Exact Sciences’ Inexact Approach to Commercialization

A Summary of Key Business Challenges and Recommendations

Daniel L. Edelstein

December 9, 2008

Abstract

Exact Sciences, a small cancer diagnostics company, has developed a non-

invasive, proprietary, method for utilizing genomic markers in the stool to detect

colorectal cancer. Colorectal cancer (CRC) is the second largest cause of deaths from

cancer in the US. It has been estimated that only one-half of the 90 million individuals at

risk for CRC actually undergo routine screening. The company has had only one product

to bring to market, however, due the continual refinement of its assay, EXACT has

developed several versions of its assay with varying degrees of precision. The company

owns several patents protecting its technology, almost entirely focused on DNA capture

techniques. As well, EXACT maintains exclusive licenses with academic institutions,

which are critical to the genomic detection and analysis components of its technology.

The company has a licensing agreement with LabCorp, a large U.S. laboratory company,

for its current version, of its stool test, marketed as ColoSure. The company is also

seeking regulatory approval and formal validation of its latest version, known as version

2, which is the most precise test in terms of specificity and sensitivity that the company

has thus far developed. Since its inception, EXACT has faced numerous challenges

ranging from scientific development to refine its assay, to most recently, regulatory

hurdles that the company failed to anticipate. EXACT has persistently struggled to raise

funding for its research and development. The company’s primary goal to

commercialize a highly precise and marketable non-invasive stool test remains its sole

focus and greatest challenge.

Introduction EXACT Sciences is a small diagnostics company of 8 employees, which

describes itself as an applied genomics company that develops proprietary DNA-based

technologies for use in the detection of cancer. The company has both an internal

scientific development program as well as licensing agreements with researchers in

academic medicine. EXACT has targeted colorectal cancer as its initial application for

its technologies by developing a stool based DNA (sDNA) identification assay, which

can detect the presence of colorectal cancer (CRC) and precancerous polyps. EXACT’s

current position and profitability strategy involves a single partnership with Laboratory

Corporation of America (LabCorp), who currently sells the diagnostic test, ColoSure,

which it licenses from EXACT. Since its inception EXACT has faced numerous

challenges, notably its handling of regulatory issues in commercializing its test. The

single greatest challenge, EXACT faces however, remains to be the refinement of its

currently marketed assay and the scientific developments to improve the detection rate

reliability, sensitivity and specificity of its diagnostic test. The company has devoted the

majority of its efforts towards research and development and only recently has had to

consider its past neglect of regulatory approval. The challenges to EXACT’s viability as

a company remain numerous and the company appears to be entering a hibernation mode,

attempting to conserve as many resources as possible, cutting expenditures in all areas

except for its regulatory team, while management seeks a strategic partnership with a

larger entity as a source of funding. The purpose of the following analysis is to highlight

the key challenges EXACT is facing, an evaluation of their current strategies and

operations, and finally, recommendations to support the company through these

challenges.

Methods

In order to identify the key challenges facing EXACT Sciences, an exhaustive

search of the current literature was performed using pubmed to identify key scientific

challenges and provide perspective on the merit of EXACT’s technology platform.

Pubmed was also utilized to measure the scope of the colorectal cancer market, as well as

compare EXACT’s technology to existing and competing detection strategies. A careful

search of market research materials revealed the scope and extent of the cancer

diagnostics market within which EXACT operates. EXACT’s corporate filings were

accessed via the Securities and Exchange Edgar database, (available at:

http://www.sec.gov/). Annual reports for the past five years were requested from

EXACT and reviewed along with additional filings such as their quarterly 10Q reports

and earnings call transcripts in order to identify management’s perspective on the

direction of their business. Finally, a search of google news, investopedia and databases

such as WebCat and WorldScope were performed in order to identify key news releases

and outside perspective on the company’s technology and business potential.

1.1 Key Science Challenges

The foundation of EXACT Science’s technology is the identification of specific

mutant fecal DNA related to colorectal neoplasia. The company is performing ongoing

development of a reliable and precise methodology to separate abnormal DNA from

normal human and bacterial DNA in stool, subsequently amplifying that DNA and testing

it for specific abnormalities. EXACT is exploiting the fact that colorectal cancer (CRC)

has been shown to develop as a result of genetic mutations or other chemical

modifications, causing inactivation or promotion of specific genes related to CRC

(Fearon & Vogelstein, 1990). Figure 1 depicts a genetic model of the pathway of CRC as

a result of chromosomal instability and some of the most common point mutations that

occur in CRC related tumor suppressor genes, such as APC, P53, as well K-ras, a

common tumor promoter gene, all of which EXACT has developed detection assays for.

As Figure 1 depicts, the adenoma is considered to be the precursor lesion to CRC,

occurring rarely in individuals under 49 (1.7-3.5%), but becoming more prevalent later in

life. In the 6th, 7th, and 8th decades of life the prevalence of adenomas has been estimated

to occur at a rate of 10% (Pendergrass et al., 2008). The dwell time of an early adenoma

to its maturation into an advanced adenoma has been projected to be approximately 2-5

years. Similarly, the dwell time of an advanced adenoma has been estimated at 2-5 years,

before it matures into an early cancer. Colonic epithelium is constantly sloughing off

cells (colonocytes), which are inevitably present in feces, and if in fact adenomas or CRC

are present in the colon, colonocytes from these neoplasms will also be present in the

stool. Ideally, any diagnostic tool to detect CRC would also need to be as effective at

detecting advanced and to a somewhat lesser degree, early adenomas, since their

identification would prevent colorectal cancer. The sole scientific focus of EXACT

Sciences is to develop reliable assays and identification techniques to consistently

identify these abnormal cells and their constituent DNA within a single stool sample.

