UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

Commission File Number: 000-32179

EXACT SCIENCES CORPORATION

(Exact name of registrant as specified in its charter)

 

Registrant’s telephone number, including area code: (508) 683-1200

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by checkmark whether or the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer x   Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, as of the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $53,921,000 (based on the closing price of the Registrant’s Common Stock on June 30, 2005 of $2.28 per share).

The number of shares outstanding of the Registrant’s $.01 par value Common Stock as of March 10, 2006 was 26,385,541.

DOCUMENT INCORPORATED BY REFERENCE

The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2005. Portions of such proxy statement are incorporated by reference into Part III of this Form 10-K.

EXACT SCIENCES CORPORATION
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2005

TABLE OF CONTENTS

 

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PART I

Item 1.                        Business

This Business section and other parts of this Form 10-K  contain forward-looking statements relating to, among other things, the building of material market demand, the sufficiency of capital resources, expected royalty fees and revenues, expected revenues and sales and marketing expenses, the impact of regulatory agency action on the marketing and sale of PreGen-Plus, the focus and level of research and development efforts and development of new technologies, expectations regarding third-party reimbursement of PreGen-Plus and  inclusion of stool-based DNA screening  in colorectal cancer screening guidelines, our expectations concerning our commercial strategy, our marketing, sales and reimbursement efforts and their likely future success, our research and development efforts, and the effectiveness and market acceptance of our technologies and  LabCorp’s PreGen-Plus test. Our forward-looking statements involve risk and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those set forth in “Item 1A. Risk Factors” and elsewhere in this Form 10-K.

Overview

EXACT Sciences Corporation is an applied genomics company that develops proprietary DNA-based technologies for use in the detection of cancer. We have selected colorectal cancer as the first application of our technologies. We have licensed certain of our patents, on an exclusive basis through August 2008, to Laboratory Corporation of America® Holdings (“LabCorp®”) in connection with a commercial testing service developed by LabCorp and marketed under the name “PreGen-PlusSM.” LabCorp’s sales of PreGen-Plus represent our primary source of revenue.

PreGen-Plus is a non-invasive stool-based DNA testing service for the detection of colorectal cancer in the average-risk population. Colorectal cancer is the second leading cause of cancer death in the U.S. and the leading cause of cancer death among non-smokers. The American Cancer Society recommends that all persons age 50 and above undergo regular colorectal cancer screening. Of the nearly 80 million people in the United States for whom colorectal cancer screening is recommended, more than 42 million have never been screened. We believe that this large population of unscreened patients represents an opportunity to reduce the mortality associated with colorectal cancer because patients who are diagnosed early in the progression of the disease are more likely to have a complete recovery and to utilize lower levels of expensive medical resources.

Today, professional guidelines, including those of the American Cancer Society, the American College of Gastroenterology, and the American Gastroenterological Association, recommend screening by a variety of methods including colonoscopy, flexible sigmiodoscopy and fecal occult blood testing (“FOBT”) as well as combinations of some of these methods. Of those people for whom screening is recommended, many reject the option of colonoscopy which, while accurate as a means of detecting colorectal cancer, is invasive and, despite having been available as a screening modality for several years, has not been widely embraced by patients. Until the commercial launch of PreGen-Plus in August of 2003, the only completely non-invasive option for colorectal cancer detection had been FOBT without a digital rectal exam. FOBT, however, suffers from relatively low sensitivity, particularly in detecting the earliest stage, most curable cancers, and requires dietary modifications, unpleasant stool sampling and stool manipulation by the patient. With the U.S. launch of PreGen-Plus by LabCorp, PreGen-Plus became the first commercially-available, completely non-invasive, DNA-based cancer screening test for the average risk population. In a study published in the December 23, 2004 issue of the New England Journal of Medicine, PreGen-Plus was shown to be four times more sensitive in detecting colorectal cancer than the most commonly used FOBT screening test on the market today, Heomoccult II®, a guaiac-based FOBT test.

