Biotech Idea: EXAS

(follow link for my PDF stock profile) (EXAS) recently announced plans to implement a cost reduction strategy, which includes suspending a clinical validation study of its V2 DNA-based colorectal cancer [CRC] screening technology, eliminating eight jobs, and renegotiating fixed commitments. The Company expects these initiatives will fund operations through at least 2Q09 based on current liquidity, without the need to raise capital at currently depressed market prices for the stock. EXACT’s partner LabCorp (LH) has recently launched a single-marker, lab-based fecal DNA test (based on the Vimentin gene which is a methylated DNA marker associated with CRC) with a sensitivity range of 72% – 77% and a specificity range of 83% – 94% in average risk individuals.

ColoSure replaces the 23-marker, stool-based DNA CRC screening test, PreGen-Plus, which was the subject of a FDA warning letter last October based on concerns over the Effipure component which is not part of the new single-marker test. ColoSure is included in the latest American Cancer Society [ACS] guidelines for CRC screening to detect the presence of any stage of CRC among asymptomatic, average-risk patients who are unwilling or unable to undergo a more invasive exam such as a colonoscopy. ColoSure retails for $220 with a reimburement price of $110 likely from insurance companies and other third-party payers.

ColoSure is poised to capture significant market share among the 8 million [M] tests per year from FOBT/FIT screening tests — which detect the presence of blood in the stool and require users to interact with the sample — because it is easier to use, only requires collection of a stool sample with no manipulation required by users, has the ability to detect CRC at a much earlier stage before bleeding occurs, and will be promoted by 1,000 LabCorp sales reps (each responsible for about 300 physicians over a one-year period). Current ACS guidelines recommend routine CRC screening beginning at age 50, which includes a growing population segment of about 87M people.

• cash burn rate for EXACT of $1.5M per quarter with cost reduction plan
• expected annual run-rate of 1M ColoSure tests by mid-2009
• expected annual run-rate of 2M ColoSure tests by mid-2010
• $110 reimburesement * 1M annual run-rate * 15% royalty = $16.5M to EXACT
• $16.5M royalties less $6.5M annual expenses = $10M net income
• $10M net income with 27M shares outstanding = $0.37 EPS * 20 PE = $7.40/share

Short-term catalysts may include LabCorp deals with Fortune 500 companies, the Veteran’s Administration, and health plans (e.g. Kaiser, Cigna, Aetna) to promote ColoSure use for CRC prevention and include the test for insurance reimbursement. On a long-term horizon, EXACT will look to secure a licensing deal with a partner to fund a validation study for FDA approval, expand into other developed countries for stool DNA-based CRC screening, and develop V3 technology with a goal of detecting over 90% of pre-cancers.

As illustrated in the 5-year stock charts, companies such as Sequenom (SQNM) and Elan (ELN) have rebounded drastically from around the $1 per share level to trade above $20 per share in the span of several years. At current levels, EXACT Sciences offers investors an opportunity for simliar returns without the inherent risks and expenses of developing a new therapy. In addition, the former CEO of EXACT and current COO of LabCorp, Don Hardison, retains a significant financial interest in his former company.

In my previous post on EXACT from July 9, I outlined the reasons for selling out of my position around $1.45 per share as I felt the lack of results from the strategic review by Leerink Swan would cause selling by some major holder(s). Since this capitulation has occurred, the risk/reward is now favorable to buy EXACT below $1 per share, and I recommend accumulating shares of the Company in that range and will do so myself once freeing up some cash. EXACT Sciences has a portfolio of over 110 issued patents and over 60 pending patent applications worldwide, making the Company a royalty-collecting vehicle for investors that leverages LabCorp’s marketing muscle for sales of the homebrew test ColoSure while looking for a partner to fund validation studies for a FDA-approved, stool DNA-based CRC screening test.

Note:   EXACT is only a royalty-collecting vehicle since recent cost reductions & layoffs – LabCorp is completely responsible for ColoSure, which is not FDA-approved but is a lab-based, homebrew test based on a single DNA marker (Vimentin).  The homebrew or CLIA waiver by the FDA allows tests like ColoSure to be sold because they are processed by LabCorp and not considered a medical device.  PreGenPlus (previous version) got into trouble because the FDA determined that the Effipure component classified it as a medical device requiring approval to market.  The Effipure component is not used by ColoSure.  The royalty rate is the same as before – it still does not require FDA approval to sell under the FDA’s homebrew, lab-based waiver.