While EXACT may have ownership of and exclusive rights to several patents, their main

platform for monetization and profitability depends solely on the refinement of a highly

specific and sensitive assay for detecting CRC, and its subsequent commercial success.

Figure 1. A Genetic Model for Colorectal Carcinogenesis (Vogelgram)

Over the years, several strategies have been devised for the proper identification

of mutant fecal DNA, however the biggest challenge for EXACT still remains the proper

isolation of the mutant DNA. For example, there is approximately 1x10-13 mg of APC

DNA per mg of stool. In feasibility studies, researchers were able to amplify this

miniscule amount of genetic material via polymerase chain reaction (PCR) and digital

protein truncation assays to detect APC mutations in 61% of CRCs and 50% of adenomas

in the stool of patients undergoing colonoscopies (Traverso et al., 2002). As Dr. Bert

Vogelstein who pioneered this isolation technique remarked, “Basically, we’re looking

for a needle in a haystack, but the search is even more complicated because we didn’t

even know the size or shape of the needle.” Since its initial feasibility was established,

several studies have reported on the use of stool DNA (sDNA) in detecting CRC and

adenomas using EXACT’s first marketed assay, Pre-Gen Plus (Version 1.0), which

targets a spectrum of DNA alterations including multiple point mutations on K-ras, APC

and P53 genes, as well as microsatellite instability (MSI) on the Bat-26 gene.

Using multiple gene markers for CRC detection, Ahlquist et al. reported an

overall sensitivity of 91% for CRC and 82% for adenomas with a specificity of 93%

ColorectalCancerdevelopsatwell‐definedstagesandarisesfrommolecularalterationsinmultiplegeneswithinanindividualcell.AdaptedfromtheseminalworkofDrs.FearonandVogelsteinwhopresentedforthefirsttimeamodelforthegeneticbasisofcolorectalneoplasia{{363Fearon,E.R.1990;}}.

(Ahlquist et al., 2008; Zou et al., 2008). Detection rates were not impacted by the disease

site or tumor stage. Several studies have yielded consistent results, reporting sensitivities

of 52-91% for CRC and 27-82% for advanced adenomas with specificities ranging from

93-96% (Imperiale et al., 2004; Itzkowitz et al., 2008; Osborn & Ahlquist, 2005). The

largest study to date is a prospective, multi-center screening study of over 4,000

asymptomatic, average risk individuals over 50 years old, comparing EXACT’s version

1.0 test to Hemoccult II. Hemoccult II is a simple, inexpensive assay, which tests for the

presence of blood within stool, often considered a symptom of CRC or polyps. The test

is rather non-specific since the presence of blood could be from numerous sources,

however it is often utilized as an inexpensive method for CRC screening during an annual

physical exam. The version 1.0 demonstrated a CRC detection sensitivity of 51.66%, vs.

12.9% for Hemoccult II, both had similar specificity (94.4% vs. 95.2%). In spite of

version 1’s clear superiority over hemoccult, the sensitivity of sDNA was unexpectedly

lower than had been previously reported. Researchers attributed these low rates to the

result of DNA degradation, which occurred while samples were in transit to the

laboratory. Attaining clinically relevant and reliable values of specificity and sensitivity

for its sDNA test has remained a key challenge for EXACT, and the delayed

commercialization of the test may be attributed to both the continual refinement of its

assays, as well as the protracted nature of a large prospective, CRC screening study.

Additionally, EXACT’s assay must be as useful for detecting adenomas as it is in

detecting cancers. Key results for the specificity of EXACT’s version 1 test are

summarized in Table 1, as are the recent results of its revised version 2.0 test.

Table 1. Summary of Sensitivity and Specificity Results for Exact Sciences Stool DNA Analysis

Table Adapted from (Herzlinger, February 25, 2008) and EXACT Sciences 10k Filing, 2007. * Specificity results not available since studies did not include a requisite number of disease free individuals

In late 2007, EXACT introduced version 2 of its assay, improving on several

technical aspects of version 1. Version 2 incorporated the development of a new

purification method utilizing a gel-based DNA capture approach, rather than the original

bead-based technology, resulting in a 5.4-fold increase in the quantity of DNA retrieved

from an individual sample (Whitney et al., 2004). By adding a DNA-stabilizing buffer to

the stool immediately upon collection, DNA degradation was prevented, and samples

were able to be transported for several days (Olson, Whitney, Durkee, & Shuber, 2005).

EXACT further improved its version 2 assay by adding a new marker, hypermethylated

vimentin gene, which has been shown be an indicator molecule for a newly modeled

epigenetic pathway by which some colon cancers develop (Rashid & Issa, 2004). In

normal colonocytes the vinmentin gene is minimally methylated, but has been found to be

highly methylated in colon cancer cell lines and in 43-83% of CRC tissues (Chen et al.,

2005). Hypermethylated vimentin has also been detected in the sDNA of 46% of patients

with CRC versus 10% of those with a normal colonoscopy (Chen et al., 2005). As

recently as August 2008, the improvements made to version 2 were validated in study

analyzing the sDNA of 241 individuals with normal colonoscopy and 42 patients with

CRC. Version 2 was shown to be extremely effective, reliable, as researchers reported a

sensitivity of 83% and specificity of 82% for CRC, concluding that version 2 would

reduce the cost of the test, make it easier to perform, and facilitate distribution to local

laboratories (Itzkowitz et al., 2008). These results proved promising for EXACT, as the

company appeared to have overcome the technical challenges impeding the tests

commercialization process.

