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EXACT Sciences Corp. (NASDAQ:EXAS)

Q2 2008 Earnings Call

August 8, 2008 8:30 am ET

Executives

Jeff Luber - President and CEO

Chuck Carelli - CFO

Analysts

Michael Moskoff - MRM Capital

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 EXACT Sciences Corporation Earnings Call. My name is Loyn and I will be your coordinator for today. At this time all participants are in 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 conference, 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 today is Jeff Luber, our President and Chief Executive Officer.

Before we get started let me remind you that certain matters we will discuss today other than historical information consists of forward-looking statements relating to, among other things; our expectations concerning our financial results, cash preservation, our continued listing status on NASDAQ, our business outlook and similar matters.

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 year ended December 31st, 2007, 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 the result of new information, future events or circumstances or otherwise. I am now going to run through the financial updates and then Jeff will provide a business update and then we'll open the call up for your questions.

For Q2 2008, the company generated a net loss of $2.1 million compared to a net loss of $1.8 million for Q2 2007. This translates into a net loss of $0.08 per share for the quarter ended June 30, 2008 compared to $0.07 per share for Q2 2007.

The increase in net loss for Q2 2008 when compared to the second quarter 2007 was primarily driven by lower non-cash license fee amortization and royalty revenues in connection with the June 2007 amendment to our license agreement with LabCorp, which I’ll review in a minute.

This increase in net loss in Q2 2008 was partially offset by savings realized in our sales and market operations as a result of the elimination in the third quarter of 2007 of those functions, as well as lower overall R&D expenses.

Total revenues of negative $146,000 for the quarter ended June 30, 2008, were lower than total revenues of $1.1 million for the same quarter of 2007.

Total revenues are comprised primarily of two elements; the first is non-cash license fee revenues related to the amortization of upfront license fee payment from LabCorp. These revenues decreased by approximately $750,000, as a result of the June 2007 amendment to our LabCorp license agreement, which extended LabCorp's exclusive license period to December 2010.

Since this amendment, we have been recording lower non-cash license fee revenue per quarter as compared to prior periods. This is because the initial $30 million upfront payment made to us by LabCorp is now effectively being amortized into our revenue through 2010, as opposed to 2008, which was the end of our exclusive license period prior to our amendment.

The second source of our revenue is product royalty fees, which has been based historically on LabCorp sales of PreGen-Plus. Effective with LabCorp's commercial offering of ColoSure in July 2008, our royalty revenues in Q3 2008 and thereafter will be based on LabCorp sales of ColoSure, as PreGen-Plus is no longer on the market.

The end of Q2 2008 marked the close of the fourth full operating quarter following the June 2007 amendment to our license agreement with LabCorp. Similar to its impact on the previous three quarters, we continue to record an estimated third-party royalty liability to LabCorp has offset to the royalty revenue line item in our P&L.

We began to record this potential liability in our financial statements during Q3 2007 and recorded charges of $1.2 million during fiscal 2007. We accrued additional charges of $300,000 during Q1 2008 and $500,000 during Q2 2008 increasing the total reserve related to this obligation to $2 million at the end of Q2 2008.

This accrual reflects our current estimate of the obligation based on sales volumes that we anticipate in light of the reimbursement and regulatory status of our technology. As we gain insights to the level of revenues generated by LabCorp sales of ColoSure will adjust this estimate as necessary.

As you may recall, we may be obligated to pay up to a maximum of $3.5 million over the exclusive license period, as LabCorp sales of products subject to our license agreement do not exceed certain specified thresholds. The ultimate amount of this potential liability is based on LabCorp sales volumes of test using our technology during three measurement periods within our exclusive license period, which again ends in December 2010. A significant increase in ColoSure sales volumes during any of the future measurement periods could reduce our obligation related to that period.

