Exact Sciences - Earnings Call - Q2 2010

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the Exact Sciences second quarter earnings 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 be given at that time. Should anyone require technical assistance during today's conference, please press star then zero on your touch-tone telephone. As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Rod Hise. Please go ahead.

Rod Hise (Head of Investor Relations)

Thank you, and thank all of you for joining us this morning for Exact Sciences second 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. They will be available to answer your questions following their initial comments. Exact Sciences issued a news release earlier this morning detailing our second quarter 2010 financial results. If you have not seen the release, please go to our website at exactsciences.com or call 608-770-7850, and I can provide a copy to you. Following the safe harbor statement, Maneesh will provide a summary of our second quarter financial results. Next, Kevin will provide comments about the company and our 2010 priorities. Immediately following our prepared comments, we will be happy to answer your questions.

I'd like to remind you that 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 herein the discussion of those factors. Your caution not to place undue reliance on these forward-looking statements, which speak only as of today. We undertake no obligation to update or revise the information provided herein, whether as a result of new information, future events, or circumstances, or otherwise. It's now my pleasure to introduce Exact CFO Maneesh Arora. Maneesh?

Maneesh Arora (CFO)

Thanks, Rod. As we look at a review of our second quarter financial highlights, our chief takeaway for this quarter is that we remain on track to meet or exceed our 2010 financial objectives. We've made investments in product development that support the validation study and the finalization of the product for the clinical trial. Of the 27 people we've hired in 2010, two-thirds are in product development. While we've made these important investments in product development, we've also managed expenses, particularly in G&A. Our cash utilization remains on its expected pace of $14 million for the year. We utilized $2.9 million of cash last quarter and ended the quarter with cash, cash equivalents, and marketable securities of $37.3 million. As you know, we completed a stock offering of $17.6 million during the quarter, and our balance sheet remains strong.

As we've said, we expect to invest $15 million-$20 million in the clinical trial that will begin in 2011. The successful completion of the trial will be a significant value creation event for the company. All of us are focused on the planning and execution of this very significant priority. It's now my pleasure to introduce Exact's President and CEO, Kevin Conroy. Kevin?

Kevin Conroy (President and CEO)

Thanks, Maneesh. I appreciate the great job you've done managing cash. We're excited to be here today. We have good topics to discuss. Before we get into the performance of the quarter, though, I'd like to give a quick overview for any newcomers to the call, a quick overview of the company. As you know, we are developing a patient-friendly test for the early detection and prevention of colorectal cancer. We believe that this test is the only non-invasive way to detect the precancers that cause colon cancer. As a result, it has the ability, potentially, to someday even eradicate colorectal cancer in the way that cervical cancer has been nearly eradicated. Our test is a DNA test that detects cancers and precancers. It meets a major unmet need. We have an exclusive intellectual property position.

We have a strong management team that has a great deal of experience in running clinical trials in molecular diagnostics. Let's take a short look at the statistics around colorectal cancer. As you know, it's the number two cancer killer in the U.S., with 50,000 deaths in 2008, 150,000 new cases every year. As you can see here, cervical cancer, which is now, I believe, about number 13, used to be the number two cancer killer as recently as the 1940s with the advent of the Pap test, which, by the way, is only about 50% sensitive, 50%-60% sensitive for precancers, has basically eradicated that disease. Given that colon cancer takes 10 to even 15 years on average to develop from a small precancerous polyp to full-blown metastasized cancer, you have a long period of time to detect and remove the precancer.

First, you need to detect it. The problem today is that, despite the screening methods that are being employed, 60% of colorectal cancers are detected late stage, at stage three or four when survival odds decrease. Taking a look at what the screening market looks like, these are updated figures. There are 12 million fecal blood tests. Fecal blood tests typically are either what are called FOBT, fecal occult blood tests, or FIT, fecal immunochemical tests. These tests are performed annually. The problem with these tests is that they're not very sensitive, even for cancer. These tests typically miss the majority of cancers, and especially the earlier stage cancers where there is not blood. That is what the test detects. There are roughly 1 million flexible sigmoidoscopy procedures performed every year.

