Exact Sciences - Earnings Call - Q2 2011
August 2, 2011
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Exact Sciences second 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 follow at that time. If anyone should require assistance during the conference, please press star and zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Cara Tucker, Manager of Corporate Communications of Exact Sciences.
Cara Tucker (Manager of Corporate Communications)
Thank you for joining us for Exact Sciences second 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 second 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 it will be provided to you. Following the safe harbor statement, Maneesh will provide a summary of our second quarter financial results. Next, Kevin will provide a detailed review of our recently initiated clinical trial. Before we get underway, I'd like to 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, 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 report 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 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, Kara, and good morning, everyone. During the second quarter, we continue to invest in our three priorities for 2011. We invested to ensure that our most important priority, the clinical trial of our Cologuard product, is successful. We ended the quarter with a strong cash balance of cash, cash equivalents, and marketable securities totaling $83.5 million. As you can see, with the initiation of our clinical trial, we have accelerated our cash expenditures, and we are on track with our cash utilization target for 2011 of $29 million. We expect a cash balance of approximately $66 million at the end of 2011. We have increased the size and power of our clinical study and expect to enroll 10,000 patients or more. As a result, we anticipate spending approximately $25 million on the trial during 2011 and 2012.
It's now my pleasure to introduce Exact's President and CEO, Kevin Conroy. Kevin?
Kevin Conroy (President and CEO)
Thank you, Maneesh. Let's start with a quick review of our 2011 priorities before talking in more detail about the clinical trial that we just recently initiated. We have three priorities: product development, clinical trial infrastructure and enrollment, and market development. We are making strong progress against each of these priorities. Because we initiated the clinical trial on June 30th, we'd like to spend the majority of our time this morning talking in detail about it and then answering your questions. An overview of the clinical trial: we expect to enroll approximately 10,000 patients, possibly more, in the study. Today, there are 50 enrollment sites that have been qualified, and we expect to qualify and contract with another 10 sites, for a total of 60 sites. These sites are weighted towards high-volume screening sites and also include primary care clinics that refer patients to colonoscopy centers.
Given that the vast majority of sites are just starting to enroll patients, we expect slower enrollment during the next 30-60 days, followed by more rapid enrollment beginning 90 days from now. Once the trial is at maximum enrollment, we expect to enroll about one patient per day per site. That goal is eminently achievable. The enrollment goal is centered around the number of patients in which cancer is diagnosed during the colonoscopy procedure, and we anticipate enrolling a minimum of 56 cancer patients and between about 400-500 precancer patients, or patients that have been diagnosed with a 1-centimeter or greater advanced adenoma. The number of cancer patients drives the total number of patients that need to be enrolled and is dependent upon the incidence rate within the study population.
Enrollment should be completed in 12-15 months, and we will keep investors apprised of our enrollment progress. This study is a big deal. It is one of the largest prospective diagnostic clinical trials ever run, and we have taken our time to make sure that it is very well thought through. It has gotten the input of key opinion leaders, CMS, FDA. On the next page, you will see a map highlighting the majority of our enrollment sites. You can see that these sites are well dispersed geographically. We actively sought sites that would provide us with an appropriate geographic and ethnic distribution within the study. Securing and educating all of these sites has been a significant project that has been conducted over the last year, and I would like to commend all of those involved in pulling the various pieces together in a timely and very efficient way.
Every person enrolled in the trial will receive three tests: the Cologuard test, which includes an FIT test, another commercially available FIT test, and a colonoscopy procedure. Now, let's talk about the clinical trial endpoints. The primary endpoint is the sensitivity and specificity of Cologuard for colon cancer compared to colonoscopy as a reference standard. The secondary endpoints include determining the sensitivity and specificity of Cologuard for confirmed advanced adenomas compared to colonoscopy. Another secondary endpoint is determining, on a non-inferiority basis, of Cologuard to a commercially available FIT for cancer sensitivity and superiority to FIT for advanced adenoma.
When you look at this study, the primary endpoint is for cancer detection, and the secondary endpoint is for advanced adenoma detection and also a comparison to the FIT test, which I will remind you is a test that is run approximately 10x million per year in the U.S. as a colon cancer screening test, and at best is about 65% sensitive in a well-controlled study. That is the way that the study is designed. In terms of the hurdle that the FDA has laid out for the study in terms of cancer sensitivity, the goal is that the Cologuard needs to be more than 65% sensitive at the lower end of the 95% confidence interval. Obviously, the confidence interval gets narrower, it gets smaller as the number of cancers increase in the study.
