Exact Sciences - Earnings Call - Q1 2011

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to your Exact Sciences First Quarter 2011 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 be given at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce Ms. Cara Tucker, Manager of Corporate Communications. You may begin.

Cara Tucker (Manager of Corporate Communications)

Thank you, and thank you for joining us for Exact Sciences First Quarter 2011 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 first quarter 2011 financial results. If you have not seen the release, please go to our website at exactsciences.com or call 614-302-5622, and a release will be provided to you. Following the safe harbor statement, Maneesh will provide a summary of our first quarter financial results. Next, Kevin will provide a review and update of our 2011 priorities. Before we get underway, I'd ask everyone to take note of the safe harbor paragraph that appears at the end of the news release issued this morning covering the company's financial results.

This paragraph states that any forward-looking statements that we make speak only as of the date made, 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 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 now my pleasure to introduce our Chief Financial Officer, Maneesh Arora.

Maneesh Arora (CFO)

Thank you, Cara, and good morning, everyone. During the first quarter, we continued to invest in our priorities, including the clinical trial that we expect to begin during the third quarter. Our chief investment has been in people. We now have an outstanding team of 50 employees, including 34 in research and development. We ended the first quarter with cash, cash equivalents, and marketable securities of just under $90 million. We're on track with our cash utilization target of no more than $29 million for 2011. As you know, we'll be making our largest investment, the FDA clinical trial, this year. We anticipate spending approximately $20 million on the trial between 2011 and 2012. In short, we advanced our priorities during the first quarter while effectively utilizing our cash. It's now my pleasure to introduce Exact's President and CEO, Kevin Conroy. Kevin?

Kevin Conroy (President and CEO)

Thanks, Maneesh. Let's start with a brief review of our 2011 priorities. We'll then provide a detailed update on each. During 2011, we are focused on three things: product development, clinical trial infrastructure and enrollment, and market development. Let's turn now to a more detailed discussion of our product development work during the first quarter. We've made great strides in enhancing the performance of Cologuard. We've optimized our magnetic bead DNA capture method. Since October 2011, that's the time of our validation study, we've improved DNA extraction by 200%. The more DNA that you capture, the greater the analytical performance of the test. We've begun to automate Cologuard to make it easier to run and more reproducible. We have the instrument in-house now, and our automation team is working towards a goal of delivering the easiest-to-use, most efficient automation solution.

We've solidified our detection assays and optimized our bisulfite conversion method, which is critical to DNA methylation detection. We've also optimized Cologuard for the quARTZ detection chemistry on FDA-cleared real-time thermal cyclers. Finally, we've improved our collection device, making it easier for patients to gather a sample at home and mail it to the lab. We're proud of all of the efforts of our exceptionally strong team to solve a number of complex problems inherent in stool-based DNA detection. We are excited by the prospect of beginning the clinical trial and bringing this innovative product to market. Let's talk now about DDW. Later this week, our management team will attend in Chicago Digestive Disease Week, the world's largest gathering of GI physicians and researchers. We'll have a series of meetings with thought leaders. We'll also be exhibiting at the meeting with the goal of reintroducing Exact to the GI community.

DDW always hosts some of the most important colon cancer screening scientific presentations, and we expect to attend talks detailing developments in our field. Let's review our second priority for 2011, the clinical trial. We're pleased to report that we remain on track to begin enrolling patients in the third quarter of this year. We've submitted our final study protocol to the FDA. All of the components of our protocol have been completed, and we're looking forward to beginning enrollment. We are very pleased that there will be a parallel review of the trial by CMS for a national coverage determination regarding Cologuard. CMS coverage and reimbursement of Cologuard can have a significant influence on private payer reimbursement. We've received and incorporated CMS's comments into the final clinical trial protocol design. We've qualified 42 enrollment sites, all of which we expect to participate in trial enrollment.

These are weighted towards high-volume screening sites. We plan to implement a central call center to assist patients in their participation in the trial. We have an experienced external clinical affairs team, the same team that supported the successful third-wave HPV clinical trial, which also was a PMA. Let's turn now to more detailed discussion of the clinical trial design. Our trial is a study of average risk patients between the ages of 50 and 84 who have none of a series of well-defined risk factors for colon cancer. Every patient understands three tests: the Cologuard test, which includes an FIT assay, a separate commercially available FIT test, and a colonoscopy procedure. The primary endpoint of the trial is a comparison of Cologuard to colonoscopy. The secondary endpoint is a comparison of Cologuard to FIT. Let's look in more detail at our clinical trial design.

