EXACT Sciences Corporation (NASDAQ:EXAS)
Q4 2007 Earnings Call
February 5, 2008 8:30 am ET
Charles Carelli - CFO
Patrick Zenner - Exec Chairmanand Interim CEO
Jeffrey Luber - President
Leah Hartman – CRT Capital
Michael Moskoff – MRM Capital
Yogi Parikh – Azar Incorporated
Good day, ladies and gentlemen, and welcome to the fourth quarter 2007EXACT Sciences Corporation Earnings Conference Call. My name is Katine and I will be your coordinatorfor today.. At this time, all participants are in a listen-only mode. We willconduct a question-and-answer session towards the end of this conference. (OperatorInstructions.) As a reminder, this conference is being recorded for replaypurposes.
I would now like to turn the presentation over to your host for today'scall, Mr. Chuck Carelli, Chief Financial Officer. Please proceed.
Thank you. Good morning everyone, and thank you for joining us today.With me on the call are Pat Zenner, ourExecutive Chairman and Interim Chief Executive Office r,and Jeff Luber, ourPresident. Certain matters we'll discuss today, other than historicalinformation, consists of forward-looking statements relating to, among otherthings, our expectations concerning our financial results, cash preservation,and commercial and regulatory strategies. These forward-looking statements arenot guarantees of future performance, and are subject to a variety of risks anduncertainties that could cause actual results to differ materially from theresults contemplated by the forward-looking statements. These risks anduncertainties are described in our annual report on form 10-K, for the the yearended December 31, 2006, andsubsequent forms 10-Q. You are cautionednot to place undue reliance on these forward-looking statements, which speakonly as of today. We undertake no obligation to update or revise theinformation 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.
Thanks Chuck, and good morning everyone. Initially we thought that we'dbe having this call with the updated colorectal cancer screening guidelineshaving been announced, and that way we would be celebrating the success ofstool-based DNA's inclusion in the guidelines. As we await the news of theguidelines, we are no less confident in the potential of our DNA technology toimprove screening rates and to save lives.
Given the breadth of medical evidence that EXACT has presented to theAmerican Cancer Society and the U.S. Multisociety Task Force for ColorectalCancer screening, we remain very confident that it's merit inclusion as an importantscreening option. This key event of guidelines inclusion is a necessary firststep towards greater awareness and eventual broad-based adoption of ourtechnology. With more than half of the 87 million people in this country overthe age of 50, who should be screened for colorectal cancer, not getting anyscreening at all, new options are needed now.
There are two other major initiatives that the company has focused onintently, and which we believe will further pave the way for the commercialsuccess of our DNA technology. The first of these is our pursuit of FDAapproval for stool-based DNA testing for colorectal cancer. We are workingaggressively and collaboratively with the FDA to obtain approval as quickly aspossible The second is working closely with Medicare to obtain futurereimbursement for our technology. Jeff will describe each of these objectivesin greater detail in his remarks.
It's important to remember, however, that the fundamentals ofour company have not changed since EXACT was founded. Millions of peoplecontinue to resist current screening methods and too few cancers are caughtearly, at more manageable stages. After all, this is a cancer that is greaterthan 90% curable if detected early.
We believe that non-invasive DNA-based screening offers certaincharacteristics that are lacking in the traditional screening methods, andunless there are new, less invasive approaches such as DNA technology morewidely available, it's unlikely that screening rates will improve. As a result,more lives may be lost unnecessarily, and the burden to the healthcare systemin treating this disease will continue to rise. We believe that our technologyoffers an opportunity to change the way people think about screening, and willprovide them with an important, patient-friendly option that may prompt morescreening and ultimately, save more lives. Our mission is clear, our objectivesare focused and we continue to work vigorously to position the company forfuture success.
Now I'm going to turn the call back to Chuck, who will review thefinancials and then Jeff will give you a more detailed update on our business.Thank you. Chuck?
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 companygenerated a net loss of $12 million, compared to a net loss of $12.9 millionfor the year ended December 31, 2006. This translates into a net loss of $0.15 per share, and $0.44 pershare for Q4 2007 and the year ended December 31, 2007, respectively, compared to a net loss of $0.09 pershare, 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 primarilydriven by lower royalty revenues and non-cash license fee amortization inconnection 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 savingsrealized in our sales and marketing operations as a result of the el iminationin Q3 2007 of those functions. The decrease in net loss for the year ended December 31, 2007, whencompared to the full year 2006, was primarily driven by lower sales and marketingand R&D expenses, partially offset by lower royalty revenues andnon-cash license fee amortization.