PreGen-Plus is offered commercially by LabCorp, the second largest commercial laboratory in the United States with more than 30 primary laboratories and over 1,200 patient service centers. LabCorp is

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the exclusive licensee, in the United States and Canada, of certain of the technologies utilized in PreGen-Plus. LabCorp currently does not offer PreGen-Plus in Canada. The license was entered into exclusively with LabCorp for five years following the launch of PreGen-Plus (through August 2008), followed by a non-exclusive license for the life of the licensed patents (through 2023). LabCorp performs the PreGen-Plus test in its laboratories, makes the test available through its sales force of more than 600 people and, by the terms of the license, pays us a royalty on each test reimbursed. Since commercial launch of PreGen-Plus in August 2003, LabCorp has offered the PreGen-Plus testing service as an in-house developed laboratory test, or “homebrew.” Homebrew tests have historically been treated as exempt from premarket clearance or approval requirements of the U.S. Food and Drug Administration, or FDA. On January 13, 2006, the FDA sent correspondence to LabCorp that focused primarily on Effipure but also more broadly on the PreGen-Plus test as a whole and indicated that PreGen-Plus is subject to FDA regulation as a medical device. The FDA also indicated that the device cannot be commercially distributed without an appropriate premarket determination from the FDA. LabCorp is currently discussing this matter with the FDA with the goal of arriving at a regulatory and commercial solution that is acceptable to both the FDA and LabCorp.

To date, LabCorp has paid us $30 million in upfront license fees and milestones associated with our license to them. In addition, LabCorp has committed to paying an additional $45 million in milestones and performance incentives in the event that certain third party approval and substantial performance levels are achieved. Between commercial launch and December 31, 2005, LabCorp has received over 8,800 patient samples for testing from physicians across the country, billed insurers and received payment from numerous third-party payors, including more than 300 health plans. None of these third party payors have yet issued formal policy approval for PreGen-Plus. Accordingly, we do not expect widespread disclosure of PreGen-Plus availability to, and use of PreGen-Plus by, a payor’s members, prior to any such formal approval.

Background

Colorectal cancer is the third most common malignant disease and the second most frequent cause of cancer-related death in the United States, with more than 148,000 new cases and more than 55,000 deaths anticipated in 2006. We believe that many of these people die because they are not screened for colorectal cancer or they use ineffective screening methods that either fail to detect the cancer or detect it at a later stage, when the five-year survival rate falls below 50%. Moreover, the number of people who die annually from the disease has remained relatively unchanged over the last 20 years, despite the availability of multiple colorectal cancer screening options, all of which we believe fail to effectively meet the collective needs of patients, doctors and payors.

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As reported in the February 3, 2005 issue of the New England Journal of Medicine, the tumor-node-metastasis (“TNM”) system of the American Joint Committee on Cancer is now the most commonly used system for staging colorectal cancer and serves as a benchmark for predicting the likelihood of five-year survival. This staging system is described in the table below.

*                    Source: Greene FL, Balch CM, Fleming ID, et al., eds. AJCC cancer staging handbook, 6th ed. New York: Springer, 2002.

Detection of pre-cancerous adenomas and colorectal cancer in its earliest stages increases the likelihood of survival and reduces the significant cost associated with treating late-stage colorectal cancer. As a result, the American Cancer Society recommends that the approximately 80 million Americans age 50 and above undergo regular colorectal cancer screening.

The Solution

We believe that stool-based DNA detection in the general population offers an opportunity to increase screening rates and decrease mortality from colorectal cancer. Stool-based DNA detection includes proprietary and patented technologies that isolate and analyze the trace amounts of human DNA that are shed into stool every day from the exfoliation of cells that line the colon. When colorectal cancer is present, a minute portion of the total isolated human DNA will represent DNA shed from cancerous or pre-cancerous lesions. Once the human DNA in the sample is isolated, stool-based DNA detection looks for specific mutations and other abnormalities in that DNA associated with colorectal cancer. A “positive” result from stool-based DNA detection does not necessarily mean that a patient has colorectal cancer. A “positive” result means that one or more of the genetic markers associated with colorectal cancer likely shows a mutation or abnormality. Under such circumstances, the clinical protocol is for the patient to then obtain a colonoscopy for confirmation. Moreover, a “negative” result from stool-based DNA detection does not mean that a person is free of colorectal cancer. Stool-based DNA detection, like virtually all

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screening tests (including mammography, PSA, and PAP smear) also reports false negatives (see clinical study table below for specific information on stool-based DNA performance).