The test volumes consistent with historical PreGen-Plus sales levels would result in payouts to LabCorp for the full $3.5 million. The first measurement periods, which ends in December 2008 includes the maximum potential obligation of $1.5 million, which would be payable to LabCorp in January 2009. Additional payments of $1 million related to the second measurement periods, and $1 million related to the third measurement periods would be due in January 2010 and then in January 2011 to the extent necessary.

Our total operating expenses decreased to $2 million for Q2 2008 down from $3.1 million for the second quarter of 2007. As a result of the continued delays in the guidelines decision that we experienced starting in Q4, 2006 and through the end of 2007.

We took steps to reduce our cost and structure of the company to better align our resources with strategic imperative. These actions included reducing our R&D group at the end of 2006, eliminating our sales and marketing functions in Q3 2007 and reducing the amount of space leased at our corporate headquarters.

Most recently in July 2008, we took additional steps to preserve our existing cash resources by suspending proposed clinical validation study of our Version 2 technology and eliminating eight physicians effective August 1, 2008. On an annualized basis, we expect that the July 2008 staff reduction will provide approximately $500,000 to $600,000 in savings to EXACT after restructuring costs.

Our Chief Medical Officer and our Vice President of R&D remain engaged, as we continue to pursue strategic transaction for EXACT. We plan on recording estimated restructuring charges ranging from approximately $200,000 to $300,000 in the third quarter of 2008 related to one-time employee termination benefits, including severance, outplacement and other fringe benefits, which we expect will be paid out in cash through December 2008. We are also pursuing efforts to further reduce our facility cost and may record additional restructuring charges related to any reductions.

Our R&D expenses decreased to $528,000 during Q2 2008, down from $1.3 million for the quarter ended June 30, 2007. This $800,000 decrease was a result of the continuing effect of our cost reduction efforts, which included lower personal related and other operating cost as well as lower external licensing cost.

Due to the elimination of our sales and marketing function in July 2007, we had no sales and marketing expenses in Q2 2008, which represents savings of approximately $400,000 when compared to Q2 2007.

We finished Q2 2008 with approximately $7.7 million in unrestricted cash, cash equivalents, and marketable securities. Based on our current cost structure and operating assumptions, which not include funding for any FDA related studies. We expect that our existing cash will last through the second quarter of 2009. Obviously, any additional unexpected expenses could negatively effect this projection.

Finally, I want to provide an update on the July 10, 2008 notification that we received from NASDAQ, indicating that we do not meet the market capitalization minimum to remain listed on the NASDAQ Global Market. To-date, we have not regained compliance and accordingly, we expect to receive official notification to this effect, from the NASDAQ listing qualification staff as early as August 11th.

Our current plan is to request a hearing before the NASDAQ listing qualification’s panel, which would stay any delisting determination until the panel render a decision subsequent to the hearing. Accordingly, during the time period from August 11, through the date of the NASDAQ panel's decision, our stock will continue to trade on the NASDAQ Global Market. It's our understanding that it could take up to 45 to 90 days from the date of the delisting notification to receive a file of the termination from the NASDAQ panel.

Our success of the hearing will depend on our ability to demonstrate, that we can regain compliance with listing requirements for the NADAQ Global Market or alternatively the NASDAQ Capital Market. If unable to maintain our NADAQ listing, the company will seek to have our common stock transferred to NASDAQ's Over-the-Counter Bulletin Board Quotation System.

Now I’m going to turn the call over to Jeff, who’ll provide an update on the business.

Jeff Luber

Thanks, Chuck. Good morning, everyone. Let me begin by giving you an update on where we stand with our strategic process. Since our call on July 18, we have had discussions with the senior management teams of several companies, based in the U.S. and abroad. These discussions are still in their early stages. In our view, there is much to be optimistic about this process as we think about the new information that we now have in hand that speaks directly to the value of the opportunity at EXACT.

First, having recently received conformation of study size from the FDA for a Version 2 study, this can allow a prospected strategic partner to better predict costs and time to market for a new in vitro diagnostic test that can be submitted for clearance or approval by the FDA. We believe that the power of an FDA label can open the market up significantly for certain companies.