Total revenues of negative $600,000 for the quarter ended December 31, 2007, were lowerthan total revenues of $1.2 million forthe same quarter 2006. The negative revenues for Q4 2007 resulted from our June2007 amendment to the LabCorp agreement, which again, I'll get intomomentarily.
Total revenues for the year ended December 31, 2007, of $1.8 million, were lower than total revenuesfor the year ended December 31, 2006, of $4.8 million. Total revenues are comprised of three elements. Thefirst is non-cash license fee revenue related to the amortization of upfrontlicense fee payments from LabCorpp. The second is procuct royalty fee revenueon LabCorpp sales of its stool-based DNA screening test, which is based oncertain of our intellectual property. And the third is product revenue relatedto sales of [inaudible] to LabCorp.
Then end of Q4 2007 marked the close of the second quarter operatingunder our amended license agreement with LabCorp, which as you may recall,impacts our revenues in two ways. First, by extending the exclusive licenseperiod to December 2010, we now record lower non-cash license fee revenue ascompared to prior periods. The initial $30 million upfront payment made to usby LabCorp is effectively being amortized into our revenues through 2010 asopposed to 2008, which was the end of our license period prior to ouramendment. Second, we now record a potential third-party royalty liability as areduction the royalty revenue line item in our PNL.
As a reminder, we may be obligated to pay up to a maximum of $3.5million over the exclusive license period if LabCorp sales of PreGen-Plus donot exceed certain specified thresholds. The ultimate amount of this potentialliability is based on LabCorp's sales volume of PreGen-Plus during threemeasurement periods within our exclusive license period, which again, ends inDecember 2010. A significantincrease in PreGen-Plus sales volumes during any of the measurement periodscould reduce our obligation related to that period, while test volumesconsistent with historical PreGen-Plus sales levels could result in payouts toLabCorp, totaling the 3.5 million that I just referenced.
The first measurement period, which ends in December 2008, includes amaximum potential obligation of $1.5 million. We began to record this potentialliability in our financial statements during Q3 2007, and recorded charges of$950,000 and $1.2 million, respectively, during the three and twelve monthsended December 31, 2007. Based on ourcurrent estimates of the potential obligation using sales volumes that weanticipate in light of the FDA and CMS statuses of our technology, which Jeffwill address in his comments. These charges resulted in negative productroyalty revenue for Q4 and the year ended December 31, 2007. January 2009 would be the first time that anypotential cash payment would be due toLabCorp. Other payments to the extent necessary would be due in January 2010and January 2011.
Total operating expenses decreased to $3.6 million and $14.6 million forthe quarter and year ended December 31, 2007, respectively, compared to $3.9 million and $18.1 million for thecomparable prior year periods.
Starting in Q4 2006 and through the end of 2007, we took steps to reduceour costs and structure the company in a way that aligns our resources withstrategic imperatives. These actions included reducing our R&D group at theend of 2006, elimination our sales and marketing functions in Q3 2007, andright-sizing the amount of space leased at our corporate headquarters toreflect our reduced size.
R&D expenses were essentially flat when comparing Q4 2007 to Q42006, 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 ofpersonnel-related and other operating cost reductions, realized by reducing ourR&D head count from 18 employees to 8 employees during the period from Q4 2006through December 31, 2007. Our current expectation is that the R&D group will focus onsupporting our regulatory process as well as specific technology improvementprojects. Our sales and marketing expenses were lower in both the quarter andyear ended December 31, 2007, when compared to the same periods of 2006, as a result of theelimination of those functions in July 2007, in connections with the third amendment to ourlicense agreement with LabCorp.
G&A expenses increased to $2 million for Q4 2007, up from $1.6million for the same quarter of 2006. This increase was mainly driven by higherlegal and professional fees in the fourth quarter of 2007 in connection with our ongoing regulatory efforts. Ona year-to-date basis, our G&A expenses increased to $7.5 million for theyear 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 feesin connection with our regulatory efforts, as well as non-cash, stock-basedcompensation charges.
