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Exact Sciences (NASDAQ:EXAS)

Q2 2012 Earnings Call

July 25, 2012 10:00 am ET

Executives

Rod Hise

Maneesh K. Arora - Chief Financial Officer, Chief Operating Officer, Principal Accounting Officer, Senior Vice President and Secretary

Kevin T. Conroy - Chief Executive Officer, President and Director

Maneesh Arora

Analysts

Matthew M. Notarianni - Robert W. Baird & Co. Incorporated, Research Division

Brian Weinstein - William Blair & Company L.L.C., Research Division

Stephen S. Unger - Lazard Capital Markets LLC, Research Division

Charles C. Duncan - JMP Securities LLC, Research Division

Varun Dua - Jefferies & Company, Inc., Research Division

Jeffrey Frelick - Canaccord Genuity, Research Division

Zarak Khurshid - Wedbush Securities Inc., Research Division

John M. Putnam - Capstone Investments, Research Division

Bryan Brokmeier - Maxim Group LLC, Research Division

Raymond A. Myers - The Benchmark Company, LLC, Research Division

Operator

:

Good day, ladies and gentlemen, and welcome to the Exact Sciences Corporation Second Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Rod Hise. Please go ahead.

Rod Hise

:

Thank you, and thank all of you for joining us for Exact Sciences' second quarter 2012 conference call. On the call today are Kevin Conroy, the company's President and Chief Executive Officer; and Maneesh Arora, our Chief Operating and Financial Officer.

Exact Sciences issued a news release earlier this morning, detailing our second quarter 2012 financial results. If you've not seen the release, please go to our website at exactsciences.com or call (608) 807-4607, and I'll provide it to you.

Following the Safe Harbor statement, Maneesh will provide a summary of our second quarter financial results. Next, Kevin will provide an update on our DeeP-C clinical study.

Before we get underway, I'd like to ask everyone to take note of the Safe Harbor paragraph that appears at the end of the news release issued this morning, covering the company's financial results. This paragraph states that any forward-looking statements that we make: one, speak only as of the date made; two, are subject to inherent risks and uncertainties, including those described in our most recently filed annual report on Form 10-K, and our subsequently filed quarterly reports on Form 10-Q; and three, should not be unduly relied upon. Except as otherwise required by the Federal Securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein or elsewhere to reflect any change in our expectations with regard thereto to any change in events, conditions or circumstances on which any such statement is based. It is now my pleasure to introduce our Chief Operating and Financial Officer, Maneesh Arora.

Maneesh K. Arora

:

Thanks, Rod, and good morning, everyone. Our DeeP-C clinical trial is on track. Expenses related to the clinical trial also remain in line with our expectations.

In the second quarter, we invested in expanding our Mayo collaboration. And in connection with this investment, the company took a noncash charge of $1 million in the second quarter. Kevin will provide a full update on both the trial and the Mayo collaboration in just a moment.

As we move towards completion of the trial, we're continuing to make investments in operations and in market development. These investments ensure that we will be ready to commercialize Cologuard after approval by the FDA.

We also remain on track to meet our full year cash utilization target of $41 million to $43 million. Our cash balance at the end of the second quarter was $70.9 million. It's now my pleasure to introduce Exact's President and CEO, Kevin Conroy.

Kevin T. Conroy

:

Thanks, Maneesh. We're very pleased to announce that we have enrolled 9,000 patients into the clinical trial. I want to complement the entire team in Exact for keeping enrollment on track. Enrolling 9,000 patients into a colorectal cancer study is no small undertaking.

Colonoscopy and pathology reports have been completed for approximately 6,000 patients. The pathology data for roughly 3,000 patients are in process. The final pathology report determines whether an enrolled patient has cancer.

Our goal is to enroll 49 to 56 patients with colon cancer. To date, our cancer accrual in the study is in line with expectations. We have already enrolled more than 400 patients with advanced adenomas or pre-cancers, which more than adequately powers the study for pre-cancer sensitivity. Assuming that our cancer incidence rate remains on par with the rate so far, we expect to complete the study and make our FDA submission per our guidance, the manufacturing module in the fourth quarter and the clinical analytical modules together in the first quarter of 2013 per FDA's request.

Let's turn to our recently completed cutoff study. The cutoff study or our final DeeP-C training sets involve more than 900 patients, including more than 80 cancer patients and 70 pre-cancer patients. We are very pleased with the results of the study. The results are in line with previously released data and we look forward to presenting this new data at a fall 2012 scientific meeting. These data are being used for final confirmation of the cutoff criteria for the assay.

Two important things to note about the cutoff study. First, the patient samples were processed on the automation system that will be part of the DeeP-C study and represents our commercial high-volume solution. The study validated the robust performance of our instruments. Second, this is the third set of data that meets or exceeds our expectations, which increases our confidence even further as we head towards testing the DeeP-C samples later this year.