We expect to enroll between 10,000 and 12,000 patients for the study. We've now qualified more than 40 enrollment sites, and we expect to qualify more. We anticipate enrolling between 50 and 60 cancer patients and 400-500 precancer patients. We'll begin enrollment during the third quarter of this year and expect to complete enrollment roughly a year later. About three months after enrollment has been completed, we'll prepare our PMA document and submit it to the FDA. Let's turn now to more specific objectives of the clinical trial. The FDA is focusing on Cologuard's cancer detection ability and has set the lower bound of our confidence interval as the primary endpoint that must be exceeded in our trial. It is 65% at the lower bound of the 95% confidence interval.

This means that with 85% point sensitivity, we expect to be well above the 65% lower bound, even with approximately 55 cancer patients in the study. It's a very logical lower bound. The Morikawa study, which is a long-term study of FIT screening, showed 66% cancer sensitivity for the FIT test. We remain on track to begin enrollment during the third quarter. While our market development efforts aren't as visible as the trial, we are preparing for the eventual launch of Cologuard. As you probably saw, John Krayacich recently joined our management team as Senior Vice President of Sales and Marketing. John's a healthcare marketing professional with more than 20 years of experience marketing to physicians. We warmly welcome John and are very excited to have him as an important team leader.

Under John's leadership, we're ramping up our outreach and education efforts with thought leaders, primary care physicians, GIs, clinical labs, payers, and patients. These efforts are critical to preparing the market for Cologuard's launch. We'll undertake pharmacoeconomic studies this year. They are among the most important market developments in 2011. These studies will measure the cost-effectiveness of Cologuard. They're important to achieving the desired reimbursement level for the test. We believe we can demonstrate significant cost-effectiveness in the use of Cologuard in screening for colon cancer. Finally, we're refining our go-to-market strategy, again under John's direction. Let's review the company's key milestones. First, in the first half of this year, we're preparing for the clinical study and beginning the clinical trial in the third quarter of 2011, with the goal of submitting to the FDA in 2012 and launching the product after FDA approval.

In conclusion, Exact remains on track with each of our 2011 priorities. During the first quarter, we optimized key components of our test and began to work on an exciting automation program. Our clinical trial remains on track, and we expect to begin enrollment during the third quarter. The parallel review by CMS is a boost to our reimbursement strategy that potentially saves us time and money while possibly delivering a positive national coverage decision. We're dedicated to entering the market as soon as our test is approved, and our research shows that the market is a substantial $1.2 billion opportunity. Thank you, and we'll be happy to take your questions.

Operator (participant)

Thank you, ladies and gentlemen. If you do have a question, please press star then one on your touch-tone telephone. If your question has been answered and you wish to remove yourself from the queue, you may press the pound key. Our first question comes from Quintin Lai from Robert W Baird.

Quintin Lai (Managing Director)

Maneesh, thanks for taking the question.

Kevin Conroy (President and CEO)

Thanks, Quinn.

Quintin Lai (Managing Director)

When you do begin the clinical trial enrollment, how do you expect the enrollment to progress throughout as you start the trial and as it progresses from the rest of this year into next year?

Kevin Conroy (President and CEO)

It will begin at a moderate pace and then, of course, increase significantly as with most clinical trials as time goes on. The key thing is to get the sites trained effectively, and we have a training day for all of the clinical trial enrollment that is set, and we will be focused on making sure that the enrollment is done correctly, do it right, and make sure that protocol is followed. Over time, we will see the enrollment numbers increase significantly.

Quintin Lai (Managing Director)

With respect to your automation, it sounds very positive that you've got kind of a prototype now. Do you anticipate that that will be used during the clinical trial?

Kevin Conroy (President and CEO)

Yes, that's our plan. We're really pleased about being able to pull this automation program into the study without affecting timelines. As you recall, up until recently, our goal was to deliver to the market a manual solution and follow up with an automated solution. What this does is brings a solution to market that would potentially be approved at the same time the test would be approved, and that reduces risk at launch. It reduces risk down the road. We're really pleased with this. It does not affect our timeline, and we believe we'll be able to do it with a reasonable cost. This is an instrument that has been FDA-approved and in the market for some time, and we're modifying slightly the instrument and also the software and customizing it for our needs.

