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EXACT Sciences Corporation (NASDAQ:EXAS)

Q4 2007 Earnings Call

February 5, 2008 8:30 am ET

Executives

Charles Carelli - CFO

Patrick Zenner - Exec Chairman and Interim CEO

Jeffrey Luber - President

Analysts

Leah Hartman – CRT Capital

Michael Moskoff – MRM Capital

Yogi Parikh – Azar Incorporated

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 EXACT Sciences Corporation Earnings Conference Call. My name is Katine and I will be your coordinator for today.. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions.) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Chuck Carelli, Chief Financial Officer. Please proceed.

Chuck Carelli

Thank you. Good morning everyone, and thank you for joining us today. With me on the call are Pat Zenner, our Executive Chairman and Interim Chief Executive Office r,and Jeff Luber, our President. Certain matters we'll discuss today, other than historical information, consists of forward-looking statements relating to, among other things, our expectations concerning our financial results, cash preservation, and commercial and regulatory strategies. 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 by the forward-looking statements. These risks and uncertainties are described in our annual report on form 10-K, for the the year ended December 31, 2006, and subsequent forms 10-Q. 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 in this call, whether as a result of new information, future events or circumstances, or otherwise.

I'm not going to turn the call over to Pat.

Pat Zenner

Thanks Chuck, and good morning everyone. Initially we thought that we'd be having this call with the updated colorectal cancer screening guidelines having been announced, and that way we would be celebrating the success of stool-based DNA's inclusion in the guidelines. As we await the news of the guidelines, we are no less confident in the potential of our DNA technology to improve screening rates and to save lives.

Given the breadth of medical evidence that EXACT has presented to the American Cancer Society and the U.S. Multisociety Task Force for Colorectal Cancer screening, we remain very confident that it's merit inclusion as an important screening option. This key event of guidelines inclusion is a necessary first step towards greater awareness and eventual broad-based adoption of our technology. With more than half of the 87 million people in this country over the age of 50, who should be screened for colorectal cancer, not getting any screening at all, new options are needed now.

There are two other major initiatives that the company has focused on intently, and which we believe will further pave the way for the commercial success of our DNA technology. The first of these is our pursuit of FDA approval for stool-based DNA testing for colorectal cancer. We are working aggressively and collaboratively with the FDA to obtain approval as quickly as possible The second is working closely with Medicare to obtain future reimbursement for our technology. Jeff will describe each of these objectives in greater detail in his remarks.

It's important to remember, however, that the fundamentals of our company have not changed since EXACT was founded. Millions of people continue to resist current screening methods and too few cancers are caught early, at more manageable stages. After all, this is a cancer that is greater than 90% curable if detected early.

We believe that non-invasive DNA-based screening offers certain characteristics that are lacking in the traditional screening methods, and unless there are new, less invasive approaches such as DNA technology more widely available, it's unlikely that screening rates will improve. As a result, more lives may be lost unnecessarily, and the burden to the healthcare system in treating this disease will continue to rise. We believe that our technology offers an opportunity to change the way people think about screening, and will provide them with an important, patient-friendly option that may prompt more screening and ultimately, save more lives. Our mission is clear, our objectives are focused and we continue to work vigorously to position the company for future success.

Now I'm going to turn the call back to Chuck, who will review the financials and then Jeff will give you a more detailed update on our business. Thank you. Chuck?

Chuck Carelli

Thanks Pat. For Q4 2007, the company generated a net loss of $4 million, compared to a net loss of $2.4 million for Q4 2006. For the year ended December 31, 2007, the company generated a net loss of $12 million, compared to a net loss of $12.9 million for the year ended December 31, 2006. This translates into a net loss of $0.15 per share, and $0.44 per share for Q4 2007 and the year ended December 31, 2007, respectively, compared to a net loss of $0.09 per share, and $0.49 per share for the respective comparable prior year periods. The increase in net loss for Q4 2007 when compared to Q4 2006 was primarily driven by lower royalty revenues and non-cash license fee amortization in connection with the June 2007 amendment to our license agreement with LabCorp, which I'll explain in a minute.

