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EXACT Sciences Corporation (NASDAQ:EXAS)

Citi Global Healthcare Conference Call

February 26, 2013, 11:05 am ET

Executives

Analysts

[Abrupt Start]

……statement. This test is a real breakthrough test. It’s using cutting edge technology to detect precancerous polyps that are even as small as 1 centimeter that take five to 10 to even 15 years to develop into colon cancer and you can detect them non-invasively. One of the big problems with colon cancer screening is just not enough people will undergo screening; many people are uncomfortable with colonoscopy and never show up. So this is an opportunity for us to move to cancer prevention in what is the number two cancer killer.

Today, we will talk about the actual opportunity, our solution, our plans for commercialization, a new pipeline opportunity and our financial overview. Again, this is a product that detects cancerous and precancerous polyps. There is a significant unmet need in the market. We think this is globally at least a $3 billion market opportunity. We have a pivotal study that is nearing completion. We have exclusive intellectual property around this product and we have a broad base collaboration with the Mayo Clinic which has been truly indispensable in this collaborative partnership in developing the colon cancer test and we have some very promising other tests in the pipeline.

So colon cancer is known as the most preventable, yet least prevented cancer. The reason that it is so preventable is it’s a disease that grows in the colon which is acceptable with colonoscopy, so the biology is such that if you find a precancerous polyp you simply can remove it and then disease doesn't progress after the polyp has been removed. The problem is a huge problem, so in the US there will be in the ballpark of 140,000 to 150,000 new cases every year and 50,000 deaths and it impacts men and women equally. There are roughly 25,000 men and 25,000 women that die of course colon cancer every year. It’s the number two cancer killer, next to lung cancer and it’s a disease that can be prevented. People shouldn't die of colon cancer. With adequate screening you can find the precancerous polyps, remove them; patient doesn't then develop colon cancer.

So this is a unique product and that it delivers great clinical value and it’s also quite at a point that is today less than the current screening standards of colonoscopy. So we know that in the Medicare population, we see an increasing weight in colon cancer incidence and we will see this for the next two decades as the baby bloomers hit the Medicare world. So there is a big problem in the US with spending $14 billion a year treating colon cancer, not including the screening costs, but just the treatment cost.

And that will go to $17 billion to even $20 billion by the end of this decade, so the costs of treatment are escalating rapidly and the healthcare economics of our test especially if we find a pre-cancer, remove the pre-cancer and prevent the disease, we really see an economic impact as well as obviously a patient impact, because the truth is you would rather get hit by a bus than be diagnosed with late stage colon cancer. It’s a very, very difficult disease to treat when following late stage. It’s expensive on a probation basis. So Medicare cost is one steady showing the cost to treat all the way to there for a Medicare patient is $142,000, on average and despite the big impact in the high incidence rate today only about half of patients are in compliance with current screening guidelines. This compares to cervical cancer screening which is 85% compliant; breast cancer screening, 85% compliant; colon cancer screening, 50% compliant, there is a huge gap.

As a result, today 60% of colon cancer cases are diagnosed late stage, stage three or four. For stage four, there is about 68% five year survival -- I am sorry, stage three, 68% survival, stage four, less than 10% survival. Multiple surgeries are frequently required, chemotherapy, expensive chemotherapy. So what's going on in the screening world today? In U.S., you see about 4 million average risk patients every year, so people who have no history of disease, no family history, no prior pilot, who underground screening colonoscopy starting at age 50, and then at age 60 and age 70, age 80, that’s the current screening guideline. For patients who are unwilling to undergo colonoscopy, you have about 10 million fecal blood tests where you look for actually hemoglobin in the stool, which is an indirect indicator of colon cancer and it also can mean a lot of other things and so it is not a very sensitive test, in other words, it misses a lot of cancer. The FOBT test misses lung cancer than it finds the FIT test is moderately better detecting typically in the mid 60% of cancers, but missing a third of cancer, so the cancer isn’t bleeding and stage 1 cancer typically don’t bleed, stage that you want to find the cancer in, so this is the other test. There is a huge market for these non-invasive stool based tests today.

