancer at 100% specificity. Our quantitative-detection chemistry is also showing some nice benefits, performing well as we expected. We continue to be enthusiastic about the accuracy, ease of use, and speed this chemistry is bringing to our assay. Let's turn now to the improvements we've made with our DNA extraction process. Extraction is the way that DNA is removed from the sample for use in our assay. The old method of DNA extraction followed the steps at the top of this slide. It required multiple steps and was labor-intensive, costly, and time-consuming. It took 48 hours from the initiation of the process until DNA was extracted. A team led by our Chief Science Officer, Dr. Graham Liddgard, has made remarkable progress towards a new method.

We've simplified DNA extraction and reduced the processing time to 3 hours. This extraction method can be automated. Critically important is the fact that our new method yields 10x more DNA than the old method. These time and cost improvements will deliver meaningful benefits to our clinical lab customers. Most importantly, the increased DNA yield from our new method will enhance the sensitivity of our assay. Let's turn now to our preclinical study. The preclinical study is comprised of three separate studies: a specificity study, a training set study, and a test set study. The specificity study's purpose is to establish the normal operating range of the test on patients that do not have disease. The training set is used to establish the cutoff for the test, and the test set is to test or validate that cutoff and establish the performance characteristics.

Let's spend a little bit more time on the specificity study. First of all, the job of a diagnostic test is to distinguish between those patients who have disease and those who do not. Our specificity study, using 1,000 normal samples, helps us to identify how we draw that distinction with our test by establishing its performance on normal, non-precancer, non-cancer samples. Establishing the test's normal range involves capturing as much patient variability as we can. As a result, we must ensure that our 1,000 normal samples represent a broad range of ages, ethnicities, geographies, and diets. Our collaborator is leading the effort to obtain these samples. We are well on our way towards meeting our goal. Let's turn now to how the results of the specificity study help us establish a cutoff value. With the training set, once we range would begin testing on cancer and precancer samples.

Data generated by the training set will help us establish the cutoff values for the test. The cutoff is set through the statistical analysis of the data curves produced by both the specificity and training set studies and determines which samples can be called positive and which are negative. Sensitivity and specificity for both cancer and precancer are also established when the cutoff value is set. As a result, we can see the effect on sensitivity and specificity levels of higher and lower cutoff values, again, through statistical analysis. This rigorous analytical approach leads to a test that is highly reproducible and with a smaller confidence interval than a test developed without this underlying rigor. Please note that due to the collection methods, the FIT component will not be included in the preclinical study.

We believe that this will have a small impact on the cancer sensitivity but minimal, if any, impact on the precancer sensitivity. Finally, the test set. Our test set will establish the cutoff value and confirm the performance of the test established through the analysis of the specificity study and the training set. The test set will be conducted at an outside lab. The test will independently establish the test performance characteristics, namely sensitivity and specificity for cancer and cancer precursor lesions. The test set will complete our preclinical validation study. We expect to see this independently generated data from our preclinical study in the second half of this year. During the second or third quarter of 2011, we anticipate beginning our clinical trial, and we anticipate completing our clinical trial and making our FDA submission in 2012.

We look forward to providing additional detail and more guidance as we get closer to each of these important events. A quick summary of the quarter. We efficiently utilized our capital, focusing it on our research and development activities. We successfully raised capital. We have made significant progress on the biomarker assay development. We've seen a 10x improvement in our DNA extraction method while seeing a 45-hour decrease in the time to result. We have in place a rigorous preclinical study design. Finally, a quick summary of the business. We believe that our test will be the only non-invasive colon cancer screening test, meeting a major unmet need in the market for precancer detection, leading to a significant market opportunity in excess of $1 billion. We will conduct an 8,000-patient prospective clinical trial, and we have a strong experienced team that is focused on execution.

Thank you very much for participating in the call today, and if you have any questions, now is the time. Thank you.

Operator (participant)

Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone phone. If your question has been answered or you wish to leave the queue for any reason, please press the pound key. Once again, ladies and gentlemen, if you have a question at this time, please press star then one now. Our first question comes from Quinton Lai with Robert W. Baird.

Quinton Lai (Analyst)

Hi. Good morning. Thanks for taking the question. Kevin, with respect to kind of the biomarkers, are you pretty—do you feel like that that set of biomarkers, are you comfortable with what you've got, and now you're just trying to figure out which ones, or do you think that you'll still be opportunistic in licensing other biomarkers?

Kevin Conroy (CEO)

We are very comfortable with the biomarkers that we have today. There is a possibility that we would improve the test even further with a different biomarker that could be included, and I would stress could be included going forward.

Quinton Lai (Analyst)

Thanks for going to all the detail on the preclinical trial design. Could you go into a little bit more detail about the specificity study, the importance of doing that normal study? Is there something particular you're looking at, and how important, I guess, do you feel specificity is for your assay relative to competing assays?

Kevin Conroy (CEO)

Yeah.

Quinton, this is something that I learned from Graham after he joined the company, is the rigor of developing a test after first establishing how the test performs on a broad range of normal patient samples. The reason that you do that first is that you can't cheat and set the number at the set a cutoff based upon a very small set of normal samples at a value that optimizes your sensitivity performance.

That rigor of looking at a huge number of samples leads to you understanding where that cutoff is going to be, which then leads to a smaller confidence interval so that when you run this study in an 8,000-patient prospective clinical trial, you have a high degree of confidence that the cutoff that is being used in the clinical laboratories that are running the test and the cutoff that ultimately is applied going forward with this test is one that is based upon data and a large enough data set that will give you confidence in the performance of the test going forward. The specificity study is really critical. What you can see here is that where you're really trying to place that cutoff is in that gray area between a positive and negative result.

The more normal samples that you have, the more confidence you have that that cutoff is set at the appropriate place from a clinical perspective.

