EXACT Sciences (NASDAQ:EXAS) provides a timely case study on the current debate over healthcare reform in the U.S. Our current “sick-care” system focuses on the treatment of disease rather than preventative medicine initiatives through investments in wellness programs and improved diagnostic screening tests – particularly in the area of cancer screening since this represents a fast-growing, costly disease.
The Company’s next-generation screening test (V3) for colorectal cancer (CRC) holds the promise to detect both early-stage cancer and pre-cancerous growths. This stool-based DNA (sDNA) screening technology platform also has the potential to develop tests in the future for the early-stage detection of related cancers (e.g. stomach, pancreas, etc.).
Rather than spending thousands on expensive treatments for patients with late-stage CRC; the focus of healthcare reform should be in the development of improved screening tests that will result in the detection of both pre-cancerous lesions and early-stage disease.
On 6/11/09, EXAS announced a collaboration and licensing agreement with the Mayo Clinic along with the closing of an $8.2 million (M) private placement for 4.3M shares of its common stock (with XMS Capital Partners serving as the Company’s financial advisor).
Including the newly-issued shares as part of the private placement, EXAS has about 35M shares of common stock outstanding for a market cap of about $95M as of mid-July with a stock price around $2.70 per share.
The pact with the Mayo Clinic is focused on developing patient-friendly diagnostics that reduce deaths from CRC. According to projections by the American Cancer Society (ACS) there will be 146,970 new cases of CRC and nearly 50,000 deaths attributable to the disease in 2009 in the U.S. alone, representing the second most common cause of cancer-related death following lung cancer (60,000 deaths) and ahead of breast cancer (about 41,000 deaths).
Under the license agreement, EXAS has secured exclusive rights to intellectual property (IP) developed by David Ahlquist, M.D., Mayo Clinic, including patents that cover advances in sample processing, analytical testing and data analysis associated with non-invasive, sDNA screening for CRC.
EXAS will make up-front, milestone, and royalty payments to the Mayo Clinic and will provide funding for future work in Dr. Ahlquist’s lab in exchange for the exclusive rights to commercialize any promising results from this collaboration.
A week after the Mayo Clinic deal, EXAS announced that it received a $1M loan from the Wisconsin Department of Commerce to relocate its headquarters and operations from Marlborough, MA, to Madison, WI.
The Company’s expansion plans include the creation of up to 150 jobs over five years as EXAS achieves commercial milestones for its non-invasive sDNA screening test for the early detection of CRC. The relocation to Madison follows a management overhaul in March that brought a new leadership team from Third Wave Technologies, including the new President & CEO, Kevin Conroy.
Third Wave was acquired by Hologic (NASDAQ:HOLX) in 2008 for $582M, and the management team now at EXAS led the development through FDA approval for two human papillomavirus (HPV) molecular diagnostic tests in addition to a test for cystic fibrosis.
The new executive leadership team is expected to restore investor confidence in EXAS once their strategic plan is communicated to correct the backwards development of the Company's promising sDNA technology for the average risk population in the detection of CRC.
EXAS secured inclusion for its sDNA technology in the World Gastroenterology Organization, U.S. Multi-Society Task Force, and ACS guidelines for CRC screening before successfully developing a FDA-approved, fully automated test to fully capitalize on this major commercial and preventative medicine (i.e. saving lives) opportunity.
Thus, LabCorp (NYSE:LH) currently markets ColoSure on a homebrew basis with little in the way of sales or third-party reimbursement (i.e. insurance or government) – which is unlikely to change until FDA approval is secured for the Company's V3 technology.
The exclusive agreement with LabCorp runs through the end of 2010 for the use of EXACT’s IP as part of a commercial testing service for CRC screening, which was launched as ColoSure last summer by LH on a homebrew, non-FDA approved basis.
ColoSure is a single-marker sDNA test for the detection of CRC at all stages for asymptomatic, average-risk patients who are unwilling or unable to undergo a more invasive structural exam such as colonoscopy (the current gold standard).
Published studies involving patients known to have invasive CRC show that ColoSure has a sensitivity range of 72-77% and a specificity range of 83-94% while the detection rates for general population screening have yet to be determined.