In the US, we think that even with 30% penetration that is 30% of the 80 million Americans over the age of 50, utilized in a non-invasive DNA based test. You can get to a market in the US alone of over $2 billion. The global market is obviously huge. The goal here and you can see from this slide the biology of the disease is that small polyps develop; some of those polyps, a minority of those polyps develop pre-cancerous cell, it’s actually one layer cell on the outer layer of the polyp start to progress towards cancer. And these polyps sometimes they go to cancer in two years, sometimes they go to cancer in 15 years. But if you can catch them at the polyp stage you actually just cut out the polyp, through a colonoscopy procedure. It’s an out-patient procedure, just like a normal colonoscopy and the polyp is removed, the tissue is send to the pathologist and were to examine to determine whether it’s pre-malignant.

You also can detect cancer in stage 1 typically the colon is receptive and the cancer shift under inner lining of the (inaudible) part of being testing and they stitch it back together and you typically don’t even undergo chemotherapy. But as you progress into finding cancer later, your prognosis gets a lot worse in the treatment, it’s a lot more expensive and a lot more difficult for the patient.

Our test is very simple at-home convenient private collection that can be widely disseminated. This collection kit is send to a patient, via the mail or through an overnight service and returned in the same way directly to the lab where the sample is processed and very advanced DNA tools are used to look for even minute traces of altered DNA. These pre-cancerous polyps, they have certain mutations or methylation pattern and our test looks for the particular mutations or methylations that we know exist in basically all cancers. Our test looks for two different methylation marker seven mutations in the KRAS chain, total quantitative DNA and also this protein hemoglobin, so a lot being shed directly into the colon. If any of these particular markers is above a certain level the test is positive. There is an algorithm in which these scores are added together; cumulatively they trigger a result over a certain lever, that it’s a positive result, and a positive result, the primary care physician would tell that patient to go to colonoscopy. So now you are starting to move people who other wise want to be screened by colonoscopy to a simple convenient test with the polyp DNA and then to colonoscopy with a positive result.

We have a very powerful automation system that can generate 43 results in an automated fashion in an eight hour shift, so we developed not only the assay, but the instruments and the software to go along with it. This is all part of our clinical trial and all part of our FDA submission; I will talk about the clinical trial in a minute, it’s one of the largest clinical trial of it’s kind ever run, so it will be very well powered. This product has been developed over the last 3.5 years and consecutively over the last three years we have run studies using this technology in a case controlled fashion with no normal and no new cancers and we have seen outstanding and very consistent performance. As you can see the test performance improved after our initial prototype product in 2010. So now, we are detecting 98% of cancers in the last study, 83% of high grade display show which is the immediate precursor to colon cancer, the last stage before Stage 1 cancer.

Precancerous polyps over 50% and I'll talk about the importance of being over 50% in a minute and the polyps positive rate is only 10%. So 90% specificity means about 10% polyps’ positive rate. As you can see here one of the important attributes of the test is that as the polyps grow in size and they progress towards cancer, our test is increasingly able to detect those polyps.

As you get to a Stage 3 or a 3 centimeter polyp, those polyps almost certainly over time progress to high grade displays and to cancer. So it’s very important that this test increases in its ability to detect as the polyp grows inside.

Now here's probably the most important slide here. This shows you the power of repeat testing. This is why the pap smear has basically eradicated cervical cancer in screen population because we have a long period of time to detect something and you have over 50% chance to detect it in any given time, repeat testing will find these precancerous polyps.

Now keep in mind that the back-to-back colonoscopy studies that look to the ability of [GIs] to find precancerous polyps show that even when they are being watched, GIs are detecting only about 75% of precancerous polyps and that rate varies widely from physician-to-physician and even within physician depending on the time of day or day of week that the test is performed.

