Exact Sciences Corporation
Q3 2013 Earnings Call Transcript

Published: 29 Oct 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Exact Sciences Corp. Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I'll now introduce your host for today's conference, Rod Hise. You may begin.

[Rod Hise:]

Thank you for joining us for Exact Sciences third quarter 2013 conference call. On the call today are Kevin Conroy, the company's President and Chief Executive Officer; Maneesh Arora, our Chief Operating Officer; and Bill Megan, Senior Vice President of Finance. Exact Sciences issued a news release earlier this morning detailing our third quarter 2013 financial results. If you haven't seen it, please go to our website at exactsciences.com or call [phone] and I will send it to you. Following the Safe Harbor statement, Bill will provide a summary of our third quarter financial results. Next, Kevin will provide an update on our corporate priorities. Before we get underway, I'd ask everyone to take note of the Safe Harbor paragraph that appears at the end of the news release issued this morning covering the company's financial results. This paragraph states that any forward-looking statements that we make

[William J. Megan:]

Thank you, Rod, and good morning, everyone. The company remains on track with its milestones and is continuing to focus on FDA approval, reimbursement and commercial readiness. Kevin will address each of these in a moment. We used $10 million in cash during the quarter and ended with a cash balance of $148 million. Our cash utilization is on track. We anticipate that fourth quarter costs will increase as work intensifies on our clinical lab, operating systems and commercial activities. We still expect to end 2013 with approximately $130 million in cash. It's now my pleasure to introduce Exact's President and CEO, Kevin Conroy. Kevin?

[Kevin T. Conroy:]

Thank you, Bill, and thank you, all, for joining us. First, I want to welcome Bill as our Senior Vice President of Finance. With a deep background in finance and operations, Bill is an outstanding addition to the team. We continue to make strong progress on all of the elements of the successful Cologuard launch

[Operator:]

[Operator Instructions] Our first question is from Jeff Elliott of Robert W. Baird.

[Jeffrey T. Elliott:]

Just a question on the timing here. Understandably with the government shutdown, perhaps, the FDA panel may have changed. But is there anything else going on that would have caused an impact on the timing there? And then on the scientific publication, I guess, I think we were under the understanding that, that was going to come in the fourth quarter. Now it sounds like first quarter. What happened with the timing there?

[Kevin T. Conroy:]

Yes. Well, first of all with the government shutdown, it didn't really have a significant impact on the review. We are really pleased that the principal reviewer continued to work on the review during the shutdown. Originally, we believed that the panel would occur in December and provided guidance to Q4. Based on our current conversations with the agency, though, we expect the panel to now occur in Q1. We underestimated the amount of time required on the agency's part to organize the panel meeting. But the agency continues to work extremely hard on its review of the submission, and we're very appreciative of this high level of interactive dialogue between the FDA and our clinical affairs team. We will be meeting with the agency in the near term and we'll discuss the panel date at that meeting. With respect to the publication, there is still some chance that there could be a publication in December. However, we think that it's more likely to be in the early part of Q1. We, obviously, don't control that and it's not set in stone at this point. But we do feel pretty comfortable that, that is coming soon. The importance, and I can't really overstate the importance of a publication in a premier journal, is that it triggers very important decisions down the road, including commercial coverage, physician adoption. We think it will also play a role in the review by the regulators in terms of approving this test, both the FDA and CMS. So we're really pleased with the quality of the publication and we think long-term that, that publication will create a lot of value.

[Jeffrey T. Elliott:]

Got it. Okay. So outside of your control as far as the timing. Shifting over to the compliance, and again, I talk to investors a lot. I do think the commercialization activities you have underway, perhaps, are a bit underappreciated. So I wanted to dig into the compliance engine. Can you talk about what are the big milestones that we should be tracking towards over the next year as you prepare for launch, in terms of the compliance engine?

