EXACT Sciences: 8 Points Following Q2 Earnings

Mike Havrilla submits:

The stock research section of BioMedReports.com has been updated on 8/14/09 to reflect new developments following the 2Q09 conference call and business update for EXACT Sciences (NASDAQ:EXAS'>EXAS) as the company prepares for a Phase 3 study next year to obtain FDA marketing clearance for its next-generation stool DNA (sDNA) screening test (V3) for colorectal cancer (CRC) and pre-cancers.

The following is a summary of the highlights, projections, and expected milestones from my updated report for EXAS.

1. Financial Metrics: About 35 million fully diluted shares outstanding, $27.8 million cash/equivalents, zero debt and the CEO has guided for no capital raise within the next 12 months and an ongoing goal of maintaining at least $10 million in capital at all times. Expected modest dilution (5 million shares sold at much higher prices) for about 40 million shares outstanding at the time of expected FDA marketing clearance and U.S. launch in mid-2011 (3Q11) to support commercialization.
2. U.S. commercial strategy will involve direct licensing of a FDA-cleared V3 test kit to major labs throughout the country at an estimated royalty of 20% ($30/test based on $150 pricing model) through an in-house sales team
3. Announced appointment of Graham P. Lidgard, Ph.D., as Chief Scientific Officer (CSO) on 8/3/09 to assist with product development and regulatory affairs. Dr. Lidgard has over three decades of clinical/molecular diagnostics experience and a successful track record of preparing and obtaining FDA marketing clearance for 510(k) and PMA submissions as he previously led the R&D organization at Gen-Probe (NASDAQ:RO'>GPRO) that developed that Company's Procleix blood-screening and Aptima sexually-transmitted disease products (which generated over $400 million in revenues during 2008.
4. Pending Phase 3 FDA study is likely to be much smaller in scale (3,000 subjects) versus the previous guidance of 8,000-10,000 subjects enrolled at 30-40 clinical sites that would have taken 12-18 months to complete. Goal of this study is to obtain broad claims and FDA marketing clearance for a non-invasive stool DNA based colorectal cancer (CRC) screening test, including the detection of pre-cancers. Projected start of a 3,000 patient study during 2Q10 after product development is concluded (along with extensive input from the recently appointed CSO) with results in about six months during 4Q10 at an estimated cost of about $5 million with results and FDA submission expected in early 2011. FDA marketing clearance and U.S. commercial launch is possible by mid-2011 (3Q11)
5. CEO stated on 2Q09 conference call that screening relevant neoplasias (pre-cancers) is the major change since the new management team took over EXAS in terms of positioning the V3 test for development and marketing. The focus on a V3 test that screens for both pre-cancers (5% incidence) + fully-developed cases of CRC (<1% incidence) greatly expands the incidence in the over 50 year-old screening population so that a shorter, less expensive clinical study can be conducted with fewer subjects enrolled. Improvements to sDNA screening technology to-date include ability to detect over 85% of CRCs and 50% of pre-cancers versus rates of about 50% and 20%, respectively, with potential to expand sDNA screening technology for other GI-related cancers such as gastric, pancreatic, etc. after commercializing the V3 test for CRC.
6. During 2Q09, EXAS completed relocation to Madison, WI (which included a $1 million forgivable loan) along with conducting a survey of 150 primary care physicians (PCPs) and GI specialists along with an extensive review of available biomarkers and platforms as part of the product development process for the V3 test to be evaluated in the Phase 3 trial
7. A five-year interval for sDNA CRC screening equates to about 16 million people in U.S. eligible for annual screening; while a three-year interval ups the number to 27 million with $700 million to $1.6 billion domestic market opportunity. Significant upside to these estimates is possible based on wider adoption of preventative medicine as part of U.S. healthcare reform, especially in the area of screening tests for the early detection of cancer. Key earnings model assumptions include a recommended three-year screening interval for the FDA-cleared V3 technology as a mass-screening test for the average-risk population with the ability to detect pre-cancers and adenomas. Market opportunity in the U.S. alone equates to potential earnings power of nearly $4/share for EXAS in 2013 and $1.79/share in 2012 with market penetration rates of 2, 5, and 10% over the first three years of launch.
8. Major risk factor underlying the earnings models presented in my report is the pending results in the upcoming clinical trial for FDA clearance. Goal is to obtain a broad, FDA-cleared test with 80-90% sensitivity for the detection of CRC and 65-70% for pre-cancers in the average risk population for a three-year testing interval recommendation.

Disclosure: Long EXAS

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