That is a procedure that looks at less than a third of the colon, so it misses a significant percentage of precancerous polyps and cancers. Colonoscopy, there are at least 2 million colonoscopies performed every year in the U.S. As you know, this is an expensive procedure, and many people over the age of 50 who should be screened with colonoscopy simply will not be screened with colonoscopy. Our test, a non-invasive test, includes specific DNA biomarkers, including methylation biomarkers. We have also included the FIT, or the fecal immunochemical test, as a component of our test. The reason that we have included that is it is a backup in case any of the DNA biomarkers are present for some reason.

Also, because there are 12 million fecal blood tests being performed every year in the U.S., and we think from a strategic marketing standpoint, having that marker in our test will assist commercialization. Our goal that we have stated is to be able to detect a minimum of 85% of cancers and 50% of precancers. We'll talk a little bit about the validation study and the data that we expect to see there. With the stool DNA test, the Exact Sciences stool DNA test, you'll be able to combine that with colonoscopy to create a new powerful screening methodology, one where a stool DNA test could be used multiple times, starting at the onset of the screening age, either without colonoscopy or in between colonoscopy. We believe that this will be a tool that helps colonoscopy detect more cancers and precancers.

A little bit about the market opportunity in the U.S. We believe the market opportunity to be in excess of $1 billion. Obviously, in molecular diagnostics, there are not too many markets that are that sizable. This is driven by the fact that there are 100 million Americans, or close to 100 million Americans, over the age of 50 in the U.S. If we have 30% market penetration and a three-year testing interval, you get to this number with a very reasonable kit cost for our test. Taking a look at our priorities for 2010, I am really happy to report that our number one priority, product development, has gone incredibly well. I really want to give credit to Graham Lidgard and the entire R&D team for the great work that they have done in developing a test that has exceeded our expectations to this juncture.

Clinical trial planning is also coming along very well. Market development, which is our third priority, we have done a significant amount of fundamental research that will help us as we prepare our strategic plan towards the end of this year. First, I'd like to talk about three key improvements in our product. First, we have an all-new patient sampling kit. We also have significantly improved DNA extraction. We have a much more sensitive DNA detection technology that also may be more specific. First, the all-new patient sampling kit. This is a user-friendly kit with a flushable catchment pouch, an integrated sampling device, and a small 50 mL tube that's easy to mail.

It's easy both to mail to a patient as a kit, and it's also easy for the patient to mail the tube back to the clinical testing lab, and it's easy for the lab to deal with the tube. We're really excited with the way that this simple kit is progressing. The DNA extraction, as we've reported in the past, the current DNA extraction technology that we've developed yields 10 times more DNA than the older method. Why is this important? It's important because when you're looking for a rare event, that is a rare DNA copy from a small precancerous lesion. You need to get as much DNA as humanly possible into the reaction vessel. This can improve the sensitivity of the test, particularly for precancers.

We've also improved the processing time from 48 hours down to three hours, which makes it much easier to automate on an existing platform. There's improved DNA detection. We've improved our methylation detection. We believe that our test is more sensitive with fewer false negatives. It detects one mutant. This technology that we've developed, the detection technology, which is an asset by itself, detects one mutant in 10,000 normal genes using existing real-time PCR instrumentation. A little bit about methylation biomarkers. Methylation, DNA methylation, forms methyl groups in the promoter regions of genes, which can act as a switch that turns off gene expression. This abnormal methylation is strongly associated with different cancers. It's a well-characterized phenomenon. One of the challenges with detecting DNA methylation is there is a background methylation that occurs in healthy cells.

Conventional real-time PCR techniques have a hard time discriminating between background methylation in normal healthy cells and denser colorectal cancer or cancer methylation. We believe that the technology that we've developed is able to discriminate very, very nicely between background methylation and actual cancer methylation. We recently, yesterday, announced a license with OncoMethylome, an exclusive worldwide license of up to two of their DNA methylation markers for our test. There's extensive data that we've developed and also they've had supporting the strength of these markers, and this will supplement our current marker panel. I'm also really excited today to present a poster today at AACC.