[Maneesh K. Arora:]

So the -- I mean, the real goal for us is to drive awareness. First off, it's really understanding screening rates. So what Kevin talked about in our 2-pronged strategy was really engaging and understanding the systems and their current screening rates. And what we know, across the board, is that those screening rates are below the rates of cervical cancer screening, well below the rates of breast cancer screening. And that's really the opportunity, is working and partnering with these systems. So if you think about it, Jeff, it's not us just selling another test, but us selling a strategy to increase those colon cancer screening rates. So the real goal for us in the background is to really understand the gaps and the reasons for those gaps. One of the biggest reasons is just the low compliance. So working with these systems to partner with, let's say, a lead group of early adopters once we have FDA approval. And that's really the next big milestone, is us, after FDA approval, being to -- being able to announce some of these agreements with premier systems that we will partner with to drive up colon cancer screening rates. And then, over the course of that first year of launch is working with them to actively report and engage, not just with their physicians, but also a lot of these systems have integrated payers. So working to both establish increased screening rates, which we will be able to show with our sole-sourced lab, but also increase cost effectiveness over time.

[Operator:]

Our next question is from Brian Weinstein of William Blair.

[Brian Weinstein:]

Kevin, you talked a little bit about the reimbursement and kind of adding up the codes there, but why you are confident that a crosswalk is the way we're going to go here and not a gap-fill process? And if we do use the gap-fill process, how comfortable are you that you can get to the same kind of a number?

[Kevin T. Conroy:]

Well, first of all, because we've had extensive discussions with the agency, and what is going on in the background, as you're probably aware, is that there's been a lot of effort to create a system by which molecular tests can be reimbursed. This crosswalk process to these new molecular pathology codes is the way that, that will occur. Our test is so -- fortunately, a very straightforward test with a limited number of biomarkers in it. And we, unlike other new molecular tests, are not looking to be reimbursed based upon the value of an algorithm, rather we are looking to be reimbursed for these specific codes, which have been fortunately listed in these Tier 1 and Tier 2 codes that have been created. So I think that is part of thought process on the part of CMS. That's not to say that gap filling isn't possible. However, if gap filling occurs, understand that the gap filling would likely occur just for the methylation markers that have not been reimbursed, or a payment level hasn’t been set today. And the process for gap filling a methylation code should not be very complicated. There are many similar codes out there with similar processes for detection that can be used as the data point. And again, Cahaba has already gone through a gap-filling process for methylation detection. We also believe that other Medicare contractors will be going through that process.

[Brian Weinstein:]

Okay. And then turning to the economic study we had heard about previously. I'm curious about the timing of getting that out, kind of the model that you guys are using for that and what the key endpoints are that we should be thinking about?

[Kevin T. Conroy:]

Sure. So the goal of the first economic paper, and I think there will be a number over time, but the first economic paper is really aimed at showing what's the appropriate interval for the test, based upon modeling. And that paper will look at the cost effectiveness based on dollars per quality adjusted like U.S. Aid [ph] at a range of intervals, 1, 3 and 5 years, and at a range of prices or costs for the test. And what that will show is that, we believe, that 3 years is a rational interval for the test, based upon that cost-effective analysis. This -- it will also show that compared to other cancer screening modalities, for example, breast cancer screening and cervical cancer screening, that Cologuard presents a much less expensive or a much more cost-effective way to screen for colon cancer. Other economic studies down the road will show the impact of differential compliance, mainly the fact that we believe Cologuard will be -- have a higher compliance rate associated with it as a test that is taken every 3 years compared to, for example, fecal blood tests, which is supposed to be taken every year, but fewer than 10% of the people who are recommended to be screened every year with the FIT test actually get screened every year. So showing differential compliance increases the relative cost-effectiveness of Cologuard compared to a fecal blood test.

[Operator:]

Our next question is from Jeff Frelick of Canaccord.