The one great thing about a DNA test is we extract DNA from the human specimen and we detect DNA from that specimen and a robot does it in very consistent reliable way. So if you use the pap smear as an example and I always tell a story in the pap smear was introduced in the US in 1954 and in 1954 cervical cancer was the number one cancer killer of women, killing about 35,000 women every year.

Today, cervical cancer kills 3,500 women. It is the only cancer that has basically nearly been eradicated and the reason its not totally eradicated is because not all women are screened every year but women who are screened every year with the advanced pap smear and HPV technique means that you get to a high level of detection and that is despite the fact that the pap smear is only about 47% sensitive for an equivalent precancerous lesion, for (inaudible) cell, and about 95% sensitive or 95% specific.

Our test we think will be awfully similar. Now the thing is with colon cancer takes a little bit longer for these lesions to progress to cancer so you actually can have a longer interval. You can have a three-year interval for testing and you can still get to a very high level of detection.

So this is, the power of this test is with repeat testing and the ability to detect precancerous polyps non-invasively. We know one thing and this is a study that came out last year, 300 patients throughout their colonoscopy only 38% complied despite their doctor asking them to within a year. When offered a choice between a stool based test and colonoscopy 69% so a near doubling of people willing to undergo screening if presented a choice.

Our goal is not to replace colonoscopy. Our goal is to increase the screening population and to send the positive patients to colonoscopy for visual examination and removal of Precancerous. That's how you really get to the core of preventing this disease and getting to improve patient care and getting to improve costs.

We know that the patients prefer this test, that this is the test when patients use stool being a collection device, the FOBT test and colonoscopy that there is a strong preference. It's a very easy collection process; it's a very convenient collection process.

Now let’s turn to the clinical trial. When we set out to build this product, we knew that we're going to invest a lot. Developing this test is a very, very challenging R&D project. The clinical trial we decided, we're going to one of the most robust clinical trial that we could imagine which today, we enrolled 12,700 patients, 10,800 have performed all three tests.

So with that, we have found 56 cancers. We have found about 800 precancerous and we will have over 9,000 normal patients. So from these we will be able to derive sensitivity and specificity, sensitivity for both cancer and these advance data for precancerous polyps.

The endpoint, the primary endpoint is how well does this test detect cancer relative to colonoscopy? So colonoscopy is held as perfection and we need to achieve about 78% point sensitivity. As you could see, we were in the 90s in the previous study.

Now we don't expect to be at 98% in prospective study, we've guide it to 85% or greater. We certainly hope to be at 90 or above. Our secondary endpoints include the ability to detect precancerous polyps and then also very importantly the next secondary endpoints as it compares into the current FIT or fecal hemoglobin test. Why is this important? That is the test that has run and performed 10 million times in the US and we have a direct comparison to the ability to detect cancer and precancerous polyps.

And we believe that our test will significantly outperform the FIT test particularly for precancerous polyps which the FIT test typically doesn't pick up those polyps because they don't bleed. Key milestones to focus on as we have a big data release coming up in the near-term in the March-April timeframe and then we will submit it to the FDA in May and have a panel at some point later in the year and hopefully progress rapidly to FDA approval.

One thing to note is that we are may be the only company; we want to be the only company who is undergoing a very unique parallel review by both FDA and Medicare System which will potentially post forward Medicare coverage, a national coverage decision by 18 months to two years. So, it's a real benefit to be part of this polyps program.

Let me talk a little bit about how we will deliver this service to physicians and to patients is directly through our own laboratory. Through this we will be able to control the patient experience; we will get a tick to the patient. Remind the patient to return the test, if they don't return it quickly, provide compliance reporting back to the physicians, so they know each patients, they don't know each patient always undergo colonoscopy or undergo the FIT test and so until they see the patient the next time.

So this is a real service, the real value that we are delivering to physicians, who are concerned about their patients not getting screened if the patient develops colon cancer there is reliability risk for the primary care physician, and then finally, we get control of the market penetration directly engaged with the players to optimize the coverage for this test and the reimbursement for the test.