At an 85% point sensitivity, we have a significant margin for meeting or exceeding that hurdle. We are very confident that the hurdle is an appropriate one, that 65% sensitivity is approximately, again, what in the Murakawa study, the FIT test is in terms of sensitivity. We are very comfortable that we will be able to meet this endpoint. Now, let's talk about the inclusion and exclusion criteria. These criteria were developed in consultation with key opinion leaders, with FDA and CMS, to guide who should be in the study and who should not be in the study. Those that are in the study should be patients who are at average risk for developing colorectal cancer. They must be able and willing to undergo colonoscopy. There are patients between the ages of 50-84, and they have to be able to provide consent.
Those that are excluded are patients who have had a colonoscopy procedure within the last nine years. They've had some other colorectal exam in the last five years. They've had either colon cancer or an advanced adenoma that has been dealt with and removed, or some other aerodigestive tract cancer. There are some other exclusion criteria here, but the key thing is that this study is a study of average risk patients, and this product will be a product that will be intended to be used in average risk patients. That is a very broad population when you're looking at approximately 100 million Americans over the age of 50. Next, let's talk about the collection device. We have finalized our collection device for the study, and a picture of it here is shown. We are using a container rather than a scoop, and you may ask why.
Before initiating the study, we wanted to make sure that patients preferred the scoop over the container, and the consumer research showed that on an eight-to-one basis, patients preferred a container, which is that you simply deposit the sample into the container, pour a buffer over the top of the sample, and screw the lid on, put it into a simple mailer, and mail it through the US Postal Service back to the processing lab. Patients very clearly favored this, in part because there is significantly less interaction with the sample. We're pleased to get this news before we started the trial, and this sample collection device is a device that has been used in multiple previous studies, so it also gives us great confidence in the similarity of results as we head into this prospective study.
Now let's transition to a top-line discussion of our final marker panel. The panel includes NDRG4 hypermethylation, an assay to detect hypermethylation in that gene. Also, BMP3 hypermethylation, seven point mutations in the KRAS gene, quantitative beta-actin, quantitative hemoglobin FIT, which is a marker for blood. The beta-actin marker is a marker for total human DNA, which acts both as a control and also with significantly elevated total human DNA. That by itself is a marker. We are very pleased with the final marker panel, and we're prepared to answer your questions regarding this in the Q&A session. Next, I'm also very happy to report that we are slightly ahead of our internal schedule on our automation solution development. The team has done a tremendous job, and I'm really pleased with the progress of the prototypes that we have developed in-house.
Our automation solution will perform DNA extraction, bisulfite conversion, and plate setup for incubation and detection. Our goal has been to make the processing of the patient samples as simple and lab-friendly as possible and as robust as possible. We're pleased with this progress. It's really a strong automation team, and as you know, a year ago, this was not part of our plan. Not only have we been able to move this forward and get to this point, but we've been able to do it within the budget that we laid out at the beginning of the year. We're very pleased with the progress, and we will talk more about the progress of the automation solution in upcoming quarters.
Next, I'm also really pleased to announce that we hosted a principal investigators meeting for the clinical study last week, and we had two different groups come in, a total of 57 sites and 120 attendees, GIs and their staffs from across the country. Key accomplishments included educating the sites about Cologuard and the clinical trial, training on the actual enrollment procedures, and then we formally initiated 12 sites. Now we have 13 sites that are formally initiated, and we were really pleased with the feedback that we got from the GIs and their staffs about not only the study that we're performing but about the product. There's a significant amount of enthusiasm for what we're doing as a company and for what this product can mean to GIs. I think largely they believe that this will help them find more precancers and prevent more cancers.
The enthusiasm was tangible, and we're excited to continue developing those relationships as we go forward. As a reminder of our key company milestones, early in the year, we guided to preparing for the clinical study in the first half of the year, and I'm happy to report that that's completed. We guided to starting the clinical trial in Q3. We started on June 30th, so we're very pleased with that. Today, we're on track for an FDA submission in 2012. Obviously, a lot has to be done between now and FDA submission, but we're on track. A lot of the planning, a lot of the real hard work has been done already, and I think that will pay dividends as we move forward. Finally, touching upon remaining areas of focus in our product development, first of all, manufacturing transfer.
After products are developed in the R&D function, they have to be transferred over to manufacturing to ensure a documented and quality manufacturing environment. We need to qualify suppliers and establish inbound quality specifications and test procedures, and we need to have a rigorous, extensive validation of all of the processes involved. Secondly, automation and software. We are focused on completing development of the automation solution prior to the testing of over 10,000 samples. This automation solution will be ready when we start the testing, which we will begin next year. As part of this, the area of focus now in automation is largely around software development under design controls. Our validation study we expect to complete in the fourth quarter of this year.
Samples are being collected now from controls and cancer subjects, and we will be collecting several hundred control samples in the range of more than 50 cancers. We will process these samples late in 2011 and publicly present those results. Finally, we will be performing analytical studies to support our FDA submission. There is an extensive amount of work that is required to complete a PMA submission, and the team is very focused on making sure that is done in a timely and efficient way. In conclusion, we're happy to report that we are on track. We're making strong progress in all of the priorities that we laid out at the beginning of the year. The clinical trial is underway. Protocol is in place to deliver data for an FDA submission. Market development continues. We're pleased with the progress that we're making there.