[Jeffrey Frelick:]

Kevin, you've done a pretty good job here of beefing up the team in preparation for Cologuard commercialization. As we've seen in some of the survey work, the primary care awareness is pretty strong. When do you start really beginning some serious discussions with the healthcare systems you've pointed out about Cologuard, the data so far that we've seen in the headline data, and the compliance service?

[Kevin T. Conroy:]

All right. Well, certainly as part of developing this test and developing a clinical trial, which engaged 80-some-odd -- 85 clinical trial sites around the country, we've had lots of conversations about the need for screening, the role of a stool-based DNA test. And so we have just a wealth of information and contacts with large systems, who have a real deep need for a new test that will help them increase their colon cancer screening rates. So that has begun. It will certainly accelerate after FDA approval, when we can start to more actively discuss the data behind the test and how the test would be specifically implemented. But at this point, we feel really confident based upon the extensive amount of awareness the company and Cologuard, as we have had a number of publications and we've been active in, again, discussing what their colon cancer screening needs are.

[Jeffrey Frelick:]

Anything you can share on early feedback with respect to logistics and the compliance service component?

[Kevin T. Conroy:]

It's a good question. One of the things that we've asked them is how important would the service be. And this isn't a scientific response, but I would say about 70% of systems say they have a significant need to offload some of the, what we call, mundane work of colon cancer screening, and that is following up and reminding patients that they need to return a test. There are some groups who say, "Look, we already do a really good job at this." And our system will be flexible enough to account for those systems that don't want our patient engagement engine. I do think that, over time, those systems that don't initially opt for the compliance engine will opt for it when they see the impact that it has on screening compliance rates. That's an important data point. The majority of physicians will tell you -- primary care physicians, say the thing that they least like about their practice is all of the paperwork and following up with patients. They really want to practice medicine and solve health problems. And if we're willing to take on this nagging that is required to get people screened, and cajoling, then they're more than happy to ask us to do that.

[Jeffrey Frelick:]

And you guys are still thinking monthly report or something like that of folks that were noncompliant?

[Kevin T. Conroy:]

That's correct. And another thing that systems like is the ability to see what the respective rates of compliance are on a physician-by-physician basis, which they'll be able to see. So that they can help further train the physicians with lower compliance rates.

[Jeffrey Frelick:]

That's interesting. Good point. And just last question, Kevin. The November meeting with the FDA, remind us -- anything you can share with us, kind of the purpose of that meeting, what would be the takeaways from that?

[Kevin T. Conroy:]

Sure. So, as you know, we submitted 3 modules to the FDA. The FDA then comes back with comments on each of those modules. This is that final meeting to get together face-to-face and review all of our responses to their comments to our submission. So from this point forward, things will start to accelerate in terms of the FDA preparing a panel pack, putting together a panel and having any final requests for more information or any final data from the company. We don’t expect that there will be anything major that comes out of that meaning in terms of anything new, because again, this has been an interactive dialogue, which isn't typical. They have -- there's been an interactive process of us providing them information and the agency responding to it. And again, we're really appreciative of how active the FDA has engaged on the submission.

[Operator:]

Our next question is from Peter Lawson of Mizuho Securities.

[Eric Criscuolo:]

This is Eric filling in for Peter. I just want to make sure I got the timing correct. When you said that the -- you expect preliminary Medicare coverage decision around the time of FDA approval and that is first quarter of next year?

[Kevin T. Conroy:]

We haven't guided to when we expect FDA approval, nor will we. But we have said that, based on our current understanding of the parallel review program, that we expect the preliminary coverage decision to be roughly in parallel with the FDA decision. In order for Medicare to make a binding national coverage decision, they have to provide roughly a 90-day notice and common public-review period of that preliminary decision. And that is the reason for the 90-day difference between FDA approval and the preliminary coverage decision and the final national coverage decision.

[Eric Criscuolo:]

Okay, great. And then, relatedly, on the private payers, so the Aetnas and the U.S. Healthcares. When do you -- has there been any progress with talks with them or when do you expect that they start to fall in line, assuming the Medicare coverage is -- comes in as expected?