And this is what we will focus on two segments as we rollout this test one of the large network that employ a large percentage of primary care physicians in the US, the large hospital systems that employ these physicians directly and high prescribing FIT and FOBT physicians. We know who those physicians are and can target them.

So today about 64% of primary care physicians are employed. This has rapidly changed from 30% or 40% 10 years ago and we expect this to accelerate. It's very expensive to be your own primary care physician and with the requirements around patient medical records, electronic patient records it's even more on moving to assistant.

We also know that 6% of primary care physicians drive 60% of those 10 million FIT, FOBT tests per year. So by focusing on the large systems except their own screening standards and the primary care doctors today are ordering a large number of this test, we know that the top 2,000 account for about 1 million tests per year. We know who those positions are and our sales force will be able to call on them directly. We know that the FIT test which came into market about eight years ago, has seen rapid adoption by focusing on this same strategy, focused on the large systems that will convert hundreds of dots at once and then also focus on the high prescribing physician, and with even a small sales force and a fairly weak marketing effort the bit makers have really changed the screening landscape pretty rapidly.

We have data showing that 96% of physicians and 92% of patients would either be very likely or moderately likely to use this test. This is significant, it’s unusual for a new product like this to score this high when you go out in an unbiased way and then in a statistically significant sample poll perspective users in patients.

Talking about the reimbursement process, if we are successful in getting the national coverage decision in parallel with the FDA approval it would be one of the first times a new diagnostics so rapidly has seen reimbursement and there are three elements to securing coverage, one is the coverage decision from CMS, secondly is a special code and three is the natural payment level. So we are focused on all three of these within a short term period of time after FDA approval. Hopefully about 90 days.

We have been closely tracking the large payers in the US that cover a majority of the privately insured lives in the US and they are watching us. So for the top five insurers last year updated their medical policy and dual DNA testing. And 58 out of the top 80 have a medical policy. So, one of the benefits of this company being around for a long time in having prior versions of a test is that insurers have been looking at this. They are looking for ways to save costs and colonoscopy is expensive and it’s hard to get people to do. So there's a real draw on the part of the payers as they look at this test. And one of the great things is that this test is currently in the American Cancer Society screening guidelines.

It’s really unique to have a product that is yet to be FDA approved to be in the cancer screening guidelines. This was based upon a prior version of the product that was much less sensitive for cancer and pre-cancer detection, but still made it into the guidelines. So that's helpful. I'll touch quickly here on an opportunity in the IDD space. So patients with Crohn and ulcerative colitis have about a 20% 30 year risk of colon cancer, so very, very high risk and there's no good way to screen.

As you can see from these pictures how do you see a small one centimeter polyp when you have all of these pseudo polyps and significant inflammation, you don't. The current standard is even though the patients are supposed to get scoped every year after they had the disease for 10 years to get diagnosed with Crohn’s disease at age 16 starting at age 26, they are supposed to get a colonoscopy every single year. That's the recommendation. During the colonoscopy they just take random biopsies hoping to bump into a small one or two centimeter polyp or dysplasia. It’s not a very effective means of screening, and GIs have a lot of angst about this tool. They also know that it’s hard to get patients to come in every year. The patients just don't want to take a day and a half, two days out of their schedule to get screened, and so we think this could be used in a different ways, the early data showed a high level of detection for both cancer and pre-cancer polyps.

Now this was a small end that was down through our collaboration with the male clinic. We're now running a 300 patient study to further validate this approach. Our initial feedback from perspective GI customers is that, majority of them would incorporate this test in to their practice. They are using this test every other year for these patients or using it alongside colonoscopy. There is a tool that allows you to find pre-cancerous polyps even when you see the bunch implementation and it's a technique called chromo endoscopy where you spray the intestinal valve with a dye and then the displacia actually you can see.

