Four years ago, Exact Sciences was roadkill. The company, based in greater Boston at the time, had been experimenting with molecular diagnostic technologies for more than a dozen years. It had a stellar scientific pedigree from founder Stanley Lapidus. But it had burned through more than $170 million of investor cash, and still had no convincing clinical trial data to support a market-ready diagnostic test.
The company was down to its last $30 million of cash. For a while, it had to fend off a low-ball takeover bid for some of its assets. The stock fell as low as 80 cents. At that valuation, investors were basically saying Exact was worthless.
The story at Exact (NASDAQ: EXAS) is completely different today. The company, now based in Madison, WI, has put itself in position to start marketing its first diagnostic test in 2014. It’s a new genetic-based screening tool for colorectal cancer that has potential to be used by millions of people in the U.S. over the age of 50, who are currently unlikely to get screened via the more invasive colonoscopy. Exact’s Cologuard test, which analysts expect will be priced at between $300 and $500 a patient, was able to detect colorectal cancer 92 percent of the time in stool samples provided in a 10,000-patient clinical trial.
That data is currently under review by the FDA, and by folks at Medicare who are considering how much to pay for such a test. Investors are expecting both agencies to sign off on Exact’s test. That means the big question in the year ahead is whether Exact can make millions of people comfortable with the idea of shipping stool samples via FedEx to get screened for colon cancer. The other, related challenge, will be to prove its sales and marketing people can convince physicians to start recommending a test that’s unlike anything they’ve used before.
Wall Street investors, who are often skeptical of new molecular diagnostic rollouts, have bid Exact’s shares up to more than $11. Exact had more than $145 million of cash in the bank at the end of its most recent quarter, and the company’s market valuation has soared to $835 million.
People across the molecular diagnostics industry are watching closely to see how Exact will perform during this pivotal year ahead. Public health recommendations say more than 80 million people in the U.S. should be routinely screened for colorectal cancer, but fewer than half get tested. If Exact Sciences can capture 30 percent of the available market, and people get screened every three years, it could tap a $2 billion market in the U.S., according to forecasts it has provided investors.
“It is a big story. They’ve done an excellent job developing this test,” says Mark Capone, president of Salt Lake City-based Myriad Genetics (NASDAQ: MYGN), which markets a different genetic test for colon cancer that isn’t directly competitive. “They’ve put many years into their R&D, and all of it has been done with excellent guidance from opinion leaders in the field. The studies are well done. They went through the FDA process, which is rigorous. They’ve done everything you’d hope to do for a test of this significance.”
CEO Kevin Conroy and Maneesh Arora, the chief operating officer, had success working together once before at Madison, WI-based Third Wave Technologies, which they sold to Bedford, MA-based Hologic (NASDAQ: HOLX) for $580 million in 2008. Chief science officer Graham Lidgard, a former Gen-Probe executive, joined Conroy and Arora shortly into their turnaround venture at Exact in the summer of 2009.
Getting Exact into this position meant betting almost everything on the one massive clinical trial of 10,000 patients that it felt it would need to win over skeptical patients, physicians, and payers. This will be the year Exact finds out how well the market truly responds that gamble, and its investment of $150 million in R&D of its Cologuard test.
“We chose to do it because we thought it was the right thing to do,” Conroy said. “We have a philosophy of doing it once, doing it right, and investing what you have to do to do it right. Don’t do things incrementally. Make it big, and make it stick.”
Although Exact Sciences has not released full details from its 10,000 patient study in a peer-reviewed scientific journal or presented the results at a medical meeting, the data are being scrutinized now by the FDA. Conroy isn’t a blustery type, but he’s also not afraid to publicly predict big things for this test. “We are confident that Cologuard will change the colon cancer screening paradigm,” he says.
Lloyd Smith, a chemistry professor at the University of Wisconsin and a founder of Third Wave, said he likes and respects Conroy from his experience at the prior company. He’s just not sure yet whether Exact will be the next big success story for Wisconsin biotech, or whether it will be acquired and sliced up like other companies from the past. “Kevin is a good guy, and a good manager,” Smith said. “He puts the whole company on one thing and doesn’t get distracted. He’s careful how he places his bets.” Plus, Conroy has a strong working relationship with Arora, the No. 2 exec, Smith adds.
The story of the turnaround at Exact Sciences goes back to January 2009. That was when the board approached Conroy about his interest in joining as CEO, fresh off his success at Third Wave. Conroy and Arora took a close look. They saw technology that they liked. Lapidus, Conroy felt, was “ahead of his time” in envisioning possibilities for DNA-based noninvasive colorectal cancer screening. Conroy and Arora studied the colon cancer screening and diagnostic market carefully to see what was needed. They talked to folks at the Mayo Clinic about another technology component they felt was necessary to combine with what Exact had. And they talked to their friends at the State of Wisconsin about getting some financial assistance to move the company from Boston to near their homes in Madison. Conroy and Arora joined on April 2, 2009, along with some help from a $1 million loan from the Wisconsin Department of Commerce.