Quintin Lai (Managing Director)

Okay. So actually, if anything, it sounds like a bit of an acceleration to your overall strategy then with respect to what's going on with the progress you've made in instrumentation then.

Kevin Conroy (President and CEO)

I think that's right. This is a simple, elegant solution that is very achievable. It also has the potential to reduce variability. What you see when you perform this test manually versus when you perform the test with a robot is that, as you would expect, a robot has less variability. We think that also reduces actual clinical trial performance risk.

Quintin Lai (Managing Director)

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

Kevin Conroy (President and CEO)

Thanks.

Operator (participant)

Thank you. Our next question comes from John Wood from Jefferies.

Kevin Conroy (President and CEO)

Hi, John.

Brandon Couillard (Senior VP)

Thanks. This is Brandon Couillard, actually, in for John this morning. Kevin, have you had any discussions with the FDA on whether to include stage 4 cancer patients in the trial or not?

Kevin Conroy (President and CEO)

Those discussions are ongoing, and we'll provide more clarity as soon as we have it.

Brandon Couillard (Senior VP)

Okay. I believe Dr. Ahlquist is presenting data on detection of pancreatic cancer at DDW next week. Is that something you're actively exploring? Should we anticipate any notable developments with respect to Cologuard at DDW as well?

Kevin Conroy (President and CEO)

The first question, are we exploring detecting pancreatic cancer with a test or in collaboration with the Mayo Clinic? The answer to that is we've been talking to the Mayo Clinic for the past two years about the concept. We still think that is some ways off, but it is an important area of future development, and that's how we would look at that. What was your second question again, Brandon?

Brandon Couillard (Senior VP)

Just whether or not we should anticipate any notable developments with respect to Cologuard at the conference?

Kevin Conroy (President and CEO)

No, DDW will be an opportunity for us to provide incremental information about Cologuard. There will be information relating to how Cologuard performs, particularly for precancers, relative to one of the blood tests that is in market. There will not be anything major or earth-shattering at DDW. In other words, there is no new validation study or separate independent data point on a new set of samples in terms of Cologuard performance.

Brandon Couillard (Senior VP)

Great. Thank you.

Kevin Conroy (President and CEO)

Thanks.

Operator (participant)

Thank you. Our next question comes from Brian Weinstein from William Blair.

Brian Weinstein (Managing Director)

Hi, good morning. A couple of questions here. Maybe I missed it, but did you guys say anywhere that you still expect to show additional data this year at some point?

Kevin Conroy (President and CEO)

We didn't say that, but yes, we do intend to show additional data. That remains one of the goals for the second half of the year. We haven't provided clarity as to when we will present that data, but we do plan to run an additional study and present that data in the second half.

Brian Weinstein (Managing Director)

Okay. Then you mentioned that you incorporated some CMS comments in the trial design. Are you willing to talk about what some of those comments were?

Kevin Conroy (President and CEO)

The main thing that CMS is looking for is the performance of the test in Medicare-age population. The changes that were made mainly had to do with the appropriate enrollment of patients in that age category.

Brian Weinstein (Managing Director)

Okay. And then the last thing was you guys had sent out the slides from the Dr. Ahlquist presentation coming up here on Mother's Day. We all appreciate that. Maybe you can give some preliminary thoughts on those slides and what the conclusions were from that and your perspective on that.

Kevin Conroy (President and CEO)

I think it's best. Dave's talks will be, and he has several talks at DDW. He'll be a busy guy there. One of them will be a comparison of a blood test to our test, the stool DNA test, in the same set of patients. I think that will be important. Again, not earth-shattering, nothing that I think wasn't already known. There are a number of presentations at DDW, and if people care to learn more, they can contact Cara Tucker, and she can provide more information as to when Dave and others will be speaking.

Brian Weinstein (Managing Director)

Okay. Thanks.

Operator (participant)

Thank you. Our next question comes from Bill Quirk from Piper Jaffray.

Dave Clair (Associate VP and Equity Research Analyst)

Good morning, Kevin. I'm Manish. It's Dave Clair here for Bill. How are you guys doing?

Kevin Conroy (President and CEO)

Great. You?