Second, LabCorp’s new ColoSure based on certain of our intellectual property, offers the commercial opportunity for a test aimed at one of the largest diagnostic markets in the history. LabCorp regards this test as a significant addition to its family of advanced molecular tests; and with market traction, the royalties on this type of opportunity could be a very attractive prospect.

Remember, the ColoSure test is being offered into a significantly underserved diagnostic market, one in which millions of people have historically been either unwilling or unable to obtain a colonoscopy.

While our studies have shown that non-invasive screening can bring more people into a screening program, LabCorp’s list price for ColoSure in the $200 range can also be helpful I believe, in building market demand for the test overtime. You will recall that PreGen-Plus, LabCorp’s prior testing service was list priced at $495, with an average reimbursed price of about $300,000. We have also been told that LabCorp is in the process of distributing training materials on ColoSure to their large sales force and that formal training session are being scheduled.

We believe that the performance, price and compliance attribute the ColoSure, can operate significant competitive advantage for LabCorp among those patients unwilling or unable to obtain a colonoscopy. Another important element of value at EXACT, that we are communicating to perspective strategic partners involves this morning’s announcement regarding publications in the journal Gastroenterology of the study results for a new stool DNA technology being developed at Johns Hopkins University known as BEAMing.

According to the AGA Institute, the journal Gastroenterology by the way is the most highly sighted journal in the field of digestive disease. This newest published study showed 92% detection of mutated DNA through use of the BEAMing stool DNA technology. The performance for blood-based DNA detection in this study, when backing out late stage disease, Stage four, calls to 43% detection while stool DNA remained at 86%.

The message from this latest publication is clear. Stool-based detection of DNA offers substantial advantages for early non-invasive detection because stool is by its nature, a DNA rich environment that yields according to study's authors, “a near limitless supply of DNA.” Coupled this target rich environment with a highly sensitive detection technique; BEAMing could detect one in 10,000 rare molecules by the way and the bar for non-invasive detection can be raised substantially.

Now, I'm not suggesting that BEAMing is even near-ready for commercialization, but I am saying that all great innovations in stool DNA testing have started with great science published in great journals, and we commend the work of the authors like Johns Hopkins and those from EXACT Sciences in taking their research to the next level.

fDNA I believe will be the key to pushing performance even higher over time, and potentially serve as the basis for strong adenoma detection. Being able to reliably catch pre-cancerous adenomas remains today primarily the province of invasive screening like colonoscopy. With BEAMing, based on the research from Johns Hopkins and work from Case Western Reserve University, we may have an opportunity to do the same over time with a completely non-invasive product.

While bringing this new BEAMing technology from the laboratory to the market will take time. We are working to educate potential strategic partners about our technology portfolio including, according to the BEAMing studies authors, the potential for BEAMing-based detection to be easily automated. And this is just the US market.

Last year, stool DNA technology as you will recall was included in international screening guidelines, because colorectal cancer is a global problem that requires a multitude of solutions to reduce mortality worldwide. Stool DNA today and in the future can be an important part of this global solution.

In addition, we are in regular contact with pioneers in the field of stool DNA screening at Johns Hopkins and Case Western Reserve University, and we know that their work on stool DNA research continues. Through our license agreements with these entities, they serve essentially as outside development engines for EXACT Sciences and in this regard add considerably in our view to the value of EXACT and to our continued productivity on the R&D side.

Now despite our current stock price and potential NASDAQ delisting as Chuck mentioned, I continue to remain excited by the prospects ahead. We have core intellectual property relating to a non-invasive DNA base diagnostic that is aimed at one of the largest underserved diagnostic markets in history.

With US and International guidelines endorsement in hand, our 15% royalty relating to LabCorp sales of ColoSure a single marker less expensive test and FDA study size now confirmed and even higher detection rates for next generation stool DNA technology published this month, as well as ongoing research surrounding our intellectual property through key collaborators.

