This post is to update you on some recent developments and research done on EXAS.  Clink on the title to read the article we published on Monday: “EXAS- Data Validation Study with a 10/29/10 Catalyst Date“.

Today, July 28th Exact Sciences reported their Q2 earnings.  Some of the highlights include:

Financial Information

Exact reported total revenues of $1.3 million for the second quarter of 2010, compared to total revenues of $1.3 million during the same period of 2009. Total revenues for the first six months of 2010 were $2.6 million, compared to total revenues of $2.3 million for the same period of 2009.

Exact reported a net loss of ($2.5) million, or ($0.06) a share, for the second quarter of 2010. The company had a net loss of ($2.4) million, or ($0.08) a share, for the same period of 2009. Exact’s net loss for the six-month period ended June 30, 2010, was ($4.6) million, or ($0.12) a share, compared to ($6.2) million, or ($0.21) a share, for the same period of 2009.

Operating expenses for the second quarter of 2010 were $3.8 million, compared to $3.7 million for the same period of 2009. Operating expenses for the first six months of 2010 were $7.2 million, compared to $8.6 million for the same period of 2009. Operating expenses for the six months ended June 30, 2010, were lower primarily due to one-time expenses incurred during the first quarter of 2009, associated with the company’s strategic transaction with Genzyme, and severance and stock option expense related to last year’s management change.

Exact ended the second quarter of 2010 with cash, cash equivalents and marketable securities of $37.3 million, compared to $24.3 million at Dec. 31, 2009. The company completed a $17.6 million common stock offering during the quarter.

Product Information

“We remained focused on our key priorities during the second quarter, all of which are a part of our mission of making colon cancer eradication possible through an accurate, patient-friendly screening test,” said Kevin T. Conroy, the company’s president and chief executive. “We continue to make refinements to our test. These improvements include a new patient sampling kit, a biomarker panel that provides near universal coverage of cancer and precancer, and an improved DNA detection method that enables greater sensitivity and specificity.”

“Our validation study remains on track and we look forward to announcing the results of the study and discussing the performance of our test at the American Association of Cancer Research meeting in Philadelphia on October 29. In the meantime, we’re excited to be sharing new data today at the American Association of Clinical Chemistry meeting demonstrating that our quantitative detection chemistry detected 100 percent of colorectal cancers and precancers in a preliminary study with colorectal tissue,” Mr. Conroy said.

EXAS also released the following Press Release today:

Exact Sciences’ Methylation Detection Technology Achieves 100 Percent Sensitivity, Specificity

ANAHEIM, Calif., Jul 28, 2010 (BUSINESS WIRE) — Exact Sciences Corp. (Nasdaq: EXAS) today announced that data being presented this afternoon at the annual meeting of the American Association of Clinical Chemistry (AACC) demonstrates that its methylation specific technology, using a combination of DNA methylation markers, detected 100 percent of colorectal cancers and precancers at a specificity cutoff of 100 percent in a preliminary study with colorectal tissue.

The study data also showed that the methylation specific technology was able to detect fewer than 10 copies of methylated DNA. The technology also demonstrated the ability to discriminate 10 copies of methylated DNA target in an unmethylated target population of 100,000 copies.

“The data being presented today at AACC illustrates the groundbreaking approach Exact Sciences is taking to the detection of both colorectal cancers and precancers,” said Kevin T. Conroy, president and chief executive of Exact Sciences. “We believe our study is the first time that any set of markers has achieved 100 percent discrimination of both colorectal cancers and precancers from normal tissue. While we believe the performance of these markers will be diminished in stool samples, the 100 percent sensitivity and specificity they demonstrated in tissue samples gives us confidence about achieving our goal of greater than 85 percent and 50 percent cancer and precancer sensitivity, respectively, in our upcoming validation study, which will include approximately 1,650 stool samples.”

DNA methylation regulates gene expression, the process that converts the information in DNA into proteins. Scientific studies have shown that methylation markers are clinically relevant for the detection of colorectal cancers and precancers. Methylation markers are typically present more frequently than individual DNA mutation markers in colorectal cancers and precancers and, as a result, fewer methylation markers are required to detect them.

The data is being presented at the AACC meeting in a poster titled “Sensitive Quantification of Methylated Markers with a Novel Methylation Specific Technology.” The study was a collaboration of Exact Sciences and Mayo Clinic.

Clearly, this is exciting for EXAS.  I asked two of my colleges to prepare price targets for EXAS.  Take a look at the following:

From Jeff D. ( MewTwoShadow on BioRunUp Forums )

DD On EXAS’s upcoming data validation study

(Before reading, remember that this is not an FDA panel or PDUFA run up, so there exists much more risk.)