Let's turn to the expansion of our relationship with the Mayo Clinic. We're excited about the expansion and extension of this relationship. In May, we announced this extension, which goes to the core of the value that we think we can create for patients in the GI field by collaborating with the Mayo Clinic, an institution not only with a world-class clinical capability, but also with world-class research capabilities. We are in a very strong position to be able to develop diagnostics that make a big impact on the patient population in this area. This collaboration will be focused on GI cancers and disease generally, including pancreatic cancer, esophageal cancer, inflammatory bowel disease and other GI diseases. This relationship also gives us access to clinical samples, which as you know are not always easy to come by. And importantly, it gets us exclusive intellectual property rights flowing from this collaboration.

In 2012, we have 3 priorities: making an FDA submission, preparing for manufacturing and marketing development.

We just discussed the completion of the clinical trial on the FDA submission. We remain on track for all of our manufacturing goals, including implementing the necessary quality system and the development of our automation equipment.

We also continue to make strong progress on our market development priorities. They include securing routine, optimal reimbursement, working with key opinion leaders, medical groups and GI and primary care physician societies.

I want to conclude by thanking all of the employees at Exact and our extended team of scientific collaborators. We're having a great year because of your commitment and hard work. All of us at Exact know the second half of the year will be very busy as we complete the DeeP-C study and begin making our submission. We look forward to updating you on our progress next quarter and in the quarters to come. Thank you, and we'll be happy to take your questions.

Question-and-Answer Session

Operator

:

[Operator Instructions] Our first question comes from Matt Notarianni from Baird.

Matthew M. Notarianni - Robert W. Baird & Co. Incorporated, Research Division

:

So really quick, just kind of picking up after the last quarter's call. The enrollment here seems to suggest really good progress. I think there was some concern about or extra attention paid to a particular age group as you were enrolling patients. Is it fair to kind of assume that, that -- the steps that you took to kind of get that cohort went well?

Kevin T. Conroy

:

Yes, Matt. Maneesh took the steps very early in this year seeing that this could be an issue. And as a result, we are enrolling the vast majority now of patients who are 65 or older. And obviously, the cancer incidence rate in that group is much higher than in the 50 to 65-year-old group. And as a result, we're very confident that we will see a continued relatively high cancer accrual rate flowing from that group.

Matthew M. Notarianni - Robert W. Baird & Co. Incorporated, Research Division

:

And just moving quickly to just the Mayo deal expansion. I mean following that announcement in the quarter, we kind of saw some initial stuff on IBD at DDW. But just any kind of color on any milestones to pay attention to on pancreatic or esophageal or [indiscernible] to stay tuned?

Kevin T. Conroy

:

Well, let me take a step back and answer that by saying the value created at Exact Sciences over the last 3 years has largely come from the collaboration with the Mayo Clinic, the clinical and research capabilities that they brought to bear and the IBD experience that Exact Sciences has brought to bear. It is largely responsible for the value creation. And there are just many more diseases for us to tackle in this field. And the truth is, is that it's not a field that, in molecular diagnostics, receives a lot of attention. So pancreatic cancer by itself, you could spend a long time developing diagnostics, screening diagnostics, diagnostics to determine whether a patient with a cyst should be removed. There are just -- you could almost spend a career there. So rather than talking about individual milestones, I'd really like to just focus today on the great opportunity that there is in this broad field of GI diagnostics. And really, I'm not sure there's anybody, any institution better in the world at it than Mayo Clinic. And one additional thing, just the access to the samples that we've been able to gain, the velocity of access to the samples has given us the ability to run these studies, including the cutoff study that we just ran. There are so many benefits that flow from this that we think will unearth [ph] to the benefit of the shareholders and just as importantly, more importantly, patients.

Matthew M. Notarianni - Robert W. Baird & Co. Incorporated, Research Division

:

Last one for me. Really for Maneesh, kind of on expense pacing, presumably that noncash charge was kind of a one-timer here in the quarter, so just kind of wondering if there's anything special as we think about kind of R&D expense kind of tapering off still at the end of this year? And any comments on SG&A?

Maneesh K. Arora

:

Sure, Matt. So you're right, the expense was a noncash onetime charge. So we don't expect it to be at these levels. And we do expect them to not necessarily return to Q1, but definitely taper over the course of the year. And then S&M and G&A are, I think, are right in line with what should be expected for the rest of the year.

Operator

:

Our next question comes from Brian Weinstein from William Blair.

Brian Weinstein - William Blair & Company L.L.C., Research Division

:

Question on just clarifying some of the timing here. So I just want to make sure I'm clear. So we're going to see the most recent study, the cutoff study at a fall conference presumably. And then we would look to see data on the clinical trial itself on the full PMA trial sometime in early Q1, is that correct?