While EXACT currently has a very competent scientific platform and several

studies to reinforce the use of its technology, the sensitivity of its version 2 assay is

considered to be below an acceptable threshold of 90-95%, while the specificity is

significantly below the target of 95-99.9%. As Dr. Vogelstein has previously stated “In a

screen its okay not be 100% sensitive, as long as your specificity is good. For example, if

we could determine presymptomatic cancers in two-thirds of people with no false

positives, we could potentially reduce deaths from cancer by two-thirds, with no therapy”

(Kling, 2006). To address this issue, EXACT, in September 2008, expanded their

existing license with Johns Hopkins University to include a new DNA isolation

technology known as BEAMing, in attempt to further enhance its technology platform to

better detect adenoma’s and CRC. Coincidentally, a new study investigating BEAMing’s

efficacy was released the same day in which EXACT reported its financial results. In the

study performed at Johns Hopkins, BEAMing was shown to improve the mutant DNA

isolation rate in stool, as well as reliably provide a sensitivity of 92% (Diehl et al., 2008).

The company faces several challenge which must be overcome in order to have their test

recommended as part of a screening program, including: increasing the sensitivity of

sDNA testing for large adenomas, improving the test’s sensitivity to minimize false-

positive rates, provide consistent and reliable detection rates, determine an optimal

screening interval, identify patient populations most suitable for sDNA testing, validate

whether sDNA testing will improve compliance with CRC screening, and finally, provide

a rational measure of its cost effectiveness. These challenges though many, may be

overcome with further research and clinical testing. Going forward, EXACT’s

technology platform could benefit substantially by devoting the maximum number of

resources possible to fully develop the expanded BEAMing license and generate a

clinically relevant and reproducible Version 3 of its assay. Unfortunately EXACT may

not be capable of doing this alone, and must seek a partner or an alternative source of

funding to maximize the development of BEAMing.

1.2 Industry Concerns EXACT Sciences product development and technology platform exists as a

miniscule speck in the burgeoning worldwide market for in-vitro diagnostics (IVD),

which was estimated at $42 billion in 2007, and is expected to grow 6% annually,

reaching $56.3 billion in 2012. The US represents 44% of the worldwide IVD market at

$18.5 billion in 2007, with growth expecting to reach $23.1 billion by 2012 (Rosen,

Saeks, & Krul, 11/2008). More specifically, EXACT belongs to the worldwide market

for molecular tests, which was $3.2 billion in 2007, and is expected to grow to $5.4

billion in 2012. Refining the market even further to the oncology molecular test market,

sales worldwide were $150 million in 2007 and are expected to double to 300 million in

2012 (Rosen et al., 11/2008). The expectation for such expansive growth in the

molecular testing market is the result of realizing the benefits of new genomic technology

and DNA isolation techniques, which in the past have been time consuming and labor

intensive, as well as the demands of an aging population in creating a larger market for

diagnostics.

EXACT Sciences technically makes broad claims for its focus as “an applied

genomics company that develops DNA-based technologies for the detection of cancer.”

In the realm of genomic based cancer detection, EXACT faces several competitors also

attempting to develop blood, tissue and urine biomarkers for the early detection of

cancer. Specifically companies such as Roche Diagnostics are developing serum-based

tests to detect the presence of proteins and/or nucleic acids produced by CRC in the

blood. Additionally EXACT faces competition from academic medicine, as researchers

continually update, improve and invent molecular screening tools. Since colorectal

cancer detection is the core focus of EXACT’s technology applications, EXACT’s

immediate competition includes clinically available procedures for the detection of CRC.

These procedure based detection strategies such as optical colonoscopy, flexible

sigmoidoscopy, and the recently validated virtual colonoscopy all provide direct imaging

of the colon. The optical colonoscopy is considered the gold standard for the detection of

CRC and adenoma. Additionally, improvements in immunochemical fecal occult blood

tests (FOBT), a test similar to Hemoccult II, have prompted a broader acceptance of this

test as a viable screening tool in patients who refuse colonoscopy or as a cost effective

component of the annual physical examination. EXACT’s stool test certainly represents

an advantage over current invasive screening methods, given its relative ease of use, non-

invasiveness, and cost-effectiveness, however in the longer term, blood tests, though yet

to be developed, are perhaps more desirable from a patient and provider standpoint, as

they have become common place and are generally better accepted than a test involving

stool collection.

Though there are several molecular testing companies targeting cancer detection

via blood and fluid assays, EXACT does not suffer from direct competition for its stool-

based technology in CRC detection. Both Targeted Diagnostics and Therapeutics and

AMDL inc. are companies that have developed blood tests to detect the presence of

metastatic CRC cells. These blood tests are only approved for individuals currently

diagnosed with colorectal cancer, and neither company technically poses a direct threat to

EXACT, since EXACT seeks to offer a screening tool for all individuals in the general

population at risk for CRC. However, the technology development platforms at both

Targeted Diagnostics and AMDL are fairly advanced and either company is capable of

translating their tests into a general screening tool, potentially posing a direct threat to

EXACT.

