Exact Sciences - Earnings Call - Q3 2010
October 27, 2010
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to Exact Sciences' Third Quarter Earnings call. At this time, all lines 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, you may press star and then zero on your touch-tone telephone. As a reminder, this call is being recorded. I would now like to turn the conference over to your host today, Rod Heiss. Please begin.
Rod Heiss (Head of Investor Relations)
Thank you, and thank you for joining us for Exact Sciences' Third Quarter 2010 Conference Call. On the call today are Kevin Conroy, the company's President and Chief Executive Officer, and Maneesh Arora, our Chief Financial Officer. Exact Sciences issued a news release earlier this morning detailing our third quarter 2010 financial results. If you haven't seen the release, please go to our website at exactsciences.com or call 608-770-7850, and it will be provided to you. Following the safe harbor statement, Maneesh will provide a summary of our third quarter financial results. Next, Kevin will provide a brief company and product overview.
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 Form 10-Q.
We incorporate herein the discussion of those factors. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. We undertake no obligation to update or revise the information provided here, whether as a result of new information, future events, or circumstances, or otherwise. It is now my pleasure to introduce Maneesh Arora, the company's CFO.
Maneesh Arora (CFO)
Thanks, Rod. Let's review our third quarter financial highlights. The chief takeaway for the quarter is that we completed a major milestone for the company, our validation study, while remaining on track to achieve our 2010 financial objectives. We've continued to make investments in experienced, talented people who supported the completion of the validation study. We're finalizing our product for the clinical trial and will help execute it. We now have 35 employees at Exact Sciences, with 23 of them focused on product development and the clinical trial, which will continue to be the company's top priorities. While we've made significant investments in R&D, we continue to manage our other expense lines well. Cash utilization continued to be less than our guidance of $1.1 million a month. We utilized $2.5 million in cash during the quarter and ended the quarter with cash, cash equivalents, and marketable securities of $34.8 million.
The company will begin to make its most significant investment in the execution of the clinical trial of our product in the near term. We expect to invest $15-$20 million in our clinical trial. It's now my pleasure to introduce Exact's President and Chief Executive Officer, Kevin Conroy. Kevin?
Kevin Conroy (President and CEO)
Thanks, Maneesh. Nice job managing the cash for the quarter. As you know, we're focused here at Exact Sciences on commercializing a new test for the detection both of colorectal cancers and, very importantly, the precancers that lead to colorectal cancer. You also know that colon cancer is a major problem in the U.S. There are 150,000 new cases every year, 50,000 deaths. We believe that our test will meet a major unmet need in excess of a very large market, in excess of $1 billion a year in the U.S. only. We have very strong underlying technology, exclusive intellectual property, including access to what we believe are the best markers for the detection of colorectal cancer. We have a strong team. Also, as you probably know, we will be discussing the results of our validation study tomorrow, October 28th. A quick overview of our product.
There are different categories of markers representing different pathways that provide an opportunity to detect colorectal cancer and the precancers that lead to colorectal cancer. The benefit of our multi-marker approach is the test's greater coverage for cancer. I'd like to emphasize that nobody has ever taken this multi-marker, multi-pathway approach. Next, a quick overview of the test workflow. We'll talk more about this in upcoming calls. The test is essentially a four-step process for the detection of colorectal cancer and precancers. First is the sample processing step, a common step for a molecular test, then DNA extraction, followed by bisulfite treatment, which is an important processing step for methylation detection, followed by DNA analysis. A quick review of the events tomorrow. At 1:00 P.M., there will be a press conference hosted by AACR. Dave Alquist from the Mayo Clinic will be presenting the top-line data at 1:00 P.M.
Prior to that, we've requested that NASDAQ halt trading for the afternoon until all material information is disseminated. At 3:00 P.M. Eastern, the company will be hosting an investor call to review the study results in greater detail. I will take any questions that you have about reported financials or questions about the timing of the events tomorrow. However, any questions about the actual data, we'll have to wait until tomorrow. Thank you very much.