Kevin T. Conroy

:

Actually, the cutoff data we are targeting, the AACR conference, October 16 through 19 in Anaheim at the 11th annual conference on the frontiers in cancer research. So that's what we're targeting. I guess there's a small possibility we could end up at AMP but most likely not. And then in terms of seeing the top line data for the FDA study, it could be in the fourth quarter still. We certainly expect, as previously guided to announce the achievement of the endpoint and then to present that top line data will either be at a conference in January. And again, this assumes that the clinical trial, that the cancer accrual continues at the current pace. In early January, or potentially by press release assuming that the journal or journals that we are targeting for inclusion of this data in goes along with that. So we just need to sort through some of that before we know what there would be at the end of the fourth quarter or at the beginning of the first quarter.

Brian Weinstein - William Blair & Company L.L.C., Research Division

:

Okay, great. Was there anything, [indiscernible], was there anything about the patients in the cutoff study that was odd in any way, right side or left side stage of cancer, anything like that, that you can comment on at this point?

Kevin T. Conroy

:

Yes, we -- so the best thing about the data from the cutoff study, it was very, very consistent with what we've seen in the past. As you look at the left and right side and the percent contribution by the individual markers, there was nothing out of line from what we saw in the past. But what we get from this data, we have a significant number of normals. And as you know, we set our cutoff based upon normal samples that is the most important thing is to set a cutoff with this particular specificity in mind. And in our case, that's greater than 90%. It really gives us confirmation that this assay performs very, very well. And it performs in a robust fashion. So there was an extremely, extremely low error rate on the instrument. That gives us even more confidence going into this clinical study because today, we've used manual-type padding as a means to generate result and that has inherently higher error rates.

Brian Weinstein - William Blair & Company L.L.C., Research Division

:

Okay. And then a question for you on the parallel paths. Just to want to confirm some timing here. Where do you get the sense on as far as what the potential timing could be for a code on the CMS? As I understand, you need the code for screening test in that population, correct?

Kevin T. Conroy

:

Yes. So the goal is, we've had discussions with CMS and FDA, is to time the NCD and the PMA decision awfully close to each other. And the CMS decision, there are some statutory notice and comment provisions that could delay by a couple, maybe 3 months a final NCD. So the way that we'd expect this to come out is hopefully an FDA approval, assuming the data is good and the FDA likes it, and an initial CMS coverage decision that will be put out for notice and comment and then a final NCD. And we hope to parallel path the pricing as well. So within a few months, we expect to have, and this is the great thing, is that we expect to have not only FDA approval, but also CMS coverage and pricing. We don't know yet whether this would be on the lab fee schedule or the physician fee schedule. We don't think that it matters much to us, but that timing should all occur in basically the quarter or 1 or 2 quarters of FDA approval.

Brian Weinstein - William Blair & Company L.L.C., Research Division

:

Okay. For my last question is on any sense about if USPSTF would take this up because obviously at that point, if it would require to be covered, I believe, under PPACA. So any idea if it would take this up and I believe, and can you confirm if the FIT test is already considered in kind of that category B of that USPSTF recommendation?

Kevin T. Conroy

:

Yes. So first of all, the USPSTF is the United States Preventive Services Task Force. And under the healthcare reform law, any screening test that is rated A or B by that task force is -- must be covered by all private insurance companies. And that's a real benefit to us. Fortunately for us, the timing is perfect that in 2013, USPSTF is scheduled to take up their every 5-year review of colon cancer screening test. Ours will -- we expect to have data in a good journal during that time period and we will be submitting a lot of data to USPSTF. We won't know until next year of the timing of all of that and what their schedule looks like. But we're really pleased with the fact that this, our data, coincides well with their colon cancer review.

Operator

:

Our next question comes from Steve Unger from Lazard Capital Markets.

Stephen S. Unger - Lazard Capital Markets LLC, Research Division

:

Kevin, if you end up on the lab fee schedule, do you know whether you'll or what you would crosswalk to or whether you would pursue a gap fill?

Kevin T. Conroy

:

Well, we've done the analysis both ways. And we're prepared to have the discussion with CMS. And either way you do that, we think that we get to the value that we had talked about. And that value is in line with the cost effectiveness and the kind of the pharmacoeconomic studies that you've done. So we're waiting to see what CMS does generally with molecular pricing and whether they put molecular test on the lab fee schedule or the physician fee schedule. But we think either way that ends up, we're in a very strong position to get the value that we think we deserve with this test.

Stephen S. Unger - Lazard Capital Markets LLC, Research Division

:

Okay. And then it's my understanding then that your price wouldn't be in effect until the first quarter of 2014? You would apply right in July and have that discussion for the crosswalk or the gap fill and it would be determined for the fee schedule for '14, is that right?

Kevin T. Conroy

:

That, I think, that is generally right. Again, a lot remains to be seen, but I think that's probably a pretty good target.

Stephen S. Unger - Lazard Capital Markets LLC, Research Division

:

Good, okay. And then you mentioned that you have at least 100, right, adenomas in the clinical trial at this moment. I was wondering since you know that, do you know what your cancer accrual is and how come you're not telling us what the cancer accrual is right now?