Quinton Lai (Analyst)

Just to clarify for my thought, is that this is all normal. You're not going to be excluding any specific subset of the population through the study?

Kevin Conroy (CEO)

That's correct.

Quinton Lai (Analyst)

All right. Given the progress that you have so far, I mean, I know you haven't conducted the trial, but what's your thoughts about hitting those targets of better than 50% sensitivity for precancer and 85% for cancer?

Kevin Conroy (CEO)

I mean, as you can imagine, we've seen quite a bit of data over the last six months in product development, and we are very confident in the marker panel that we have developed.

You never know until you finally have the data, but what we're seeing right now is quite positive from a sensitivity and specificity standpoint.

Quinton Lai (Analyst)

Super. Thanks. I'll jump back and thank you.

Kevin Conroy (CEO)

Thanks.

Operator (participant)

Our next question comes from John Putnam with Capstone Investments.

John Putnam (Analyst)

Yeah. Thanks very much and good morning. I was wondering, Kevin, if you might give us some idea of how you actually improved the speed and the extraction of DNA. I mean, that sounds like a pretty major step from 48 hours down to 3 hours. I guess the other question is, can you get that even to be lower than 3 hours?

Kevin Conroy (CEO)

I have to take credit for that improvement because I found this brilliant guy named Graham Liddgard and somehow convinced him to move from La Jolla to Madison, Wisconsin. The truth is, really, it comes from experience.

Graham has been in the industry for 15 years in immunoassay and 15 years in molecular. With that, you learn there's quite a bit of know-how. This is a direct capture method, so there are direct capture feeds that go in and directly pull out the DNA. It's actually so elegant and straightforward that we've asked the question, "Why hasn't anybody thought of this before?" You're dealing with a complex sample with billions and billions of stools mostly made up of bacteria, and the bacterial DNA is something that we really struggled with in the past. Separating that bacterial DNA was a big part of the 48 hours. Getting it below 3 hours, I think, is a challenge.

Most DNA processes take time, and when you're dealing with as complicated of a sample as stool, we don't know that you'd expect to see this go much below that. The key thing for us is to be able to develop an assay that can be automated within one shift, and this enables us to do that. From a commercial standpoint, this is a really major step forward. Oh, it's enormous. Clinical labs want to be able to run a test and get results within a shift, not within four days. If this test is going to be successful, it'll be successful in a big way, which means high throughput automation is required, and you don't want to spend two days just in DNA extraction. This is a very significant and exciting development. Even equally important is the fact that we're getting 10 times as much DNA.

A lot of times in product development, you do not worry about DNA quantity, but here you do because, again, we are looking for a rare event. The more DNA that you can extract, the greater the chances are that you will have sufficient quantities of the mutant DNA that is mixed in with the normal DNA, that you will get enough of the mutant DNA that you can actually detect it. This is really, really exciting.

John Putnam (Analyst)

Great. Thanks very much. Thank you. Congratulations.

Kevin Conroy (CEO)

Appreciate it.

Operator (participant)

Our next question comes from Bill Kowlorowski with TCS Financial.

All right. Thank you, gentlemen, and congratulations on the progress you are reporting this quarter. Thanks, Bill. Kevin, I believe that if I understood you correctly, the FIT component of the test will be left out of the preclinical study. Did I understand you correctly? If so, may I ask why?

Kevin Conroy (CEO)

Yeah.

It's because of the way the samples have been collected. Some of these are the cancer samples are retrospective samples that have already been collected. All of those samples are banked, and the FIT test that we're using in our prospective clinical trial is something that we are in the process of developing now. There wasn't the opportunity to go back a year ago or two years ago and use that test. That's the main reason. Also, with the normal samples that are being collected at Mayo, the collection method doesn't allow for that. Again, it's important to note that we think that the FIT component of the test will detect an additional several up to several cancers per 100 patients examined. It will have a minimal, if any, impact on precancer detection.

At the end of the day, I think that will be, you will need to understand that as you look at the preclinical study data, the actual clinical trial, we would expect to see slightly better cancer detection sensitivity than with the preclinical study. Okay. Without affecting specificity. That is correct. Okay. We are setting the FIT cutoff at close to 100% for the FIT assay. Again, you'll pick up a few additional cancers that potentially the stool DNA test or the DNA biomarkers would miss without having an impact, a significant impact on false positive rate.

Okay. Good. The three steps or three different studies within the preclinical trial, are they going to be, do you just sort of lock down the assay and then run them all concurrently, or will they be run sequentially?

Sequentially.

The specificity study first, followed by the training set, followed by then at an outside collaborator's lab, they would run the test set on a blinded basis.

Okay. And considering that they are being run sequentially, are you going to release the results at the end or as the steps are completed?

What we expect to do, first of all, this data will be really significant data, and we want to make sure that it gets into the best publication possible. In order to do that, what we will do most likely is to issue a press release saying whether we have exceeded our stated performance characteristics. Then we expect to present the data verbally at a conference, most likely by the outside collaborator, which does not impede our ability to then be published in one of the top publications.

That is the plan, would be a press release without a lot of data, followed by a presentation at a conference, and then finally more of a full-blown release of data at the nearest point in time following that verbal presentation.

Okay. After all three studies are completed?

After all three are done. Correct.

All right. Thank you very much.

Thank you, Bill.

Operator (participant)

Once again, ladies and gentlemen, if you have a question at this time, please press star, then one on your touch-tone phones.

Kevin Conroy (CEO)

Okay. Any other questions? Thanks, everybody, for joining the call today. Never hesitate to give me a call if you have questions. Going forward, we look forward to having another strong quarter next and reporting to you in the upcoming future. Thank you.

Operator (participant)

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program, and you may now disconnect.