Operator (participant)
Thank you, ladies and gentlemen. If you have a question at this time, you may press star, then one, on your touch-tone keypad. If your question has been answered and you wish to remove yourself from the queue, you may press the pound key. Again, ladies and gentlemen, to ask your question, simply press star, then one. One moment for the first question. Our first question comes from Quintin Lai with Robert W. Baird & Co.
Quintin Lai (Managing Director)
Hi. Good morning.
Kevin Conroy (President and CEO)
Good morning, Quintin.
Quintin Lai (Managing Director)
Oh, good. Can you hear me okay?
Kevin Conroy (President and CEO)
Yes.
Quintin Lai (Managing Director)
Okay. Super. Exciting, I guess, that you're now to this spot. I'm not going to ask you questions about the data tomorrow, but instead talk about maybe timing. Once that data's out, how do you start planning and ramping up the clinical trial process, Kevin?
Kevin Conroy (President and CEO)
Sure. The next steps will be the normal process of taking a product that is now validated from what you would call, in our world, a feasibility standpoint. You then need to take it through a quality system, which means you need to document all of the inputs that you utilize to develop the test in a very, very rigorous, scientific, and systematic approach to ensuring that the product will be robust and also, ultimately, at the end of the day, pass an FDA inspection. As you know, Quintin, that process takes a great deal of time if you do it right, and we plan to do it right. That is step one, is to focus on the product and taking a lot of steps to further enhance and improve the product.
We also need to develop internally the manufacturing processes and the operational processes to ensure that the product meets FDA requirements. Finally, we will kick off the FDA study. The FDA study has many, many moving parts, and a key piece of that is ensuring that you have all of the right enrollment sites, the colonoscopy centers, and potentially primary care centers where you will enroll patients. We have already taken extensive steps there in terms of validating enrollment sites and also having built the basic infrastructure. We need to test that infrastructure, which we're actually doing now with two sub-studies, one which we've already kicked off to collect samples that will be used in further product development. There are a lot of steps to it. You don't just jump into a clinical trial.
There is a huge amount of further product development activity and clinical trial preparation activity.
Quintin Lai (Managing Director)
Great. With respect to other pathways for the test, I mean, have you been approached by any others to maybe run it as an RUO as you're going through the FDA clinical trial?
Kevin Conroy (President and CEO)
That's not something that we're focused on today. What we're focused on is developing this test as a—most likely, it will be a PMA. That's what the agency is saying to us now, and ensuring that we have a kit-based product and platform that will allow us to rapidly disseminate the test upon FDA approval. What we may do in the future is make the kits available to researchers who would like to do studies prior to FDA approval, and we have been approached by others who have a great deal of interest in this area. We can talk about that in the future, though.
Quintin Lai (Managing Director)
Great. On the last call, I think you may have mentioned that maybe CMS was also interested in being part of the discussion with the FDA. Any update there with their position?
Kevin Conroy (President and CEO)
It's interesting. CMS and FDA had a joint announcement that they are proposing a dual pathway for both FDA and CMS approvals, and that is something that we are carefully considering today.
Quintin Lai (Managing Director)
Thank you. Good luck tomorrow.
Kevin Conroy (President and CEO)
Thank you.
Operator (participant)
Our next question comes from Bill Quirk with Piper Jaffray.
Bill Quirk (Analyst)
Thanks. Good morning, everybody.
Kevin Conroy (President and CEO)
Good morning, Bill.
Bill Quirk (Analyst)
Kevin, first question. Understanding that we are not yet at the data release, but can you talk at all about where we are in terms of chatting with FDA about the clinical trial design? You mentioned just a few minutes ago that this is almost certainly going to be a PMA, which I think is pretty consistent with what most of us on the phone are considering as well.
Kevin Conroy (President and CEO)
Yes. We are in discussions with FDA, the pre-IDE discussions, and hopefully, we're narrowing the number of questions that the agency has about the product and the study. We hope to, by the next conference call in February, have a much clearer picture for what the path forward will be.