We'll have more to update in the future. At the end of the day, this is a product that we think will meet a really important unmet need, and that is actually preventing colorectal cancer. We have a lot of work to do, but if we do that, we feel that we'll not only launch a product that will make a major impact on a terrible disease, but we will also create a significant market in the U.S. over $1 billion in what we think could be equal to or in excess of that globally. Thank you very much, and we are happy to take any questions.
Operator (participant)
Thank you. If you have a question at this time, please press star then one on your touchstone 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 Quinton Lai with Robert W. Baird.
Quinton Lai (Managing Director)
Hi, good morning. Congratulations on the start of your trial.
Kevin Conroy (President and CEO)
Thanks, Quinton.
Quinton Lai (Managing Director)
When you changed out your sample collection, you talked about patient preference. How do you ensure, I guess, that you get your minimum 8g of collection?
Kevin Conroy (President and CEO)
There will be a weighing step when the sample comes to the lab, and we actually did a study to determine the bell curve distribution of samples by weight with about 300 patients. We are very comfortable that we will be able to collect the appropriate size samples, if you will, from patients. The instructions are pretty clear.
Quinton Lai (Managing Director)
All right. I guess, tell us how this is going to go. You start enrollment now. They'll start collecting samples, doing colonoscopies, but your automation won't be ready until later. Will they just freeze those samples and then thaw them to test them then?
Kevin Conroy (President and CEO)
Yes. The samples will be pre-processed. That is basically homogenized, and aliquots taken. Fifty milliliter tube aliquots will be taken and frozen. It is a pretty simple procedure. They will be frozen and tested. Most likely, towards the middle of next year, we will run these in batches at three different clinical trial testing sites. We will contract three different commercial laboratories to perform the testing, and all of the samples will be tested on a blinded basis.
Quinton Lai (Managing Director)
You'll do the FIT, both yours and the commercial, on the fresh stools?
Kevin Conroy (President and CEO)
That is correct. The commercial FITs will be on the fresh stools.
Quinton Lai (Managing Director)
Oh, okay. But your FIT will be done on the frozen?
Kevin Conroy (President and CEO)
That's correct.
Quinton Lai (Managing Director)
Okay. Super. I mean, as you look at enrollment, I mean, one of the things because one of the criteria is not having a colonoscopy within nine years. I mean, how do you prevent kind of an age bias of just a bunch of 50-year-olds coming into the clinical trial?
Kevin Conroy (President and CEO)
Yeah. That is something that we had long discussions with both CMS and FDA about to make sure that we have the appropriate age makeup, and it is something that we can track. We will also actually weight towards older patients, and the statisticians and the FDA and the CMS agree that that is appropriate.
Quinton Lai (Managing Director)
When you talk to your PIs, I mean, it sounded like that you felt that when it's up and running that you'll be able to get one patient per day per site. I mean, do they feel like that they see enough of those people that they'll be able to get those type of enrollment numbers?
Kevin Conroy (President and CEO)
Yes. Most of these sites are seeing 10-20 patients a day. Now, not all of those patients are average risk patients, but we only need one a day. It is very important for us to have the appropriate age patients in the study. One of the reasons we basically doubled the number of clinical trial enrollment sites was to ensure that there was basically overkill. In case all clinical trials are more difficult than you expect by an appreciable order of magnitude, we doubled the number of sites, Quinton, so that we would not run into this problem. We will keep very close track of this so we do not end up with 80% of patients between ages 50 and 60. The majority of the patients will be over 65.
Quinton Lai (Managing Director)
All right. I'll jump back in queue. Thanks.
Kevin Conroy (President and CEO)
Thanks.
Cara Tucker (Manager of Corporate Communications)
Our next question comes from Brian Weinstein with William Blair.
Brian Weinstein (Managing Director of Investment Banking)
Hey, good morning, guys. Question for you on the three sites that are going to be running the tests. Excuse me. How representative are they of kind of mainstream labs out there in terms of technical ability, or are these really just kind of really high-end commercial labs that may not be representative of kind of what you'll see in actual practice?
Kevin Conroy (President and CEO)
They will certainly be high-quality labs, but actually, they will be different labs. There will be higher volume and lower volume and kind of medium volume labs involved. It is critical that you select your lab appropriately, people who you would want to send your samples to. With our background, we have strong relationships, and we know where the strong labs are and have experience in running these clinical studies. You want a dedicated person overseeing these samples as they come in our process so that every sample is tracked and processed properly. We are very confident in those sites, but it will be a diverse makeup of those three sites.