Dave Clair (Associate VP and Equity Research Analyst)

Good. Good. Thanks. The first question for me just on the Dr. [audio distortion]. Can you tell us which versions of each assay are going to be included in the comparison?

Kevin Conroy (President and CEO)

I can tell you for the stool DNA test, it's the subset of the data from the validation study. As you know, the validation study in the fall had samples that came from multiple different sources, one of them being the Mayo Clinic. The Mayo Clinic samples also had matched blood samples for the same patients. Those blood samples were sent to a lab that runs a blood DNA test, and those samples included precancers and cancers. That is the focus in terms of the version. This was the version of our test, pre-improvements that we've made over the last six months.

Dave Clair (Associate VP and Equity Research Analyst)

Okay. Would you be willing to share how many methylation markers are in the test?

Kevin Conroy (President and CEO)

Not at this juncture, but Dave will.

Dave Clair (Associate VP and Equity Research Analyst)

Got it. Sorry.

Kevin Conroy (President and CEO)

No, that's okay. We haven't talked about what the final marker panel is, but at the appropriate time this year, we'll do that, probably in the near term rather than the longer term. We will lay out exactly what the final methylation marker composition is this year.

Dave Clair (Associate VP and Equity Research Analyst)

Okay. Thank you.

Kevin Conroy (President and CEO)

Thanks, Dave.

Operator (participant)

Thank you. Our next question comes from William [Height] from Lazard Capital Markets.

How are you?

Kevin Conroy (President and CEO)

I will.

I have a question about the pharmacoeconomic studies. You said that they would be conducted this year, but could we expect to see data from that? On top of that, is this going to be sort of incremental spend, or is this already built in, sort of the guidance that you guys have given?

We asked for more money out of Maneesh, but he is not prying it loose from his. It is built into this budget. Yeah.

In terms of seeing the data this year, probably not because we'll probably have those studies or papers prepared, but they won't be published until next year.

What sort of venue do you think you guys would look for to publish those papers?

As significant of a publication as possible. It's important. And we've already run various models. There are a lot of colon cancer screening cost-effectiveness models out there. And taking a look at the modeling, our test is one of the most cost-effective tests because of its ability to detect precancers, which has the ability to avoid all of the cancer treatment costs. There's no other non-invasive test, as you know, that eliminates those costs. And you can see some of the most recent data on the cost of treating colon cancer is actually frightening. Those costs are skyrocketing from, call it the mid-$100,000 to over $300,000 to treat a Medicare patient that has colon cancer. This is kind of a break-the-bank type of disease, particularly with the new drugs that are coming to market.

We need to make sure that we have all of the right inputs into the model because the world has changed. Namely, the cost of treatment has gone up so high. If we can help the world avoid treating people for colon cancer, our test becomes more cost-effective. We just need to make sure that we have it right because when we launch, we want to make sure that all of the right information is in the hands of the payers.

Now, is this going to be some sort of a scenario analysis, or what's going to be the baseline comp that you guys are going to use in the trial or in the study?

As you can imagine, there will be a lot of different inputs, everything from the sensitivity of colonoscopy to the sensitivity of our test. There will be a lot of modeling assumptions done. Probably right now is not the best time to get into all of those details because many of those may change over time. It is a pretty big project to do this right, and we want to make sure that we bring in all of the key leaders in this area and get their thoughts over the upcoming months.

Great, guys. Thanks a lot.

Thank you.

Operator (participant)

Thank you. Our next question comes from John Putnam from CapStone Investments.

John Putnam (Managing Director)

Thanks. Good morning. I was wondering, Kevin, if you've completed the discussion with the FDA on the protocol, or are there still some issues that may be open?

Kevin Conroy (President and CEO)

We are still waiting for the FDA to respond to this final protocol design. As you can imagine, we've had lots of discussions, so we're not expecting any surprises. We will hear back from the FDA in the upcoming weeks. Yes, there are still a couple of outstanding items, but nothing that we would consider to be major.

John Putnam (Managing Director)

That's great. And then on the automation, is this automation also applicable to commercialization, or would you have to do something to be able to use it for commercialization as well?