During Mr. Conroy’s tenure as chief executive of Third Wave, he oversaw the development of two human papillomavirus (HPV) molecular diagnostic tests, including their successful clinical development. Importantly, both of Third Wave’s HPV tests secured FDA marketing clearance, in addition to the Company’s InPlex cystic fibrosis test.
For 1Q09, EXAS reported revenue of $1M and a net loss of $3.8M, ending the quarter with cash and equivalents of $20.6M (which excludes the recently announced $8.2M private placement) and zero debt.
The increase in cash and revenue largely reflects the Company’s strategic pact with Genzyme (NASDAQ:GENZ) announced in early 2009 as part of an intellectual property transaction that generated $17.2M in proceeds for EXAS that will be recognized as revenue over 20 quarters as a non-cash allocation.
EXAS provided guidance that cash/equivalents as of 1Q09 would be sufficient to fund operations for at least 12 months, but stated the Company would require additional funding to complete the clinical development required for FDA marketing clearance of its next-generation sDNA CRC screening test.
Subsequently, EXAS received an additional $8.2M in proceeds from a private placement, extending the Company's operating liquidity until at least late 2010 – in addition to future licensing opportunities for the fully-automated, V3 test being developed to obtain a broad label from the FDA.
Terms of the deal call for GENZ to acquire select IP of EXAS related to prenatal diagnostics and reproductive health while EXAS retained the rights to its key asset, a FDA-approved version of its next-generation (V3) sDNA test, which represents a much larger commercial opportunity than prenatal diagnostics.
EXAS will also receive a double digit percentage of any sublicensing income that GENZ receives related to IP it purchased outside of prenatal/reproductive.
EXAS enjoys a strong patent estate for CRC screening, including the following:
- Platform technology: exclusive licenses to digital PCR and BEAMing technology (both stool + peripheral blood detection) from Johns Hopkins University (JHU) for the detection of CRC;
- Content: APC (adenomatous polyposis coli)and p53 (these are two common genetic mutations associated with CRC) licensed from GENZ with diagnostic testing kit rights + exclusive licenses to key tumor biomarkers such as Vimentin;
- Methods: broad IP for stool sample processing.
The deal included the purchase of 3M shares of EXAS common stock by GENZ at $2 each ($6M), an upfront cash payment of $16.65M, and an additional $1.85M to be received over an 18-month period for $24.5M in total cash proceeds associated with the deal.
Aside from the obvious benefits of the immediate cash infusion, EXAS now has access to the product development and regulatory expertise of GENZ, in addition to its global distribution network.
Adding further value to the Company’s non-invasive sDNA CRC screening IP, the results of a population-based, case–control study published in the medical journal, Annals of Internal Medicine, concluded that colonoscopies may actually prevent 60%-70% of CRC, rather than the previously quoted rate of 90% for the test.
While colonoscopies are still effective at preventing CRC and will continue to be widely recommended and used; the study highlights limitations of the procedure - especially in the detection of flat and right-sided lesions, with the latter accounting for about 40% of all CRC cases.
Sensitivity results of 82% were already published last summer for the Company’s V2 sDNA technology, while the next-generation sDNA test (V3) boasts 92% sensitivity and has shown the potential to detect 86% of precancerous adenomas.
Currently, only 24% of the 90M eligible patients in the U.S. are compliant with CRC screening recommendations and there is clearly an unmet medical need for an effective, non-invasive CRC screening test for the average-risk population which people will actually use.
The potential for an effective, non-invasive CRC screening test for the average risk population is also a global opportunity as a report concluded that the E.U. needs to double the current rate for cancer screenings in order to reduce preventable deaths. The report calls on the 27 member countries to improve large-scale screening programs for target groups regardless of their symptoms, and only 12 member countries currently have programs for CRC screening.
Developing a V3 sDNA CRC screening test will be the focus of EXAS now that it has secured much of the funding necessary to see it through 2011, when it expects to submit for FDA approval of the V3 CRC screening test. EXAS will design the clinical trial based on extensive input from the FDA from last year, along with input from GENZ in the form of the joint advisory committee. EXAS may pursue a CLIA or homebrew launch of a V3 test by early 2011 and will also evaluate other opportunities such as aero-digestive cancer screening tests.