Restructuring charges for the year ended December 31, 2007 wereapproximately $1.2 million, consisting of approximately $800,000 relating tothe elimination of our sales and marketing force during Q3 of '07, andapproximately $400,000 in facility-related restructuring costs, related to thefourth quarter of 2007, in connectionwith the consolidation and sublease of certain of our lease space at ourcorporate headquarters. The one time restructuring cost resulting from our facility consolidationwill be more than offset by the cash savings that will accrue over the life ofthe sublease.
We finished 2007 with approximately $12.6 million in unrestricted cash,cash equivalents in marketable securities. Based on our current cost structureand assumptions relating to potential studies that the FDA may require for clearance of our technology, weexpect that our existing cash will last through December 2008. Obviously theFDA filing and approval process, including whether we'd be required to conductany additional studies, could negatively affect this projection. We continue towork 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 businessoperations as these discussions progress. In the meantime, we'll continue toclosely manage our expenses.
Now I'm going to turn the call over to Jeff.
Thanks Chuck. Thank you everyone for joining us on today's call. Webegin 2008 with a continued focus on obtaining inclusion in the guidelines ofthe American Cancer Society and United States Multisociety Task Force forColorectal Cancer Screening. This remains our most important, near-termstrategic milestone. In addition, we continue our efforts towardcommercialization of Version 2 of our technology, as well as pursuit of FDAapproval. I will take you through the status of each, as well as update you onother key areas of the business.
However, before we go through our plans for 2008, I want to discuss therecent proposed decision by CMS regarding our application for coveragedetermination. Last week, the centers for Medicare and Medicaid Servicesreleased their proposed coverage decision memorandum on the Version 1technology for stool-based DNA screening. Although CMS did not issue us apositive coverage determination, we are pleased with the outcome in light ofthe FDA issue as it preserves our future opportunity for Medicare coverage ofour technology upon FDA approval or clearance of our Version 2 technologies.
Several of you have asked questions regarding the background here, solet me take a few minutes to walk you through it, for those of you who arealready aware of this please bare with me.
You may recall that in August 2007, CMS accepted our application on theVersion 1 stool-based DNA assay, which was a laboratory developed test.Laboratory developed tests are also sometimes referred to in the industry asin-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 importantdiagnostic tests come to market through the in-house developed route. An inhouse developed laboratory test is regulated under the Health and HumanServices CLEA program, as well as the FDA, but the FDA has historicallyexercised enforcement discretion over such tests by not requiring FDA premarketclearance or approval.
Over time, however, the FDA has updated its policies regarding in-housedeveloped tests and began to define the category of such tests more narrowly.That said, in house developed tests continue to remain a mainstay of thelaboratory services business.
Many of you likely remember that slightly over two years ago we receiveda letter from the FDA which raised questions regarding the regulatory status ofthe PreGen Plus test and we and LabCorp ultimately agreed to take severalactions that we understood would satisfy the FDA’s concerns regarding the test.
Based on subsequent correspondence we received from the FDA, we believethat we satisfactorily addressed the FDA’s concerns at the time and we believethat the FDA was comfortable with the nature of the test as a laboratorydeveloped test. It was on this basis that CMS accepted our application inAugust 2007.
In October of last year, nearly 17 months following what we understoodwas satisfactory resolution of the FDA matter and with LabCorp’s PreGen Plustest on the market throughout this 17 month period, we then received thewarning 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 theFDA’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 CancerSociety.
We have been working hard ever since to find out by talking andcorresponding with the American Cancer Society, and CMS, and by regularlyconsulting with experts in the field and others.
We still do not know how the FDA letter will affect the guidelinesprocess, if at all, but I will get into the guidelines process in more detailin a bit.
With respect to the process for our national coverage determination byCMS, we have corresponded, discussed, and even met with CMS since our receiptof the FDA warning letter in October of 2007, to better understand what impactthe warning letter might have on our national coverage application.
It became apparent that even the experts at Medicare were unclear how todeal with an accepted NCD application in the face of apparent shifting FDApolicy. Without any definitive guidance from CMS, we took measured actions tokeep the opportunity for Medicare coverage alive for our technology, including,as we announced in mid-January, an offer to CMS to withdraw our applicationpending our receipt of FDA clearance.
Again, the test remains on the market, our opportunity for Medicarecoverage 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 additionalspecifics on the CMS process going forward.
You may recall that once accepted by CMS, a national coverageapplication, follows a mandatory statutory review timeline of up to 12 months,by which Medicare must render a decision. We believe that CMS concluded thatthey could not simply stop the clock once they had accepted our applicationeven in the face of an apparent change in the regulatory status of ourtechnology.