We're doing this call here from sunny Southern California, and we're excited about the fact that for the first time, we have been able to show, and we believe anybody has been able to show, 100% sensitivity and 100% specificity, the sensitivity for both cancers, 37 cancers and 25 adenomas, and correctly identifying 29 normals. This is a tissue study. We've been able, in this study, to show one in 10,000 methylated to unmethylated gene detection. That means that we can detect the rare event that is necessary. You can't do that with conventional real-time PCR. We've been able to detect as low as 10 copies per reaction. This data is very promising in advance of the 1,650-patient stool sample study that we will be conducting in the near-term and presenting October 29. A little bit about that study. That study is comprised of three separate studies.

One is a specificity study. It's really important anytime you're developing a diagnostic to know how that diagnostic performs on normal patients. We have a wide range of patients in that population, ages, ethnicities, geographies, etc. Following the specificity study is a training set where the cutoff for the assay is established. That training set will have 250 cancers and precancers and will be followed by a test set where we will hand the cutoff, the instruments, the reagents to an independent lab where they will test 100 blinded cancers and advanced adenomas and 100 normal samples. We look forward to being able to present the results of that validation study on October 29 at the American Association of Cancer Research's colorectal cancer meeting in Philadelphia. This is a very important date for the company.

This study is a very well-powered study, very similar to the FDA study that we'll be doing. So we look forward to that October 29th date. A little bit about the company's milestones. The validation studies we discussed will be October 29th. We'll begin the clinical trial, the FDA clinical trial next year, and hope to submit to the FDA in 2012 with a product launch after FDA approval. I am also very pleased to announce the addition of three stellar new board members. Dan Levangie, who you may know as the former president of Cytyc, where he grew that business basically from a startup to a $6 billion acquisition by Hologic. Dave Thompson, Dave was the longtime president of Abbott Laboratories, where he grew that business from $150 million in revenue to $2.5 billion in revenue. And Lionel Sterling, who is a recognized financial expert.

We welcome these three new board members, and we are really excited to have them on board. Key takeaways here is that we are meeting a major unmet patient need. What we're doing is important. We're excited about it. We're energized about it. The market opportunity is a very attractive market opportunity. The validation study that is coming up is an exciting event, and the team here could not be more energized and focused on execution. Thank you for taking the time to join the call today, and I'd be happy to answer any questions.

Operator (participant)

Ladies and gentlemen, if you have a question at this time, please press star, then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Quintin Lai of Robert W. Baird. Please go ahead.

Quintin Lai (Managing Director and Senior Equity Research Analyst)

Hi.

Good morning.

Kevin Conroy (President and CEO)

Good morning, Quintin.

Quintin Lai (Managing Director and Senior Equity Research Analyst)

The license that you just signed with OncoMethylome and the data that's out there, can you tell us a little bit? It looks really, really good in tissue. Have you tried it looking for those markers or those sets of markers in stool? I guess, what kind of color can you help us with on that?

Kevin Conroy (President and CEO)

Sure. We've done extensive product development. We haven't disclosed any of that internal product development data. Suffice it to say, as we said in the press release, there is always a dilution effect that occurs in stool. Obviously, if you go to tissue and you can't find a marker, you either have a problem that the marker isn't there or that you have a technology that isn't effective.

The main emphasis of today's release is that the technology that we've developed is exquisite at accurately detecting markers in tissue. There is a falloff in stool, which is why we've provided the guidance that we have that we believe will be able to detect more than 50% of precancers in stool. In terms of what that actually ends up being, the October 29 data will be very instructive there. We are very confident based upon the work that we have done to date and the data that we've seen that we will meet or exceed the targets that we have specified from a stool sample.