[Kevin T. Conroy:]

Right. So that Medicare coverage decision is really important for our commercial payers because many commercial payers will peg off of the Medicare coverage decision. Also, many -- in many states, when a test is included in the American Cancer Society guidelines, it's mandatory that commercial payers in those states cover the test. So those are things that will occur and our activity around the commercial payers will increase significant -- significantly once the peer-reviewed article is published. And we have already began those discussions and have been having those discussions over a period of time to understand the timing and the process and the key factors that the commercial payers will be looking for. Suffice it to say, we are very confident that commercial payers look at this test as a new way of doing colon cancer screening that is a cost-effective way of doing colon cancer screening.

[Eric Criscuolo:]

Got it. And then just last question, on the timing of the publication or -- as best you can expect. Is that publication going to be -- is that coming out before the preliminary Medicare coverage decision?

[Kevin T. Conroy:]

We don't know for sure yet. It will depend upon -- well, we would expect that it would. Yes. The one thing that we don’t know today is the exact date of when that publication will occur or the exact date of the FDA panel. And then, of course, we don't know how long the FDA will take after the advisory panel vote to make a determination on approval. So that could be a range of time, and we don't want to publicly comment on what is the FDA's purview.

[Operator:]

Our next question is from Zarak Khurshid of Wedbush Securities.

[Zarak Khurshid:]

Hey, Kevin, do you have a sense for the timing when we will get final clarity on the Tier 2 codes? And then after that, are there any other key meetings or events prior to the preliminary coverage decision that we should be kind of thinking about?

[Kevin T. Conroy:]

Key -- I'm sorry. Key meetings or events?

[Zarak Khurshid:]

Yes, meetings or events related to reimbursement issues.

[Kevin T. Conroy:]

Yes. So in terms of that question, in terms of the timing, we don't expect that CMS -- the CMS process is not as public of a process until that preliminary coverage decision is made. I'm sorry, the first question related to what the -- whether this would be -- timing of the Tier 2 codes. We don't know yet. We have heard that there are a couple of other MACs[ph] out there that are planning to ascribe values to these Tier 2 codes, because remember these Tier 2 codes are being -- are tests that are being run today. So there needs to be clarity. They can't just not price these at any point in time. There's a lot of pressure that ACLA and others are putting on the system to get clarity on molecular testing, and Tier 2 codes are a big part of molecular testing. So we do expect that, that will occur. For us, we don't mind if that is part of the process for the review and payment level for Cologuard because, again, it's just 2 methylation marker codes. And to -- even for CMS to get those particular codes is not a complicated process. We can lay out the costs associated with that -- with those markers in a pretty, easy straightforward way. So we think it will either occur before our test is approved or as part of the reimbursement decision for Cologuard under CMS.

[Zarak Khurshid:]

Got it. Makes sense. And then in terms of the new products or programs, can you just give us an update on how things are shaping up there?

[Kevin T. Conroy:]

Sure. In terms of the pipeline, what we've tried to do, Zarak, is divide up the company, so that the bulk of the company is focused on launch and there is a small team that is focused on pipeline development. As you know, we have this deep relationship with the Mayo Clinic, and that relationship is bearing fruit in terms of both pancreatic cancer biomarker development and esophageal cancer biomarker development. The goal here is -- the long-term goal is to develop a test with 1 collection, you can screen for pancreatic cancer, esophageal cancer. And those markers that we're developing, we believe, will also provide really important value in applied diagnostics for both pancreatic and esophageal cancer. The focus is going to be on Cologuard in the near-term, but there is a team that's working really hard to develop these other very valuable pipeline products.

[Operator:]

Our next question is from Brandon Couillard of Jefferies.

[S. Brandon Couillard:]

Kevin, MDxHealth has recently secured a Tier 1 reimbursement code for one of it's methylation markers and inclusion in the NCCN guidelines. How does that inform your view of how CMS is likely to proceed with respect to setting reimbursement level for Cologuard? Is that an appropriate proxy to look at?