This increase in net loss is Q4 2007 was partially offset by savings realized in our sales and marketing operations as a result of the el imination in Q3 2007 of those functions. The decrease in net loss for the year ended December 31, 2007, when compared to the full year 2006, was primarily driven by lower sales and marketing and R&D expenses, partially offset by lower royalty revenues and non-cash license fee amortization.

Total revenues of negative $600,000 for the quarter ended December 31, 2007, were lower than total revenues of $1.2 million for the same quarter 2006. The negative revenues for Q4 2007 resulted from our June 2007 amendment to the LabCorp agreement, which again, I'll get into momentarily.

Total revenues for the year ended December 31, 2007, of $1.8 million, were lower than total revenues for the year ended December 31, 2006, of $4.8 million. Total revenues are comprised of three elements. The first is non-cash license fee revenue related to the amortization of upfront license fee payments from LabCorpp. The second is procuct royalty fee revenue on LabCorpp sales of its stool-based DNA screening test, which is based on certain of our intellectual property. And the third is product revenue related to sales of [inaudible] to LabCorp.

Then end of Q4 2007 marked the close of the second quarter operating under our amended license agreement with LabCorp, which as you may recall, impacts our revenues in two ways. First, by extending the exclusive license period to December 2010, we now record lower non-cash license fee revenue as compared to prior periods. The initial $30 million upfront payment made to us by LabCorp is effectively being amortized into our revenues through 2010 as opposed to 2008, which was the end of our license period prior to our amendment. Second, we now record a potential third-party royalty liability as a reduction the royalty revenue line item in our PNL.

As a reminder, we may be obligated to pay up to a maximum of $3.5 million over the exclusive license period if LabCorp sales of PreGen-Plus do not exceed certain specified thresholds. The ultimate amount of this potential liability is based on LabCorp's sales volume of PreGen-Plus during three measurement periods within our exclusive license period, which again, ends in December 2010. A significant increase in PreGen-Plus sales volumes during any of the measurement periods could reduce our obligation related to that period, while test volumes consistent with historical PreGen-Plus sales levels could result in payouts to LabCorp, totaling the 3.5 million that I just referenced.

The first measurement period, which ends in December 2008, includes a maximum potential obligation of $1.5 million. We began to record this potential liability in our financial statements during Q3 2007, and recorded charges of $950,000 and $1.2 million, respectively, during the three and twelve months ended December 31, 2007. Based on our current estimates of the potential obligation using sales volumes that we anticipate in light of the FDA and CMS statuses of our technology, which Jeff will address in his comments. These charges resulted in negative product royalty revenue for Q4 and the year ended December 31, 2007. January 2009 would be the first time that any potential cash payment would be due to LabCorp. Other payments to the extent necessary would be due in January 2010 and January 2011.

Total operating expenses decreased to $3.6 million and $14.6 million for the quarter and year ended December 31, 2007, respectively, compared to $3.9 million and $18.1 million for the comparable prior year periods.

Starting in Q4 2006 and through the end of 2007, we took steps to reduce our costs and structure the company in a way that aligns our resources with strategic imperatives. These actions included reducing our R&D group at the end of 2006, elimination our sales and marketing functions in Q3 2007, and right-sizing the amount of space leased at our corporate headquarters to reflect our reduced size.

R&D expenses were essentially flat when comparing Q4 2007 to Q4 2006, and decreased to $4.9 million for the year ended Decem ber 31, 2007, from $6.7 million for the full year 2006. This decrease was a result of personnel-related and other operating cost reductions, realized by reducing our R&D head count from 18 employees to 8 employees during the period from Q4 2006 through December 31, 2007. Our current expectation is that the R&D group will focus on supporting our regulatory process as well as specific technology improvement projects. Our sales and marketing expenses were lower in both the quarter and year ended December 31, 2007, when compared to the same periods of 2006, as a result of the elimination of those functions in July 2007, in connections with the third amendment to our license agreement with LabCorp.