Quintin Lai (Managing Director and Senior Equity Research Analyst)

Thank you. Kevin, there's been a lot of press over the last couple of few weeks about how colon cancer screening is underutilized and could really help healthcare costs.

There was another one out there about CT colonoscopy not being effective. Have you been approached by any government agencies about potential post-FDA clearance of your test and the impact that you could have on overall healthcare budgets?

Kevin Conroy (President and CEO)

The answer to that is yes. We have spent a great deal of time on Capitol Hill and also with CMS. CMS has put a lot of time and energy into evaluating our test. Obviously, Medicare today—maybe this is not obvious—but Medicare today pays for about 75% of the $12 billion in cancer treatment costs. The federal government is acutely aware of the failures of the current screening methodologies. We have spent a lot of time with U.S. senators, with congressional leaders to create even greater awareness here. We are excited about the things that we can do at the federal level to have an impact.

Quintin Lai (Managing Director and Senior Equity Research Analyst)

And then final question for me. I mean, last week, there was also an FDA panel talking about laboratory-developed tests. Based off of that discussion, does it just make you feel better about taking this approach about going full FDA clearance?

Kevin Conroy (President and CEO)

The answer to that is yes. Although the primary reason to go with the KIPP approach is that we strongly believe that labs are tremendous partners to help commercialize the test. Every time you sell to a large hospital lab, they have outreach to their GIs and to their primary care physicians, and they can help you create awareness of the test, answer questions directly to their physicians. We have seen this model work before. When you take a look at any broadly successful, widely utilized molecular test, there also are these KIPPs. It is the rare company that can succeed broadly with a lab-developed test model.

Quintin Lai (Managing Director and Senior Equity Research Analyst)

Thank you.

Kevin, thank you.

Kevin Conroy (President and CEO)

Thanks, Quintin.

Operator (participant)

Our next question comes from Bill Quirk of Piper Jaffray. Please go ahead.

Bill Quirk (Managing Director and Senior Research Analyst)

Thanks. Good morning, guys.

Kevin Conroy (President and CEO)

Good morning, Bill.

Bill Quirk (Managing Director and Senior Research Analyst)

At the risk of trying to get ahead of the data or the full data set at AACC, I was wondering if there's just a couple of top-line questions you could answer there. Things like number of samples, cancer, precancerous, normal in the preliminary study?

Kevin Conroy (President and CEO)

Sure. 37 cancers, 25 adenomas, 29 normal. So that's 37 cancers, 25 adenomas, 29 normals.

Bill Quirk (Managing Director and Senior Research Analyst)

Okay. Very good. And Kevin, were both right and left-sided cancers included in the study?

Kevin Conroy (President and CEO)

That's, I think, a question for Graham Lidgard today at the poster presentation. Good question. I believe the answer to that is yes.

Bill Quirk (Managing Director and Senior Research Analyst)

Okay. Great. We'll double-check that later. Good to hear. And then just taking a couple of questions in a slightly different tact.

The initial gains in DNA yields from the magnetic bead capture approach, if memory serves, I think those were based on a single target per bead. I believe you guys are taking a look at potentially multiplexing those. Can you talk at all about DNA yield with multiplexing?

Kevin Conroy (President and CEO)

We have not talked about that at this juncture, and I think it would be better for us to talk about that first with the scientific poster or with Graham leading the charge. Suffice it to say, we will be multiplexing here. All that means is we are attaching multiple capture oligos to individual beads. We are not seeing a degradation in the quantity of DNA as a result of the multiplexing.

Bill Quirk (Managing Director and Senior Research Analyst)

Excellent. Last one for me is it is pretty hard to improve on perfect here in terms of the preliminary data set.

Is it safe to assume that the marker set that you're going to be presenting data on here a little later on today is also the one that's basically being designed for the preclinicals?

Kevin Conroy (President and CEO)

What you'll see in the poster are nine markers individually listed in terms of their sensitivity and specificity for cancer and advanced adenomas. We are not disclosing which markers those are for competitive reasons. We are not disclosing the combination of markers that lead to this result. We are still in the process of securing patent protection on combinations of markers. We are really the only company or researchers that we're aware of that has done this type of a study. We want to be very careful about disclosures at this point, Bill.