Brian Weinstein (Managing Director of Investment Banking)
On the marker makeup of the panel, how does that differ from what we saw last October and the results that are out there?
Kevin Conroy (President and CEO)
There were two additional methylation markers in the validation study from last year. One of those markers was a marker that the data showed had about a 75% positivity rate for people who were over 75. For people under 75, it was a pretty good marker for colorectal cancer. For people over the age of 75, it was a pretty good assay for determining that you were over 75. The other marker, the Vimentin marker, which for several years was kind of a bedrock of the test, basically overlapped 100% with the NDRG4 marker. As a result, you did not really need to have both markers. NDRG4 performed slightly better than Vimentin, and it was a tough call to remove that marker. If you have 100% overlap, you are not getting significant additive value on sensitivity, and you are giving up something on specificity.
The fewer markers you have, the better specificity you have, obviously. We are very pleased with the ability to get the coverage that we have with the methylation markers with just two. The KRAS markers are typically present in more than 30%, probably in the 30%-50% range of patients with colorectal cancer. Think of the KRAS markers as additive to the methylation markers. The quantitative human DNA, the beta-actin, is both a control and, again, a backstop or safety net in the event the methylation and mutation markers do not pick up the cancer. Finally, as a final backstop, you have total human hemoglobin in stool, which by itself is present in 50%-65% of cancers. We feel the marker panel has been really well thought through.
Remember all of the studies that we presented last year, and the progression from marker identification to marker validation was something that was done in a very public way. We feel very strongly that we have a solid assay that has been well thought out.
Brian Weinstein (Managing Director of Investment Banking)
Just to confirm, this is going to be the exact set of markers that will be in the validation study that we will see the results on sometime maybe Q4, maybe early next year?
Kevin Conroy (President and CEO)
That's right.
Brian Weinstein (Managing Director of Investment Banking)
Okay. Thank you.
Operator (participant)
Our next question comes from the line of William Quirk with Piper Jaffray.
William Quirk (Managing Director and Senior Research Analyst)
Yeah. Thanks. Good morning. First off, Kevin, the 12-18 month window to complete the clinical trial, does that include the filing as well, or should we think about additional, I don't know, call it three to six months to assemble and submit the package?
Kevin Conroy (President and CEO)
Think of it as 12-15 months for the trial itself and an additional three months for submission. If you do that math, that puts submission in the fourth quarter, assuming everything goes according to plan, the fourth quarter of 2012. That is realistic. One thing that we are shooting for, Bill, is to do a modular submission so that we would do a submission separately and ahead of time on our manufacturing documents, which, as you're aware, is a significant part of a PMA filing. We do not know that we'll be able to achieve that at this point, but that is the goal, and we will kind of push towards that goal.
William Quirk (Managing Director and Senior Research Analyst)
Got it. Second question is, for the 65% sensitivity cutoff, the 95th percentile for cancer, what's the specificity that you're going to be held to there?
Kevin Conroy (President and CEO)
We'll target a specificity in the 91%-92% range. We'll set the cutoff slightly ahead of where we want this to ultimately end up at 90% just so that if statistics come into play, they come into play in our favor. That specificity goal will be about 90%.
William Quirk (Managing Director and Senior Research Analyst)
Okay. Very good. Then remind us, in terms of the marker portfolio or the markers for the product, rather, how proprietary are these? What type of IP have you filed? I seem to recall that you guys had the exclusive right to use methylated Vimentin. Talk to us a little bit about NDRG4 and BMP3.
Kevin Conroy (President and CEO)
We have exclusivity through MDX Health for NDRG4, and we have exclusivity to BMP3 through the Mayo Clinic. Those two markers form the bedrock for this test. Together, they cover most colorectal cancers and precancers. The other markers are not proprietary. Combining all of these markers together, there's nobody that has ever come up with the approach that Graham and the Mayo Clinic and others have come up with here that is combining methylation, mutation, total human DNA, and hemoglobin into one test. We have also sought, we're in the process of seeking, IP protection for this type of combination. We think that that is patentable. It certainly is innovative. Together, that gives you the sensitivity and specificity that's really difficult to get with just mutation markers or a combination of mutation and methylation markers.
William Quirk (Managing Director and Senior Research Analyst)
Got it. Last question for me is just, has Graham or anyone on the scientific staff talked about, because we're going to end up freezing that clinical sample, I guess, for a period of up to, I guess, in some cases, almost a year, is there an estimate at all about the performance of the FIT assay as part of your test? Obviously, we had zero performance as it relates to the initial, I guess, preclinical studies. Just kind of curious to see what the comment is there.