-MKTShare-

It’s currently locked at 33.33% Here is a fantastic article describing what EXAS’s stool DNA screening test is all about and it’s comparison between it’s current competitors.

< http://findarticles.com/p/articles/mi_m … n17210933/ >

We are competing with the gFOBT and the iFOBT screening tests:

Table 2. Web Resources Available for the Three Stool Tests

CRC Screening Test Web sites

gFOBT http://www.beckman.com/products/RapidTe … occult.asp
http://www.beckman.com/customersupport/ … videos.asp
http://content.nejm.org.cgi/content/abstract/334/3/155

iFOBT http://www.insuretest.com/
http://www.insurefobt.com/kitrequest.html
http://www.caonline.amcancersoc.org/cgi … 3/l/44.pdf

Stool DNA test http://www.labcorp.com/services/hcp/colorectal_cancer/
http://www.exactscience.com/consumers/faqs.html
http://www.exactsciences.com/

< Extracted from hyperlink above >

(By the way, the pipeline for actually trying to cure/stop CRC are the following drugs. There is a difference between screening and curing just in case anyone gets confused =P)
6. Pipeline Assessment/Clinical Trial Products/Clinical Developments
6.1. TP3001 (Topoisomerase I Inhibitor)
6.2. Aflibercept (VEGF-Trap)
6.3. Cediranib (Recentin)
6.4. Dalotuzumab (MK0646)
6.5. Vatalanib
6.6. Enzastaurin
6.7. Ispinesib (SB-715992)
6.8. Brivanib
6.9. ABT-751
6.10. SN-38 liposome
6.11. Sunitinib
6.12. DavanatCoFactor
6.13. OncoVAX
6.14. TroVax
(~ by marketsandmarkets on May 20, 2010.)

< http://druganddevicemarket.wordpress.co … gy-market/ >

-MKTDrug-

The report estimates the colorectal cancer (CRC) market as being worth $6 billion in 2009 with a projected CAGR of 9.8% and projected market value to exceed $11.6 billion in 2016.

This imho is the main reason why EXAS did so well in the early to mid 2000s. When markets for diseases were being shown to the public, there existed so much potential and given that there was known competition, their price was ranging between $6-$17. As Phase I was taking forever, EXAS price was dropping. EXAS used to be $0.37. The company started Phase II, it grew 825%. It’s just about to complete Phase II. Lots of potential in this drug market.

< http://www.prlog.org/10508773-colorecta … eport.html >

-Technicals-
% Held by Insiders 14.51
% Held by Institutions 23.60

The chart itself looks like an uptrend is beginning to form, but really that wouldn’t matter because earnings are released on the 28th of July

< http://stockcharts.com/c-sc/sc?s=EXAS&p … i=0&r=7871 >

However, since there is a rise in volume, there was also a modest rise in short interest. Since last quarters estimate was shy by one cent, EXAS’s performance hasn’t been so top notch (notice the decline).
Short Interest (Shares Short)
2,329,300
Days To Cover (Short Interest Ratio)
3.3
Short Percent of Float
2.11 %
Short Interest – Prior
761,400
Short % Increase / Decrease
205.92 %

< http://www.shortsqueeze.com >

For clinical trials, personally i don’t really assess the technicals as much as i do the financials.

-Financials-

Financials play A HUGE role when assessing biostocks going through the clinical phases I-III (IV if req.), so i will go in depth with what EXAS has to offer.

Quarterly Balance Sheet:
Fantastic. Currently their cash stands at $18.17M, Total Current Assets standing at $23.498M and Total Assets standing at $24.087M. Their last 3 quarters had a 78% cash position of their total assets or higher. Accumulating all of their current liabilities, this stands at $7.4M, and they also have this long term debt of a million. Their main liability is their deferred license fees (less current port) which stands at $10.934M.

The good news about their deferred license fees is that they are managing it very well. Observe the last 5 quarters:

Deferred license fees, less current port (amount in thousands, starting from current quarter and on)

$10,934

$11,161

$12,408

$13,654

$14,901

Therefore their total liabilities stand at $19.35M. This implies that their total equity stands at a very healthy $4.737M.

What also makes this balance sheet fantastic is that there is barely any dilution:

Total Common Shares Outstanding

35,832

35,523

35,510

35,182

30,763 (but they supplied a reason on this date [3/31/09, offering]

Quarterly Cash Flow:

Could have been better. Excluding the last quarter, all other quarters were doing very well given the fact that EXAS’s main cash flow generator was the proceeds from Genzyme Collaboration, Lic. Their proceeds this quarter stopped at $962,000, where Genzyme was providing $16.65M for every other quarter available (by the way when i say “available”, i only look at the last 5 quarters (up to march 31, 2009)). Therefore since their proceeds stopped, there will be negative cash flow (which is why the estimates for july 28th’s EPS is negative standing at an estimated -$0.05 as a mean).