Bill Quirk (Managing Director and Senior Research Analyst)

Got it.

Would a rational read-through, though, be, Kevin, is that you commented that you'll be filing on different combinations of markers? Said another way, we're eventually going to have a target marker set, but you guys would presumably have IP on various and sundry combinations that I assume would potentially generate somewhat similar results. Said another way, you're just tightening up the competitive positioning.

Kevin Conroy (President and CEO)

Yeah. To say something that may not be specifically disclosed in the poster is that different combinations get you to close to 100. And 100, 100, and 100 obviously isn't truly perfection because if you did that over 1,000 samples, it's virtually impossible to get to 100% sensitivity for any assay, as we know. Statistically, that isn't significant. What is significant is that with different approaches, you get to very high sensitivity and specificity, again, which goes back to the platform technology.

One may ask, how did we get to the nine markers? We actually did a sequencing study where we looked at roughly 250 samples for 32 different markers. We sequenced all of those genes, those 32 genes, across all of the samples. That gave us truth, and that gave us the ability to winnow down to these nine markers. Again, we're not aware of anybody else who has done that kind of a study. We have a significant amount of sequencing information, and we believe additional intellectual property on markers that have been previously disclosed. We know some things about those markers that the researchers or other companies that possess those markers do not know. The other thing that we know is which markers work best in combination with each other.

We will keep that information close to the vest at this juncture. Thanks, Bill.

Maneesh Arora (CFO)

Thanks, Bill.

Operator (participant)

Our next question comes from Elemer Piros of Rodman. Please go ahead.

Elemer Piros (Senior Biotechnology Analyst)

Good morning, gentlemen.

Kevin Conroy (President and CEO)

Hello, Eli.

Maneesh Arora (CFO)

Good morning, Eli.

Elemer Piros (Senior Biotechnology Analyst)

What I'd like to ask you is the license that you obtained from OncoMethylome, those two specific methylation markers, were they part of the nine that you mentioned that you'll present data on today?

Kevin Conroy (President and CEO)

Yes.

Elemer Piros (Senior Biotechnology Analyst)

And about tonight's presentation, Kevin, if you could—I didn't really understand better—each individual marker performed at 100% sensitivity and specificity, or are there some combinations?

Kevin Conroy (President and CEO)

Yes. Good question. It's a combination of four that get you to the 100, 100, 100.

Elemer Piros (Senior Biotechnology Analyst)

Okay. Combination of four. And that is probably obviously part of that four, the two that you licensed is actually part of. Is that safe to assume?

Kevin Conroy (President and CEO)

I think that, again, we don't want to disclose specifically which markers—in fact, we haven't disclosed OncoMethylome at this point—which markers we are licensing. We do have a period of time here in which we will make that final call. We would rather not discuss it at this point, Eli.

Elemer Piros (Senior Biotechnology Analyst)

Okay. Looking forward to the October release of the validation study, when you actually get to the training set stage, will you already lock down the number of markers that you will do the training exercise with? Or at the end, you may also be able to modify or exclude some markers that did not actually add too much to the overall outcome?

Kevin Conroy (President and CEO)

No, those markers will be locked down heading into the training set.

Elemer Piros (Senior Biotechnology Analyst)

Okay.

One last question, which seems the answer is probably very obvious, but what my takeaway message was from the recent hearing on LDTs is that companies that are undercapitalized may not be able to meet the regulatory hurdles or are able to demonstrate that. Do you see that as a positive from the competitive landscape, some smaller companies out there that would like to compete with you in the future but may not be able to?

Kevin Conroy (President and CEO)

Yes. There will be, in my view, a relatively significant hurdle imposed upon new cancer diagnostics. Cancer is not something that is a binary call in diagnostics, yet our regulatory system is more or less set up to look at a binary call. I think there are going to be challenges.