Kevin Conroy (President and CEO)

Yeah. It's a great question. This automation program is focused on making life easy for our commercial lab customers. The automation will be focused on you will insert 50 milliliter tubes with sample, and we'll go to a result. Now, there are multiple upfront processing steps that will not be automated, as we've explained in the past. We didn't want to try to have an all-encompassing automation, but the critical steps of DNA extraction, isolate conversion, plate setup, so mixing the reagents and the DNA will all occur on the deck. An operator would move that 96-well plate over to a real-time thermal cycler for the detection step. We are focused on solving the most complicated analytical portions of the test to make life easier for our customers.

John Putnam (Managing Director)

Great. Thanks very much.

Operator (participant)

Ladies and gentlemen, if you do have a question, please press star then one. Our next question comes from Scott Gleason from Stephens.

Scott Gleason (Analyst)

Thanks, Dave, for my questions. I guess going back to the automation initiative, are you guys at liberty at this time to talk about some of the equipment that you're going to basically incorporate into the automation? I guess, would a customer be locked in since the assay is going to be validated on this automated system to basically using that technology, or could Quest or Labcorp make modifications? Can you talk a little bit about what the overall cost, I guess, of the complete package might look like?

Kevin Conroy (President and CEO)

Good questions. We are not talking about who the supplier is for the instrument. There are a limited number of liquid handling instrument suppliers in the world, so you could probably figure out the small universe. In terms of pricing around this, that has not been solidified. I will tell you that assuming we get the reimbursement that is our target of $300 per test and a lab runs 100 tests per shift to 250 days per year, in a matter of months, a lab would generate the margin necessary to—let me be conservative. In a short period of time, a lab could generate the margin to pay for the instrument. If you fold the instrument costs into a per-test basis, so through a reagent rental agreement, it becomes a de minimis portion of the overall cost to the lab. We're excited about this.

The numbers really work for this test with the throughput that we're looking at, making it a pretty easy decision for a commercial lab to want to bring this test on board.

Scott Gleason (Analyst)

Great. Kevin, can you talk a little bit about the incorporation of the FIT test into the actual assay and, I guess, the steps you guys are taking to make sure that does not have any impact on specificity in terms of some of the lower sensitivity specificity profiles of FIT tests on the market that are commercially available today?

Kevin Conroy (President and CEO)

Sure. The FIT test will be a—and you can see some of these online—but they're just a small tube, about half the size of a pen, with a stick attached to the cap. You unscrew the cap, and you stick the stick into the stool and put it back into this small vial. It is a small separate collection that is processed separately from the DNA component of the test. It is a very easy immunoassay test, immunochemical test to run in the lab. You can run them in batches, so it is much easier to run than a DNA test. It is a very easy collection process too.

Scott Gleason (Analyst)

I guess, Kevin, just looking specifically at specificity, are you guys making any changes, I guess, to the analytical cutoffs for that test?

Kevin Conroy (President and CEO)

Yes, we are.

Scott Gleason (Analyst)

Just making sure that it's not going to have any detrimental impact on the specificity of the overall assay?

Kevin Conroy (President and CEO)

Yes. We are setting a very high cutoff so that the specificity target will be nearly 100%, so 99.9% specific, so that the FIT test will not appreciably affect the specificity of the overall test result. That will have the effect of lowering the sensitivity slightly by maybe—we expect maybe 10 percentage points. The whole goal with the FIT test is to have a test that should the DNA markers for one reason or another not pick up a cancer, the FIT test would have a reasonable chance of detecting that. All of the data that you've seen to date is really driven mainly off of the DNA component of a test. Let's take 85% sensitivity overall.

If you add an FIT test that is 50% sensitive, theoretically, you should capture up to 7.5% of the 15% that you missed or half of the 15% that you missed. We're not banking on it being able to detect that much, but to get another 3-5 percentage points of sensitivities with no appreciable impact on specificity would be a very positive attribute of the test clinically.

Scott Gleason (Analyst)

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Kevin Conroy (President and CEO)

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Operator (participant)

Thank you. I am not showing any other questions at this time. I would now like to turn the program over to Mr. Kevin Conroy for any additional remarks.

Kevin Conroy (President and CEO)

I would just like to close in thanking the team internally here. They have really put up a strong quarter of effort in product development and preparing for the clinical trial, and we're really looking forward to starting the clinical trial in the third quarter. Thank you very much, and we'll talk to you in three months. Take care.

Operator (participant)

Later.