Bill Quirk (Analyst)
Understood. Also, as we think about the logistics of setting up the clinical study, and you also mentioned the enrolling sites, is it fair to assume that a number of the sites that had samples as it relates to the preclinical study would presumably be interested in being involved in the clinical study? To what extent can you talk to these guys in terms of initial IRB discussions before wrapping everything up with FDA, etc.? Thank you.
Kevin Conroy (President and CEO)
We have already visited over 30 sites. We have identified what we believe to be the best sites in terms of the number of potential enrollees. The IRB approval process at some of those sites has already begun. Having been through these studies in the past, we know that the IRB approval process, particularly for academic sites, can take quite some time, and it is something that we are very focused on well in advance of the start of the study. The key driver of study enrollment is ensuring that you start with the right sites. We have the benefit of understanding the sites that produced in previous studies, both for our company and other companies, and we will take those learning lessons and apply them as we go forward here with the clinical study design.
Bill Quirk (Analyst)
Very good. Thank you very much, and best of luck tomorrow.
Kevin Conroy (President and CEO)
Thank you, Bill.
Operator (participant)
Our next question comes from Stephen Unger with Lazard Capital. Hi. Good morning.
Kevin Conroy (President and CEO)
Good morning, Stephen.
Stephen Unger (CFO)
I just have a couple of questions. The first question I was going to ask you is, could you discuss your plans for including automation? I know that you've been considering it. Has a decision been made in that regard? If not, when would a decision be made?
Kevin Conroy (President and CEO)
Our assumption all along is that we will go to this clinical trial, the FDA pivotal study, with a manual method. That's all that we have announced publicly to this day. However, it's fair to say that if we can develop automation in a timely way so that we can run both the—so that we can run an assay on an automated method as part of the clinical study, we will. The benefits of doing so is that you are able to launch an automation solution along with the assay upon FDA approval. We have hired a very experienced leader who moved here from San Diego. Actually, the second R&D person that's moved from San Diego to Madison with 20 years of experience in molecular with well-known automation platforms. He is up and running and delivering us a plan.
If we can make that happen, we will, and we hope to be able to provide—we expect to be able to provide more information along these lines in February.
Stephen Unger (CFO)
Got it. Okay. In terms of Europe, I was wondering if you have a plan for regulatory approval in Europe and some launch there.
Kevin Conroy (President and CEO)
Yeah. I think there's been some confusion about this. We, today, don't have a plan to enter Europe. We think that we could be in Europe as early as next year just in terms of a regulatory—we could get regulatory approval by as early as the end of next year. But we don't have any plan presently to be in Europe at the end of next year. However, we are studying that. As you know, one of our priorities is to develop a go-to-market strategy, a high-level go-to-market strategy by the end of this year. Europe will be part of that study. Obviously, the thing you really need to be careful about in Europe is you can spend—you can make a lot of investments and make unwise investments if you don't approach that market in a sensible fashion. We will talk more about that in upcoming calls.
It's a big market, Steve. There are 400,000 new cases of colorectal cancer in Europe. That is over twice as many new cases as in the U.S. There are 150,000 deaths. That is three times as many deaths in Europe. The challenge that you see in Europe, though, is reimbursement. It is obviously a highly fragmented market, so one marketing strategy does not meet the needs of all the countries. You need to approach it carefully, but it is a big potential market.
Stephen Unger (CFO)
I know that you're not—you don't want to discuss the data on the call today. I was curious, though, if I could ask you, and you probably say no, but how many markers have you determined the marker set, and how many markers is the test now?
Kevin Conroy (President and CEO)
We'll provide more of that clarity tomorrow. Graham Leckie and Dave Ahlquist will both discuss the markers. What we went into that study with was four methylation markers, two DNA mutation markers, and a hemoglobin marker. Again, looking at three different pathways gives you the best coverage for both colorectal cancer and precancer.
Stephen Unger (CFO)
I thought I'd give it a try. Looking forward to tomorrow. Thanks.
Kevin Conroy (President and CEO)
Thanks, Steve.
Operator (participant)
Our next question comes from John Putnam with CapStone Investments.
Kevin Conroy (President and CEO)
Hi, John.