Kevin T. Conroy

:

Steve, we can't tell you everything. Actually, the pre-cancer accrual is already at 400. And the cancer accrual is in line with where we expected it to be. We just don't want there to be a hyperfocus on one number, so we'd rather not discuss that at this time.

Stephen S. Unger - Lazard Capital Markets LLC, Research Division

:

Okay. So you at least know what the pathology reports are saying as far as cancer?

Kevin T. Conroy

:

So we have pathology reports from the first 6,000 patients enrolled in this study. And we're pleased with where we are so far.

Stephen S. Unger - Lazard Capital Markets LLC, Research Division

:

Got it, okay. And then lastly. I missed the first part of the discussion just regarding expenses. I noticed you mentioned something about a noncash expense. Is that an R&D? And what is that related to?

Kevin T. Conroy

:

Yes, that's in R&D. It's a $1 million noncash charge related to the Mayo license. It's the Mayo collaboration expansion that we did in May. So it's not recurring. It went into R&D. And it's not expected to carry forward. So the comment I made was related to R&D, not returning to Q1 levels but tapering from here through the balance of the year.

Stephen S. Unger - Lazard Capital Markets LLC, Research Division

:

Okay. And then I guess just a follow-up on that. As far as, are you signaling then, I guess, that with the Mayo collaboration that you're going to, you as a company, are going to pursue additional tests, additional GI areas and that there will not be, I guess, a decline in R&D expenditure once this clinical trial is done, DeeP-C is done?

Kevin T. Conroy

:

Well, we're not signaling that we're going in the direction of developing other GI test. We're actually telling you that. But in terms of the actual R&D expenses, the R&D expenses now include a massive colon cancer screening trial which we don't expect to replicate anytime soon. So there will be continued investments in R&D with a major focus on Cologuard. There are a lot of other opportunities where we think we can create values. We'll be very selective in doing that. And I think the track record is that we've been able to create value for the products that we've focused on.

Stephen S. Unger - Lazard Capital Markets LLC, Research Division

:

Okay. So what do you think the R&D run rate would be, the expense run rate would be starting the first quarter of 2013?

Kevin T. Conroy

:

Steve, we're not ready to talk about that right now. If you take a look at the base cost, we know that the clinical trial is really driving the vast majority of our expenses this year. And so as we get through the clinical trial, we'll be prepared to discuss that when we provide guidance for 2013.

Maneesh K. Arora

:

And one way to look at what we're spending on the clinical trial and back that out, we have a significant and highly capable R&D team that have proven their ability to meet the R&D timelines that we've laid out. We're not laying those people off after we complete this clinical study. They were going to devote their attention to some other things. So there's a base cost in R&D which you can discern. We'll keep investing in those people and collaboration with the Mayo Clinic. And we've already talked a little bit about the most likely next product after Cologuard and that's an extension of Cologuard as a screening tool into the IBD population. There was data released at DDW which showed the ability to detect at a very high rate cancers and high-grade dysplasia, so serious pre-cancers in those patient populations, in that patient population which to-date, doesn't have the good means of being screened. So there will be certainly an investment made there starting sometime after we complete the Cologuard study. We'll provide more clarity later on.

Operator

:

Our next question comes from Charles Duncan from JMP Securities.

Charles C. Duncan - JMP Securities LLC, Research Division

:

I -- my first question, Kevin, was -- may seem like kind of a naive one given that we've covered this story for a while and it's been well vetted. But just kind of wondering what you think, given some of the changes in the competitive environment, what clinical trial results are really needed to drive the new standard of care for colon cancer and polyps screening? What would you like to see?

Kevin T. Conroy

:

Well, it's a great question, Charles. Today, you have to look at the landscape today and over the next 10 years. But today, only about 1/3 of patients will regularly go to colonoscopy, about 1/3. Yes, there's data that shows 60% of people have had a colonoscopy, but you need more than 1. And many people go once, and they never go back. So the biggest challenge you have with colon cancer screening compared to breast cancer screening and cervical cancer screening is people won't do it. Then why won't they do it? If I came to you with the notion of a test that required a bowel purge and a 5-foot long tube inserted in visual scoping and a day and a half off of work, you wouldn't pick up coverage, right? But that's the best test we have and it's a great test and it's the gold standard and it will be the gold standard. But we have 2/3 of the patient population that isn't being screened. And they're not being screened for pre-cancers and there's simply no way to prevent cancer by only looking for cancers, which is all the FIT test and FOBT test do. They just look for cancer. So when you take a look at kind of the competitive landscape, the biggest competition is the fact that people do nothing is changing people's behavior. And how do you address that? You would address that with a patient-friendly test that detects pre-cancers. That's what we believe. And we believe that if you have a patient-friendly test that detects pre-cancers and sends those patients to colonoscopy, you can start to do for colon cancer what the Pap smear did for cervical cancer, which is basically eradicate the disease in a screen population. So now the question is, what level of sensitivity or what level of performance is needed to achieve that goal of prevention? Well, with the test that detected even 40% of pre-cancers on a noninvasive basis, screened frequently enough, the cumulative sensitivity is 40% and then 40% a year later or 2 years later or 3 years later. And so what's really important and, I think investors and some analysts spend too much time thinking about point sensitivity. This is not about point sensitivity. It's about programmatic or cumulative sensitivity. The Pap smear, the conventional Pap smear detects about 50% of pre-cancers. And before Thin Prep came along and before the HPV test came along, they did pretty much eradicated cervical cancer in a screened population. So to answer, that's a long answer to your question, but it's an important question. With even 40% pre-cancer sensitivity, you'd get there. We think that will be somewhere between 50% and 60%. And so with that and frequent enough testing, you can actually make a massive difference in colon cancer prevention.