I believe that the opportunities for productive discussions on the strategic front remain strong. I look forward to continue to communicating this message to a variety of potential partners as we move forward.

Now I'm going to open up the call to your questions.

Question-and-Answer Session

Operator

(Operator Instruction) And your first question comes from the line of Michael Moskoff with MRM Capital.

Michael Moskoff - MRM Capital

Hey, Jeff.

Jeff Luber

Good morning, Mike.

Michael Moskoff - MRM Capital

Just a little clarification here, when Chuck said I believe the restructuring announcements that you announced in July is going to cut the operating expenses by about $500,000 to $600,000, I guess from the $2 million this quarter. Is that correct?

Chuck Carelli

Yeah, there is two components to it, Mike. There is the headcount reduction which reduces ongoing burn. We also had planned about $2 million for FDA related studies during 2008, which with the suspension of the study we're not going to spend that money either. So there is two components. And based on those two cuts, that we believe gets us through the end of the second quarter 2009.

Michael Moskoff - MRM Capital

Okay. And then the future cash expenditures that you state, when you talk about the restructuring charges of $200,000 to $300,000 grant is future cash expenditures, can you quantify that?

Chuck Carelli

Yeah. It's exactly that. It's $200,000 to $300,000 and it's essentially severance outplacement and related benefits.

Michael Moskoff - MRM Capital

Okay. Last question is, Jeff you made a statement just now that you are in early stage discussions with several companies US and abroad. This announcement of the restructuring, I mean, possibly enhancing shareholder value of selling the company [what have you] was announced I believe in March, we are now in August. And with what anyone, who has been along the start for a longtime thinks that you had some great value as a result of technology and the seriousness of Colon Cancer. What for an extent, I'm sure other institutional holders are as well is why is it taken so long to make a deal and you are in the early discussions. Can you elaborate on that at all?

Jeff Luber

I mean I understand the question, it's a good question. The conversation with --some folks are revisiting. Folks, we have spoken to before some are on the result of new outreach. And the reason we made the decision to kind of focus primarily on the strategic process rather than focusing on the money raise is because we believe with new information in hand and that could be helpful for the process. If we don't believe that was a case we would be pursuing it as we are now.

So, we have got new information on the FDA. We got a LabCorp lower priced test with better performance that's now launched. We didn't have that earlier this year. The new BEAMing publication I think could be helpful in terms of talking about where the technology can go. So, look, I mean, it's an organic situation. I don't think any of this stuff fits into any kind of [neat box] in terms of how it should play out one way or the other except to say that we make the best decisions we can based on the facts as we have them and I think we got a very good set of facts right now.

Michael Moskoff - MRM Capital

So, would you be leaning more towards raising money or is it more towards a strategic value of selling the company?

Jeff Luber

No. As I said before, our priority right now is focusing on a strategic transaction with a partner. As I said last time on our last call, it doesn't mean we'll never raise money but I can tell you that our priority right now and the reasons we are having discussions with companies is because we think there's a better way to get to the next level with this technology by finding folks, who have a good strategic fit and whether that's merger sale or something else, that's to be decided. If we wanted to just raise money that would be a different scenario, but our priority is a strategic transaction right now.

Michael Moskoff - MRM Capital

Okay. It would seem to be that LabCorp will be very strategic, wasn't it?

Jeff Luber

Well. I can't speak of specifics of any of the companies with whom we are talking. I mean obviously I have got confidentiality agreements and that kind of thing. But it's a question and a point that folks have made in the past and I'll just leave it at that.

Michael Moskoff - MRM Capital

Thank you so much.

Jeff Luber

All right. Thanks, Mike.

Operator

And I'll now turn the call over to Mr. Jeffrey Luber for closing remarks.

Jeff Luber

Well. Thank you very much for your time and for participating in today's call.

Operator

And again thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect and good day.

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