G&A expenses increased to $2 million for Q4 2007, up from $1.6 million for the same quarter of 2006. This increase was mainly driven by higher legal and professional fees in the fourth quarter of 2007 in connection with our ongoing regulatory efforts. On a year-to-date basis, our G&A expenses increased to $7.5 million for the year ended December 31, 2007, from $6.9 million for the year endedDecember 31, 2006. this increase was also the result of higher legal and professional fees in connection with our regulatory efforts, as well as non-cash, stock-based compensation charges.

Restructuring charges for the year ended December 31, 2007 were approximately $1.2 million, consisting of approximately $800,000 relating to the elimination of our sales and marketing force during Q3 of '07, and approximately $400,000 in facility-related restructuring costs, related to the fourth quarter of 2007, in connection with the consolidation and sublease of certain of our lease space at our corporate headquarters. The one time restructuring cost resulting from our facility consolidation will be more than offset by the cash savings that will accrue over the life of the sublease.

We finished 2007 with approximately $12.6 million in unrestricted cash, cash equivalents in marketable securities. Based on our current cost structure and assumptions relating to potential studies that the FDA may require for clearance of our technology, we expect that our existing cash will last through December 2008. Obviously the FDA filing and approval process, including whether we'd be required to conduct any additional studies, could negatively affect this projection. We continue to work with the FDA to define the regulatory requirements for our DNA technology, and we will update you on the potential impact on our financials and business operations as these discussions progress. In the meantime, we'll continue to closely manage our expenses.

Now I'm going to turn the call over to Jeff.

Jeff Luber

Thanks Chuck. Thank you everyone for joining us on today's call. We begin 2008 with a continued focus on obtaining inclusion in the guidelines of the American Cancer Society and United States Multisociety Task Force for Colorectal Cancer Screening. This remains our most important, near-term strategic milestone. In addition, we continue our efforts toward commercialization of Version 2 of our technology, as well as pursuit of FDA approval. I will take you through the status of each, as well as update you on other key areas of the business.

However, before we go through our plans for 2008, I want to discuss the recent proposed decision by CMS regarding our application for coverage determination. Last week, the centers for Medicare and Medicaid Services released their proposed coverage decision memorandum on the Version 1 technology for stool-based DNA screening. Although CMS did not issue us a positive coverage determination, we are pleased with the outcome in light of the FDA issue as it preserves our future opportunity for Medicare coverage of our technology upon FDA approval or clearance of our Version 2 technologies.

Several of you have asked questions regarding the background here, so let me take a few minutes to walk you through it, for those of you who are already aware of this please bare with me.

You may recall that in August 2007, CMS accepted our application on the Version 1 stool-based DNA assay, which was a laboratory developed test. Laboratory developed tests are also sometimes referred to in the industry as in-house developed tests or home brews. This has been an involving area of regulation, and one that seems to be continuing to change as more and more important diagnostic tests come to market through the in-house developed route. An in house developed laboratory test is regulated under the Health and Human Services CLEA program, as well as the FDA, but the FDA has historically exercised enforcement discretion over such tests by not requiring FDA premarket clearance or approval.

Over time, however, the FDA has updated its policies regarding in-house developed tests and began to define the category of such tests more narrowly. That said, in house developed tests continue to remain a mainstay of the laboratory services business.

Many of you likely remember that slightly over two years ago we received a letter from the FDA which raised questions regarding the regulatory status of the PreGen Plus test and we and LabCorp ultimately agreed to take several actions that we understood would satisfy the FDA’s concerns regarding the test.

Based on subsequent correspondence we received from the FDA, we believe that we satisfactorily addressed the FDA’s concerns at the time and we believe that the FDA was comfortable with the nature of the test as a laboratory developed test. It was on this basis that CMS accepted our application in August 2007.

In October of last year, nearly 17 months following what we understood was satisfactory resolution of the FDA matter and with LabCorp’s PreGen Plus test on the market throughout this 17 month period, we then received the warning letter from the FDA. LabCorp did not receive the warning letter, exacted, and the test remains on the market today.