Kevin Conroy (President and CEO)
Yeah. Great question, Bill. We've done an extensive amount of sample stability studying, both with the DNA part of the test and also our FIT test. The way you do that is you bake it at a very high temperature for an extended period of time, and you assess the performance of the test at time zero and time X down the road. By doing it at a high temperature, you get a pretty good sense of how it works over a period of time frozen. The stability of our FIT test appears to be much better than the commercial FIT test that we also studied. The team did a lot of work on different buffers that preserve the hemoglobin, and we're very happy with where we are with that.
William Quirk (Managing Director and Senior Research Analyst)
Worst case, we're looking at one heck of an FIT test.
Kevin Conroy (President and CEO)
Yeah. We won't think of it that way, but.
William Quirk (Managing Director and Senior Research Analyst)
No, of course not.
Kevin Conroy (President and CEO)
Thanks for the thought.
William Quirk (Managing Director and Senior Research Analyst)
Thank you.
Cara Tucker (Manager of Corporate Communications)
Our next question comes from the line of John Wood with Jefferies.
Brian Couillard (Senior Associate of Equity Research)
Hi. Thanks for taking the question. This is Brandon Couillard for John this morning. Kevin, you increased the number of sites from roughly 30, which was communicated earlier, to about 60 or so. Was that something that was suggested by the FDA, or was that simply a function of the larger population size?
Kevin Conroy (President and CEO)
That was something that we decided as a team because we wanted to ensure that we met our goal of completing the study within 12-15 months. It is a really important goal. Every month of a delay causes a month that we are not in market. We doubled the size of this to make sure that we achieved our goal. Part of it, Brandon, is driven by our experience with the cervical cancer screening study that we did at Third Wave with the Cervista test. That was a study where we had to consent approximately 75,000 women. The thing that we learned from that study was you can never have too many sites. The faster you start, the better chances you have of completing a study on time.
We completed that study on time, but we had to hustle towards the end to be able to do that. Our goal here was, let's just double the number of sites that we have. We take the time risk out of question here. The team has been really, really focused on getting these sites trained and educated and motivated. That's after we screened all the sites to make sure we had the right sites. There were a lot of sites that wanted to participate in this study that didn't for various reasons.
Brian Couillard (Senior Associate of Equity Research)
Thanks. Do you expect to include any stage four cancer patients in the trial?
Kevin Conroy (President and CEO)
Yes. After discussions with FDA and CMS, ultimately, the conclusion was to include all cancers regardless of stage as part of the study.
Brian Couillard (Senior Associate of Equity Research)
Okay. Lastly, any word from the FDA on the lower bound of the confidence interval for precancerous polyps?
Kevin Conroy (President and CEO)
No. At present, there is no hurdle. We think it's important commercially and clinically for this test to detect at least half of 1 centimeter and greater advanced adenomas because over time, with a test that is 50% sensitive and a lesion that takes years and years and years to grow into cancer, we believe that that is a test that will work like the PEP test. That commercial or clinical hurdle in our mind is 50%, and we want to keep investors focused on that. Our goal is greater than 50% sensitivity.
Brian Couillard (Senior Associate of Equity Research)
Great. Thank you.
Kevin Conroy (President and CEO)
Thank you.
Cara Tucker (Manager of Corporate Communications)
Our next question comes from Steven Unger with Lazard Capital Markets.
Stephen Unger (Director of Equity Research)
Kevin, with the final marker panel, does that change the third-party royalty burden on the product going forward?
Kevin Conroy (President and CEO)
It actually decreased the royalty burden.
Stephen Unger (Director of Equity Research)
It will be decreased. That is essentially the elimination of Vimentin?
Kevin Conroy (President and CEO)
It is a combination of factors, but it slightly decreased the royalty burden.
Stephen Unger (Director of Equity Research)
Great. Could you give us an update on the health economics study? Does that change with this change to the marker size?
Kevin Conroy (President and CEO)
No, it doesn't. The data that will be input into that study will be sensitivity and specificity. We don't expect that the change in the markers appreciably will change the performance of the assay one way or the other. It doesn't change the health economics. What really drives the health economics is if you prevent more cancers, you save a lot of money. The way to prevent more cancers is with an inexpensive patient-friendly test. Our goal is to lay out the economic case in peer-reviewed publications. We'll probably have one publication that's aimed toward a Medicare population and one publication that would be aimed more towards private payers, a younger population, that shows the cost-effectiveness of Cologuard relative to multiple other forms of colon cancer screening.
Stephen Unger (Director of Equity Research)
Got it. If you do have higher specificity, we're modeling that you would run the test at an interval of every third year. Is it possible that we could get an interval that's every two years?
Kevin Conroy (President and CEO)
It is. Work still needs to be done there, and you may have different groups come out with different guidelines. The guidelines for colon cancer screening have become more robust over time. Presently, we think that two to three years is the appropriate screening interval with this test.
Stephen Unger (Director of Equity Research)
With the change to the sample collection, could you comment on the size of the container? It looks like a medium cup of Dunkin' Donuts coffee. Is that the basic size of this container?