Charles C. Duncan - JMP Securities LLC, Research Division

:

So Kevin, there was recently approved for distribution in New York a frequency-based blood test for colon cancer. I don't think they have any data for adenomas, but do you think that, that approach has any merit in terms of being an effective screening paradigm?

Kevin T. Conroy

:

It has some merit. But first of all, that particular test, it hasn't gone through any clinical studies. It went through an analytical study and there is -- we don't know what the performance of that test is. But the studies that have been done with an RNA approach of maybe 50% cancer sensitivity, no pre-cancer sensitivity and a huge false-positive rate. It doesn't make sense. And I'll repeat that. That approach as a screening tool doesn't make sense, you can't for an annual test that sends 20% or 30% or 40% of patients to colonoscopy. You're going to drive up cost and scare the heck out of patients. The FIT test detects 65% of cancers with only about a 5% false-positive rate. And if you want to just detect cancers, use that test that's used 10 to 12,000,000 times a year. So the problem with a blood test in general is that they have high false-positive rate and that they don't detect pre-cancers. You can slightly affect the mortality rate by detecting cancers, but you have to detect them early stage 1 or 2, and the blood tests aren't very good at detecting stage 1 or 2 cancer.

Charles C. Duncan - JMP Securities LLC, Research Division

:

Okay. One last question on the conduct of DeeP-C. Let me ask you a few, you've discussed with the FDA what the target patient population should be. I'm sure you guys have a perspective on that. But in terms of the number of patients or representation of patients that are 65 years and older versus younger, and whether or not there's a chance that if you have mostly 65 years and older patients, the label may reflect that?

Kevin T. Conroy

:

Great question. So the intended population for this test will be patients between the ages of 50 and 84 were at average risk for colon cancer. So think about patients who don't have a significant family history who haven't had cancer before, who haven't had advanced adenomas taken out. So just the, call it 80 million out of the 100 million Americans over the age of 50 who are at average risk for the colon cancer. That is the target population. If further studies will be -- will look at younger patient populations and we haven't begun even -- begun to discuss that with FDA yet, there is a huge population that needs to be addressed between the ages of 50 and 84. And I think you had a second question there, too. Or did...

Charles C. Duncan - JMP Securities LLC, Research Division

:

Well, the question really is, do you feel that if you had a lot of 65 year or older patient population, the FDA may see that as a certain population?

Kevin T. Conroy

:

No. Okay, so remember that in the first, call it 6 months of enrollment, we enrolled a majority of patients who were between 50 and 65. So we think that this will end up being within a stone's throw of 50/50 overall, probably maybe 60/40 overall, about 65 and older to 50 to 65.

Maneesh Arora

Well, one other note, Charles, that we had extensive discussions with the agency about the potential for age enrichment or not, so what we're doing is after thorough vetting and discussions with the FDA.

Charles C. Duncan - JMP Securities LLC, Research Division

:

That's perfect and it helps. Maneesh, one last question for you. I know that you guys aren't giving any guidance for '13, but just maybe wax theoretically in terms of SG&A spending and what would you anticipate to occur in '13 should you get the results that we're all anticipating, would you invest in SG&A to launch the test? And if you could provide some color on that?

Maneesh K. Arora

:

Sure. And I think that where people and what people will typically expect is G&A, is pretty consistent. We would expect to see a shift from R&D into sales and marketing. And do we expect to see a dramatic shift? Probably not a huge investment, but enough to make sure that we're prepared for launch. I know that's not a lot of information, but we'll be prepared to discuss this as we get closer to '13 a little more.

Operator

:

Our next question comes from Jon Wood from Jefferies.

Varun Dua - Jefferies & Company, Inc., Research Division

:

This is actually Varun Dua in for Jon Wood today. Just a couple of questions here. Firstly on your commercialization plants, I know you've talked about having discussions with some commercial lab players with automated instruments. Wondering if you can update us on the discussions there?

Kevin T. Conroy

:

We continue to have high level discussions with institutions, large providers that want to learn more about the DeeP-C study at this time. And those discussions are really conducted through our chief medical officer. At this time, we're not prepared to really talk about any color on commercialization other than we've talked about today.