The current global financial crisis has had serious negative impacts on the

operation and viability of the biotechnology industry. A recent article highlighting the

“unprecedented” number of biotech bankruptcies occurring over the last several months

reported that the amount of money raised by biotechnology companies this year fell by

54% or 9.7 billion through September, compared with the same period in 2007 (Olmos &

Waters, November 21, 2008). According to the report, biotech companies in the U.S. are

now raising less money than they have in 10 years, as financing dropped from $17.9

billion to $8.2 billion through September. The article points out that historically

biotechnology bankruptcies are fairly rare, since the majority of companies have

partnered with large pharmaceutical companies or strategic financing options, however

those possibilities are fast disappearing in a market saturated with smaller less developed

companies in desperate need of funding. The strategy for several small biotechnology

companies has been to go into “hibernation mode”, basically performing the bare

minimum operations in order to maintain the company while waiting for the crisis to

abate and new capital to resurface. A second strategy has been for the smaller companies

with more developed pipelines to actively seek strategic alliances with larger companies.

While EXACT is suffering from a severe shortage of cash it is prudently performing both

strategies as it has ceased the majority of its cash intensive activities while seeking a

strategic partner to fund the final development of its technology.

Diagnostic companies often face difficult challenges in terms of making

significant advances into the market on their own, given the high cost of clinical trials,

the multiple regulatory hurdles, and persistent need to refine their technology, all of

which contribute to a significant cash burn rate. Over the past several years as equity

markets have lost their fund-raising grandeur, the greatest chance a small diagnostic

companies such as EXACT have had to fully commercialize their technology has resulted

from a merger with a large company specializing in molecular diagnostics. Currently,

Roche Diagnostics is the largest diagnostic company in the world, with sales of $918

million in 2007, followed by Novartis Diagnostics, which had sales of $707 million in

2007, and finally Digene Corp. (recently acquired by Qiagen) with sales of $202 million

in 2007. It seems inevitable that given the large market for colorectal cancer screening,

and EXACT’s strong technology and patent portfolio, EXACT presents as a strong

strategic target for a merger for a large diagnostics company seeking to sustain growth.

To the extent possible, with what funds remain, EXACT should execute its hibernation

strategy to conserve its few remaining resources while it seeks to strengthen its

intangibles – notably its patent portfolio in order to further entice a company such as

Roche diagnostics to buy EXACT Sciences.

1.3 Regulatory Issues

Since its inception, EXACT has mishandled and underestimated the extent of

regulatory approval in commercializing its technology. Since August 2003, EXACT has

licensed its version 1 test under the trade-name PreGen-Plus to LabCorp which in turn

offered it to the general public through its nationwide network of labs and sales

representatives. The PreGen-Plus test includes a DNA stabilizer component, Effipure,

which EXACT developed. Both companies had assumed that the test they sold was

considered an in-house developed laboratory test or “homebrew” testing service, which

the FDA does not normally regulate. LabCorp is regulated under the Clinical Laboratory

Improvement Amendment of 1988 (CLIA) and is certified to perform complex testing,

including tests it has developed in-house which it then offers as laboratory services. In

January 2006, the FDA informed LabCorp that the Effipure component of the PreGen-

Plus assay, supplied by EXACT to enhance the purification of DNA from stool, may be

considered a device in and of itself, potentially subjecting the entire process to FDA

approval. LabCorp responded to the FDA stating that it was developing an alternative to

Effipure and hoped to eliminate the component by January 2007. However, on October

11, 2007, the FDA then sent EXACT a warning letter stating that it believed EXACT’s

PreGen-Plus assay is a medical device requiring pre-market approval or clearance. The

FDA was in the process of instating policies to include all “homebrew” tests as medical

devices, subject to FDA regulation. EXACT’s response to shareholders and the FDA

was that it was surprised by the letter since the company was in fact planning on applying

for clearance for PreGen-Plus with the FDA. However, EXACT stated that it was

waiting to see if its test would be included in updated CRC screening guidelines due to be

released by March 2008. EXACT’s apparent surprise at the warning letter is truly absurd

considering the company had just one month prior to the receipt of the warning letter,

submitted an application to the Centers for Medicare and Medicaid Services (CMS),

seeking reimbursement for its test. The most likely scenario (author’s postulation) is that

the CMS contacted the FDA upon receipt of EXACT’s application, to verify the

acceptability and regulatory status of PreGen-Plus before it rendered a decision.

EXACT at the very minimum should have engaged the FDA at the time of its

CMS application submission, the fact that the company merely sat and waited, speaks to

the shear negligence and lack of foresight of the management to anticipate a discussion

with the FDA concerning the regulatory status of its only product. Regardless of the

reason for EXACT’s poor planning and execution, the company and LabCorp halted

sales of PreGen-Plus as they transitioned to offer a new product, ColoSure, a revised test

which eliminated the need for Effipure and therefore, they assumed, FDA regulation.

Beyond EXACT’s negligence in working with the FDA since beginning to license

its test to LabCorp, the company’s lack of foresight and planning seems to be systemic

throughout the company, contributing to a record of irresponsibility. Specifically,

EXACT’s inaction in submitting a premarket submission 510(k) application to the FDA

for its PreGen-Plus test. The FDA’s website clearly lists examples of when a 510(k) is

required as well as a list of exemptions (US FDA, 2006). The FDA explicitly states that

whenever an assay “has a new intended use or operates using a different fundamental

scientific technology than a legally marketed device, then a 510(k) must be submitted to

market the new device.” The new DNA capture technology used as part of EXACT’s

PreGen-Plus assay to extract DNA from stool clearly requires a 510(k). Over the past

few years the company has made it very clear that it had no idea what the costs or timing

of the approval process were. Evidently, EXACT, though lacking initial transparency on

these matters finally admitted to lacking the management and expertise to guide their

product through an approval process with the FDA. It would be of great benefit for the

company to actively seek a development partner or bring someone on board with the

regulatory expertise to direct a well thought out and publically visible path towards

approval with the FDA.

