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| EXAS > SEC Filings for EXAS > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
The information contained in this section has been derived from our consolidated financial statements and should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Overview
EXACT Sciences Corporation develops proprietary DNA-based technologies for use in the detection of certain cancers. We have selected colorectal cancer as the first application of our technologies. We license certain of our colorectal cancer screening technologies, including improvements to such technologies, on an exclusive basis in the United States and Canada through December 2010 to Laboratory Corporation of America® Holdings, or LabCorp®. LabCorp has developed and commercially offers a non-invasive stool-based DNA colorectal cancer screening service for the average-risk population, which is based on certain of our technologies. Our current focus is on commercially developing, and obtaining U.S. Food and Drug Administration, or FDA, approval for, a colorectal cancer screening product based on our stool-based DNA technologies.
In January 2009, we completed a strategic transaction with Genzyme Corporation, pursuant to which Genzyme acquired from us, for an aggregate of $18.5 million, our intellectual property assets related to the fields of prenatal and reproductive health as well as certain intellectual property outside the fields of colorectal cancer screening and stool-based DNA testing. Genzyme also purchased three million shares of our common stock, or approximately ten percent of our outstanding common stock, for an aggregate of $6.0 million. Under our agreement with Genzyme, we retained worldwide rights to our colorectal cancer screening and stool-based DNA testing intellectual property, and will receive a double-digit royalty on any Genzyme sublicensing income that may derived from the purchased intellectual property outside the fields of prenatal and reproductive health. We and Genzyme also agreed to form a joint advisory committee to assist Genzyme in the achievement of product development goals related to the purchased intellectual property and to assist us with our regulatory goals.
Since our inception in February 1995, our principal activities have included:
º •
º researching and developing our technologies for colorectal cancer
screening;
º •
º conducting clinical studies to validate our colorectal cancer
screening technologies;
º •
º negotiating licenses for intellectual property of others;
º •
º developing relationships with opinion leaders in the scientific and
medical communities;
º •
º pursuing reimbursement for stool-based DNA screening with third-party
payors, including the Centers for Medicare and Medicaid Services, or
CMS;
º •
º conducting market studies and analyzing various markets for our
technologies;
º •
º raising capital;
º •
º licensing our certain of our intellectual property to LabCorp, Genzyme
and others;
º •
º working to further the adoption of stool-based DNA testing for
colorectal cancer, including obtaining inclusion of our technology in
the guidelines of the major guidelines organizations;
º •
º pursuing U.S. Food and Drug Administration, or FDA, clearance or
approval, or exemptions therefrom, for our stool-based DNA screening
technology for colorectal cancer;
º •
º working on activities in support of the awareness around stool-based
DNA screening; and
º •
º pursuing strategic alternatives for our business, resulting in the
Genzyme Transaction.
We have generated limited operating revenues since our inception and, as of December 31, 2008, we had an accumulated deficit of approximately $172.5 million. Our losses have historically resulted from costs incurred in conjunction with our research, development and clinical study initiatives, salaries and benefits associated with the hiring of personnel, the initiation of marketing programs and, prior to August 31, 2007, the build-out of our sales infrastructure to support the commercialization of stool-based DNA screening. We expect that our losses will continue for the next several years and we may never achieve profitability.
From the date of commercial launch through June 2008, when LabCorp stopped commercially offering PreGen-Plus, LabCorp had accessioned approximately 14,900 PreGen-Plus samples, including approximately 1,800, 3,700 and 4,000 samples during the years ended December 31, 2007, 2006 and 2005, respectively. In July 2008, LabCorp began to commercially offer ColoSure™, its next generation non-invasive, stool-based DNA testing service for the detection of colorectal cancer in the average-risk population, which is based on certain of our intellectual property. From such date through February 28, 2009, LabCorp has accessioned approximately 995 ColoSure samples, including approximately 512 ColoSure samples during the quarter ended December 31, 2008, and approximately 391 ColoSure samples during January and February 2009.