The clinical trial for FDA marketing clearance of the V3 test will include 8,000-10,000 subjects enrolled at 30-40 clinical sites with a goal of obtaining broad claims as a non-invasive sDNA-based CRC screening test, including the detection of adenomas.
The new executive management team has extensive experience in conducting these types of oncology screening clinical trials, and the successful decline in cervical cancer mortality provides a benchmark for success in decreasing the mortality and increasing the early-stage detection of CRC.
Pap Screening has reduced cervical cancer mortality by 74% from 1955-1992 (with less than 4,000 deaths per year now from the disease. Characteristics for a successful screening test in the setting of oncology include the following:
- The test must detect both cancers and pre-cancers;
- Regular testing intervals to allow for the removal of tumors without the need for chemotherapy; and
- The removal of pre-cancerous lesions to reduce the occurrence of disease and overall mortality.
Only sDNA-based screening tests allow for the non-invasive, patient-friendly detection of both cancers and pre-cancers, which can be combined with colonoscopy + pre-cancer removal for a drastic reduction in CRC mortality.
Last summer, EXAS announced the published results of a study in which stool and blood plasma were compared head-to-head for the detection of CRC using an improved BEAMing DNA detection technology (V3) from JHU. Study results demonstrated 92% sensitivity for detecting CRC in stool samples, which outperformed blood plasma testing – especially in the detection of early stage disease, which is crucial to have a positive impact and decrease mortality as CRC has a much better treatment outcome when diagnosed at early stages.
BEAMing describes an assay technology which incorporates the use of "Beads, Emulsion, Amplification, and Magnetism". The technology is a useful method for performing single-molecule analysis of DNA or "Digital PCR" that has been demonstrated to provide a high level of sensitivity for the detection of mutations or deletions in gene sequences of interest.
In the study, a total of 25 sDNA samples from CRC patients were analyzed and a next generation sDNA technology (V3) correctly identified 23 (92%) of the cancers. In the 16 of 25 cases where there were paired stool and plasma DNA samples, the sDNA technology detected mutated DNA in stool in 14 cases (88%) while only 8 (50%) corresponding plasma DNA samples had detectable levels of mutated DNA. In addition, when late-stage disease (Stage IV) is removed from the total, non-invasive sDNA performance remained at 86% (12/14) while plasma DNA performance fell to 43% (6/14). The results of the study, Analysis of Mutations in DNA Isolated from Plasma and Stool of Colorectal Cancer Patients, were published in the August journal of Gastroenterology.
Only 24% of an estimated 90M individuals in the U.S. are currently compliant with CRC screening recommendations, which results in 68M people who are non-compliant. The early detection of CRC saves both lives and money by avoiding the high costs of dealing with late-stage disease through expensive anti-cancer drugs and/or palliative care.
Late stage (III/IV) CRC accounts for 60% of diagnoses, but the five-year survival rates for Stage III CRC is 60% and just 11% for Stage IV disease. Compare those stats to early stage disease, which includes a 90% five-year survival rate for Stage I CRC and 70% for Stage II.
A five-year interval for sDNA CRC screening would equate to about 16M people in the U.S. alone eligible for annual screening; while a three-year interval ups the number to 27M. If about one-third of those eligible for annual screening underwent sDNA screening for CRC; the market opportunity would be around 5M patients per year for a five-year interval and 9M for the three-year interval.
At an estimated price of $100/test and 20% royalties, EXAS could earn $100-$180M per year in royalty revenue (about 2X the current market cap) based on these conservative estimates for market adoption and pricing.
Using $140M as the mid-point for potential royalty revenue in 2012 at a price/sales ratio of 3-5X discounted back three years at 20% annually yields a price target range of about $6-$10 per share for EXAS. Significant upside is possible based on wider adoption of preventative medicine initiatives in the U.S. and worldwide, especially in the area of screening tests for the early detection of cancer.
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