We therefore did not know, in light of these facts, what impact the FDA’s notice to us but not to LabCorp might have on our Medicare application, and even more importantly, on the guidelines process with the American Cancer Society.

We have been working hard ever since to find out by talking and corresponding with the American Cancer Society, and CMS, and by regularly consulting with experts in the field and others.

We still do not know how the FDA letter will affect the guidelines process, if at all, but I will get into the guidelines process in more detail in a bit.

With respect to the process for our national coverage determination by CMS, we have corresponded, discussed, and even met with CMS since our receipt of the FDA warning letter in October of 2007, to better understand what impact the warning letter might have on our national coverage application.

It became apparent that even the experts at Medicare were unclear how to deal with an accepted NCD application in the face of apparent shifting FDA policy. Without any definitive guidance from CMS, we took measured actions to keep the opportunity for Medicare coverage alive for our technology, including, as we announced in mid-January, an offer to CMS to withdraw our application pending our receipt of FDA clearance.

Again, the test remains on the market, our opportunity for Medicare coverage remains alive and we now await the most important near-term catalyst, an answer on guidelines inclusion.

With that background in mind, let me now walk you through additional specifics on the CMS process going forward.

You may recall that once accepted by CMS, a national coverage application, follows a mandatory statutory review timeline of up to 12 months, by which Medicare must render a decision. We believe that CMS concluded that they could not simply stop the clock once they had accepted our application even in the face of an apparent change in the regulatory status of our technology.

What they did do, however, as we learned last week, with their proposed coverage decision memorandum is keep the opportunity for coverage alive for our technology pending our receipt of FDA clearance. This was actually a good outcome in our view.

We are also encouraged by this result, in light of the recent agency for healthcare research and quality, or AHRQ cost effectiveness report that was requested by CMS in connection with our NCD.

This report, which is available on the CMS website essentially describe the characteristics for a valuable stool-based DNA screening test for the Medicare population and provided a roadmap for the test characteristics that would merit strong reimbursement even while it offered a cautious assessment of the value of our Version 1 test.

Again, our focus as a company is on Version 2, and we were encouraged by the message of the report as we think about the potential value of our technology over the long term.

According to AHRQ, compliance with screening, in addition to the performance characteristics of the test are important elements to strong reimbursement for a test that’s a stool-based DNA screening.

As an investor in EXACT, you likely know that EXACT was founded with the principle of screening compliance in mind. Our goal has always been to develop a technology that can break down screening barriers, increase compliance, and save lives from colon cancer, something that traditional technologies are not doing effectively today on a great enough scale.

You may recall that in October 2006 we presented the results of a study at the annual meeting of the American College of Gastroenterologists, showing an initial compliance rate of 73% across 1440 patients who used stool-based DNA screening with LabCorp’s Patient Navigator System. This is a compliance rate well above published reports on compliance with existing methods.

Remember, only one in four Medicare beneficiaries today are using traditional screening methods. While this study alone that we’re talking about will not be enough to satisfy AHRQ or CMS in my view, in connection with any future application, I believe it demonstrates significant promise regarding the value of our technology including the Version 2 assay, which we believe can merit good reimbursement according to the language of the AHRQ report.

This report also concluded that a stool-based DNA screening is adopted by a significant number of individuals who would not have been screened otherwise; again another fundamental principle underlying our business model. Its relative value would increase substantially, coincident with high compliance rates with follow up surveillance colonoscopy.

Let me remind you that in January 2006, we published a study in clinical colorectal cancer showing that 52% of 1211 people who used stool-based DNA screening had never been screened before and that over 90% of these folks indicated that they would likely use the test again in the future.

Regarding next steps with CMS, you should now that CMS routinely carries out reconsiderations of technologies in areas marked by rapid technological change and the emergence of new medical and scientific information.