We have developed or licensed technologies related to a Version 2 colorectal cancer screening technology that we believe has greater sensitivity and is more cost effective than our Version 1 technology underlying the PreGen-Plus testing service formerly offered by LabCorp. Our Version 2 technology includes two DNA markers that, in published studies, have been shown to be associated with colorectal cancer. These markers include the aberrant methylation of the Vimentin gene promoter region, which we refer to as Vimentin, and DIA®, or long DNA. We have exclusive rights to the Vimentin technology through our license agreement with Case Western Reserve University, or Case Western, under which we are obligated to pay a royalty and certain other fees to Case Western in return for the right to use and sublicense the Vimentin technology. We own the rights to DIA and do not pay any royalties on the use of DIA. In a research study evaluating stool-based DNA in 82 patients with confirmed colorectal cancer and 363 colonoscopically normal individuals, our Version 2 stool-based DNA technology demonstrated sensitivity of 83 percent and specificity of 82 percent for the detection of colorectal cancer. LabCorp's ColoSure testing service relies solely on the Vimentin gene and does not use the DIA marker that is also included in our Version 2 technology.
Following the closing of our strategic transaction with Genzyme in January 2009, we have begun resuming our efforts to develop an FDA-approved in vitro diagnostic test for stool-based DNA colorectal cancer screening testing service. As part of our development efforts and ongoing evaluation of stool-based DNA capabilities and market needs, we are exploring the marker combinations and platform requirements necessary for optimal performance of our technology based on market need. Objectives around performance, throughput and cost are among the elements that will need to be met in the design and development of a commercial product based on our technology. We believe obtaining FDA approval for our stool-based DNA colorectal cancer screening technologies is critical to building broad demand for stool-based DNA colorectal cancer screening technologies and for the successful commercialization of stool-based DNA colorectal cancer screening nationally. We do not currently have sufficient funds to fully achieve this goal. We may determine to develop an FDA-approved product containing a Version 3 technology based on BEAMing or digital polymerase chain reaction, or digital PCR, we may use genetic markers that are different from those used currently or in the past, we may focus on increasing the performance of our existing Version 2 technology and/or we may determine that our existing Version 2 technology provides sufficient performance to enable reasonable market penetration for stool-based DNA for colorectal cancer detection. During 2008, a proof of concept study using the BEAMing technology, an advanced form of digital PCR developed by The Johns Hopkins University, in which stool and blood plasma were assessed in a head-to-head comparison for the detection of colorectal cancer, demonstrated 92 percent sensitivity for detecting colorectal cancer in
stool samples. These data were published in the August 2008 issue of Gastroenterology in a paper entitled "Analysis of Mutations in DNA Isolated from Plasma and Stool of Colorectal Cancer Patients." Although we believe that this technology may have the potential to be more sensitive and specific than the current stool-based DNA colorectal cancer screening test commercially offered, Version 3 is still in the prototype stage of development.
Recent Developments
On March 18, 2009, Jeffrey R. Luber agreed to resign as our President and Chief Executive Officer effective April 2, 2009. Also on March 18, 2009, Mr. Luber agreed to resign from our Board of Directors, effective April 2, 2009. In addition, on March 18, 2009, Charles R. Carelli, Jr. agreed to resign as our Chief Financial Officer, effective April 2, 2009.
In connection with their departure, Messrs. Luber and Carelli were entitled to receive severance benefits pursuant to their previously disclosed retention agreements, including salary continuation of $472,500 and $287,500, which is equal to eighteen months and fifteen months, respectively, of their base salaries as of the date of termination. On March 31, 2009, we entered into release agreements with Messrs. Luber and Carelli that provided, in exchange for a general release in favor of us, for the accelerated payment of the salary continuation obligations on March 31, 2009. In addition, the release agreements also provided for the repurchase by us of options held by Messrs. Luber and Carelli for an aggregate of 895,000 shares of common stock, in lieu of accelerated vesting and an extension of the option exercise period arising from the prior retention agreements. We paid Messrs. Luber and Carelli approximately $39,000 and $11,000, respectively, to repurchase Mr. Luber's options to purchase 620,000 shares and Mr. Carelli's options to purchase 275,000 shares. The purchase price of the outstanding options represented a 75 percent discount from the estimated fair value of the vested options as of March 31, 2009. Messrs. Luber and Carelli retained the balance of their existing options, which will remain exercisable for two years following, and will be subject to nine months acceleration of vesting upon, the termination of their respective employment with us. We expect to record in our first quarter financial results the charges associated with the acceleration of the severance payments to Messrs. Luber and Carelli and the redemption and modification of their options.