Once on board, they went to work on a new plan. They wanted to come up with something far superior to the existing fecal immunochemical tests (FIT) that have been around for decades. Those tests look at stool samples for the presence of blood, which can sometimes indicate there’s a precancerous lesion in the colon, but it isn’t a highly reliable indicator. The existing FIT tests are cheap, in the $20 range, but various studies show they only detect about 65-75 percent of early cases of colon cancer and about 20-25 percent of precancerous polyps.
The vision at Exact was to come up with a test that looked at a combination of several gene mutations, alterations in DNA methylation (which affects how genes are expressed), as well as the presence of hemoglobin—a blood-based protein sometimes found in stool samples. If such a test could look for all those different things, it theoretically could catch many more cancers at an early, treatable stage. Exact’s management team felt they would have a noninvasive screening test that just might convince many more patients to get screened in the first place. Such a screening test would still need to be verified by a colonoscopy, but as long as it were highly accurate (in the 90 percent range), then it would certainly provide a compelling reason for a patient and physician to take that next step.
There’s a reason nobody else has come up with such a test yet—the technical challenges are daunting. Most of the DNA in a stool sample is from bacteria. There’s all sorts of human DNA normally getting shed in a healthy colon, which needs to be separated out from DNA that might be indicative of cancer. “It’s really a huge challenge to get the DNA extraction right, and knowing which DNA fragments and genes to look at,” Conroy said.
Once the new technology platform was put together for Cologuard, Exact went to work on crafting a clinical trial that could offer convincing enough proof to win over skeptical regulators at the FDA, skeptical physicians, and skeptical insurance companies who are all quite good at finding holes in sloppy, shoddy datasets. So Exact ran a few small case-control studies to get a sense, internally, of what it had. Then it spent the big bucks on a study called Deep-C, which enrolled more than 10,000 patients at 90 clinical sites in the U.S. and Canada. As a company trying to create a new kind of market where none had existed before, Exact knew it needed to go in armed for battle with strong clinical trial data that came with an FDA stamp of approval, even though it could have taken a shortcut by setting up what’s known as a CLIA lab that didn’t require prior FDA approval. Conroy didn’t say how much Exact spent on the Deep-C trial, but the company has invested $150 million in its development, he said.
“We felt (FDA approval) would be helpful in commercialization of the test, because more doctors would have confidence in it, and insurers would have confidence, as would the Medicare system,” Conroy said.
The study was designed for all patients to provide stool samples, and have them analyzed with Cologuard, with an existing fecal immunochemical test, and with a colonoscopy. By November 2012, enrollment was complete. Preliminary results came out six months later. The data showed that Exact hit all the study goals. Importantly, the screen was able to detect colon cancer in 92 percent of cases, and spot pre-cancerous polyps 42 percent of the time.
Exact is going over that data carefully now with the FDA, and with Medicare, in a set of parallel negotiations to secure market approval and reimbursement. The company hasn’t disclosed full details of the result just yet, preferring to put them out in a top peer-reviewed medical journal that it hopes will get the attention of a wide audience of physicians. Exact is preparing to make its detailed case for Cologuard in front of a public FDA advisory panel in early 2014, which it hopes will be followed by regulatory approval and Medicare reimbursement. If Medicare goes for it, Exact hopes private insurers will fall in line and pay for it as well, as they often do.
Exact has carefully prepared for this series of big events for years. The big clinical trial helped Exact set up a highly automated sample processing system at its Madison, WI facility, which Conroy says should be able to process up to 1 million samples per year at peak capacity. Exact is striving to deliver results back to patients and physicians with a turnaround time of one week. The company entered this year with 87 full-time employees, and has been making key hires this year as it prepares for the initial sales and marketing push behind Cologuard. This fall, Exact Sciences has made a number of hires on its commercial team from places like Cytyc, ARUP Laboratories, and Johnson & Johnson, said Peter Lawson, an analyst with Mizuho Securities, in a note to clients on Dec. 2. Investors now largely expect Exact to win FDA approval and secure reimbursement—the big question now is whether the company can successfully commercialize the test.
In a recent series of meetings with investors, Lawson wrote, “management walked through the two-pronged go-to market strategy; large healthcare systems but with the initial ramp driven by high prescribing fecal blood physicians, and the importance of patient engagement/compliance service to drive adoption.” While Exact has its fans on Wall Street, you can bet they will want to see sales picking up quickly after the first quarter on the market.
On his travels, Conroy said he sometimes get asked by investors why Exact is based in Madison. Isn’t it harder to recruit top-flight marketing people? Conroy, 48, who got an electrical engineering degree from Michigan State University and a law degree from the University of Michigan, said he brushes off such concerns.
“Madison is a great place to live, it’s a great place to start a company,” he said. “We have phenomenally talented scientists who are graduating every year from UW-Madison. Quality of life is really high. There are a lot of other biotech or life sciences startups in the area. Wisconsin is a great state to raise a family in, send your kids to school in. We’re in the middle of the country, and it’s easy for us to get to the West or East coast. I honestly wouldn’t want to be anywhere else with this business.”
And, he adds, even though the winters are cold, “we haven’t had any difficulty recruiting marketing people.”