What they did do, however, as we learned last week, with their proposedcoverage decision memorandum is keep the opportunity for coverage alive for ourtechnology pending our receipt of FDA clearance. This was actually a goodoutcome in our view.
We are also encouraged by this result, in light of the recent agency forhealthcare research and quality, or AHRQ cost effectiveness report that wasrequested by CMS in connection with our NCD.
This report, which is available on the CMS website essentially describethe characteristics for a valuable stool-based DNA screening test for theMedicare population and provided a roadmap for the test characteristics thatwould merit strong reimbursement even while it offered a cautious assessment ofthe value of our Version 1 test.
Again, our focus as a company is on Version 2, and we were encouraged bythe message of the report as we think about the potential value of ourtechnology over the long term.
According to AHRQ, compliance with screening, in addition to theperformance characteristics of the test are important elements to strongreimbursement for a test that’s a stool-based DNA screening.
As an investor in EXACT, you likely know that EXACT was founded with theprinciple of screening compliance in mind. Our goal has always been to developa technology that can break down screening barriers, increase compliance, andsave lives from colon cancer, something that traditional technologies are notdoing effectively today on a great enough scale.
You may recall that in October 2006 we presented the results of a studyat the annual meeting of the American College ofGastroenterologists, showing an initial compliance rate of 73% across 1440patients who used stool-based DNA screening with LabCorp’s Patient NavigatorSystem. This is a compliance rate well above published reports on compliancewith existing methods.
Remember, only one in four Medicare beneficiaries today are usingtraditional screening methods. While this study alone that we’re talking aboutwill not be enough to satisfy AHRQ or CMS in my view, in connection with anyfuture application, I believe it demonstrates significant promise regarding thevalue of our technology including the Version 2 assay, which we believe canmerit good reimbursement according to the language of the AHRQ report.
This report also concluded that a stool-based DNA screening is adoptedby a significant number of individuals who would not have been screenedotherwise; again another fundamental principle underlying our business model.Its relative value would increase substantially, coincident with highcompliance rates with follow up surveillance colonoscopy.
Let me remind you that in January 2006, we published a study in clinicalcolorectal cancer showing that 52% of 1211 people who used stool-based DNAscreening had never been screened before and that over 90% of these folksindicated that they would likely use the test again in the future.
Regarding next steps with CMS, you should now that CMS routinely carriesout reconsiderations of technologies in areas marked by rapid technologicalchange and the emergence of new medical and scientific information.
Last week’s CMS decision related specifically to our Version 1technology, not Version 2. You’ve probably heard me say before that Version 2represents the future of EXACT Sciences. That’s because it is a two market testwith demonstrated high sensitivity, is less complex than Version 1 for alaboratory 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 genefrom Case Western Reserve.
Being able to submit an application for reconsideration to Medicarebased on our Version 2 technology is an opportunity that in my view offers longterm promise for the future.
We will likely not be submitting an application for reconsideration toMedicare until after our receipt of FDA approval or clearance of ourtechnologies, which I do not expect would happen sooner than the second half of2009.
If we are included in the guidelines of the American Cancer Society, andwith FDA efforts in motion, I suspect that other important pieces ofinformation going forward can be exceedingly helpful as part of ourreconsideration efforts with Medicare.
Now let me say a few words with respect to our 2008 focus, beginningwith the status of a guidelines decision.
Last week I was informed by the co-chair of the United StatesMulti-Society task force for colorectal cancer screening, that he expectedfinal approval of the guidelines this week, and that the timing of anannouncement was driven by the American Cancer Society.
I do not know the content of the guidelines, nor do I know whenspecifically the American Cancer Society will make their announcement. I knowthis is as frustrating for you as it is for us, but we continue to believe thatthe large body of clinical evidence for stool-based DNA screening and thecontinued low screening rates and a high mortality from colorectal cancer inthe United States merits stool DNA’s inclusion in the guidelines of theAmerican Cancer Society and US Multi-Society task force.
Let me also describe for you where things stand on the FDA front. Wehave another meeting in the coming weeks to meet with the FDA to continue ourdialogue regarding our Version 1 regulatory approach.
In the FDA’s recent correspondence to us in response to our pre-IDEsubmission, they asked questions regarding our prior studies, as well astechnical questions that we intend to discuss during our upcoming meeting withthem.