In recent months EXACT has redeemed to some degree its previous negligence

by openly engaging the FDA on the regulatory process for its in development version 2

technology, as well the proper classification of its ColoSure test, currently marketed by

LabCorp. The company submitted in April 2008, a pre-Investigational Device

Exemption (pre-IDE), to the FDA for its version 2 technology (EXACT Sciences, 2007).

Though the company is actively engaging the FDA, there is still evidence of uncertainty

regarding the approach of management. EXACT’s objective in submitting a pre-IDE is

to seek clarification from the FDA that a 510(k) submission followed by de novo

classification request represents the proper regulatory path for version 2. De novo

classification is generally reserved for low risk IVD’s. Though EXACT is now working

actively on the approval process, their inability to initially openly discuss with the FDA

the proper route of approval was inappropriate and led to significant delays in the

marketing process, delays which EXACT may not financially be able to survive.

Additionally the company has received notice from the FDA on further clinical validation

studies necessary for the approval of version 2, requiring, EXACT estimates, an

additional $6 to $8.5 million in funding. Given EXACT’s severe cash shortage and

unwillingness to issue debt or new shares, the company would be best suited to find a

strategic alliance with a larger diagnostic company to finally gain FDA approval for its

product. An alternative and equally viable strategy would be to seek a collaborative

development financing arrangement (CDF), which would provide EXACT with a source

nondilutive capital, while allowing the company to retain the development rights of their

drugs. A CDF would be of immense benefit to EXACT, as it would provide them with

the necessary capital as well as the expertise and resources it currently lacks to guide

their technology though the FDA’s approval requirements.

1.4 Financial Considerations

There is no question that EXACT is facing a severe shortage of cash and

resources entering the final months of 2008. Its stock price reflects investor’s poor

expectations for the company, as the share price tumultuously slid 95% in 2008 despite a

barrage of positive news throughout the year. On November 26, 2008, the company’s

stock was demoted for not meeting the NASDAQ listing requirement of maintaining a

minimum market capitalization of $50 million. On November 28th, with shares trading at

$.39, EXACT’s shares (ticker symbol: EXAS) were effectively transferred from the

Nasdaq Global Market to the Nasdaq Capital Market, where their future remains

uncertain as they are currently well below maintaining a minimum $1.00 bid price.

While the stock market is not always indicative of success, it would appear that given the

abnormally low daily trading volume of EXAS, and its severely depressed share price,

investors are trading the company as if it were positioning for bankruptcy.

Potential catalysts for the company’s share price include positive sales growth of

its test, ColoSure, via a licensing agreement with Laboratory Corporation of America

(Lab-Corp), as well as technical developments to improve the test’s efficiency. The latter

seems unlikely to be an organic process since EXACT announced in July 2008, that it

was introducing a number of expenditure reductions to cut costs significantly enough to

maintain viability while awaiting a regulatory decision period with the FDA. The

company eliminated 67% of its staff, in sales, marketing and R&D. It would appear that

the company is relying solely on academic research centers, chiefly Johns Hopkins

University, to further refine the efficiency of its sDNA test. On a somewhat positive note

for shareholders, EXACT, faced with limited options to raise cash, decided not to pursue

a direct offering of new shares of stock, citing that this option was too dilutive to current

shareholders. If EXACT’s stock price does not increase to above a dollar within an

acceptable timeframe, the company should strongly consider a 10-1 reverse stock split.

Reverse stock splits generally appeal to the psychology of investors, as a higher share

price creates the impression that a company has an increased intrinsic value compared to

its industry competitors. Though reverse stock splits are generally performed as measure

to delay delisting, this approach may allow EXACT to remain listed long enough for the

sales of its ColoSure test to increase, as well as allow the company to fully develop its

technology and receive FDA approval for its version 2 test. Both events would support a

sustained improvement in investor’s outlook for the company, and subsequent increase in

the stock price.

EXACT has never been profitable, the company derives the majority of its

income from a licensing agreement with Lab-Corp which markets a version of EXACT’s

test under the name Colosure. Colosure was introduced in July 2008 and is a single

marker test for detecting the methylation of the vimentin gene. LabCorp has sold and

processed approximately 250 ColSure kits at $300 each, for the period ending October

31, 2008, of which EXACT receives 15% as per their licensing agreement. Clearly

EXACT cannot rely on ColoSure sales alone, making future strides in product

development even more difficult for the company since they have decided to cut

expenditures dramatically. EXACT’s recent actions to curtail all R&D, sales, as well as

refinance its debt, may work in the company’s favor if it can avoid bankruptcy while

waiting for sales of ColoSure to increase. LabCorp recently started training its 1,000

sales reps in November, promoting ColoSure, in the hopes of capturing a percentage of

the 8 million FOBT/FIT test performed each year. Both companies have forecasted to

sell and process 1 million ColoSure tests by the middle of 2009, and another 1 million by

the middle of 2010. Under the license agreement with LabCorp, EXACT receives a 15%

royalty on the net revenue of tests sold/reimbursed. EXACT is estimating a

reimbursement of approximately $110 per test, which would allow the company to

realize $16.5 million in revenue by the end of 2009. This amount would more than offset

their anticipated expenses of $6.5 million, and they would finally realize a net income of

approximately $10 million by 2010. These estimates would in fact be realistic, if both

companies would officially verify the regulatory status of ColoSure with the FDA, so that

they can effectively market the test to the general public. The single most important

factor for EXACT going forward is to ensure the marketability of its ColoSure test, so

that LabCorp can effectively market it. The do this, EXACT should focus its dwindling

resources on engaging the FDA in discussion and beginning the approval process so that

the test can be officially marketed to physicians.