Last week’s CMS decision related specifically to our Version 1 technology, not Version 2. You’ve probably heard me say before that Version 2 represents the future of EXACT Sciences. That’s because it is a two market test with demonstrated high sensitivity, is less complex than Version 1 for a laboratory to run, and is comprised of technologies that are patent protected, with a pending patent application relating to the Vimentin Gene in Version 2, that upon issuance would not expire until the year 2024.

You will recall that we have an exclusive worldwide license on this gene from Case Western Reserve.

Being able to submit an application for reconsideration to Medicare based on our Version 2 technology is an opportunity that in my view offers long term promise for the future.

We will likely not be submitting an application for reconsideration to Medicare until after our receipt of FDA approval or clearance of our technologies, which I do not expect would happen sooner than the second half of 2009.

If we are included in the guidelines of the American Cancer Society, and with FDA efforts in motion, I suspect that other important pieces of information going forward can be exceedingly helpful as part of our reconsideration efforts with Medicare.

Now let me say a few words with respect to our 2008 focus, beginning with the status of a guidelines decision.

Last week I was informed by the co-chair of the United States Multi-Society task force for colorectal cancer screening, that he expected final approval of the guidelines this week, and that the timing of an announcement was driven by the American Cancer Society.

I do not know the content of the guidelines, nor do I know when specifically the American Cancer Society will make their announcement. I know this is as frustrating for you as it is for us, but we continue to believe that the large body of clinical evidence for stool-based DNA screening and the continued low screening rates and a high mortality from colorectal cancer in the United States merits stool DNA’s inclusion in the guidelines of the American Cancer Society and US Multi-Society task force.

Let me also describe for you where things stand on the FDA front. We have another meeting in the coming weeks to meet with the FDA to continue our dialogue regarding our Version 1 regulatory approach.

In the FDA’s recent correspondence to us in response to our pre-IDE submission, they asked questions regarding our prior studies, as well as technical questions that we intend to discuss during our upcoming meeting with them.

We are encouraged in that the FDA has not said that a 510K approach is unavailable. This does not mean however, that they cannot or will not require a PMA or another asymptomatic study that can be time consuming and costly. When we initially met with FDA in October, we suggested a 510K pass forward with FOBT as the predicate device. Because FOBT and stool-based DNA based screening both essentially have the same indications for use. We intend to continue in this vein in our discussions with the FDA this month.

You should also know that we intend to accelerate our plans regarding our Version 2 filing with the FDA. We will pursue our Version 1 filing as required for compliance purposes but also intend to pursue this in parallel with our Version 2 filing, if the FDA permits. We intend for this too, to be a subject of our discussions with the FDA in the coming weeks.

I do not expect that we will have a definitive answer from the FDA after this meeting, but we will continue to pursue this dialogue with the agency in order to obtain FDA approval of our technologies in an expeditious manner as possible.

The time and cost associated with the Version 2 approval will obviously be driven by what the FDA requires in terms of studies. Timelines and costs are primarily driven by whether the FDA requires average risk samples or allows sample to be collected from confirmed cancer patients. The latter category can be accomplished more quickly and cheaply than the former. Our understanding is also that the FDA seeks to work with companies to take the least burdensome approach toward achievement of regulatory goals.

For example, if an average risk study is required for approval of our Version 2 technology, how many samples will the FDA require for a valid study? The timelines and cost associated with a 15th sample average risk study are obviously more rapid and less costly than much larger studies. Moreover we currently maintain a sample bank in house of more than 1,000 normal samples and a small number of cancer samples.

If an asymptomatic study is required for our Version 2 technologies we will likely need to keep accruing more average risk samples. In any event, I do not expect that we could finish the required studies and obtain FDA approval for Version 2 before the second half of 2009, at the earliest. Also, it may well be that if Exact had its own certified lab we could offer the Version 2 test as our own in-house developed test.

Remember, the FDA indicated in its warning letter to us in October, that in their view the (ph) pre-designed assay is a test that was designed, developed and validated by Exact sciences. We do not know if this means that the agency would be comfortable with our launching the test ourselves in parallel with our pursuing regulatory approval for Version 2, but we do intend to at least explore the topic with the FDA, when we meet with them in the coming weeks.