John Putnam (Managing Director and Co-DOR)
Good morning, Kevin and Maneesh. It's great to be in this situation. I was wondering, on this joint approval process between the FDA and CMS, why wouldn't that be quite attractive if you were able to get the approval of the agency and the approval of CMS at the same time?
Kevin Conroy (President and CEO)
It is very attractive assuming that by putting those two processes together in a dual pathway, it does not slow down FDA approval. On one hand, having Medicare approval upon FDA approval is huge because it shortens that process by at least 18 months. Typically, after FDA approval, it takes about 18 months to get CMS approval. Medicare alone covers about 50% of people over the age of 50. As you also know, many of the private payers follow Medicare's lead. This could just be a huge boost to follow this pathway. However, if by those two agencies working together, FDA approval is delayed by a year, that is a potential negative. We just want to talk to both agencies, really understand the way that they are looking at the dual process, and understand what both the benefits and the risks are.
We will do that carefully. All in all, we would like to pursue this if we are comfortable that it will not cause excessive delays, if any.
John Putnam (Managing Director and Co-DOR)
Great. Thanks a lot, and good luck tomorrow.
Kevin Conroy (President and CEO)
Okay. Thanks, John.
Operator (participant)
Our next question comes from Bruce Cranna with Jefferies & Company.
Bruce Cranna (Managing Director)
Hey, good morning, guys.
Kevin Conroy (President and CEO)
Good morning, Bruce.
Bruce Cranna (Managing Director)
Kind of beating a dead horse here, Kevin, but I'm just curious, assuming we have, I guess, positive data tomorrow and looking at timelines to finalize a study design, is it safe to say—and I think you guys have said publicly that in terms of starting enrollment, it's kind of Q3 or Q2, Q3 next year—is it safe to say that there's a, I guess, a moment in time between here or tomorrow and then where you actually announce that you finalize the study design and enrollment kind of happens immediately upon that finalization of the study design? Or is there a period of time after that finalization and when you actually start physically enrolling?
Kevin Conroy (President and CEO)
Right. The three things that are required before we start the FDA study are, one, agreement with the FDA on the protocol. Two, we have kits. That is, totally manufactured, quality-assured kits as this product and the components have been put through a quality system. You cannot start that study until you have those kits manufactured. Third, you need to have all of the sites enrolled, IRB approved, so on and so forth. Finally, we have the question of automation. At this point, there are no changes to when we would expect to start. Automation remains a question, obviously, and we need to get on the same page with the FDA in terms of the protocol.
Bruce Cranna (Managing Director)
That timeframe is still, in your mind, reasonable? That, let's say, nine, 10, 11 months post tomorrow, that sort of timeframe is still reasonable?
Kevin Conroy (President and CEO)
That timeframe is still reasonable.
Bruce Cranna (Managing Director)
Just thinking about 2011, and I think a lot of us are kind of wondering what kind of catalyst, if any, we might see in that sort of vacuum period. Any chance, from your perspective, of any incremental data presentations in 2011? Maybe a DDW, for instance, or some kind of rework of the AACR data, or maybe you mentioned some private researchers who have kits in their hands next year. Any chance that there's incremental data at any point in 2011?
Kevin Conroy (President and CEO)
You know, Bruce, today we've been totally focused on this current validation study. Over the next 30-60 days, we'll take a look at this because we know it's important to get as many publications as possible on the performance of this product. There are a lot of reasons to get as many publications as possible. It is something that we would like to do, but we'll be able to provide more clarity around that on our next call.
Bruce Cranna (Managing Director)
Okay. All right. Thanks, guys.
Kevin Conroy (President and CEO)
Thank you.
Operator (participant)
Our next question comes from Kay McKay with Chardon Capital.
Kay McKay (Analyst)
Yes. Good morning, folks.
Kevin Conroy (President and CEO)
Hey, Kay.
Kay McKay (Analyst)
Kevin, whether or not you pursue a dual approval strategy with the FDA and CMS, is it your plan with respect to the pivotal study to also incorporate some economics that you will be evaluating?