I’m going to exclude cash from investing activities because they seem to be pretty consistent recently, but the reason why i state that this could have better yet this is not garbage is that EXAS realized that once the proceeds would stop coming in, they would have to cut costs, which they did. Up to the last quarter, their burn rate for cash from operating activities was climbing at a high rate, yet their last quarter stated that they severely cut the cash flow from operating activities down -77%! This is their best feature from the cash flow report.

In the end, they did burn a total of $3.753M last quarter, being their only burn as of late. If their report on Wednesday matches or is at most -$0.07 EPS, then they should be set to finance their sDNA testing.

Quarterly Earnings:

Could have also been better, but at least it was very consistent. As i recently mentioned, the dilution is very small. Their last quarter EPS was -$0.06. Their only source of income are their license fees averaging at $1.28M (some may argue that their product royalty fees are also generating revenue, but they only average $10,000 so it’s not really worth mentioning).

Their main costs as always have been their research and development costs and their general and administrative costs standing at $1.795M and $1.512M respectively. These costs have been pretty consistent.

Overall though, one thing to note is that this company and EPS surprises do not match. So landing within the new range of EPS (-$0.05 to -$0.09) should make EXAS good this upcoming quarter. This is key because afterwards, they will report their next quarterly financials on October 28th, but by then, who cares because there may be a potential run up in between now and the catalyst date October 29!

*Note: Just because they are not known for EPS surprises, there bears a risk of having one.
http://www.biorunup.com/wp-content/uplo … ncials.jpg

(1)Their April financing must have generated $21.83M (The part that investors are looking at carefully, because clinical trials and investors only match if there is a guarentee of cash certainty)

(2)Guided Cash Utilization of $1.1M per month (Not really important since they have been consistent with their reports, but if their operating cash flow is around -$3.3M per quarter then it’s all good)*

-Clinical Trial Discounting-

Please be advised that this is not an evaluation for an FDA Panel or a PDUFA date, this is a trial, so I will discount a risk factor every year it takes to reach FDA approval PLUS another risk factor that the data itself presented may also fail (“fail” in this context represents investors not pleased with the results). My best guess anyways =P.

-My Evaluation-

(1)Drug Market = (MKTShare)(MKTDrug)
DM=(33.33%)($6Bx1.098%)
DM=$2.196B

(2)Sum of Shares = (Shares now)(Dilution Rate)

Now the actual dilution rate is at an impressive 0.86%, but since they will be needing cash regardless, let’s assume they will dilute to 25%
Q=(40.1M)(1.25)
Q=50.13M

(3) Do not buy into any >99.5% actual Gross margin percentages because that percentage is strictly based on the license fees. Since the product EXAS has to offer has not been released to the public, we shall assume a very fair rate of 40% for the Gross Margin.

(4)Gross Revenue Margin = (Gross Margin)(Drug Market)
GRM=(40%)($2.196B)
GRM=$878.4M

(5)Again, predicting future costs can be rather difficult, so like JAZZ’s DD, i will impose the same tactic plus add an additional cost. The layout will consist of the average annual operating expense plus two-thirds the standard deviation from the mean PLUS $50M for the new trial and research expense.

(Note: I assume $50M, but EXAS expects $15-20M
< http://www.biorunup.com/wp-content/uplo … ncials.jpg > )

Operating Expenses = 3xTotal Variable Costs + Total Fixed Costs

*The 3 represents the approximate number of years until FDA panel*

OExp= 3xTVC + TFC
OExp=[3x((2/3)($3.861M) + $15.311M)] + $50M
OExp=[3x$17.885M] + $50M
OExp= $103.655M

(6) Total Costs = Operating Expenses + COGS
TC = OExp + COGS

Now comes the game theory part, evaluating the COGS. COGS is something of its own, this does not have anything to do with OExp ***when it comes to clinical trials***.
Predicting the COGS is also quite challenging. If the company succeeds the approval, then COGS should range somewhere around 16-40% if all goes well. This is the collected average range within 1 standard deviation from the mean excluding all other results.

< Pharmaceutical manufacturing handbook: regulations and quality, Volume 13
page 324, figure 6, By Shayne Cox Gad>

So to be fair, let’s impose COGS of 40% of GRM.

TC= OExp + (40%xGRM)
TC= $103.665M + $351.36M
TC= $445.02M

(7) Profit = GRM – TC
TT= $878.4M – $445.02M
TT= $433.38M

(8)Let P/E be 15 to be fair (Do NOT use the given ~37 one, because again that reflect earnings from the license fees).