That said, I do not expect that there will be material sales volume prior to any receipt of FDA approval, even with a positive guidelines answer. If LabCorp presents us with sales projections or guidance that is different from their view, we will obviously consider that as we think about Ramp. In the mean time, we will continue to work purposely and collaterally with the agency toward approval of our technology.

This will likely not be quick or easy but in my idea it will be well worth the effort given the size of the market that we are after. I believe, that having an FDA approved test can offer even greater strength to a tremendously promising technology like stool-based DNA screening.

Finally, I want to mention some things about our relationship with John’s Hopkins University and Doctors Bert Vogelstein and Ken Kinzler, long time collaborators of EXACT Sciences. Many of you are probably familiar with the work of Dr. Vogelstein’s and Kinzler’s lab at Johns Hopkins and their reputation in breakthrough work in colorectal cancer research.

Dr. Vogelstein is a member of the National Academy of Sciences, holds 99 U.S. patents and is among one of the most widely sited authors in clinical medicine in the world. Dr. Vogelstein is currently working on additional development design to further increase sensitivity and specificity for colorectal cancer detection through fecal-based screening as well as greater detection of adenomas, the critical precursor to colorectal cancer.

Remember, the key to a powerful screening test is not just the ability to pick up cancers, something other technologies claim to do, but being able to pick them up in their earliest stages. This is why Dr. Vogelstein’s work is so important in the area of stool-based DNA screening. We know that Dr. Vogelstein is completing a manuscript based on his recent work using beaming, a very sensitive digital PCR type technology. The name beaming is derived from the principal components used in the technique, metal beads, emulsion, amplification of DNA and magnetic.

We also know that he intends to submit a publication in the near term. We are very excited about Dr. Vogelstein’s work because, in addition to the other technologies that we have licensed from Johns Hopkins based on such work we are also the exclusive licensees of this beaming technology from Johns Hopkins for use in stool- based DNA screening.

Let me close with a quick summary. We have navigated through new territory with CMS and achieved a satisfactory outcome. Our discussions with FDA continue in a constructive fashion and we hope soon to have greater clarity on the regulatory pass forward for our Version 1 and Version 2 technologies.

We also plan to explore what latitude we may have to offer our Version 2 technology at Exact as an in-house developed test while we are also pursuing FDA approval of the technology in parallel. Again, this may not be an option for us but it is a discussion we intend to have with the FDA when we meet in the coming weeks. However, the most important near term milestone, for Exact Sciences remains in the American Society Cancer guidelines.

If we are included in critical foundation for the long-term value for stool-based DNA screening and Exact Sciences will have been laid toward addressing a significant unmet screening need in the United States. Now I would like to address a couple of questions I suspect you have.

First, is LabCorp still planning on launching Version 2 during the first half of 2008? My understanding is that LabCorp’s launch plan for Version 2 will be driven, at least in part, by what the guidelines decision says and clarity coming out of the FDA on our Version 2 technology. Beyond that, I am not going to speculate a specific time frame for the launch of Version 2.

Second, given the FDA and CMS processes, when do you anticipate material sales of the stool DNA technology? Three significant catalysts to driving major adoption and uptake of our technology are guidelines inclusion, FDA clearance and Medicare coverage at a price that makes sense relative to the cost of the assay.

We are working aggressively to attain the FDA approval and then we’ll peruse Medicare reconsideration. We also continue to believe that while our technology can save lives because of its advantages over currently available screening modalities the FDA clearance process and then the Medicare reconsideration process are necessary steps in ramping this product. We therefore do not expect to begin to see any meaningful rampant sales volumes until at least the second half of 2009, at the earliest.

So I am now going to open the call for your questions.

Question –and- Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from the line of Leah Hartman representing CRT Capital. Please proceed.