Kevin Conroy (President and CEO)
Absolutely. That's a critical piece of the puzzle to get CMS approval. We have been working with the experts that have very sophisticated models, and they have provided us with the inputs that are required to generate the data to pump through those models, to generate the price per test that CMS and payers are most likely to pay for the test. It is very important that our study design, as we envision it, be the study that we ultimately implement because it answers not only the FDA question but also the CMS and payer questions. We are very focused on that and have been focused on it and think that we have the right approach.
Kay McKay (Analyst)
Okay. Very good. Thanks.
Operator (participant)
Our next question comes from Phil Kowrowski from TCS Financial. Please go ahead.
Phil Kowrowski (Analyst)
Hi. Good morning, gentlemen.
Kevin Conroy (President and CEO)
Good morning, Phil.
Phil Kowrowski (Analyst)
All my previous questions have been intelligently answered previously. Kevin, you did make one comment that I'd like to expand upon or maybe help me out with something I'm confused about. For the validation study, you said that one of the markers was going to be a hemoglobin marker. I was wondering if that relates to the FIT component that you said you'd be including in the FDA clinical trial.
Kevin Conroy (President and CEO)
Yes. The FIT component is, FIT is a test that looks for human hemoglobin in stool, so hidden blood in the stool. That is another way of saying FIT.
Phil Kowrowski (Analyst)
Okay. So the FIT component was part of the validation study.
Kevin Conroy (President and CEO)
We'll talk more about the validation study tomorrow.
Phil Kowrowski (Analyst)
Okay. All right. Thank you very much, and good luck tomorrow.
Kevin Conroy (President and CEO)
Thank you.
Operator (participant)
Our next question comes from Rob Bencomo with Bencomo Associates.
Rob Bencomo (CEO)
Hi. Good morning. I just have the most basic of questions, as everything else has, in fact, been answered. You said your conference call is at 3:00 tomorrow. Is that Eastern or Central Time, and what is the call-in number for that investor conference call?
Kevin Conroy (President and CEO)
It is Eastern, and the telephone number is—I will repeat it for everybody on the call—is 877-212-6082. That is 877-212-6082. Access code is 156-83774. 156-83774. This information will be on our website, and we hope you can join us tomorrow.
Rob Bencomo (CEO)
Thank you, and good luck.
Kevin Conroy (President and CEO)
Thank you.
Operator (participant)
Our next question comes from Nelson Jaeggli with Southwell Partners.
Nelson Jaeggli (Physician)
Hi, Kevin and Maneesh. Thanks for taking the question here. I have two questions. First, going forward, I think hopefully having good news next tomorrow, the pivotal study they'll start next year, do you have a broad sense of what that'll cost?
Kevin Conroy (President and CEO)
$15 million-$20 million in external costs.
Nelson Jaeggli (Physician)
Okay. 15-20 million. All right. I know you've changed the test dramatically in the recent past. Has that changed your IP or your patents? Can you give me a sense of where those are standing?
Kevin Conroy (President and CEO)
Sure. It has. We have a new detection technology which we think is the best way of detecting methylation markers and minimizing false positives or maximizing specificity. That's called the Quartz technology, which we have exclusive rights to for this field. We license that technology from Hologic. Exclusive rights to key markers, and that all supplements the base intellectual property of stool processing to colorectal cancer result. We constantly are focused on improving our intellectual property portfolio, and we're very confident that we have a web of IP that will protect the investments that we've made.
Nelson Jaeggli (Physician)
Okay. What year do those run out to?
Kevin Conroy (President and CEO)
Depending on the IP into the early 2020s, 2023, 2024.
Okay. Okay. Great. All right. Thank you for answering the questions.
You're welcome.
Operator (participant)
I'm showing no further comments or questions. I would like to turn it back over to Kevin Conroy for closing comments.
Kevin Conroy (President and CEO)
Thank you again, and thanks for joining us. In conclusion, I'd really just like to thank the team here, especially the R&D team under Graham Leckie's leadership. We look forward to talking to you again tomorrow afternoon. Thank you.
Operator (participant)
Thank you, ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the conference. You may now disconnect.