Varun Dua - Jefferies & Company, Inc., Research Division

:

Okay, that's helpful. And secondly on the cutoff study, can you comment on the protocol used in the study? Was it exactly the same that you plan to use for the DeeP-C study or was it more of kind of what on the lines of what you've used in the previous studies? And secondly on the patients, was this a totally new set of patients or did you use some samples from the previous studies and some samples that you plan to use for the DeeP-C study?

Kevin T. Conroy

:

The patients were new patients and that's important. You never want to go back to a population that you've previously sampled, that you've previously used before. And in terms of the protocol, the difference was that the samples were run on the automation instruments. So it was essentially the same processing other than the fact that the assay was run, both the FIT assay and the -- our internal FIT assay and the molecular assays were processed on the automation equipment.

Maneesh K. Arora

:

And, Varun, important to note, there were no Deep-C specimens used, which I think was another one of your questions. That's something that will happen later this year.

Varun Dua - Jefferies & Company, Inc., Research Division

:

Okay, that's helpful. And lastly on the DeeP-C study, so there's been a bit of discussion on how the patient samples should be distributed equally between Medicare population and the population in the 50, in basically the age groups between 50 and 65. Now when it comes to the cancer patients and the adenoma patients, is it also a requirement that those samples be distributed in a way that is statistically relevant or can you have those 49 to 56 cancer samples just between the age of 50 and 65?

Kevin T. Conroy

:

Well, you would never expect to see the perfect age distribution because the incidence of colorectal cancer changes by age. So the incidence for a 50-year-old is about 0.1% and the incidence rate for a 65-year-old is about 0.6%. And so neither FDA nor CMS expect that it'd be equally distributed between those 2 age groups.

Operator

:

Our next question comes from Jeff Frelick from Canaccord.

Jeffrey Frelick - Canaccord Genuity, Research Division

:

Just a couple of questions on the cutoff study. The -- just with the cutoff optimization, so are you satisfied with -- of what you saw on the study? And do you still need to make some further adjustments before you are beginning to run the patient samples on DeeP-C? And second part of that is the instrument performance, was that as expected or again, still some additional changes on instrumentation before locking that down?

Kevin T. Conroy

:

So I'm sorry, can you repeat the first part of that question?

Jeffrey Frelick - Canaccord Genuity, Research Division

:

Yes, just on the -- where you are with the cutoff. Are you -- is that set or you think will still continue to optimize the cutoff a little bit more?

Kevin T. Conroy

:

The statisticians are pouring over that data to make sure that, that cutoff is 100% where it should be. But that will be complete within the next 5 or 10 business days. And then the -- that those cutoffs, it's not just really one cutoff because as you know, we have 11 markers, will be locked and applied for the DeeP-C study. In terms of the automation, the automation performed actually better than expected. It had an extremely low error rate. And we're really pleased with that. The automation team has really done an incredible job to develop this instrument. Remember, we pulled this instrument forward starting last year into this program. And in about, I don't know, 16 months, they had built an instrument that is unbelievably robust and has a high throughput value proposition to our clinical lab partners going forward.

Jeffrey Frelick - Canaccord Genuity, Research Division

:

Can we minus what the throughput is on it?

Maneesh K. Arora

:

It will do roughly 100 samples a day, assuming that you have 2 shifts. So roughly 45-plus samples per shift.

Jeffrey Frelick - Canaccord Genuity, Research Division

:

Okay, great. And one, just one quick follow-up. On your comment earlier on the test extension for the IBD population. As you move that forward, will you need to optimize any markers or you think you just need to take the existing test into that IBD population?

Kevin T. Conroy

:

Well, so there's an initial study, Jeff, that was performed by the Mayo Clinic. And we are now collecting more patient samples. And we'll be doing more testing to determine that, whether we need to make any modifications. But the initial study, which had a small end detected 100% of cancers and 80% of high-grade dysplasias with a 90% specificity cutoff. Obviously, you never expect to be at 100%. And that was with just 2 markers. So we think that there may be some modifications, but probably not significant modifications. We know one thing is that the FIT assay will not be included because most of those patients are positive for HemoQuant.

Operator

:

Our next question comes from Zarak Khurshid from Wedbush Securities.

Zarak Khurshid - Wedbush Securities Inc., Research Division

:

I'm jumping around a few calls this morning. I apologize if you already addressed it, but what is your thinking on targeting the ulcerative colitis and Crohn's disease patient groups? Would that require separate trials, a specific approval? And then how would the sales strategy or ordering physician be different than the current product?