On March 18, 2009, our board of directors appointed Kevin T. Conroy as President and Chief Executive Officer, effective April 2, 2009. Also on March 18, 2009, based on the recommendation of our corporate governance and nominating committee, the board of directors elected Mr. Conroy to our board. Our board of directors also appointed Maneesh Arora as our Senior Vice President and Chief Financial Officer, effective April 2, 2009.In connection with their appointments, Messrs. Conroy and Arora entered into employment agreements with us on March 18, 2009. Messrs. Conroy and Arora are employed as vice presidents until April 2, 2009, when they begin service in their positions as President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, respectively.
In January 2009, we completed a strategic transaction with Genzyme Corporation, pursuant to which we assigned to Genzyme all of our intellectual property applicable to the fields of prenatal and reproductive health, which we refer to as the Genzyme Field, and granted Genzyme an irrevocable, perpetual, exclusive, worldwide, fully-paid, royalty-free license to use and sublicense all of our remaining intellectual property in all fields other than colorectal cancer detection and stool-based disease detection. We retained our rights in both the assigned and licensed intellectual property in the fields colorectal cancer detection and stool-based disease detection. We and
Genzyme also agreed to form a joint advisory committee to assist Genzyme in the achievement of product development goals related to the purchased intellectual property and to assist us with our regulatory goals. The collaboration period may be terminated on the fifth anniversary of the date of the agreement or sooner upon certain events.
As part of the strategic transaction, we assigned to Genzyme our rights under our prior license agreement with JHU, dated March 25, 2003, as amended. In return, Genzyme sublicensed to us the intellectual property subject to the license agreement with JHU for colorectal cancer detection and stool-based disease detection, including the BEAMing technology for the detection of colorectal cancer. We and Genzyme will share in the royalty and annual payment obligations to JHU. We also amended and restated our prior non-exclusive license from Genzyme dated March 25, 1999 related to the use of certain genes, specifically APC and p53, and methodologies related thereto. In exchange for the license, which continues until the expiration of the last to expire licensed patent, we have agreed to pay Genzyme royalties based on net revenues received from performing tests that incorporate the licensed technology and sales of reagents and diagnostic test kits that incorporate the licensed technology, as well as certain minimum royalties, milestone payments and maintenance fees.
Genzyme agreed to pay us an aggregate of $18.5 million, of which $16.65 million was paid at closing and $1.85 million is subject to a holdback by Genzyme to satisfy certain potential indemnification obligations of Exact. Subject to terms of the strategic agreement, one-half of the holdback amount will be released to us in 12 months and one-half will be released in 18 months. Genzyme also agreed to pay a double-digit royalty to us on income received by Genzyme as a result of any licenses or sublicenses to third parties of the assigned or licensed intellectual property in any field other than prenatal and reproductive health or colorectal cancer detection and stool-based disease detection.
In addition, we issued and sold to Genzyme 3,000,000 shares of our common stock at a per share price of $2.00, for an aggregate purchase price of $6.0 million. Genzyme also has the right until December 31, 2010 to participate in certain future private offerings of equity securities by us up to the amount necessary to maintain Genzyme's pro-rata percentage ownership of us, at a price per share equal to the greater of $2.00 or the trading price of our common stock at the time notice is provided to Genzyme of its right to purchase additional shares. This right is subject to certain customary exclusions, including issuances to employees pursuant to a stock plan, issuances in connection with a change of control transaction and issuances in connection with strategic partnerships. Genzyme also has the right to include the shares purchased from us on a registration statement filed by us and, under certain circumstances, to cause us to file a registration statement covering the resale of such shares.
Since August 2003, the date of commercial launch by LabCorp of its stool-based DNA colorectal cancer screening service, LabCorp billed insurers and received payment from numerous third-party payors for its screening service, including more than 350 health plans. However, none of these third-party payors ever issued formal policy approval for stool-based DNA screening for colorectal cancer..
Following the inclusion of stool-based DNA screening in the colorectal cancer screening guidelines of the ACS and MSTF-CRC, twelve states and the District of Columbia have adopted legislative mandates requiring that stool-based DNA screening be included in available colorectal cancer screening options offered by certain categories of insurers in these states. These states include Alaska, Georgia, Illinois, Indiana, Kentucky, Maine, Maryland, Missouri, Nevada, New Jersey, North Carolina and Rhode Island. In addition, in the second half of 2008, CIGNA, one of
the nation's largest insurers, included stool-based DNA screening among its covered benefits nationally. While we view inclusion of stool-based DNA screening for colorectal cancer in the state mandates and the positive coverage decision by CIGNA as important first steps in securing wide-spread coverage for stool-based DNA screening for colorectal cancer from private insurance carriers, we believe that obtaining strong reimbursement from payors and a positive coverage decision from CMS for our stool-based DNA screening technology will be among the necessary elements to achieving any material commercial success. Despite the positive coverage decision from CIGNA and the state mandates noted above, we do not anticipate material sales relating to ColoSure until strong reimbursement is negotiated between LabCorp and CIGNA and between LabCorp and other payors with which it maintains contracts.