Kevin Conroy (President and CEO)
It's a little bit larger than the coffee cup, but we may change the configuration of the device as we commercialize this. We are going to be doing a lot of work as we go forward to make this device even easier to use and easier to send in the mail.
Stephen Unger (Director of Equity Research)
Does the stool go in the bowl, or is there a collection film?
Kevin Conroy (President and CEO)
Yeah. It just goes right under the toilet seat, and the sample is deposited right into that container. The top is twisted on after the buffer is poured into the container. It is actually a pretty simple process. We have all tested it and used it, and board members have tested it and used it. It is actually pretty easy to use. We have been talking to the postal service about rates and packaging and all of those details that will be really important to make sure that we have a positive customer experience.
Stephen Unger (Director of Equity Research)
All right. Congratulations on getting the trial going.
Kevin Conroy (President and CEO)
Thanks, Steve.
Cara Tucker (Manager of Corporate Communications)
Our next question comes from Zohra Kashid with Wedbush Securities.
Zohra Kashid (Analyst)
Hi, Kevin. I'm Anish. Thanks for taking the question.
Kevin Conroy (President and CEO)
Hi, Zohra.
Zohra Kashid (Analyst)
Hey. On automation, how much actual design and development is involved? Does the solution use off-the-shelf thermocycles and other components? Any color there?
Kevin Conroy (President and CEO)
Sure. The actual liquid handling instrument is manufactured by a company that does what they do, and they do it for IVD automation solutions. It is manufactured in the appropriate quality environment. The real-time PCR machine that is used for incubation and detection is to an IVD-cleared real-time PCR machine. We have a really strong relationship with that vendor. We will talk more about those relationships and those products in the future. On the front end, there will also be an automation solution for the actual processing of the aliquots of sample. At some point, we will have an investor meeting where we lay this out, and we show the workflow, which we think is important. We have had a lot of feedback from strong labs from around the country that have come in and looked at the workflow and given us input on ways to improve it.
Our goal here is to develop something that's really simple. Having, again, been through this before with the Cervista test, this is a test that will be easier to process than the HPV tests that are in the market. One of our learning lessons from that study was go to market with your automation solution in the clinical study rather than trying to circle back and do it after the fact. Ultimately, this is a solution that will be very easy for even a university hospital lab or a community hospital lab to implement. Given the economics of this test, we think it will be very attractive, which helps us to get those hospital systems to adopt our tests and displace the FIT test.
Zohra Kashid (Analyst)
Great. Along this theme, is the FIT component part of the automation as well? I think you just answered this final question, but the automation will be submitted as part of the PMA. Is that correct? Thanks.
Kevin Conroy (President and CEO)
Yes. This automation will be submitted as part of the PMA, and the FIT system is a small, simple system that is separate from the stool DNA system.
Zohra Kashid (Analyst)
Great. Thanks.
Kevin Conroy (President and CEO)
Thanks.
Cara Tucker (Manager of Corporate Communications)
Our next question comes from John Putnam with Capstone Investment.
John Putman (Analyst)
Yeah. Thanks very much. Congratulations on getting it launched, the trial. I was just wondering, Kevin, the validation study that you have to do, is that because you've changed the markers in the assay? How large and how long will that be?
Kevin Conroy (President and CEO)
I'm sorry. One more time, John.
John Putman (Analyst)
You talked about having to do another validation study that the results you will, I guess, share with investors.
Kevin Conroy (President and CEO)
Yes. The reason for that.
Go ahead.
I'm sorry. Go ahead.
John Putman (Analyst)
No, I just wondered if the reason was because you've changed the markers in the assay.
Kevin Conroy (President and CEO)
No. Whether we had changed the markers or not, we would. You really want to do a final validation before you do the final testing. We have spent the last six months optimizing the performance of the assay, and we've been doing a lot of internal testing. You want to do that on a blinded basis before you process 12,000 samples. That is the reason for doing this. If we need to tweak the cutoff at all going into the validation study, we would rather do that on live samples. Going back one more time to the Cervista study, we never had the opportunity to do that because the samples were so hard to come by here. They're hard to come by, but not impossible to come by. We are in the process of collecting those samples.
That is the biggest stumbling block or the biggest hurdle to overcome, actually getting cancer samples. Collecting samples from patients who have just been diagnosed with colorectal cancer is not the easiest thing to do. We have multiple sites that are working on that. We expect to have hundreds of controls and between 50 and 100 cancers in the study.
John Putman (Analyst)
Okay. If the trial were to last 15 months, would the cost of it exceed the $25 million that you talked about?
Kevin Conroy (President and CEO)
We expect it's going to be about 25, but obviously, it's a function of how long and how large it gets. We'll keep you apprised of that. One thing we don't want to be is penny-wise, pound-foolish. You don't want to not invest the appropriate amount. That's why we believe that it will cost approximately $25 million.