Kevin T. Conroy

:

Well, so let's start with the second piece of that first. The target population or the target ordering physician for the IBD screening test for colon cancer in an IBD population is a small set of GI specialists who focus on Crohn's and colitis. Those physicians today screen using colonoscopy, but rather than using optical colonoscopy as the main screening method, they take biopsies and send those biopsies to pathology and they do that because -- and you can Google a picture of Crohn's disease and look at an image. It's -- you can't tell the difference between a small cancer lesion and the raw inflammation that looks like somebody's taken a sandpaper to a colon. So it's very hard visually, optically with colonoscopy to see cancer. And these patients have a 30-plus percent lifetime chance of developing colon cancer, so screening among that patient population is critical. We'll go to market with this test. After discussions with FDA, we need to make a determination of whether this would be a lab-developed test or whether it would be a -- we would take it through a clinical trial. That decision has not been made yet, but the sales strategy around that would require a very small sales force calling into and educating these G.I. specialists.

Operator

:

Our next question comes from John Putnam from Capstone Investments.

John M. Putnam - Capstone Investments, Research Division

:

Kevin, just a clarification. Would you anticipate additional testing run on the same automated system that Cologuard will run on or would it require a separate instrument?

Kevin T. Conroy

:

That remains to be determined if this test ends up being KRAS plus NDRG4 plus BMP3, which we think they very well could. It could use the same automation system. You just wouldn't use the FIT test. And that's one of the beauties of this product. And really, back to the collaboration with the Mayo Clinic, this was -- we never would have thought about this product on our own. It was only because Dr. Ahlquist at the Mayo Clinic brought this to our attention, and; so this is something that could be of really high value. So, but -- and being able to do it on the same automation system is a tremendous value proposition to a lab which doesn't have to go out and buy a new instrument for a new high-value test.

John M. Putnam - Capstone Investments, Research Division

:

I can appreciate that certainly. One other question, given your -- the incidence in cancer that you're finding now with Cologuard, will the study top out at around 10,000 patients?

Kevin T. Conroy

:

Well, so that's a good question, John. We -- the fact of the matter is, is that we may have a sufficient number of cancers already enrolled in the study. We just don't know because these last 3,000 patients, you don't have the final reports on. A big chunk of them have had polyps removed and then those polyps get sent to pathology and some of them had cancer and the pathologists make their final determination. And we need to keep enrolling until we see that we've hit at least 49 cancers. We know that once we see the pathology, the 49 pathology report that denotes cancer, that we will stop, and that with the patients that are then enrolled, that were waiting for pathology reports on will -- that number statistically should increase. So we don't know if we are going to be at 9,500 or 11,500. We'll know that in the coming months. And we're just pleased with where we are today. So we're in a good position to feel confident about completing the clinical trial on time.

Operator

:

Our next question comes from Bryan Brokmeier from Maxim Group.

Bryan Brokmeier - Maxim Group LLC, Research Division

:

How many centers are you enrolling at? I checked that. It looked like there was about 140, but it looked like a couple may have stopped or...

Kevin T. Conroy

:

No, so there are over 100 enrollment locations at over 80 sites. So what you see is, some in clinicaltrial.gov that you're looking at, if there is one office that has multiple sites or a doctor that has a satellite office, we're required to list all of them. So that's what you're looking at.

Bryan Brokmeier - Maxim Group LLC, Research Division

:

Okay. And just correct me if I'm wrong, but the biggest cost of the clinical trial is the patients, enrolling the patients themselves, correct?

Kevin T. Conroy

:

That's correct.

Bryan Brokmeier - Maxim Group LLC, Research Division

:

So as in right now, you've got about 90% of enrollments depending on as Kevin has talked about, the 9,500 to 11,500. But if you get a 10,000, you're about 90% of the way through that enrollment, correct?

Kevin T. Conroy

:

Yes. I mean, it's going to, I'll refer back to what Kevin just said, depending upon where we need to end that. That's directionally correct.

Bryan Brokmeier - Maxim Group LLC, Research Division

:

Okay. And that's as of today? Or where were you, as of the end of the second quarter for enrollments, just sort of in terms of understanding the expenses we're already seeing flowing through the income statement?

Maneesh K. Arora

:

You know what? That's not something we've talked about, but...

Kevin T. Conroy

:

That's not something that we're prepared to discuss today.

Bryan Brokmeier - Maxim Group LLC, Research Division

:

Okay. And just another question on the R&D. Have you done much hiring in R&D over the last year or so? I think as Kevin was talking about earlier that the -- there will be a decline in R&D, but you're not going to be laying anyone off once the clinical trials are complete?

Kevin T. Conroy

:

Bryan, some of these questions, why don't you come visit us and we'll sit down and we'll take you through the operations here? We obviously didn't have a chance to speak before you issued your recent report. And I think there's a fair amount of education that could go on, so feel free to come visit and we can talk about these things.

Operator

:

[Operator Instructions] Our next question comes from Raymond Myers from Benchmark.

Raymond A. Myers - The Benchmark Company, LLC, Research Division

:

You've answered most of my questions. But one thing that came to mind during your talk was this automation system that's working better than you had expected. Does that possibly present a revenue opportunity in selling the equipment to laboratories?