[Kevin T. Conroy:]

Well, we don't know yet what the reimbursement rate is for the MDx methylation test. But yes, I think what it speaks to is the fact that there are always new molecular -- valuable molecular tests that are being developed. And CMS is very cognizant of the fact that there needs to be a way to pay for these valuable tests. We think that, that could be a proxy for methylation detection, it just really depends on how -- the timing of the process to review that and we don't know if that will occur before or after our test. But the good news is that these codes are being issued, they're being validated by CMS by putting them as a Tier 1 code and we think that, that will occur with NDRG4 and BMP3 for us.

[S. Brandon Couillard:]

And can you give us a sense of how the commercial organization scales over the coming periods going into the FDA review, in terms of headcount, sales force buildout? Where do you expect to be in terms of the sales force size, let's say, midyear in front of the launch and then by the end of next year?

[Maneesh K. Arora:]

Sure, Brandon. This is Maneesh. So we want to be prudent and careful. So as Doug Ikeda has come aboard and we've started to build out the team, we're bringing aboard the leadership for the team and I think we've said in the past and we'll reiterate, we plan to go to market, as most -- as many folks do with commercial launches, with a contract sales organization. And so we would plan to bring that contract sales organization up right around the time of FDA approval. So that by the time we get to launch, we would be able to actively call on those accounts. Now that would be for folks calling on physicians. We will plan to be scaling over the next 2 quarters to bring in key account executives, that's about 10 folks, to call on the systems. So the -- you could expect to see a total sales force between the 45 to 50 field reps through a contract sales organization coming in at about the time of FDA approval, and between now and then, a ramp-up of the key account executives, which is a force of about 10 by the time we launch at FDA. So when all is said and done, we expect a field system sales force, a field sales force, as well as marketing folks, between 70 and 75 heads at the end of the next year while we're in launch.

[Operator:]

Our next question is from Raymond Myers of Alere Financial.

[Raymond Myers:]

Kevin, I want to drill down a little bit more on the pancreatic clinical work that's being done. Can you give us an update as to where that study is? And what the regulatory pathway is in terms of milestones as well as timing?

[Kevin T. Conroy:]

Ray, at this point in time, we don't want to disclose what we're -- all of our tactics and plans for developing the pancreatic cancer test, or actually, there could be a number of tests, because we want to protect that program from a competitive standpoint. We think that this is a highly valuable test, in part, Ray, because today, there is no screening modality for pancreatic cancer. And the modalities for screening esophageal cancer involve a scope, so they're very expensive. So look for more updates down the road. Again, we want to make sure that the focus as we move into launching Cologuard is on Cologuard and not on the pipeline. And we'll provide timely updates on both of those future products at the appropriate time. But right now we're just not ready to do that.

[Raymond Myers:]

If I could follow up, I just want to understand. I can understand for competitive reasons you don't want to do this. You have given details in prior calls about the products. And so, what is the reason that you're not giving continued updates? Is it truly that you're not -- that there is some new competitive difference or has there been a change in those programs?

[Kevin T. Conroy:]

No, there hasn't been a change in those programs. There is, again, active work that has been done. As you're probably aware, at DDW, there was data disclosed in a presentation by a researcher at the Mayo Clinic, in collaboration with us, around the detection of the potential diagnostic application that we're working on. Ray, I'm sincere when I'm telling you that the reason that I don't want to talk about this at this stage in any greater detail than I have right now is because we want the focus to be on Cologuard and we want the -- we haven't provided any guidance at all around these programs, although I touched upon them. We want the focus to be on Cologuard, and we want the freedom to be able to develop the pancreatic and esophageal cancer programs in a way that will create the most value for shareholders. I will say that it's something that we're really excited about and is progressing nicely. At the appropriate time, we'll probably do some type of Investor Day, where we can share a lot more information, but I just don't want it to eke out.