So with a positive FDNA test result you could actually then undergo chromoendoscopy. It's not frequently done because it's time consuming and it's not reimbursed very well. We're well positioned from a cash standpoint to execute on our plan. We had 108 million as of the end of the fourth quarter and we are deploying this cash in a very focused way, again going forward, building a commercial team that is focused on two segments. The large institution that can rapidly convert hundreds of primary care VAC and those super high prescribing FIT and FOBT position.

In conclusion, we really have a breakthrough product here that can change the way colon cancer is screened and hopefully make a big dent in the colon cancer incident rate overtime. It's a test that is convenient, private test collection in your own home, but it uses the power of DNA to find these small minute quantities of DNA being from these power (inaudible) and this FDA approval or CMS coverage decision, this parallel crack we think really benefit the company more importantly patient.

We are really excited about this opportunity in after three and half years of working on it, we can’t wait to get this FDA approved and covered by CMS. So if there are any questions I would be happy to answer them.

Question-and-Answer Session

Unidentified Analyst

So the question is what kind of system will this test be run on?

Unidentified Company Representative

We are using a Haemo-pin instrument which is an automated robotic pipe padding system. We have put a layer of our own software over the native software and we have done a (inaudible) testing to make sure that is a robust system. And what we did two weeks ago, is we submitted the result of 11th studies run on that robotic platforms. It’s part of our second module, module two to the three module at the FDA submission. So this is an IVD instrument that use by other manufacturers and has a long history in IVD lab, it’s a very robust instrument.

Unidentified Analyst

For the FIT test is it run in their own lab or is it reduced, cleared and everything.

Unidentified Company Representative

Good question. The question is how is the FIT test. FIT test that’s a component of our, (inaudible) are you talking about the commercial?

Unidentified Analyst

The commercial.

Unidentified Company Representative

So, the commercial test is the test that run both in high volume lab like (inaudible) lab core. It’s also run in smaller hospital based lab, there is one manufacture with an automation system and so those test are collected at home and put into envelope and mailed to the lab for result to be processed. Again its an at home collection with the return via the mail.

One thing to know is that our test also has the bit test and better than that and that test is on the automation platform for those lower fit collection devices go into rack that sit on that Hamilton robot and are processed on that platform.

Unidentified Analyst

(Inaudible) and do you expect to achieve from the (inaudible)

Unidentified Company Representative

The current FIT reimbursement structures is only $27 its immune assay test that doesn't detect pre-cancers and detects about 66% of cancers and it detects maybe 20% of pre-cancer, so we think that our value because this is a molecular test and its radically different in terms of the performance characteristic and based upon the way that Medicare reimbursement test here we would get significantly higher reimbursement that the FIT test, but significantly lesser reimbursement in colonoscopy, so even though the performance is close to that of colonoscopy we would be somewhere in the middle.

Unidentified Analyst

(Inaudible) represents that will at 60% in the FIT and FOBT, what are the demographics of other subscribers and also public since today?

Unidentified Company Representative

So we are doing a lot more work to learn as much as we can about the 6% and even the 1%. But it’s clear that the physicians that focus on older patients, there's a high percentage of those physicians who are OBGYN which came somewhat as a surprise. About 25% of OBGYN patients are 50 or older, and one thing we know about OBGYN patients, they are really good at cancer screening. So that's another hallmark of those physicians. But we are doing more work to figure out exactly why is it that some physicians are literally prescribing 2000 FIT/FOBT tests where others never do it. And I think those insights are really going to help to our commercial strategy.

Unidentified Analyst

(Question Inaudible)

Unidentified Company Representative

So right now we are in the process of conducting a search for a head of US sales and to begin building out the sales force. So by the end of this year we would expect to have about 20 people in the commercial team. Today we have eight people on the marketing team, really helping us develop the go-to-market strategy and it’s a long list of things you need to do as you know to be prepared for launch and that's what the team is focused on today.

Unidentified Analyst

(Question Inaudible)

Unidentified Company Representative

Thank you. I would like to thank Citi for having us present today. We appreciate it. We look forward to seeing you down the road. Thanks for coming.

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