Being able to spend anywhere from $50 million-$100 million to take a test all the way through product development, all the way through a rigorous clinical trial, and to wide commercialization as a kit is not something that every company is going to be able to do. The upside of this is that we believe that only the truly valuable products will get funded, and some of the marginal tests will not. In terms of from a competitive standpoint, our goal really is to make sure that we set the bar in terms of clinical performance of this test. With the platform technology that we have developed, we believe that it will be very hard for anybody, certainly with a real-time PCR assay, to compete. We think that that is actually a more significant hurdle, Eli.

Elemer Piros (Senior Biotechnology Analyst)

Gentlemen, thank you very much for taking my question.

Kevin Conroy (President and CEO)

Thank you.

Operator (participant)

Our next question comes from Kai Mackie of Chardon. Please go ahead.

Kevin Conroy (President and CEO)

Hi, Kai.

Kai Mackie (Analyst)

Yeah. Good morning. Kevin, with respect to your data release on October 29, is that presentation now officially part of the AACR program?

Kevin Conroy (President and CEO)

No, it is not. I want to make sure that I clarify this so as not to offend the meeting hosts. This is a target data release. We will submit to the group, and it's a peer review process. Hopefully, they accept us. Hopefully, this is something that is interesting. It may be a late-breaking submission. I know people are out there. August 23rd is the submission deadline. We may or may not meet that submission deadline, but we've certainly reached out to the meeting hosts at this point and let them know that we'll have awfully interesting data that we would like to present at their meeting.

No guarantees.

Kai Mackie (Analyst)

Okay. So if you're not part of the official program, you'll still present on that day?

Kevin Conroy (President and CEO)

How do I say without offending the meeting hosts? This is pretty important data, so we would expect if we get the abstract to them at a reasonable time ahead of time, we would hope that we would be invited to present. If not, there are a couple of meetings immediately following that. There is another AACR meeting that one of our collaborators is an invited speaker at, I believe, on November 7th through the 10th. It's the colon cancer prevention meeting. And then there is the A&P meeting a week or so after that. But we feel awfully confident, Kai, that the October 29th date is the date that we'll be able to present this data.

The reason that we need to present it at a scientific meeting, of course, is that if we just present it as a company outside of a scientific meeting, it will significantly hurt our chances for getting this study, which is an awfully important study, into a major publication.

Kai Mackie (Analyst)

Absolutely agree. Okay. Second question. Kevin, with the testing that you've done on the various permutation combination of the markers, how good is your knowledge at this point of what the additive effects are of the different markers?

Kevin Conroy (President and CEO)

When you take a look at the sequencing data plus this tissue data plus our experience and data in stool, we're awfully confident that we know what the markers are today. Certainly, three of them are more or less, in our minds, locked down. There may be change to one of them based upon additional data that we see in stool.

We are really, really pleased with where we are from a marker standpoint. We are ahead of where we ever expected to be. If you look back a year ago where we expected to be, it was not here. We are excited about that, and it gives us confidence heading into the validation study.

Kai Mackie (Analyst)

At what point do you have to lock down the combination that you are going to use?

Kevin Conroy (President and CEO)

We will lock that down heading into the specificity study.

Kai Mackie (Analyst)

I guess, how many more weeks do you have to make that decision?

Kevin Conroy (President and CEO)

We keep getting asked that question at some point because, to be fair to all investors, I think we need to just keep that one under our hat. There is not a lot of time between now and when we need to submit the data to AACR.

You can imagine it's going to be a busy and exciting time for the whole company.

Kai Mackie (Analyst)

Okay. Very good. Thanks.

Kevin Conroy (President and CEO)

Thanks, Kai.

Operator (participant)

Again, ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. Our next question comes from Phil Kobren of CCS Financial. Please go ahead.

Phil Kobren (Analyst)

Good morning. My question has been answered already. Thank you.

Kevin Conroy (President and CEO)

Thanks, Phil. Thank you. Well, thank you very much. We do not have any more questions. We look forward to talking to you on our next earnings call.