John Putman (Analyst)
Okay. And then the burn rate in the quarter that you prepare the submission to the FDA, will that be about the same, do you think, or will it begin to drop off?
Kevin Conroy (President and CEO)
We'll provide more color on that as we go into the next year. The important thing that we're really proud of is while we have increased the investment and introduced automation, we are still on track with our cash utilization objectives for this year. As we provide more color next year, we'll give you a better read into that.
John Putman (Analyst)
That's great. Thanks very much.
Cara Tucker (Manager of Corporate Communications)
Our next question comes from Raymond Meyers with Benchmark.
Raymond Myers (Analyst)
Taking the questions. My first question is, I know that you've done a lot of work preparing the scoop for use in this study. I'm curious, why did you decide to move to the container? Could you also touch upon the cost of the container itself versus the scoop and the cost of the shipping of the container versus the scoop?
Kevin Conroy (President and CEO)
Sure. We moved to the container based upon research that we did with 300 patients, having them provide a sample with both a scoop and a container. The results were not even close. Whereas intuitively, we thought the scoop would be a more user-friendly device, we wanted to put it to the test and not just rely on our own instinct. It came back pretty clear, over 80% preferred the container, whereas about 10% preferred the scoop, and 3% did not have a preference. We just listened to what patients had to say. There were patients that were dispersed age-wise and ethnically. That was the driving force there.
Raymond Myers (Analyst)
From a cost perspective, Ray, the costs are going to be a little bit higher, but not materially so, especially when you take a look at the value that this test delivers and the price point that we are expecting. The shipping is not materially different, and the actual cost of goods would not materially increase so that we would not be changing our gross margin expectations, which would be this is a high gross margin test, north of 65%. Our gross margins expectations do not change with this. Our hopes are that as the compliance increases, it could actually help us down the road. Sure. I just want to understand exactly how this works. Does the whole stool go into the vial or into the jar the way that your previous generation before the scoop did?
That's correct. Yes.
I assume the container is large enough that you don't have a problem sometimes with too much sample?
Kevin Conroy (President and CEO)
We will instruct not too much sample, but no, we do not expect to have a problem with too much sample. That was one of the things we studied. We know size of sample by age, we know what the bell curve looks like. We are okay there. This test works with small samples. It works with super large samples. There is something that we would prefer not to process, but even those can be processed.
Raymond Myers (Analyst)
From a scientific point of view, it sounds like having too little sample is not going to be a problem.
Kevin Conroy (President and CEO)
No, it's not.
Raymond Myers (Analyst)
From a practical point of view, having too much sample would be probably a big patient acceptance problem.
Kevin Conroy (President and CEO)
Fortunately, the percentage of patients who provide a really large sample is quite small. One of the interesting things is patients who have undiagnosed cancer or who have cancer tend to provide small samples. All in all, we think that if you take a look at the patient preference, that's what's going to drive adoption. You would much rather deal with 5% large samples than 20% of people who won't provide a sample. That's the ultimate analysis.
Raymond Myers (Analyst)
How many patients have you enrolled in the study so far in the 13 sites? I know the time has been very short, but can you give us a little more color?
Kevin Conroy (President and CEO)
It's been minimal. We probably won't be reporting every quarter exactly on how many patients are enrolled, but we will guide to whether we're on track or not. Today, I'm happy to report we're on track. We basically started a month or two ahead of schedule, largely thanks to the entire team here really driving towards a pre-Q3 start. They made it happen. We didn't know if it would be possible, but this team really did what may have seemed like impossible. We're starting a little bit ahead of time, which gives us a little bit extra runway that we're sure we'll need at the end of the day.
Raymond Myers (Analyst)
Is it correct to assume that since you have 13 sites initiated, that that means you have at least 13 patients, at least one per site?
Kevin Conroy (President and CEO)
Yes. We do have a, I will say, we'll have 13 patients. Ask me any more questions, and I will not answer.
Raymond Myers (Analyst)
Okay. That was my last one on that issue anyway. Regarding the three clinical trial processing laboratories that will be processing for your study, number one, have you selected those sites already? Number two, will you be doing validation of those sites to make sure that you don't have, that those sites don't have some unanticipated processing issues?
Kevin Conroy (President and CEO)
We will validate sites and not only validate sites, but validate the operators who run the test. There is a training and test that goes on for each operator. We are in the process of discussions with multiple sites, and there will be negotiations and discussions. Ultimately, we will contract with three sites.
Raymond Myers (Analyst)
Okay. Good.
Kevin Conroy (President and CEO)
Those discussions have already begun in depth.
Raymond Myers (Analyst)
I just want to confirm that via the colonoscopy that will be done on the patients at the time that their samples are taken or just after the samples are taken, you will know how many patients are positive for cancer as you're enrolling the patients. Is that correct?