We are encouraged in that the FDA has not said that a 510K approach isunavailable. This does not mean however,that they cannot or will not require a PMA or another asymptomatic study thatcan be time consuming and costly. When we initially met with FDA in October, wesuggested a 510K pass forward with FOBT as the predicate device. Because FOBT and stool-based DNA basedscreening both essentially have the same indications for use. We intend to continue in this vein in ourdiscussions with the FDA this month.
You should also know that we intend to accelerateour plans regarding our Version 2 filing with the FDA. We will pursue our Version 1 filing asrequired for compliance purposes but also intend to pursue this in parallelwith our Version 2 filing, if the FDA permits. We intend for this too, to be a subject of our discussions with the FDAin the coming weeks.
I do not expect that we will have a definitiveanswer from the FDA after this meeting, but we will continue to pursue thisdialogue with the agency in order to obtain FDA approval of our technologies inan expeditious manner as possible.
The time and cost associated with the Version 2approval will obviously be driven by what the FDA requires in terms ofstudies. Timelines and costs areprimarily driven by whether the FDA requires average risk samples or allows sampleto be collected from confirmed cancer patients. The latter category can be accomplished more quickly and cheaply thanthe former. Our understanding is alsothat the FDA seeks to work with companies to take the least burdensome approachtoward achievement of regulatory goals.
For example, if an average risk study is requiredfor approval of our Version 2 technology, how many samples will the FDA requirefor a valid study? The timelines andcost associated with a 15th sample average risk study are obviouslymore rapid and less costly than much larger studies. Moreover we currently maintain a sample bankin house of more than 1,000 normal samples and a small number of cancersamples.
If an asymptomatic study is required for ourVersion 2 technologies we will likely need to keep accruing more average risksamples. In any event, I do not expectthat we could finish the required studies and obtain FDA approval for Version 2before the second half of 2009, at the earliest. Also, it may well be that if Exact had itsown certified lab we could offer the Version 2 test as our own in-housedeveloped test.
Remember, the FDA indicated in its warning letterto us in October, that in their view the (ph) pre-designed assay is a test thatwas designed, developed and validated by Exact sciences. We do not know if this means that the agencywould be comfortable with our launching the test ourselves in parallel with ourpursuing regulatory approval for Version 2, but we do intend to at leastexplore the topic with the FDA, when we meet with them in the comingweeks.
That said, I do not expect that there will bematerial sales volume prior to any receipt of FDA approval, even with apositive guidelines answer. If LabCorp presents us with sales projections orguidance that is different from their view, we will obviously consider that aswe think about Ramp. In the mean time,we will continue to work purposely and collaterally with the agency towardapproval of our technology.
This will likely not be quick or easy but in myidea it will be well worth the effort given the size of the market that we areafter. I believe, that having an FDA approved test can offer even greaterstrength to a tremendously promising technology like stool-based DNA screening.
Finally, Iwant to mention some things about our relationship with John’s Hopkins University and DoctorsBert Vogelstein and Ken Kinzler, long time collaborators of EXACTSciences. Many of you are probablyfamiliar with the work of Dr. Vogelstein’s and Kinzler’s lab at Johns Hopkinsand their reputation in breakthrough work in colorectal cancer research.
Dr. Vogelsteinis a member of the National Academy of Sciences, holds 99 U.S. patents andis among one of the most widely sited authors in clinical medicine in theworld. Dr. Vogelstein is currentlyworking on additional development design to further increase sensitivity andspecificity for colorectal cancer detection through fecal-based screening aswell as greater detection of adenomas, the critical precursor to colorectalcancer.
Remember, thekey 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 intheir earliest stages. This is why Dr.Vogelstein’s work is so important in the area of stool-based DNAscreening. We know that Dr. Vogelsteinis completing a manuscript based on his recent work using beaming, a verysensitive digital PCR type technology. The name beaming is derived from theprincipal components used in the technique, metal beads, emulsion,amplification of DNA and magnetic.
We also knowthat he intends to submit a publication in the near term. We are very excited about Dr. Vogelstein’swork because, in addition to the other technologies that we have licensed fromJohns Hopkins based on such work we are also the exclusive licensees of thisbeaming technology from Johns Hopkins for use in stool- based DNAscreening.