Leah Hartman- CRT Capital

Good morning gentleman. Thanks for taking my call. I was taking lots of notes so I may have missed this. I believe we had a conversation during the fourth quarter about the reproducibility test that you believed you needed to conduct, regarding the Version 1 and that being part of the first step to the FDA approval via 510k. Did you mention today where you are in those?

Jeff Luber

No, Leah. It’s a good question. One of the things that’s going to be a topic of our discussion with the FDA is getting a better understanding of what specifically we have to do. That was the subject primarily of their pre-IDE responses they sent us recently, and that is the discussion we are going to have with them when we meet in the coming weeks. More importantly, it’s the studies we want to talk to them about, with regard to our Version 2 technologies, and that is a discussion we are anxious to have.

Leah Hartman - CRT Capital

Okay. I am getting a sense that you are hopeful, and perhaps I am taking this down the wrong path, that you are hopeful that you can perhaps move directly to Version 2, as opposed to going through the steps of Version 1 with the FDA. Or am I taking a leap here.

Jeff Luber

We certainly are going to do whatever is necessary from a compliance standpoint with regard to Version 1, but in terms of the future of the business and the power of our technology, it’s really Version 2 that we are anxious to pursue. So we’re going to start that discussion now rather than waiting.

Leah Hartman – CRT Capital

That certainly makes sense with our view and conserving your resources, which you’ve done a good job of, by the way. That restructuring charge, or the two main restructuring charges that were taken during the second half of 2007 with respect to the sales force and the lease commitment. Are both of those cash charges, or was there a non-cash component that we’d see pop up in the first quarter?

Chuck Carelli

No, Leah, this is Chuck. Most of it is cash. There’s a small component of the facility charge that’s non-cash that relates to some write-offs of some leaseholds, but the rest of it is cash.

Leah Hartman – CRT Capital

That’s pretty nominal. And now that, as I have you, about the accrual to the third- party royalty obligations, can you walk me through the timing? I think you did discuss it in your press release, you have an accrual, but it would not be prospectively payable till the end of 2008, is that correct?

Chuck Carelli

Yeah, that’s right. So the ultimate liability – the ultimate potential liability at the end of 2008 could be $1.5 million. Through the end of ’07 we’ve accrued 1.2 million of that total 1.5. But the cash would be essentially at the beginning of 2009.

Leah Hartman – CRT Capital

Okay.

Chuck Carelli

Okay.

Leah Hartman – CRT Capital

That’s helpful. Thank you. First of all, let’s do talk timeline. I hope I’m not hogging the call. Timelineis, whenever ACS comes out, ACS comes out. It would be great if it was this week. And then over the coming weeks, I take it, we’re hopeful, it’s a key-one event, you will be having a meeting with the FDA to put together a regulatory strategy.

Jeff Luber

Yeah. I would obviously like to go into meetings with the FDA with a guidelines answer in hand. I think that would be helpful for us. And as I mentioned, we were told last week that the guidelines approval is expected this week, but I don’t know what that means with regard to American Cancer Society’s announcement. And I don’t know what the content of it is.

Leah Hartman – CRT Capital

Right.

Jeff Luber

So you probably hear frustration in our voices, and I know I’ve heard plenty in all of yours, and rightly so. But we are very optimistic in looking towards that answer.

Leah Hartman – CRT Capital

As are we all. And then finally on this CMS to make sure that I understand this. In the event that you reinvigorate, reengage them on an application, how’s the timeline ticking? If the normal process, I have an application accepted, now I have up to 12 months to hear back from them. What’s that new timeline? Do you get to come in partway through that timeline with a reinvigorated application, if and when that happens?

Jeff Luber

It’s a great question. The reconsideration process is, we’re told, a fairly routine process of Medicare that designs for specifically those areas of rapid technological change, and when there’s new medical and scientific information coming out. So it’s kind of uniquely suited for a company like ours, especially in light of where our Version 2 is, and hopefully in the face of some guidelines that will be out soon. That said, the timelines are the same for a reconsideration as they are for an original application. Anywhere from six to nine to twelve months on the outside edge, depending on whether they seek outside advice from others with regard to their look. As I said in my prepared remarks, it’s not the kind of thing we plan on submitting until we have our FDA approval. So no one should expect that we’re going to submit for reconsideration sooner than the second half of 2009, at the earliest.