Kevin Conroy (President and CEO)
We will know who has cancer based on colonoscopy on, call it a 30-60 day lag, just based on how that information comes. It will be at a macro level, not at a site level, and not obviously by we won't have any of the test results for either the FIT or Cologuard.
Raymond Myers (Analyst)
You will know relatively real-time whether you're hitting your number of cancer patients goal, which is roughly 56?
Kevin Conroy (President and CEO)
That's right.
Raymond Myers (Analyst)
Okay. Will you be reporting that perhaps on a periodic basis? Because that is really the most important enrollment criteria.
Kevin Conroy (President and CEO)
I think we'll continue to state that we're on track or ahead of schedule or behind schedule. There's a lot of data that could be reported, and we think that it is better for investors if we keep it to whether we're on track or not.
Raymond Myers (Analyst)
Okay. Sounds fine. We're glad to hear you're on track. Good job. Thanks.
Kevin Conroy (President and CEO)
Thanks.
Thanks, Ray.
Cara Tucker (Manager of Corporate Communications)
Our next question comes from Elmer Pyros with Rodman.
Elmer Pyros (Analyst)
Can you hear me?
Kevin Conroy (President and CEO)
Yes.
Elmer Pyros (Analyst)
Yes, Elmer. Just to clarify the comparison between the panel of markers in the previous study and in this one, did you also have the 7 KRAS mutations? And the same question goes for beta-actin and the total hemoglobin.
Kevin Conroy (President and CEO)
Yes to KRAS, yes to beta-actin. The hemoglobin, we had a surrogate test called HemoQuant, which is a less sensitive version of a fecal blood test that Mayo has utilized for the last 20-25 years that performs even with the stool being homogenized in a buffer. Our FIT test, we believe, will be appreciably more sensitive than that HemoQuant test. The HemoQuant test acted as a surrogate.
Elmer Pyros (Analyst)
How is your proprietary FIT test different from the commercially available?
Kevin Conroy (President and CEO)
They're fairly similar immunochemical tests. We haven't gone into the details of how that test is designed, but we have done a lot of testing relative to commercial tests. We think that it performs at least as well and potentially better because of the stability.
Elmer Pyros (Analyst)
I see. In the validation study and also in the actual PMA study, do you have an expected and monitored number of non-cancerous adenomas?
Kevin Conroy (President and CEO)
In the prospective study, do we have a goal for non-cancerous adenomas?
Elmer Pyros (Analyst)
To monitor sensitivity in that setting. How long?
Kevin Conroy (President and CEO)
Advanced adenomas are precancerous lesions that are removed. We expect to have between 400 and 500. The incidence rate of advanced adenomas is about 5% in a naive average risk population. We expect the advanced adenoma sensitivity to be quite well-powered.
Elmer Pyros (Analyst)
Even in the validation study, Kevin?
Kevin Conroy (President and CEO)
Oh, in the validation study. In the validation study, we probably will not include advanced adenomas as part of the validation study. Frankly, they're a lot harder to come by because the only way to get them is to screen prospectively. We are doing that, but that will probably not be part of the validation study.
Elmer Pyros (Analyst)
I see.
Kevin Conroy (President and CEO)
That's a good question.
Elmer Pyros (Analyst)
Yeah. Last question, please. How much of the $25 million targeted cost for the study would be incurred this year as opposed to next year?
Kevin Conroy (President and CEO)
We haven't provided detailed breakout of that. Obviously, with us hitting our being on track this year, the vast majority of that is in 2012 of the increase. Essentially, what we're saying is we believe that in 2012, it's going to cost approximately $5 million more.
Elmer Pyros (Analyst)
I see. So we can figure out the mass $25 million total, $5 million more in the.
Kevin Conroy (President and CEO)
Correct. That's right.
Elmer Pyros (Analyst)
Yep. Got it. Thank you very much, Elmer.
Kevin Conroy (President and CEO)
Thanks, Elmer.
Operator (participant)
Our next question is a follow-up from Zohra Kashid with Wedbush Securities.
Zohra Kashid (Analyst)
Yeah. My question was just answered. Thank you.
Operator (participant)
Thanks.
Again, if you have a question, please press star then one. I'm showing no further questions in the queue. I'd like to turn it over to Kevin Conroy, President and CEO, for any closing remarks.
Kevin Conroy (President and CEO)
Thank you again. We feel that we had a very strong quarter, and I'd like to publicly acknowledge the work of the entire team here at Exact Sciences. It's a pleasure to work with this team that is so focused on execution and keeping things on schedule and on budget. We really look forward to updating investors and appreciate your support. We look forward to updating you at conferences this fall and on our next quarterly call. Thank you very much.
Operator (participant)
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.