We believe that our proprietary methods and technologies have several advantages that can lead to increased patient compliance and decreased mortality, including:

Good Performance.   We have conducted several clinical studies supporting the performance of stool-based DNA detection for colorectal cancer, including a 5,500 patient multi-center study, the results of which were published in the December 23, 2004 issue of the New England Journal of Medicine. Based on this study data, our original stool-based DNA detection technology demonstrated sensitivity four times greater than the leading FOBT, Hemoccult II, currently the most common non-invasive screening method for colorectal cancer, and was more than four times as effective as Hemoccult II in detecting cancer at its early stages, when survival rates approach 90%. Moreover, the stool-based DNA screening test that was developed by LabCorp and that LabCorp is commercially offering today incorporates several technical improvements over the test that was used in the multi-center study, which we believe result in higher assay sensitivity than that seen in our multi-center study.

Simple, non-invasive, painless and convenient testing.   Unlike current invasive screening and diagnostic methods, stool-based DNA detection requires no pre-examination preparation, invasive procedures or anesthesia, and a sample can be collected in the privacy of one’s home. In addition, our post-market data indicates that more than half of the people surveyed who were screened with stool-based DNA detection had never been screened before, which we believe indicates that stool-based DNA detection can lead to greater patient screening compliance.

The Testing Process

Diagnostic tests typically require sample collection and preparation procedures as well as detection methods. The stool-based DNA testing process involves proprietary sample preparation, DNA isolation, and analytical techniques that apply genomics discoveries to the early detection of colorectal cancer.

Specimen Collection and Transportation.   Certain of our patents relating to stool-based DNA screening for colorectal cancer are based on collecting a single whole stool sample in an easy, non-invasive manner. Utilizing a specially designed specimen container, samples can be collected in the privacy of an individual’s home and then sent directly to the laboratory for processing using one of the many national couriers.

Representative Sampling.   We have invented proprietary stool homogenization methods designed to ensure that the stool sample that is processed at the laboratory will contain uniformly distributed DNA throughout the portion of the sample being tested, and that the DNA in the stool sample is, therefore, representative of the entire stool and colon.

DNA Extraction, Purification and Amplification.   The isolation and amplification of human DNA found in stool is technically challenging because over 99% of DNA in stool is not human DNA, but is actually DNA from bacteria normally found in the colon. In addition, there are substances in stool that make the isolation and amplification of human DNA a difficult task. Proprietary technologies are used to allow for the reproducible isolation and amplification of the human DNA found in stool.

Cancer Detection Methods.   Specialized methods for detecting and identifying genomic markers associated with colorectal cancer can be performed on existing instruments commonly available in clinical laboratories conducting molecular testing.

Commercial Focus

Our goal is to become a market leader in the development and licensing of technologies for the early detection of cancer, beginning with the early detection of colorectal cancer. To accomplish this goal, we are pursuing a  strategy with respect to our technologies that includes the following components:

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Pursue commercial introduction of next-generation stool-based DNA screening technology.   In a recent research study that we conducted, our next-generation version of stool-based DNA screening technology (“Version II”) demonstrated sensitivity and specificity results in excess of 80% for detecting colorectal cancer. While previous published studies for stool-based DNA screening have generally shown specificity above 90%, the specificity results in the Version II study were closer to 80%, a performance metric that may not be deemed clinically or commercially acceptable. The blinded Version II research study was designed to test the efficacy of technological advances to enhance colorectal cancer detection in stool. This study involved the analysis of cancer samples from individuals whose colonoscopy results were positive for colorectal cancer. By contrast, our multi-center study published in the New England Journal of Medicine in 2004, was comprised of cancer samples from an asymptomatic population. The Version II research study has not yet been accepted for publication in a peer-reviewed journal.