Leah Hartman – CRT Capital

Understood. With respect to Version 2 and possibly having that validated as a home brew, and clearly I understand that none of us are clear whether the FDA would permit marketing of that, what is entailed in that? Do you just need to do validation studies on Version 2? Is it reproducibility? Can you walk us through what you think it takes to get a home brew designation for it?

Jeff Luber

You’ve put your finger on the complexity around businesses that are pursuing a home brew strategy alone. One of the reasons we decided following our receipt of that FDA warning letter to pursue collaboratively and aggressively with FDA a regulatory strategy, regardless of what they say regarding our ability to offer an in-house developed test, we still intend to pursue regulatory approval. That said, the benchmarks are not really clearly defined in terms of what’s required, but we are going to want to get a sense of comfort from the FDA if we can, that they will be comfortable with us launching it.

Leah Hartman – CRT Capital

Okay.

Jeff Luber

We do know, in the warning letter they sent us, that they indicated that the PreGen-Plus assay was a test that was designed and developed by EXACT Sciences, and that’s a concept we want to explore with them further to see if that gives us latitude to launch it ourselves. I can’t say for certain that they’ll agree with it, but it’s something we intend to explore.

Leah Hartman – CRT Capital

Well good luck everyone. I know you’re working hard to move this through, and we look forward to hearing good news from you.

Jeff Luber

Thanks Leah.

Chuck Carelli, Jr.

Thanks Leah.

Operator

Your next question will come from the line of Michael Moskoff, representing MRM Capital. Please proceed.

Michael Moskoff – MRM Capital

Hi Jeff.

Jeff Luber

Hey Michael.

Michael Moskoff – MRM Capital

Can you just specifically tell me again what you said about the ACS? You had a meeting with whom, and just repeat yourself I guess.

Jeff Luber

Sure. I actually exchanged a note with the co-chair of the guidelines committee. He’s the co-chair of the United States Multisociety Task Force for Colorectal Cancer Screening. I just received a note from him telling me that he expected the guidelines to be approved by the end of this week, but that the timing of the announcement was at the discretion of the American Cancer Society. All I can tell you is what he told me. I can’t tell you if that is is insight into the entire process, but that’s what he told me, and that’s what we know.

Michael Moskoff – MRM Capital

Is he affiliated with the ACS? Or are they two separate organizations, or…

Jeff Luber

All I can tell you is that’s what his title is with the body itself. I actually, without his permission I don’t want to get into who he is and his affiliations, but that’s his role in connection with the guidelines process. That task force and the American Cancer Society have been working together toward this guidelines answer.

Michael Moskoff – MRM Capital

Okay. That sounds kind of positive. Okay, that answered my question. Thanks Jeff.

Jeff Luber

Thanks Michael.

Operator

Your next question comes from the line of Yogi Parikh representing Azar Incorporated. Please proceed.

Yogi Parikh – Azar Incorporated

Thank you for taking my call. Since the cash will run out by December ’08, what’s the plan to raise capital, or how can you go to ’09?

Jeff Luber

We’re actually at the point right now where it’s not the kind of discussion we discuss publicly in terms of our capital needs or approaches beyond what’s already reported in our public filings. I appreciate the question, but it’s not something we want to comment on beyond that.

Yogi Parikh – Azar Incorporated

Okay, so I should take the comment that you will be out of cash by December ’08?

Jeff Luber

I would refer you to our public filings. They are fairly clear in terms of where the company sits with regards to its cash, and I really don’t want to speculate beyond that.

Yogi Parikh – Azar Incorporated

Okay. Thank you.

Operator

Ladies and gentlemen, this concludes the time we have for the question and answer. I would now like to turn the call back to Mr. Jeff Luber for closing remarks.

Jeff Luber

Well thank you all for joining us. I appreciate the good questions and we’ll be speaking soon.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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