The United States Public Services Task Force, or USPSTF, a U.S. government-funded organization that reviews available peer-reviewed published studies to make an assessment of the benefits and risks of performing certain medical procedures, completed its 6-year update of its colorectal cancer screening guidelines in October 2008. At that time, the USPSTF, which can influence coverage decisions by payors, including CMS, determined that the evidence is insufficient (USPSTF Grade: "I" Statement) to assess the benefits and harms of both stool-based DNA and CT colonography, or virtual colonoscopy, as screening modalities for colorectal cancer. The USPSTF gave no score to these two new tests added to the ACS and MSTF-CRC colorectal cancer screening guidelines. Many payors base their coverage decisions around colorectal cancer screening on the recommendations of the USPSTF. Accordingly, our future plans may include working to accumulate and publish in peer-reviewed journals additional performance data, and patient compliance and preference data, that will be useful to the USPSTF, as well as to CMS, in conjunction with our request for reconsideration of our NCD application. We could incur significant time and costs to accumulate such additional data, which still may not yield positive results with the USPSTF or CMS. Additionally, despite the fact that our technology is included in the colorectal cancer screening guidelines of the ACS and MSTF-CRC, the FDA warning letter we received with respect to the PreGen-Plus testing service may have a similar impact on private third party payors in that, like CMS, those payors may defer reimbursement policy decisions with respect to our technology until such time, if ever, as our technologies are cleared by the FDA. Finally, certain members of the MSTF-CRC may fail to separately support the position of the MSTF-CRC, which could have a detrimental effect on our commercial and reimbursement efforts related to stool-based DNA screening.
The National Committee for Quality Assurance, or NCQA, is a private, not-for-profit organization that, among other tasks, measures the performance of U.S. based health care plans. The performance measures quantified by the NCQA result in the Healthcare Effectiveness Data and Information Set, or HEDIS. We believe that HEDIS measures could be a factor used by consumers and employers when selecting among alternative healthcare plans in which to enroll. If our stool-based DNA screening technology for colorectal cancer screening is not recognized by NCQA as a test that contributes to a health plan's score for the colorectal cancer screening measure, health plans may not reimburse for stool-based DNA testing. Despite being included in the recently updated colorectal cancer screening guidelines of the ACS and the MSTF-CRC, there can be no assurance that stool-based DNA screening for colorectal cancer will be adopted by the NCQA as a test that contributes to increasing the score of the HEDIS colorectal cancer screening measure. The NCQA is currently reviewing the colorectal cancer screening measure and made its proposed changes available for public comment February 17, 2009 through March 17, 2009. The NCQA has determined not to include stool-based DNA screening in the draft 2010 HEDIS measure that will be used to evaluate 2009 health plan performance (a retrospective measure that in 2010 "looks back" at 2009 performance). A final 2010 HEDIS measure will be issued sometime after the results of the public comment period are analyzed. Such exclusion could materially limit our ability to secure third-party reimbursement and as a result, materially limit our revenues.
On July 10, 2008, we received notice from The NASDAQ Stock Market LLC, or NASDAQ, that we were not in compliance with NASDAQ Marketplace Rule 4450(b)(1)(A), which requires an issuer to maintain a minimum $50 million market value of its listed securities for continued listing on The NASDAQ Global Market. We requested a hearing before the NASDAQ Listing Qualifications Panel, which was held on October 2, 2008, and on November 26, 2008, the NASDAQ Listing Qualifications Panel determined to list our securities on The NASDAQ Capital Market on a conditional basis, pending its review of additional information regarding our plan to evidence compliance with the requirements for continued listing on that market. On January 29, 2009, we received a determination from The NASDAQ Stock Market indicating that we had evidenced full compliance with all requirements for continued listing on The NASDAQ Capital Market.