Kevin T. Conroy

:

No, Ray, mainly because the equipment will be approved for this particular test. One, two, anybody who'd use develops -- any lab that has a need for their own instrument typically has to tailor it even slightly, but tailor it for the particular use and there aren't too many molecular tests. In fact there aren't any that, that I can think of that uses a stool sample other than maybe C Diff. So we don't think that this equipment today will have broad applicability. But down the road, it may have future uses for our particular products, Ray.

Raymond A. Myers - The Benchmark Company, LLC, Research Division

:

Okay, great. That sounds good. And then maybe could you tell us an update of your progress of determining your marketing and distribution strategy and preparing for marketing and distribution?

Maneesh K. Arora

:

Yes. So we'll talk about that at a high level. And that is -- our focus is going to be in the first years of launch on converting the high value large providers that Mayo Clinics and Kaisers and the -- think the large systems that employ a large number of primary care physicians. Today, what you have seen is the FIT providers have gone into those big systems and convinced them to switch from the FOBT test to the FIT test. And if you look into the Medicare codes, you can see that there has been a rapid acceleration between about 2005 and 2011 from about 3% of all noninvasive tests being FIT test to 35% to 40% being FIT test last year. So in a 6-year period, there's been a massive conversion in the market mainly because the FIT test is about 65% sensitive for cancer whereas the FOBT test was only 30% to 40% sensitive. And so our commercial strategy is to convert those that have already converted to FIT. We're going right after FIT and FOBT because the data, we expect to be not a little bit better, but a lot better, both for cancer detection, and since FIT and FOBT largely don't detect pre-cancer, we should -- we hope to have a superiority claim for pre-cancer detection. So our strategy is to convert those big systems that employ hundreds of primary care docs where they can, from the top down, convert these tests that are being utilized, 10 to 12 million tests per year, and convert them to Cologuard.

Raymond A. Myers - The Benchmark Company, LLC, Research Division

:

Do you have a sense of what proportion of the patient population is tied to these large provider groups?

Kevin T. Conroy

:

It is approaching 50%. It's hard to get a great number on that, but it's approaching 50%. Primary care physicians are having a very difficult time making a living with all of the pressures on their practices. And so we think we will see an acceleration of GPs going to an employed model and we think that, that -- it helps us a lot as we're looking into a screening product and to a screening population.

Raymond A. Myers - The Benchmark Company, LLC, Research Division

:

That makes a lot of sense. And then my final question is, have we've talked about any more about the possibility and timing of an advisory panel?

Kevin T. Conroy

:

We have never talked about the timing of an advisory panel. We've had those discussions with the FDA. And as soon as we know when that advisory panel is, we'll share that with investors.

Operator

:

Our next question is a follow-up from Zarak Khurshid from Wedbush Securities.

Zarak Khurshid - Wedbush Securities Inc., Research Division

:

Can you talk a little bit to the extent that you can about FIT compliance at those large centers? Are they doing anything differently to get people to run the test? And then maybe if it's not too tedious, sort of walk us through kind of the old FIT and the people that don't comply, who eats the costs and how you're thinking about kind of that dynamic with your test?

Kevin T. Conroy

:

Sure. Yes, so a lot of the larger centers that are intently focused on reducing colon cancer rates in their patient populations have taken aggressive FIT compliance steps. And they do that using the electronic medical record with reminders. They actually have proactive programs where they send letters to patients. I think Kaiser has been at the forefront. Kaiser North has been at the forefront of this. And basically giving patients a choice because we know that when you give the patients a choice between a stool test and colonoscopy, you see almost a doubling in the percentage of patients who are willing to undergo screening. So about 35% to 40% of patients are willing to undergo colonoscopy screening. You get another 30-plus points of participation if you offer a stool test. And you don't see a big -- huge decrease in colonoscopy rates. You see a slight decrease in colonoscopy rates. So these big systems can drive that because they have the systems and they have the incentive now to do it because they know they need to bring their costs down. In terms of the FIT costs, these tests are pretty cheap. We think that the value is equal to the clinical value that they deliver. It's reimbursing at about $27. And so today, it's easier to eat those costs where they can -- there are some systems that will mail out a couple of hundred thousand FIT tests just to get patients to comply. Our approach is fundamentally different than that. Our approach will be to hand a patient a kind of kit or to have them pick up a kit and to comply with it that way. And we're working on some means that we think that will be fruitful to encourage people to utilize this test. We're not ready yet there to talk about those means. But prior to launch, I'm sure that we will.

Operator

:

And I'm showing no further questions at this time. I will now turn the call back over to Kevin Conroy, CEO, for closing remarks.

Kevin T. Conroy

:

Well, I'd just like to thank everybody for participating. And in summary, we had a great quarter of enrollment into the DeeP-C study. We remain on track with the FDA submission timeline. And I just want to thank all of the employees for their incredible focus on delivering the results that they've delivered over the last quarter. Thank you very much.

Operator

:

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.

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