1.5 Marketing Considerations EXACT Sciences has developed and licensed technology to target an enormous

population of individuals within the cancer diagnostics market. Colorectal cancer is

estimated to have the highest incidence of any tumor type across all pharmaceutical

markets, greater even than lung and breast cancer. The lifetime risk of developing CRC is

6%, and worldwide, 470,00 individuals were estimated to die from the disease in 2008,

while 945,000 new cases were diagnosed last year alone (Parkin, Whelan, Ferlay, &

Thomas, 2008). In the United States, it is estimated that 153,760 cases of CRC were

diagnosed in 2007, with 52,180 deaths. Approximately 90% of the CRC cases diagnosed

in the US are in individuals over the age of 50, with only 30% of cases being detected

early at a curable stage (Zauber et al., 2007). The worldwide population of individuals

over the age of 50 is estimated by the U.S. Census Bureau to be 1.35 billion in 2008,

while the population of individuals in the U.S. over the age of 50 is estimated to be 90

million. Clearly EXACT has a very defined and large market, especially considering that

approximately 50% of the US population over the age of 50 that has not undergone

recommended routine screening for CRC (Centers for Disease Control and Prevention

(CDC), 2003). Combine this enormous potential market with the fact that CRC, if

detected early enough is estimated to be 95% curable, and EXACT would appear to be

operating in an ideal market to capitalize on the strategy of detecting colorectal cancer

early in an ever increasing, aging, at-risk population.

Since the company’s inception, the single greatest potential catalyst and

marketing tool for EXACT was the expected inclusion of its sDNA technology in the

CRC screening guidelines of the American Cancer Society (ACS), the American College

of Gastroenterology, and the American Gastroenterological Association. These

guidelines have historically included colonoscopy, flexible sigmoidoscopy, double

contrast barium enema and fecal occult blood testing (FOBT). The company and its

investors have long postulated that as soon as sDNA was included in the guidelines, the

company would be armed with the necessary scientific and regulatory support it needed

to successfully sell its sDNA product to physicians. In general, physicians and

gastroenterologists look to these guidelines as the standard of care for CRC screening,

and it is highly unlikely they would prescribe a test not in the guidelines. On March 5,

2008, EXACT finally received the support it had been seeking, as the ACS along with the

U.S. Multi-Society Task force on Colorectal Cancer, American College of

Gastroenterology, American Gastroenterological Association, American Society for

Gastrointestinal Endoscopy, the American College of Physicians/Society of Internal

Medicine (the “MSTF-CRC”), and the American College of Radiology announced that

stool based DNA screening would be included in the updated national CRC screening

guidelines as a screening option for the detection of CRC in average risk, asymptomatic

individuals, age 50 and above, representing a market of approximately 90 million people.

The new guidelines effectively divided CRC screening into two broad categories, non-

invasive methods for the early detection of CRC to which sDNA and FOBT belongs, and

invasive methods such as colonoscopy and flexible sigmoidoscopy for the prevention and

early detection of CRC.

The inclusion of EXACT’s sDNA technology in the CRC screening guidelines

represents a critical first step toward building sufficient demand for its product.

However, the company faces substantial risks to marketing the product successfully,

notably, FDA clearance for its technology and reimbursement approval from the Centers

for Medicare and Medicaid Services. A recent analysis by the Agency for Healthcare

Research and Quality concluded that although sDNA represents a promising technology

that would be substantially beneficial to individuals who would not otherwise undergo

CRC screening, its cost remained a prohibitive factor as compared to FOBT and could

therefore not recommend the test as a cost-effective screening tool (Zauber et al., 2007).

Based on this analysis as well as a pending FDA approval decision, the Centers for

Medicare and Medicaid Services (CMS) decided in July 2008 to not include EXACT’s

ColoSure test as a reimbursable procedure. CMS recommended that the company revisit

the CMS application once the FDA determines the approval and marketability of

ColoSure (CMS, 2008).

The number one hurdle EXACT must overcome to achieve marketability of its

test is regulatory approval by the FDA regarding the use of its test by the general public

(discussed in detail in Section 1.3). While EXACT recently and necessarily curtailed all

marketing activities, essentially relying on LabCorp to market ColoSure, the company

must aggressively pursue a constructive discussion with the FDA in order to gain

regulatory approval. At the present time EXACT’s operation as a company rests solely

on the decision of the FDA as to whether ColoSure is marketable as “homebrew” test.

The company for the benefit of its shareholders and millions of individuals at risk for

CRC should absolutely devote its few remaining employees and funds to the

development of an appropriate pathway through FDA approval.