Let me closewith a quick summary. We have navigatedthrough new territory with CMS and achieved a satisfactory outcome. Our discussions with FDA continue in aconstructive fashion and we hope soon to have greater clarity on the regulatorypass forward for our Version 1 and Version 2 technologies.
We also planto explore what latitude we may have to offer our Version 2 technology at Exactas an in-house developed test while we are also pursuing FDA approval of thetechnology in parallel. Again, this maynot be an option for us but it is a discussion we intend to have with the FDAwhen we meet in the coming weeks. However, the most important near termmilestone, for Exact Sciences remains in the American Society Cancerguidelines.
If we areincluded in critical foundation for the long-term value for stool-based DNAscreening and Exact Sciences will have been laid toward addressing asignificant unmet screening need in the United States. Now Iwould like to address a couple of questions I suspect you have.
First, isLabCorp still planning on launching Version 2 during the first half of 2008? My understanding is that LabCorp’s launchplan for Version 2 will be driven, at least in part, by what the guidelinesdecision says and clarity coming out of the FDA on our Version 2 technology. Beyond that, I am not going to speculate aspecific time frame for the launch of Version 2.
Second, giventhe FDA and CMS processes, when do you anticipate material sales of the stoolDNA technology? Three significantcatalysts to driving major adoption and uptake of our technology are guidelinesinclusion, FDA clearance and Medicare coverage at a price that makes senserelative to the cost of the assay.
We are workingaggressively to attain the FDA approval and then we’ll peruse Medicarereconsideration. We also continue to believe that while our technology can savelives because of its advantages over currently available screening modalitiesthe FDA clearance process and then the Medicare reconsideration process arenecessary steps in ramping this product. We therefore do not expect to begin to see any meaningful rampant salesvolumes until at least the second half of 2009, at the earliest.
So I am nowgoing to open the call for your questions.
Question –and- Answer Session
Thank you.(Operator instructions) Your first question comes from the line of Leah Hartmanrepresenting CRT Capital. Please proceed.
Leah Hartman- CRT Capital
Good morninggentleman. Thanks for taking my call. Iwas taking lots of notes so I may have missed this. I believe we had a conversation during thefourth quarter about the reproducibility test that you believed you needed toconduct, regarding the Version 1 and that being part of the first step to theFDA approval via 510k. Did you mentiontoday where you are in those?
No, Leah. It’sa good question. One of the thingsthat’s going to be a topic of our discussion with the FDA is getting a betterunderstanding of what specifically we have to do. That was the subject primarily of theirpre-IDE responses they sent us recently, and that is the discussion we aregoing to have with them when we meet in the coming weeks. More importantly, it’s the studies we want totalk to them about, with regard to our Version 2 technologies, and that is adiscussion 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 youcan perhaps move directly to Version 2, as opposed to going through the stepsof Version 1 with the FDA. Or am I taking a leap here.
We certainly are going to do whatever is necessary from a compliancestandpoint with regard to Version 1, but in terms of the future of the businessand the power of our technology, it’s really Version 2 that we are anxious topursue. 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 thetwo main restructuring charges that were taken during the second half of 2007with respect to the sales force and the lease commitment. Are both of thosecash charges, or was there a non-cash component that we’d see pop up in thefirst quarter?
No, Leah, this is Chuck. Most of it is cash. There’s a small componentof the facility charge that’s non-cash that relates to some write-offs of someleaseholds, 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 tothe third- party royalty obligations, can you walk me through the timing? Ithink you did discuss it in your press release, you have an accrual, but itwould not be prospectively payable till the end of 2008, is that correct?
Yeah, that’s right. So the ultimate liability – the ultimate potentialliability at the end of 2008 could be $1.5 million. Through the end of ’07we’ve accrued 1.2 million of that total 1.5. But the cash would be essentiallyat the beginning of 2009.
Leah Hartman –CRT Capital
Leah Hartman –CRT Capital
That’s helpful. Thank you. First of all, let’s do talk timeline. I hopeI’m not hogging the call. Timelineis, whenever ACS comes out, ACS comes out. Itwould 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 FDAto put together a regulatory strategy.
Yeah. I would obviously like to go into meetings with the FDA with aguidelines answer in hand. I think that would be helpful for us. And as Imentioned, we were told last week that the guidelines approval is expected thisweek, but I don’t know what that means with regard to American Cancer Society’sannouncement. And I don’t know what the content of it is.
