EXACT Sciences Corporation (EXAS)

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EXACT Sciences Corp. (EXAS)

Q2 2008 Earnings Call

August 8, 2008 8:30 am ET


Jeff Luber - President and CEO

Chuck Carelli - CFO


Michael Moskoff - MRM Capital



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.

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