1.6 Legal Issues

Exact does not currently have any pressing legal issues impeding what remains of

its business activities nor its trajectory towards FDA approval. As of October 2008, the

company owned 37 issued patents and 22 pending patent applications in the US, as well

as 76 issued foreign patents and 39 pending foreign patent applications. The company

does not currently have any pending lawsuits or legal matters concerning its patent

portfolio. EXACT also maintains licensing agreements critical to their business, with

academic researchers at both Johns Hopkins and the Mayo Clinic. The key challenges

EXACT faces going forward is to maintain protection of its current patent portfolio, as

well as ensure the exclusivity of future licensing agreements with Johns Hopkins

University for the BEAMing technology previously discussed. BEAMing may provide

EXACT with the greatest benefit yet to its technology development and EXACT would

be wise to maintain an active discussion with Johns Hopkins University on the

availability of future technology licenses. As well, the company should devote

approximately 5% of its remaining resources to exhaustively search new patent

applications and technology licensing opportunities at key academic institutions and the

US patent office, in order to identify new technologies and procedures which may benefit

the company, as well as those which may infringe on the company’s patents. Though

appearing desperate, this search may yield potential income in the source of lawsuits for

patent infringement, as well as strengthen the company’s existing patent portfolio.

1.7 Ethical Considerations

Throughout its operation, EXACT has attempted to conduct business in an ethical

manner. In the Company’s Code of Business Conduct, EXACT describes honesty,

integrity and ethics as the foundation upon which they have built their reputation and

established competitive excellence. The company expects that every director, office, and

employee practice the highest standards of conduct in every business relationship, both

within the company and outside of the company, with its customers, competitors and

business partners. A careful review of EXACT’s annual reports and SEC filings, does

reveal that the company has handled its business relationships and recent restructuring

ethically, as it negotiated fair compensation packages for laid-off employees, as well as

appropriately adjusted retirement plans to allow for the full vesting of stock options to

laid-off employees. The company also assisted employees in finding new jobs.

While EXACT has performed within its own standard of ethics for its business

and employees, it has not properly managed its relationship with investors and potential

patients. In the past, the company has been extremely overzealous and overly positive

with its scientific claims and its guidance on the public acceptability of its technology and

products. Additionally, the failure of EXACT to properly plan for FDA approval and

acceptance of its ColoSure test has significantly delayed its marketability, adversely

affecting individual investors as well as the population of unscreened individuals for

whom ColoSure would certainly have helped. EXACT’s failure to recognize the

importance of regulatory approval reflects the company’s myopic focus on its scientific

platform, and is no excuse for the fact that it fundamentally mislead investors and the

public into believing that EXACT’s tests were initially more readily marketable then they

have thus far proven to be.

EXACT’s initial public offering in 2001 at $15/share raised $280 million. The

company went public under the premise that its business plan and execution of key

objectives would bring their technology to the market by 2003-2004. The fact that it is

now 2009, and EXACT has yet to market a successful product, speaks to the

mismanagement of the company’s objectives, its significant overestimation of the

commercial impact of its technology, and its severe underestimation of the regulatory

process. Both investors and patients have anxiously been waiting for eight years for

EXACT to execute on its initial objectives, however the company has continually

neglected strategic planning methods to gain approval for its technology as well as

accurately and transparently translate the validity of its position within both the product

development and approval timeline. As was discussed in the regulatory section,

EXACT’s surprise at receiving a warning letter from the FDA regarding the commercial

classifiation of its sDNA test, indicates its mismanagement of the approval process, and

is most likely a reaction directed to shareholders in an attempt to relieve suspicions that

the company was well aware of the regulatory hurdles, yet blatantly neglected them.

However, it appears that the company’s persistent neglect of the regulatory process,

indicates that they were clearly unaware and/or not devoting enough resources to such a

critical step.

Going forward EXACT might repair its image and previous negligence by fully

disclosing to investors and patients the timeline of the approval process. Additionally the

company needs to elaborate further on its strategy for securing funding as well as

calculate a realistic sales estimate of its ColoSure product being marketed by LabCorp.

EXACT’s apparent reluctance to disclose timely information combined with its overly

positive stance on the direction of its technology has left many dismayed with the

company and its management. EXACT does however have the time and resources

remaining to fully disclose regularly timed reports on its operational expectations and

progress of pursuing funding via a strategic alliance. It is also possible that if EXACT

were to release realistic expectations regarding the direction of its technology and product

sales, the current uncertainties depressing its stock price may be alleviated, allowing the

company to remain intact while it awaits a regulatory decision by the FDA.

1.8 Management and Leadership

EXACT currently as eight employees and is primarily operated by Dr. Barry

Berger, M.D., Chief Medical Officer (CMO), Charles Carelli, Chief Financial Officer

(CF0), and Jeffrey Luber, President and Chief Executive Officer (CEO). The company

also maintains a board of directors, comprising six individuals with various backgrounds

in biotechnology, business, and medicine. In July 2007, EXACT’s CEO of eight years,

Don Hardison left the company, and as such the few remaining employees (14) viewed

his departure as harbinger of a negative outlook. In the past EXACT’s employee count

has varied from year to year, based on the stage of development and degree of marketing

the company was pursuing. For instance, in 2004, at the height of its marketing and

development efforts for PreGen-Plus, EXACT had 71 employees, including an R&D staff

of 27 scientists, 24 sales representatives and 10 administrative employees. To tease apart

management from leadership at EXACT is a difficult task, based on the small size of the

company and the dual role company leaders, such as the CEO, CFO, and CMO must

serve in order to direct operations while simultaneously guiding the company. There has

never existed a complex management hierarchy at EXACT, rather department heads in

R&D and sales, receive guidance directly from the CEO and CMO. The board of

directors meets regularly with the chief officers to provide strategic insight and guidance

for the business, which filters down through the company’s employees through regular

meeting and discussion.