[Operator:]

Chris Lewis of Roth Capital Partners.

[Chris Lewis:]

Just first, just on the IBD study, I was hoping you could provide an update there on the enrollment for there -- for that study?

[Kevin T. Conroy:]

Yes, we have slowed down our focus on the IBD study, in part, because we need to explore with the agency, the regulatory pathway for that, and there maybe an opportunity yet to bring that study into the fold of a potential update submission. We're not sure at this point. There are a lot of things that we need to consider. And first, we want to get through the review of Cologuard and the FDA submission around the Cologuard test. So, that enrollment continues. It is -- we're unlikely to release data in Q1. At this time, I'm not prepared to say which quarter we would release the data, but enrollment does continue to progress. It is not as significant of a focus for us at this juncture, though.

[Chris Lewis:]

Okay. And then just on the CLIA lab, can you remind us how much that buildout is expected to cost and what are your expectations for building that team to support operations in that lab?

[Kevin T. Conroy:]

I'll hand that to Bill.

[William J. Megan:]

Yes. So we said back in the beginning of this year that we expected to spend about $4 million to $5 million. That included the cost of the lab, it included the associated equipment, as well as the operating support systems. And we're basically on track for that. Part of that cost has been recognized in Q3. As we mentioned, we'll see a slight uptick in expenses and in cash costs in Q4, from $10 million to $17 million, and part of that will be recognition of the costs associated with that lab. There will be some span of those costs recognized into 2014 as well. But we are on track for, as Kevin mentioned, completion of that lab for Q4 of this year.

[Operator:]

Our next question is from Peter Lawson of Mizuho Securities.

[Peter Lawson:]

Kevin, just really quickly. The delay in the panel. Does that change your commercialization plan in any way, or the ramp?

[Kevin T. Conroy:]

No, it really doesn't. We were expecting that the panel would be late in Q4. Again, we don't know quite the timing of when in Q1, and we had some cushion. Certainly we have a little less cushion than we did before, but we had some cushion in our launch planning. And we're still roughly in line with what I think that The Street expects in terms of when the test will be launched. So, in our planning, there's is not a delay in the launch as a result of a small pushback in when the panel will occur.

[Peter Lawson:]

And then just on the methylation code. In fact, there isn't a code for methylation. Could that delay the decision from CMS in any way?

[Kevin T. Conroy:]

Well, it's important to note that there is a code for methylation, it's code 81401, and the language is detecting 1 methylated variant of DNA. So that's important. That has been in process since 2012, that they had developed these molecular pathology codes. In terms of pricing that, no, we don't think that there will be delay at all. We think that the pricing of that particular code would occur as part of the CMS review of the Cologuard test and the crosswalk to those molecular pathology codes. So it's a pretty straightforward process for them to ascribe a payment level relative to detecting 1 DNA-methylated variant. It is -- that is not a complicated process whatsoever.

[Peter Lawson:]

And just finally around the publication, so that's not accepted yet or it's accepted with revisions or further data?

[Kevin T. Conroy:]

No -- okay, I want to be very clear about that. We have provisional acceptance. The journal -- the publication came back to us and asked us to shorten it, move some tables around, make a few other not material changes, nothing substantive. That, I believe, is being submitted back to the publication today. And we think it's about 30 days for them to -- in editorial review and then about 90 days ballpark from that point forward to go into publication. It could be sooner than that 90 days, though. So that's where we come up with our Q1 estimate. If that changes, we'll let you know. But right now, that feels pretty solid.

[Operator:]

I'm not showing any further questions in the queue. I'd like to turn the call back over to Kevin Conroy for any further remarks.

[Kevin T. Conroy:]

Well, first of all I'd like to thank the team that has been working here at Exact Sciences so diligently to take the company through FDA approval, work on our commercialization plan, secure reimbursement from Medicare. And we remain focused on these 3 areas and we really look forward to updating you, our investors, in the near term. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

[Kevin T. Conroy:]

Thank you.