On March 6, 2009, we received notice from NASDAQ that we were not in compliance with NASDAQ Marketplace Rule 4310(c)(3), or the Rule, which requires an issuer to maintain a minimum $35 million market value of its listed securities for continued listing on The NASDAQ Capital Market. NASDAQ also noted that we were not in compliance with either of the other alternatives for compliance with the Rule, which require minimum stockholders' equity of $2,500,000 or net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years, respectively. This notification has no effect on the listing of our common stock at this time. We were provided a period of 90 calendar days, or until June 4, 2009, to regain compliance with the Rule. If at any time before June 4, 2009, the market value of our listed securities is $35 million or more for a minimum of 10 consecutive business days, the NASDAQ staff will determine if we comply with the Rule. If we do not regain compliance with the Rule by June 4, 2009, NASDAQ will provide us with written notification that our common stock will be delisted from the NASDAQ Capital Market. At that time, we may appeal the delisting determination to a NASDAQ Listings Qualifications Panel pursuant to applicable NASDAQ rules. We are currently evaluating our alternatives to resolve the listing deficiency.
Colorectal Cancer Screening Guidelines
Professional colorectal cancer screening guidelines in the United States, including those of the American Cancer Society, or ACS, the American College of Gastroenterology and the American Gastroenterological Association, recommend regular screening by a variety of methods. Historically, such recommendations consisted of colonoscopy, flexible sigmoidoscopy, double contrast barium enema and fecal occult blood testing (FOBT), as well as combinations of some of these methods. In 2008, the ACS, the U.S. Multi-Society Task Force on Colorectal Cancer, a consortium of several organizations including representatives of the American College of Gastroenterology, American Gastroenterological Association, American Society for Gastrointestinal Endoscopy and the American College of Physicians/Society of Internal Medicine, collectively, the MSTF-CRC, and the American College of Radiology announced the inclusion of non-invasive, stool-based DNA screening technology in the updated national colorectal cancer screening guidelines as a screening option for the detection of colorectal cancer in average risk, asymptomatic individuals age 50 and above. These new guidelines now divide colorectal cancer screening into two groups, one including non-invasive methods for the early detection of colorectal cancer and the other including invasive techniques for the prevention and early detection of colorectal cancer. Non-invasive technologies include fecal occult blood testing and stool-based DNA screening for individuals unwilling or unable to use invasive screening procedures. Invasive procedures include colonoscopy, flexible sigmoidoscopy, CT colonography, and double contrast barium enema, which, according to the new guidelines, are designed to detect both early cancer and adenomatous polyps and should be encouraged if resources are available and patients are willing to undergo an
invasive test. While we view inclusion of our stool-based DNA technology in the ACS and MSTF-CRC guidelines as a critical first step toward building sufficient demand for any stool-based DNA screening test for colorectal cancer, we believe that FDA approval or clearance of our technologies, as well as reimbursement from CMS and other third-party payors will be necessary to achieve any significant increase in demand for our technologies. In addition, the ACS and MSTF-CRC guidelines indicated that new technologies and new technical versions of approved technologies need to detect a majority of colorectal cancers in a screening population to meet guidelines criteria. Neither we nor LabCorp have performed a stand-alone colorectal cancer screening study of LabCorp's ColoSure test and there can be no assurance that the guidelines groups will agree that existing studies using our Version 2 technologies, and any related data supporting ColoSure, will meet the requirements set forth in the current ACS and MSTF-CRC guidelines for inclusion of such technologies in future guidelines of such organizations. If the guidelines groups indicate a lack of acceptance for these more advanced technologies, such action could have a materially adverse impact on our business.
Regulatory Update
In April 2008, we began to focus our regulatory efforts on pursuing FDA clearance for Version 2 of our technology and we submitted a pre-Investigational Device Exemption, or pre-IDE, request to the FDA. The objective of the pre-IDE process was to seek informal guidance from the FDA that a 510(k) submission followed by a de novo classification request is an appropriate regulatory path for our Version 2 technology and that the clinical and other studies proposed in our Version 2 pre-IDE submission would likely support such a de novo regulatory path. In July 2008, we received feedback from the FDA as to the clinical performance characteristics and the minimum number of average-risk colorectal cancer samples that would be required for validation of our two-marker Version 2 stool-based DNA technology for colorectal cancer screening. In addition, based on our discussions with the FDA, we believe that the de novo pathway would be the appropriate regulatory path for our Version 2 technology. In July 2008, we . . .
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