Based on EXACT’s previous employee composition and its current state, it is

clear that management focused all available resources on the areas of R&D and

marketing, both of which they viewed as a central to the company’s success. It is clear

even from their company structure, let alone the previous discussion, that management

neglected to account for a regulatory team to manage the company’s evolving technology

platform and continually engage the FDA in a regulatory route for commercialization.

Based on company reports and news releases, it is evident that the shear enthusiasm and

overzealousness of management to persistently overestimate the company’s market

potential and underestimate the regulatory challenges may have ultimately sacrificed the

viability of EXACT. EXACT’s recent elimination of 67% of its employees as part of a

restructuring plan is further proof that the company prematurely overextended itself, most

likely resulting from the fault of leadership in neglecting to develop a comprehensive

commercialization strategy.

Due to the myriad challenges EXACT is facing as a company, the leadership

recently appointed a new board member, Michael Singer, Chief Executive Officer of the

BrainScope Company Inc., who has held executive level positions at Microsoft

Corporation, Data Critical Corporation, Revolution Health. According to a recent news

release, Mr. Singer has previously worked as a Mergers and Acquisitions banker, and has

been instrumental in a variety of strategic transactions (EXACT Sciences, 11/25/2008).

The company is clearly, and wisely attempting to position itself for a strategic partnership

or acquisition, as Patrick J. Zenner, Chairman of the Board of EXACT states “He

[Singer] is a proven deal-maker with extensive healthcare transactional experience and

brings an additional fresh perspective as well as added expertise to the strategic process

currently underway.” EXACT with its few remaining resources, and dwindling options,

is perhaps, finally, by seeking a strategic transaction and actively providing strong

leadership directing itself down a pathway to realize the full commercialization of its

technology. The fact remains that the drastic elimination of employees and sudden new

leadership is a direct result of the poor guidance and foresight which previously led

EXACT, and is now forcing it to pursue what appears to be its only option to remain a

company and provide shareholders with a nominal return.

1.9 Strategic Issues

EXACT is currently undergoing a transition from an operational company

actively selling and developing its product, to a company with dwindling resources and

insufficient funding to fully commercialize its lastest revision, version 2, of its sDNA

test. While EXACT may receive income from sales of its ColoSure test through

LabCorp, ColoSure remains an inferior assay compared to its version 2, and the FDA has

not formally rendered a decision as to whether ColoSure is in fact marketable. The

marketability of ColoSure poses a significant risk to EXACT’s future income. EXACT

has estimated that the costs to develop its version 2 technology, would be approximately

$6 to $8.5 million. The company currently has $4.5 million in cash, a significant portion

of which is designated to fund general operations. Clearly EXACT is facing what might

be its final and greatest challenge yet, to find funding to validate its version 2 technology,

while working with the FDA to ensure the marketability of ColoSure. Its evident that

EXACT as a corporate entity developed prematurely, overemphasizing its business plan

and monetization strategy, long before it had a marketable product developed. Simply,

the business was years ahead of the science, unfortunately the business model was

entirely dependent on the science.

EXACT’s shift in strategy to be acquired was solidified when it hired Leerink

Swan, a healthcare investment bank, in March 2008 to explore strategic alternatives for

EXACT. Thus far there has been no indication as to the progress of this investigation,

though the appointment of Michael Singer to EXACT’s board of directors may be an

indication that they are in active discussions with potential acquirers, and are in need of

Mr. Singers vast expertise. However, it should be noted that the current status of the

company’s progress is extremely unclear, and while speculation may provide some

insight, it should be regarded merely as conjectures. Nevertheless, the company is

following the only path it has left, a path it has paved for itself, as it desperately seeks a

strategic partnership. Without a strategic alliance, especially in the current economic

environment, the company would surely falter, go bankrupt, and be forced to relinquish

the exclusive licenses, which form the foundation of its business back to JHU under the

terms of their license agreement. The company’s strategy is justified and prudent, given

the sheer lack of alternatives. EXACT’s significant reduction in expenditures and

execution of a hibernation strategy to curtail all sales and R&D while it simultaneously

seeks a strategic partnership and guidance from the FDA on its ColoSure test are the two

best options the company has left to realize the commercialization of its technology.

Conclusion

EXACT Sciences has faced a myriad of challenges since its inception, most

notably the scientific development of its DNA capture and isolation technology. To

address the scientific challenges, EXACT should continue to work with Johns Hopkins

University to incorporate BEAMing technology into the company’s assay to provide a

significant improvement in precision. Unfortunately, since its inception, EXACT has

mishandled and underestimated the extent of regulatory approval in commercializing its

technology. The company’s prior neglect in planning for regulatory approval for its

product has created an almost insurmountable challenge for EXACT in its current state.

The company is actively seeking a strategic partnership to validate its version 2 test, and

should continue to do so, as the market for its technology is enormous and increasing

daily. The addition of Michael Singer to EXACT’s board of directors will provide a

significant benefit in terms of experience and planning for the company as it seeks out a

strategic partnership. EXACT should continue to execute its hibernation strategy to

conserve its few remaining resources while it seeks to strengthen its intangibles – notably

its patent portfolio in order to further entice a company such as Roche or a similar well

positioned diagnostics compay to buy EXACT Sciences. The company’s strategy is

justified and prudent, given the sheer lack of alternatives. EXACT’s significant reduction

in expenditures and initiation of a hibernation strategy to curtail all sales and R&D while

it simultaneously seeks a strategic partnership and guidance from the FDA on its

ColoSure test represent the best strategy that the company has left to finally realize the

commercialization of its technology.

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