Leah Hartman –CRT Capital
So you probably hear frustration in our voices, and I know I’ve heardplenty in all of yours, and rightly so. But we are very optimistic in lookingtowards that answer.
Leah Hartman –CRT Capital
As are we all. And then finally on this CMS to make sure that Iunderstand this. In the event that you reinvigorate, reengage them on anapplication, how’s the timeline ticking? If the normal process, I have anapplication accepted, now I have up to 12 months to hear back from them. What’sthat new timeline? Do you get to come in partway through that timeline with areinvigorated application, if and when that happens?
It’s a great question. The reconsideration process is, we’re told, afairly routine process of Medicare that designs for specifically those areas ofrapid technological change, and when there’s new medical and scientificinformation 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 ofsome guidelines that will be out soon. That said, the timelines are the samefor a reconsideration as they are for an original application. Anywhere fromsix to nine to twelve months on theoutside edge, depending on whether they seek outside advice from others withregard to their look. As I said in my prepared remarks, it’s not the kind ofthing we plan on submitting until we have our FDA approval. So no one shouldexpect that we’re going to submit for reconsideration sooner than the secondhalf of 2009, at the earliest.
Leah Hartman –CRT Capital
Understood. With respect to Version 2 and possibly having that validatedas a home brew, and clearly I understand that none of us are clear whether theFDA would permit marketing of that, what is entailed in that? Do you just needto do validation studies on Version 2? Is it reproducibility? Can you walk usthrough what you think it takes to get a home brew designation for it?
You’ve put your finger on the complexity around businesses that arepursuing a home brew strategy alone. One of the reasons we decided followingour receipt of that FDA warning letterto pursue collaboratively and aggressively with FDA a regulatory strategy,regardless of what they say regarding our ability to offer an in-housedeveloped test, we still intend to pursue regulatory approval. That said, thebenchmarks are not really clearly defined in terms of what’s required, but weare going to want to get a sense of comfort from the FDA if we can, that theywill be comfortable with us launching it.
Leah Hartman –CRT Capital
We do know, in the warning letter they sent us, that they indicated thatthe PreGen-Plus assay was a test that was designed and developed by EXACTSciences, and that’s a concept we want to explore with them further to see ifthat gives us latitude to launch it ourselves. I can’t say for certain thatthey’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 thisthrough, and we look forward to hearing good news from you.
Your next question will come from the line of Michael Moskoff,representing MRM Capital. Please proceed.
MichaelMoskoff – MRM Capital
MichaelMoskoff – MRM Capital
Can you just specifically tell me again what you said about the ACS? Youhad a meeting with whom, and just repeat yourself I guess.
Sure. I actually exchanged a note with the co-chair of the guidelinescommittee. He’s the co-chair of the United States Multisociety Task Force forColorectal Cancer Screening. I just received a note from him telling me that heexpected the guidelines to be approved by the end of this week, but that thetiming of the announcement was at the discretion of the American CancerSociety. All I can tell you is what he told me. I can’t tell you if that is isinsight into the entire process, but that’s what he told me, and that’s what weknow.
MichaelMoskoff – MRM Capital
Is he affiliated with the ACS? Or are they two separate organizations,or…
All I can tell you is that’s what his title is with the body itself. Iactually, without his permission I don’t want to get into who he is and hisaffiliations, but that’s his role in connection with the guidelines process.That task force and the American Cancer Society have been working togethertoward this guidelines answer.
MichaelMoskoff – MRM Capital
Okay. That sounds kind of positive. Okay, that answered my question.Thanks Jeff.
Your next question comes from the line of Yogi Parikh representing AzarIncorporated. 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?
We’re actually at the point right now where it’s not the kind ofdiscussion we discuss publicly in terms of our capital needs or approachesbeyond what’s already reported in our public filings. I appreciate thequestion, 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 byDecember ’08?
I would refer you to our public filings. They are fairly clear in termsof where the company sits with regards to its cash, and I really don’t want tospeculate beyond that.
Yogi Parikh –Azar Incorporated
Okay. Thank you.
Ladies and gentlemen, this concludes the time we have for the questionand answer. I would now like to turn the call back to Mr. Jeff Luber forclosing remarks.
Well thank you all for joining us. I appreciate the good questions andwe’ll be speaking soon.
Ladies and gentlemen, thank you for your participation in today’sconference. This concludes your presentation. You may now disconnect. Good day.
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