(9) Value = (P/E)(TT)
V=(15)($433.38M)
V=$6.65B

(10) Price Per Share = Value / Sum of Shares
PPS = $6.65B / 50.13M
PPS = $132.66 (Target if absolutely everything goes as planned)

(11)Price including FDA approval risk = 50% x PPS
P=50%x$132.66
P=$66.33

(12) Discounting until time of approval:

< http://www.fda.gov/drugs/resourcesforyo … 143534.htm >

20% is the standard discount rate per year
+10% for the chance of a delay
+5% for the chance of any earning surprises within time frame
+5% for chance of heavy dilution
My set discount rate is at 40%

First Year Discount = P – 40%(P)
P1 = $66.33 – 40%($66.33)
P1 = $66.33 – $26.53
P1 = $39.80

Second Year Discount = P1 – 40%(P1)
P2 = $39.80 – 40%($39.8)
P2 = $39.80 – $15.92
P2 = $23.88

Third Year Discount = P2 – 40%
P3 = $23.88 – 40%($23.88)
P3 = $23.88 – $9.55
P3 = $14.33

(13) Discounting just up until catalyst date study
*Keep in mind that studies can fail, in which investors would not be pleased, so i incorporate a 50% investor study acceptance rate to be fair.

Final Price Target at October 29th = 50% x $14.33
Price = 50% x $14.33
Price = $7.17

OK, here’s how i compared to most others.

List of Targets:

Breakdown of Ratings
Strong Buy 2
Buy 3
Hold 0
Underperform 0
Sell 0
Number of Analysts Surveyed 5

Price Targets
Mean $6.70
Median $6.00
High $8.50
Low $6.00
Standard Deviation 1.10
Number of Targets 5

< http://www.wsj.com >

This is what i have, and this is just my opinion as to where EXAS will lead up to October 29th. IF i have time, i’ll evaluate EXAS report on wednesday night.

Hope this helps!

(P.S. Someone privately messaged me to add a book value to my DD, so i have a book value of $4.74 for EXAS just in case that person/anyone was wondering, so technically speaking EXAS is undervalued.)

And here is another from Mike Havrilla

below are some updated notes from 16-July annual shareholders meeting and the associated corporate presentation (available for download at EXAS website)…

Potential U.S. Market (30% Penetration) = $1.2 billion based on the following conservative model using round numbers as follows…

- 90M over age 50 (now 96M) less 10% un-insured = 81M target CRC screening test population based on American Cancer Society (ACS) guidelines

- Assumes a three-year screening interval = 27M people per year target population

- A 30% market penetration rate X 27M = 8.1M tests sold per year * $150 per test = $1.2B annual market opportunity in US alone

- 40.2 million shares of common stock outstanding with 47.2M fully diluted shares that includes all options and warrants

– $40 million in cash following 1Q10/April financings

– Expected cash burn rate of $1.1 million per month in 2010

– Expecting to invest $15 – 20 million in for the pivotal FDA study that should start by 2-3Q11

- $1.2B in sales should equate to approx. $240M in net income –> assume this can be achived by 2015 with 60M shares outstanding for $4/share earnings power with 25X P/E for $100 / share target in 2015, discounted at 30% yields potential share price in teens to low twenties over next 12-18 months.

More details on the earnings / share price model for EXAS using the $1.2 billion US market opportunity, projected to occur in 2015, assuming late 2012 to early 2013 FDA approval and rapid adoption by doctors and patients given the non-invasive nature of the test, presumed ability to detect early-stage disease / pre-cancers, and vast improvement over existing FIT/FOBT for CRC screening — since it is not ideal to wait until you are bleeding out of an orifice as a screening modality for cancer, especially if a non-invasive alternative test is available to detect the disease at the genetic / DNA mutation level.

–> projected $1.2B in revenue in 2015 (based on market penetration rates and US population over age 50 as outlined in my previous post)

–> assume 65% gross margin (standard model for molecular diagnostic industry tests) = $1.2B x 65% = $780M gross profit (GP)

–> assume SG&A (selling, general, administrative expenses) equal to 35% total revenue = 0.4 x $1.2B = $420M

–> $780M GP – $420M (SG&A expense) = $360M before-tax income

–> assume 35% tax rate = 0.65 x $360M = $234M net income target for 2015

–> using round numbers approx. $4/share earnings power with 60M fully diluted shares (13M addt’l shares to reflect additional funding needs to complete FDA pivotal study, approval process, commercial launch / marketing, sales ramp-up to achieve positive operating cash flow)

–> $4 per share earnings power in 2015 x 25 price/earnings (P/E) multiple = $100 / share target

–> discount $100/share price target in 2015 by 50% annual rate = 2014 ($50), 2013 ($25), 2012 ($12.50), 2011 ($6.25); discount by 30% annual rate = 2014 ($70), 2013 ($49), 2012 ($34), 2011 ($24)

Disclaimer:

Long EXAS

Tags: EXAS