While it is not yet clear to us when Version II of our technology could be made commercially available, our future plans with regard to Version II may include seeking  the FDA’s agreement that Version II qualifies as a “homebrew” testing service, seeking FDA clearance or approval on Version II in its assay form as a testing service, or working alone or with a partner to develop an FDA-approved in vitro diagnostic testing kit for colorectal cancer screening, which may require additional studies of the Version II technology. Moreover, transferring Version II from the laboratory to the commercial setting will still require the negotiation and licensing of necessary third-party intellectual property as well as the likelihood of additional technical and clinical validations of the technology to demonstrate, among other objectives, the reliability and reproducibility of the Version II results in general, as well as with respect to various patient populations and demographic segments.

Obtain regulatory clearance of stool-based DNA screening.   On January 13, 2006, the FDA sent correspondence to LabCorp that focused primarily on Effipure but also more broadly on the PreGen-Plus test as a whole and indicated that PreGen-Plus is subject to FDA regulation as a medical device and cannot be commercially distributed without an appropriate premarket determination from the FDA. LabCorp is currently discussing these matters with FDA with the goal of arriving at a regulatory and commercial solution that is acceptable to both the FDA and LabCorp. It is likely that any version of stool-based DNA testing, including Version II, will require FDA clearance or approval as well. If the FDA determines that PreGen-Plus, Effipure, or Version II, in whole or in part, requires premarket clearance or approval, commercial sales of PreGen-Plus could be delayed, halted or prevented and enforcement action could be initiated which could involve criminal or civil penalties. In addition, the FDA’s position on this could negatively affect our operations either through regulation or new enforcement initiatives directed at LabCorp or EXACT. Further, the FDA may not approve of certain sales and marketing initiatives of EXACT, which could negatively affect our ability to build awareness around stool-based DNA testing. Accordingly, we intend to work with LabCorp to achieve a regulatory and commercial solution that is acceptable to us, LabCorp and the FDA.

Leverage LabCorp’s large salesforce  LabCorp is the second largest commercial laboratory in the country and processes over 300,000 patient specimens daily through its system of more than 30 primary laboratories and over 1,200 patient service centers across the U.S. LabCorp’s large sales force is devoted to selling a wide range of diagnostic tests to physicians across all specialties. We recently decided to focus our sales and marketing efforts primarily on the following constituents:  thought leaders and third party payors, including self-insured employers, managed care organizations, and the technology assessment groups within these organizations. We believe that an important element to the successful commercialization of PreGen-Plus is the inclusion of stool-based DNA testing in colorectal cancer screening guidelines (the guidelines of the American Cancer Society, the American College of Gasroenterology, and the American Gastroenterological Association).

Obtain inclusion of stool-based DNA screening in colorectal cancer screening guidelines.   Today, professional guidelines recommend screening by a variety of methods including colonoscopy, flexible sigmiodoscopy and FOBT. In general, the guidelines range from the use of colonoscopy every ten years to the use of FOBT annually. Inclusion in screening guidelines is, in our view, among the important

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preconditions to a test’s broad acceptance and commercial use in the market as both physicians and payors frequently follow such guidelines in implementing new technologies. For colorectal cancer screening in general, and for stool-based DNA screening in particular, we view inclusion in the guidelines of the American Cancer Society and the GI Consortium as being of primary relevance to the commercialization of stool-based DNA screening. In the event stool-based based DNA screening is included in screening guidelines, it may still take several months before this information becomes published and is usable from a sales and marketing perspective.

Obtain formal acceptance of stool-based DNA screening for reimbursement by Medicare and other third-party payors.   Our reimbursement strategy consists primarily of working with LabCorp to educate large managed care organizations and large self-insured employers about the clinical benefits and cost-effectiveness of using stool-based DNA screening for colorectal cancer. We believe that both the publication of our multi-center study results in the New England Journal of Medicine in December 2004 and cost-effectiveness study results regarding stool-based DNA screening will aid in our efforts to gain reimbursement for the test. Accordingly, on December 29, 2004 we submitted our application for a National Coverage Determination (NCD) to the Centers for Medicare and Medicaid Services (“CMS”) for inclusion into the Medicare program. CMS has not approved stool-based DNA colorectal cancer screening for payment, has not yet accepted our request for a National Coverage Determination (NCD) and has sought additional information regarding the FDA regulatory status of PreGen-Plus which has delayed our application’s acceptance. CMS will not deem the NCD application “complete” until CMS receives confirmation from the FDA that PreGen-Plus complies with current FDA regulations.  The FDA may not communicate this determination to CMS in a timely manner, if at all, or in a manner acceptable to CMS. After CMS is satisfied with the FDA’s determination of the regulatory status of PreGen-Plus, CMS may accept the NCD application, deeming it complete, or it may reject our application and request additional information or reject it outright. The timing of any acceptance of the NCD application or any subsequent coverage decision by CMS is not within our control and is dependent upon a favorable and confirmatory regulatory status determination by the FDA communicated to CMS. We would not expect CMS to make a coverage decision sooner than nine months from the date of any acceptance of the NCD application.

In connection with our and LabCorp’s discussions with the FDA to respond to the CMS request, the FDA requested additional information relating to PreGen-Plus, including information regarding Effipure to determine how the FDA would regulate PreGen-Plus and Effipure. The FDA recently indicated to LabCorp that LabCorp’s PreGen-Plus testing and Effipure, the DNA preparation component  used in PreGen-Plus, requires premarket clearance or approval. In connection with the FDA’s ongoing discussions with LabCorp, commercial sales of PreGen-Plus could be delayed, halted or prevented and enforcement action could be initiated which could involve criminal or civil penalties.

Clinical Studies

Stool-based DNA testing has been the subject of extensive research and clinical studies. In numerous studies to date, the performance of our stool-based DNA technology has been examined in thousands of tissue and stool samples.  In addition to several smaller clinical studies designed to measure the sensitivity and specificity of stool-based DNA testing in detecting colorectal cancer, the performance of the original version of our stool-based DNA testing technology was compared to the most widely-used FOBT in a multi-center study that enrolled approximately 5,500 average-risk, asymptomatic patients from more than 80 sites across the United States. The study was designed to determine whether stool-based DNA testing was clinically superior to Hemoccult II®, an FOBT that is currently the most widely used non-invasive colorectal cancer screening test. The primary endpoint of this study was achieved with statistical significance, with a p-value of less than 0.001. Results from the study, which were published in the New England Journal of Medicine in December 2004, indicated that stool-based DNA testing was four times more sensitive than Hemoccult II® in detecting colorectal cancer (52% for stool-based DNA testing versus 13% for Hemoccult II®), and more than four times more sensitive in detecting colorectal cancer in its earliest, most curable stages (57% for stool-based DNA testing versus 13% for Hemoccult II®). There was

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no difference in specificity between stool-based DNA testing and this FOBT, with both tests demonstrating a specificity of approximately 95%.

Sensitivity and specificity results from our clinical studies that have been published are summarized in the table below. The results of these studies may not be directly comparable as these studies were conducted across a variety of patient populations and clinical settings and employed varying sample collection protocols. Moreover, the clinical studies disclosed below do not include any non-published studies regarding stool-based DNA testing, the results of which may differ significantly from those set forth below. All of the published studies referenced below, except the Effipure Performance study, reflect the performance of the original, bead-based version of our stool-based DNA technology. Effipure is a technological improvement that is utilized in LabCorp’s commercial testing service, PreGen-Plus, designed to increase DNA yield.

Published Studies: