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Edited Transcript of FMI earnings conference call or presentation 2-May-18 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2018 Foundation Medicine Inc Earnings Call

Cambridge May 4, 2018 (Thomson StreetEvents) -- Edited Transcript of Foundation Medicine Inc earnings conference call or presentation Wednesday, May 2, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jason Ryan

Foundation Medicine, Inc. - CFO

* Susan Hager

Foundation Medicine, Inc. - SVP of Corporate Communications & Government Affairs

* Tom Civik

Foundation Medicine, Inc. - Chief Commercial Officer

* Troy Cox

Foundation Medicine, Inc. - CEO, President & Director

* Vincent A. Miller

Foundation Medicine, Inc. - Chief Medical Officer

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Conference Call Participants

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* Amanda Louise Murphy

William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst

* Carolina Ventoso

* Doug Schenkel

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Patrick B. Donnelly

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Tejas Rajeev Savant

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Foundation Medicine First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Sue Hager, Senior Vice President of Corporate Communications. Please go ahead.

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Susan Hager, Foundation Medicine, Inc. - SVP of Corporate Communications & Government Affairs [2]

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Thank you, Michelle, and good afternoon, everyone. Thank you for joining us for Foundation Medicine's 2018 first quarter call. I'm standing in for Kim Brown today, who's out of the office this week. As a reminder, our press release and related financial information are available on our website at foundationmedicine.com.

Before we begin with management's prepared remarks, I'd like to remind everyone that comments made by management and responses to questions on this call will include forward-looking statements and information. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Please refer to our SEC filings for a discussion of these factors.

Here this afternoon to discuss results for the quarter ended March 31, 2018, are Foundation Medicine's Chief Executive Officer, Troy Cox; and Chief Financial Officer, Jason Ryan. Our Chief Medical Officer, Dr. Vincent Miller; and Chief Commercial Officer, Tom Civik, will participate in the Q&A portion of the call.

And now I'll turn the call over to Foundation Medicine's CEO, Troy Cox, for his opening comments.

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Troy Cox, Foundation Medicine, Inc. - CEO, President & Director [3]

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Thanks, Sue, and good afternoon, everyone. Thank you for joining our first quarter call.

Foundation Medicine is off to a very strong start in 2018. Let me start with some highlights. We reported record revenue in clinical volume. We achieved Medicare coverage for FoundationOne CDx across all solid tumors under the final National Coverage Determination, and we initiated the launch of this first-of-its-kind FDA-approved test. We signed a significant new companion diagnostics agreement with Pfizer, and we have a robust pipeline of new biopharma partners advancing our evergreen strategy for FoundationOne CDx. We were granted expedited Breakthrough Device designation just last week by the FDA for review of a new and expanded version of our liquid biopsy assay, which includes an expanded gene set as well as MSI and TMB.

We also launched a new gene expression profiling program for research purposes that will harness both DNA and RNA sequencing to identify known and novel biomarkers. And we expanded our global footprint, particularly in Asia, signing deals with both Chugai Pharmaceutical in Japan and DIAN Diagnostics in China, both leaders in their respective markets.

Let's drill down on some of the details of these achievements, which further strengthen our leadership position and expand patient access to personalized cancer care.

First quarter revenues were $53 million, doubling first quarter last year. Clinical volume also remained strong, increasing 57% year-over-year as we reported nearly 22,000 clinical cases. This increase is driven by growing awareness among physicians about the importance of molecular testing as well as the benefits of biomarker-guided drug selection. Particularly in the area of immuno-oncology, physicians are increasingly relying on MSI and TMB to help inform therapy selection. Now with the launch of FoundationOne CDx, physicians can appreciate the complete view of treatment options to inform personalized cancer care, including targeted therapies, immunotherapies and potential clinical trials.

Additionally, CMS's landmark National Coverage Determination for NGS testing was finalized in March, which was a major milestone for Medicare patients with advanced cancer and a step change in reimbursement for Foundation Medicine. Under the final NCD, FoundationOne CDx is now the first and only FDA-approved assay to be covered across all solid tumors. This is a considerable change from the preliminary draft, which would have covered 5 specific tumor types. CMS's final coverage policy was also expanded beyond its draft to include patients with Stage 3 and Stage 4 cancer and for repeat testing for patients diagnosed with a new primary tumor. We applaud FDA and CMS for setting a high bar by clearly establishing PMA approval as the undisputed pathway for therapy selection for patients as well as reimbursement coverage under the NCD for those tests that meet this level of validation.

On March 30, we made FoundationOne CDx commercially available, and thus far, the launch is going extremely well. Feedback from clinicians has been quite positive. FDA approval and Medicare coverage across all solid tumors creates a powerful message for our commercial team that is resonating with the oncology community. And we anticipate biopharma support will continue to grow as we keep FoundationOne CDx evergreen with new companion diagnostics claims that enable therapy selection, yet another example of our synergistic business model.

We're operationally ready and we have the lab capacity to meet the expected demand for our full suite of products, including FoundationOne CDx, for all of our clinical and biopharma customers.

In terms of next steps on Medicare payment, we are one step closer to operationalizing payment under the NCD as CMS recently issued guidance for the new advanced diagnostics laboratory tests or ADLTs. By July 1, we anticipate FoundationOne CDx will be designated as a new ADLT which will enable reimbursement under PAMA.

On the heels of a successful Parallel Review process, we're again leveraging our regulatory experience. Last week, we announced that a new version of our liquid biopsy assay was granted Breakthrough Device designation by the FDA. This significantly expanded version of FoundationACT includes an expanded gene set as well as MSI and TMB. This is an important step in advancing personalized cancer care, particularly for those patients for whom tissue is not available. It may also help our biopharma partners to accelerate their development of liquid biopsy companion diagnostics across multiple types of cancer. If approved, we expect this assay would qualify for coverage under the final NCD. We plan to begin the regulatory review process with a modular submission before the end of the year.

So turning now to our biopharma business. The growth continues and further diversifies. Clinical trial-related testing was particularly robust in the first quarter as we processed nearly 4x the number of samples as compared to the first quarter of last year. We also signed a broad collaboration agreement with Pfizer to develop companion diagnostics. Our pipeline for companion diagnostic development continues to grow following FDA approval of FoundationOne CDx. We offer a highly differentiated and valuable product for biopharma, offering reduced risk and representing a potentially streamlined and cost-effective regulatory process to companion diagnostic development and approval.

In addition to providing a proven FDA-approved platform, our biopharma partners benefit from our commitment to continued innovation. Science and data are central to everything we do at Foundation Medicine as we help to usher in new biomarker discoveries and biomarker-guided treatment approaches.

To that end, we announced earlier today an important expansion to our CGP platform with the addition of a gene expression profiling initiative. GEP leverages our deep expertise in DNA and also RNA sequencing and further enhances our ability to support our biopharma partners and their efforts towards even more efficient identification of novel, predictive genomic and expression-based biomarkers. It also represents a significant step towards developing personalized cancer vaccines, an area of strong and growing interest among our biopharma partners. While the GEP program is currently for research use only, our goal is to rapidly advance it into clinical trials with multiple partners by early next year. We look forward to keeping you updated on our progress in this emerging and exciting field of personalized cancer care.

And lastly, let me talk about our continued progress towards international expansion. We made significant headway this quarter on the global expansion component of our strategy, particularly in Asia, by entering into 2 key collaborations in Japan and China. In Japan, we partnered with Chugai Pharmaceuticals, a leading biopharma company and a member of the Roche Group. Chugai will commercialize our suite of products in Japan and has also filed for regulatory approval of FoundationOne CDx. If approved, we'd expect the integration of CGP into clinical care to accelerate in Japan. We also expect that approval will enable the same streamlined and efficient pathway for companion diagnostic development for biopharma that we've established through FDA approval here in the United States.

Likewise, in partnership with Roche, we recently announced a collaboration with DIAN Diagnostics, a leading independent diagnostic company in China and one of the first commercial labs approved by Chinese regulatory authorities to perform NGS testing. Through this partnership, DIAN has become our exclusive clinical sequencing lab partner in China, and Roche's commercial efforts in China will help build towards broad integration of CGP into clinical care. As you may recall, we also have an important partnership with WuXi that is complementary to our partnership with DIAN since it is providing support for our biopharma partners' clinical trials and therapeutic development efforts in China. We will have both clinical and biopharma testing available in China to advance personalized cancer care.

So just 4 months into the year, we've made tremendous progress on our objectives for 2018 that further strengthen our leadership position, competitive differentiation and, most importantly, make a positive impact on the lives of advanced cancer patients.

With that, I'll turn the call over to Jason to review our financial results.

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Jason Ryan, Foundation Medicine, Inc. - CFO [4]

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Thanks, Troy. I'll begin with a review of our first quarter results and then turn to the outlook for 2018.

As Troy mentioned during his opening comments, total revenue for the first quarter doubled to $52.8 million as compared to $26.3 million recorded in the same period last year. In Q1, revenue for Molecular Information Services was $46.6 million, an increase of 121% year-on-year. This includes $27.8 million in biopharma revenue versus $9.5 million in the same period last year. This Q1 growth exceeded our expectations primarily due to a sharp increase in the sample profiling for a number of our biopharma partners. We reported 7,184 tests to these customers as compared to 1,802 tests in the same period last year.

First quarter Molecular Information Services also includes $18.8 million in clinical revenue versus $11.6 million in the first quarter of 2017. This 62% year-on-year increase was driven by overall clinical adoption both in the U.S. and ex U.S. as we reported 21,861 clinical tests, a 57% year-on-year increase.

As a reminder, Q1 is our first quarter of accrual-based clinical revenue under ASC 606. This switch to accrual-based revenue was not the driver of the year-on-year increase in clinical revenue as cash-based clinical revenue in Q1 would have been approximately $22 million, inclusive of certain onetime catch-up payments.

Also related to the new revenue standard, we recorded a onetime transition adjustment to the balance sheet of $18.3 million. Approximately $17 million of that adjustment reflects the estimated future payments for clinical claims that were outstanding at 12/31/17. This adjustment was only recorded on the balance sheet primarily to accounts receivable and retained earnings and did not impact revenue. Additional information about the new rev rec standard and our implementation is available in our first quarter 10-Q filing.

In the first quarter, Pharma R&D Services was $6.2 million as compared to $5.2 million in the same period last year and was driven primarily by non-Roche-funded R&D activities.

And lastly, for Q1, OpEx was $62 million, an increase from $55 million in Q1 of 2017.

Now turning to our full year outlook for 2018. Given the strength of total Q1 revenue, the breadth of the final NCD and an expanding biopharma business, we believe that there may be upside to the revenue range of $200 million to $220 million that we provided back in March. That said, we plan to revisit revenue guidance on the second quarter call, primarily so we can gain additional insight into the commercial rollout of FoundationOne CDx, the transition from FoundationOne to FoundationOne CDx and the confirmation of ADLT reimbursement status for FoundationOne CDx that we expect on July 1. These developments will allow us to better understand the revenue trajectory for the remainder of the year.

With respect to clinical volume, we continue to expect to report in the range of 90,000 to 100,000 clinical tests. Likewise, we're not currently changing our operating expense guidance of $250 million to $260 million for the year. We ended Q1 with approximately $60 million in cash and cash equivalents on the balance sheet and $110 million remaining available under the Roche credit facility.

In closing, Foundation Medicine is off to a very exciting start of 2018. We are benefiting from increased leverage in our business while simultaneously enabling continued differentiation and value creation in the area of personalized cancer care.

Operator, we can now open the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Amanda Murphy with William Blair.

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Amanda Louise Murphy, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [2]

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So I just wanted to focus on the NCD for a second. So obviously, not impacting numbers yet, but just curious if you're seeing any changes just in terms of how people are conducting business in the space. So I don't know if you're seeing more traction from academic centers or that type of dynamic. Maybe it's a bit early, but just trying to get a sense of how the NCD is impacting kind of the flow of testing around here in the States?

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Troy Cox, Foundation Medicine, Inc. - CEO, President & Director [3]

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Amanda, it's Troy. Thanks for the question. It's a good one. Indeed, it's a bit early. But what I can tell you is that academics and communities alike, all -- human beings in life like to hit the easy button. And while treating cancer isn't easy, the outcome of the final NCD has made it very convenient and easy for all of our customers, all practitioners to be able to cover all solid tumors, and with one pan-cancer covering all solid tumors is an important advancement for them. So that is something that we've heard some very positive feedback from our internal sales force calling on external folks, and the initial reactions that we see is that this is very simple to follow and easy to understand and makes their life easy. And obviously, of course, the validation is really important to them, the FDA validation of the high quality, and then, of course, followed by reimbursement and a lighter load for patient copays and other challenges that they deal with on a daily basis.

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Amanda Louise Murphy, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [4]

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Okay. Got it. And then just in terms of the mechanics behind reimbursement. So are you able to get paid for the CDx -- FoundationOne CDx prior to the ADLT code being issued? And then how is that going to work just in terms of transitioning from the LCD -- the one LCD to the NCD?

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Jason Ryan, Foundation Medicine, Inc. - CFO [5]

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Amanda, it's Jason. I'll take a stab at that. So for, I think, the first part of your question around just second quarter before our expected go-live of 7/1 with the ADLT, we do have this test in the marketplace. We will be doing our local MAC, but it won't be under PAMA as an ADLT. How we get paid -- and remember, we just launched 4 weeks ago, so the volume will not be sort of a full quarter of F1CDx if you think about it several quarters from now. How we get paid from NGS before we're in ADLT under PAMA is to be determined and something we're going to work through with CMS and with NGS. With respect to the transfer from FoundationOne cases that are covered for lung to Palmetto today to FoundationOne CDx, that LCD from Palmetto will stay in place. So any cases for FoundationOne that are non-small cell lung cancer, in accordance with the criteria, will be paid by Palmetto. But obviously, as we move cases towards FoundationOne CDx over the course of not just this quarter but over the course of the year, those will be much more broadly reimbursed. We anticipate a vast majority of FoundationOne CDx cases getting reimbursed under the NCD. Does that answer your question?

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Amanda Louise Murphy, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [6]

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Yes. So basically, could be a little bit lumpy in Q2, but then after that -- or after July, you should be fine is the point.

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Jason Ryan, Foundation Medicine, Inc. - CFO [7]

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Yes. We would anticipate that starting in July, with ADLT -- new ADLT status, we would begin accruing revenue for FoundationOne CDx cases that are reported.

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Amanda Louise Murphy, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [8]

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Got it. And then I guess just one more philosophical if you think longer term. So you've continued to expand the testing portfolio. I think you're quite focused on FoundationOne at the moment, obviously. But I just was curious if you could give us a perspective on how you're thinking about the task menu, if you will, over time. Obviously, you're focused on advanced cancer at this point, but maybe just speak to the longer-term strategy around expansion or maybe even thinking about bringing in technology that you don't have now, for example.

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Vincent A. Miller, Foundation Medicine, Inc. - Chief Medical Officer [9]

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Amanda, this is Vince. So I can take the first pass at that. I think one can speak of it both going deeper in advanced cancer and then going broader across the cancer continuum and any other paradigms in drug development where, I think, would start up in metastatic disease, end up in preoperative settings 4 or 5 years later after their value becomes that much clearer. So with the introduction you've heard just in the past week or so, 2 anticipated additions to our product portfolio that are truly innovative, with a liquid assay going through the regulatory path that will add TMB and MSI and a gene expression profiling tool. When we launched FoundationOne 6 years ago, it was the best place to start. But clearly, we know that's going to evolve. These 2 technologies are ones we're going to build commonly with pharma partners, at least, in part, but we're certainly not averse to looking outside and bringing in things that are not optimized by us doing them ourselves.

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Troy Cox, Foundation Medicine, Inc. - CEO, President & Director [10]

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I would add -- I would just add that, certainly, I would point in the short and the medium term around our improved FACT blood product, super exciting for us. And then also, the GEP is something that our customers are super excited about, multiple customers. And the other thing, as Vince said, is that we do have a comprehensive effort of monitoring what's out there in terms of new technologies, et cetera. And we have strong, financially sound partners that if we found something that was of interest that could give us an advantage or even be a threat to us, those are things that we would pursue with great vigor and would have the resources to do so. But we feel highly confident that we're in a good position following the sciences we are today and continuing to maintain the leading edge across our full portfolio company.

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Operator [11]

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Your next question comes from Doug Schenkel with Cowen and Company.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [12]

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Maybe sort of starting with I think what is a bit of a follow-up to at least one of Amanda's questions. You guys, again, asserted today that the finalized NCD effectively results in FoundationOne CDx being covered for testing all solid tumors and all cancers to some degree, regardless of stage, with some caveats. Some others in the industry have asserted it's probably a little bit more narrow than that, albeit broader than I think most folks originally anticipated. Have you received any additional feedback from CMS that boosts your confidence in your assertion? Or when push comes to shove, will we not really know the answer until you start filing claims and see how they're treated?

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Troy Cox, Foundation Medicine, Inc. - CEO, President & Director [13]

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Doug, it's Troy. I'm not sure if I'm fully following the question. Obviously, from the draft to the final, we see the addition of Stage 3 and as well as testing a second time with the new primary. So that is making it easier. What -- can you maybe rephrase your question?

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [14]

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Well, I think where there's some debate is around essentially the see-through or the read-through to the FDA label and, essentially, whether the inclusion of MSI, and I believe that could (inaudible) the label, effectively leads to this being a pan-cancer reimbursement approval. I think that's where there's the debate in the community. And I'm just wondering if you've heard anything that completely makes this black-and-white clarified from CMS.

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Jason Ryan, Foundation Medicine, Inc. - CFO [15]

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Doug, it's Jason. I think I can provide some insight here. So what is critically important in the final policy is that you need to look to the FDA label of the assay that's being covered under the NCDs. The first step is are you covered under the NCD, which we are. Then the scope of that coverage has to do with the FDA label. Our label is not only for the companion diagnostic claims, but it is for, effectively, all mutations. And so this is -- the label from FDA for FoundationOne CDx is a very broad label, not restricted to the CDx claims. And that's why this is a broad pan-cancer coverage for us.

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Troy Cox, Foundation Medicine, Inc. - CEO, President & Director [16]

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For all solid...

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [17]

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Yes. Always helpful, guys. I completely understand that's kind of the backbone of the question. I guess there's some others who view it differently. And my question, really, is have you black-and-white confirmed this in discussions with CMS?

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Troy Cox, Foundation Medicine, Inc. - CEO, President & Director [18]

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Yes, yes. Yes, absolutely. We are full -- all solid tumors.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [19]

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Okay. And then in terms of the impact of the NCD on commercial payers, has there been any notable change in activity or attitude since the NCD was issued?

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Tom Civik, Foundation Medicine, Inc. - Chief Commercial Officer [20]

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Doug, it's Tom here. Thanks for the question. Yes, I think Troy mentioned it earlier. The NCD was obviously a step change for us as an organization and for patient access. We sort of have a 3-step process here that we are thinking about for 2018. The first was to make sure that we landed the NCD. We're excited about the progress and where we ended up with the NCD. The next step is to work with the health plans that have Medicare Advantage lives. By law, the doctor makes the same coverage decisions better in the NCD. So we've got a team working with the health plans today to transfer the NCD for the Medicare Advantage lives. And obviously, while we're there talking about the Medicare Advantage lives, we're going to be also talking about their commercial lives as well. Now that said, we're only a month in. We've got a really passionate team that's out in front of these health plans talking to them, and we still have a lot of work to do. So I'm excited to maybe share some more updates at the Q2 call, but good progress at this point.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [21]

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Okay. Pivoting over to China. Can you walk us through the 3-party DIAN-Roche-FMI clinical agreement in China? You obviously talked about this a bit in your prepared remarks. But I guess what's unclear, to me at least, is will DIAN be the only lab running FoundationOne ACT and heme assays in China for clinical purposes? And recognizing there's already a strong relationship between DIAN and Roche, how are responsibilities delineated? And I guess finally, are economic terms the same as in other geographies, COGS plus a markup? Or is there something different in this geography?

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Troy Cox, Foundation Medicine, Inc. - CEO, President & Director [22]

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Thanks, Doug. It's Troy. I'll take that. Number one, indeed, you're aware of that, it sounds like, but others might not. There is a strong, long-standing relationship between Roche all entities, and particularly, Roche Diagnostics, with DIAN. In fact, they're the key distributor of Roche diagnostic products within China. So we have that trust and strong collaboration there already. Indeed, DIAN is an exclusive partner. So we will be working exclusively with DIAN to offer our -- ultimately, our full suite of products within China via DIAN. The WuXi relationship is the clinical biopharma business. But where else Roche enters in is in the commercialization. As you know, Roche has a very, very strong affiliate in China, a very large team of people that are going to help, in combination with DIAN and their commercial resources, to pull through our products and gain access to, hopefully, many more Chinese patients with advanced cancer for personalized cancer care.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [23]

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Okay. And maybe one last one for Jason. As you noted, you took down $30 million more under the Roche credit facility during the quarter. Can you remind us what's left? And maybe more importantly, how do you and the board think about equity versus debt moving forward? I think it's fair to say it's pretty unusual for a company at this stage of the game to be issuing debt at this magnitude. But of course, this is a company with a pretty unusual ownership structure. So it'd be helpful just to hear how you guys are thinking about that, including at the board level.

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Jason Ryan, Foundation Medicine, Inc. - CFO [24]

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Yes, Doug. I think part of your question was actually part of my answer back to you, which is it's a unique situation with our partnership and our equity ownership through Roche and, honestly, the significant alignment of the 2 companies in terms of what we're trying to get done. So just in terms of the basics, we've got $60 million in cash at the end of Q2 on the balance sheet and $110 million available under the line, so about $170 million we have access to today. That certainly sets us up to do what we want to get done this year and heading into next year. And so I think as we think more broadly about where the company is headed, we balance this -- what we see is this unfolding opportunity. We've always seen the opportunity. But you can see in the numbers, for example, from Q1, and they don't include the NCD impact yet, the leverage we're starting to see in the business and kind of a turning point. So there's big opportunity ahead of us, and we don't want to under-invest and we also want to be smart. So all of this goes into considerations with, of course, the board, in discussions with Roche. I'm going to leave it at -- I'm not going to answer specifically on financing, but we have $170 million at our disposal today. We have a very supportive majority shareholder, and we think we're very well situated to hit our key priorities for this year and certainly heading into next.

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Operator [25]

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The next question comes from Patrick Donnelly with Goldman Sachs.

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Patrick B. Donnelly, Goldman Sachs Group Inc., Research Division - Equity Analyst [26]

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Maybe just given the relatively significant changes in the final NCD compared to the preliminary version, do you need to ramp up doc education on those changes relative to the work you've done with docs before the final announcement?

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Jason Ryan, Foundation Medicine, Inc. - CFO [27]

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Patrick, I'm sorry. You broke up slightly. Was the question do we need to educate physicians differently now given the breadth of the NCD?

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Patrick B. Donnelly, Goldman Sachs Group Inc., Research Division - Equity Analyst [28]

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Exactly.

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Jason Ryan, Foundation Medicine, Inc. - CFO [29]

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Okay.

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Tom Civik, Foundation Medicine, Inc. - Chief Commercial Officer [30]

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Patrick, it's Tom here. Let me get us started on this one. I think the great news is that as an organization, we've been preparing for this launch for quite some time. So we had a commercial team and, frankly, an entire organization that was ready to hit the ground running on March 30. And part of the message that we're bringing to the marketplace is around this broad coverage of NCD. And I would say the early read from our customers is that is resonating extremely well coupled with the FDA approval. And then lastly, the report, and Troy's mentioned it a couple of times, it's just really easy and actionable for a local -- for any physician to make an important treatment decision for their patients. So it's really those 3 things, and NCD is part of it that is being received really well at these early stages of the launch.

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Patrick B. Donnelly, Goldman Sachs Group Inc., Research Division - Equity Analyst [31]

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Okay. And then maybe just one on FoundationACT, the liquid biopsy given the recent Breakthrough Device announcement. Can you just talk through timing of when you see that being a material contributor to revs? And then also, just kind of talk to the market, how you're sizing it and how it's going to ramp for you guys.

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Jason Ryan, Foundation Medicine, Inc. - CFO [32]

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I'll take the first part here on the revenue piece. Of course, we're starting this process now with the FDA. We mentioned in the prepared remarks that we anticipate the first of our modular submissions by the end of this year. I think that now, on the liquid biopsy front, the fact that this NCD is broad, not just in terms of indications but in terms of sample type, is really meaningful. So if successful going through FDA, then dependent on the label of that FDA-approved liquid biopsy, we would be gaining Medicare coverage through the NCD. And it's for a really unique blood-based assay with TMB and MSI, so different than what we have today. And so I think there is a pathway now for Medicare reimbursement in liquid biopsy through the regulated route. And that pathway hadn't existed before through the local MAC system. So we're encouraged by that. And Tom, maybe you want to touch on the commercial piece.

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Tom Civik, Foundation Medicine, Inc. - Chief Commercial Officer [33]

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Yes. I think the -- as we think about the opportunity here, and Vince, I think, mentioned it earlier as well, that there are a group of patients that just don't have access to tissue. And this is about what this organization is all about, making sure that we have something for any patient that's been diagnosed with this horrible disease, and this is an evolution of our portfolio.

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Patrick B. Donnelly, Goldman Sachs Group Inc., Research Division - Equity Analyst [34]

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Great. And then maybe just one last one on companion diagnostics, the competitive landscape there. Obviously, we all knew it was going to be a competitive market in the long term, but last month, you had the biggest sequencing player, Illumina, come out -- announced a few collaborations, including one with Bristol. So I'm curious, maybe you could just give us an update, kind of a state of the market in terms of the competitive landscape, how you're feeling about your competitive positioning. It'd be helpful to hear that.

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Troy Cox, Foundation Medicine, Inc. - CEO, President & Director [35]

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Sure. As many of you have recognized, including you, Patrick, is that we're -- Foundation Medicine is in a really unique position and is, indeed, a one-of-a-kind company. If we just step back and take it, as you well know, the current state is not right for many cancer -- advanced cancer patients. And so as you know, only 15% are getting the right kind of test. And so we are -- and we're the, by far, the leaders within that segment. So there's a lot of gain -- a lot of ground to be gained for these patients, and we're -- certainly have one heck of a head start. And I feel that both the science and Foundation Medicine is really just getting started. That said, we do believe that there's a place in the market for distributing kits. And so while we're not sharing the specifics of our strategy other than we do think, even more so in international markets, that a kitted strategy makes sense -- and over time, eventually, there will be a higher percentage of centers and other health care providers that will be able to operationalize that kind of -- today, it's relatively low. And so we're excited, first and foremost, about pulling through FoundationOne CDx, our opportunity to deliver a super innovative that, we think, is going to meet the needs of the future, with MSI and TMB, with our improved FACT, the gene expression profiling following that path. And certainly, we'll consider all other reimbursement opportunities. Our goal is to build ubiquity and ensure cancer patients around the world will be -- have access to personalized cancer care, and a distributed kit is an approach that will be a part of that -- is an important part of reaching those kinds of customers ultimately.

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Operator [36]

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The next question comes from Tycho Peterson with JPMorgan.

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Tejas Rajeev Savant, JP Morgan Chase & Co, Research Division - Analyst [37]

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This is Tejas on for Tycho. One quick one for the NCD. So Jason, I know in the second half of this year, you get 15,000 to 20,000 sort of incremental tests that will get paid. Depending on how quickly things get operationalized, you may see a greater or a lesser degree of revenue upside. But my question was more in terms of test volume itself. Could we see upside here in the second half of the year just based on greater penetration rates given the ease of reimbursement that's now in place? And are you beginning to see any early signs of that in terms of your clinical volume?

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Jason Ryan, Foundation Medicine, Inc. - CFO [38]

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Thanks, Tejas. I'm going to answer the first part and hand it over to Tom to talk about the commercial piece, the impact of the NCD. I just wanted to call out, for those others listening, the 15,000 to 20,000 number you mentioned was not one we shared. It was coming out of your model. So I wanted to be clear about that one. But in terms of the question, Tom, on the NCD impact?

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Tom Civik, Foundation Medicine, Inc. - Chief Commercial Officer [39]

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Yes. I think the NCD is obviously a really important driver towards acceptance of this product in the marketplace. It's a little bit too early for us to sort of say the full impact of it, but it's in the early days. The signals are good. And I think when we come back in Q2, we'll have a better sense of -- on how the marketplace has responded to the FoundationOne CDx launch.

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Jason Ryan, Foundation Medicine, Inc. - CFO [40]

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I got to jump back in here, Tejas, as well. Keep in mind that it's not something that you would expect to have a big volume impact because these physicians were ordering beforehand as well, as you know. So more to comment when we get back together in Q2.

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Tejas Rajeev Savant, JP Morgan Chase & Co, Research Division - Analyst [41]

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Got it. And then a couple of ones here for Vince. Obviously, there was a lot of buzz around the Merck KEYNOTE-189 results, which showed a (inaudible) benefit irrespective of PD-L1 status. Just wanted to get your statements on, a, that data and how that impacted your conversations with your biopharma partners; the general receptivity to the importance of biomarkers given there's an inherent sort of commercial incentive for those customers to have as broad a label as possible.

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Vincent A. Miller, Foundation Medicine, Inc. - Chief Medical Officer [42]

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Thanks, Tejas. So it's great to see progress in lung cancer. When I started doing this, we were debating whether any chemo made a different versus support of care. That being said, the progress has been all too slow, particularly if you're the patient or loved one. And just to sort of keep us all from drinking the full Kool-Aid in that study, only slightly less than half the patients had their cancer shrink. The average patient, so to speak, the median PFS was under 9 months, and fewer than 70% of patients survived the year. And that's on the intervention arm. And I can guarantee you, our colleagues and friends at Merck aren't satisfied with that being the stopping place for therapeutic progress nor any competitors in this space. So we have 3 dozen, give or take, rich biopharma partnerships. Many of them have key molecules and portfolios in the immunotherapeutic space. And those conversations have deepened and broadened. Those, perhaps, not using TMB are now looking at it to refine things. Those using TMB are looking for something to further refine that. And who knows, GEP may be one such vehicle. As we described today, there's an awful lot of enthusiasm around that from biopharma partners, among others.

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Tejas Rajeev Savant, JP Morgan Chase & Co, Research Division - Analyst [43]

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Got it. And then one final one here for me. Just given all the excitement around asymptomatic screening, are you guys planning to focus on that? Is that a development -- I mean, an R&D priority for you in the near term or not really at this point?

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Jason Ryan, Foundation Medicine, Inc. - CFO [44]

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Sure. So we got a couple of questions today on sort of our breadth and depth, and we certainly are looking to broaden where our portfolio goes. But that would sort of be one extreme end of things. So we haven't certainly described any initiative there. And I think that would, perhaps, at this time, where we get this tremendous opportunity in this burgeoning portfolio, almost distract us from what we need to get done.

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Operator [45]

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(Operator Instructions) The next question comes from Paul Knight with Janney.

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Carolina Ventoso, [46]

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This is Carolina Ibanez-Ventoso on for Paul Knight. So your FoundationOne CDx is a companion diagnostic for approximately 15 targeted therapies. As other therapies with companion diagnostics get approved, even if you don't -- you are not impulsive in the clinical development of that companion diagnostic, how do you plan on expanding your companion diagnostic claims?

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Vincent A. Miller, Foundation Medicine, Inc. - Chief Medical Officer [47]

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So this is Vince Miller. So that's what really Troy alluded to in his remarks around this evergreen effect or opportunity. We really feel a responsibility as companion diagnostics emerge, even if we're not the initial partner to develop with FDA and, in many cases, the pharma partner, supplemental submissions that complete the clinical validation module for that marker and drug and, therefore, migrate it to the therapeutic indications on Page 1 of our report. So that's an exciting opportunity. It's something we look forward to and bring them on, and each one just makes our efforts and our assays that much more relevant to day-to-day practice for medical oncologists.

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Troy Cox, Foundation Medicine, Inc. - CEO, President & Director [48]

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And importantly, it's in everybody's best interest, first and foremost, starting with the patients, but all of our biopharma customers just thinking about that. What they care about in terms of diagnostics is identifying the patients with a high-quality tool that's actually being used by the doctors. And so with our end market presence and strong leadership plus having the first and only universal -- this concept of evergreen across all -- keeping it pan-cancer and keeping it universal, universal is really important to us. And we can do that with or without the collaboration and partnership with a biopharma. But of course, many biopharmas will want to do that collaboratively with us because it's in their best interest.

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Carolina Ventoso, [49]

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And then you also mentioned in your prepared remarks that physicians increasingly rely on TMB and MSI. How does having this tool and your features improve the performance of FoundationACT and differentiate it from other competitor tests?

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Troy Cox, Foundation Medicine, Inc. - CEO, President & Director [50]

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So let me take the first part, and then I'll hand it over to Vince. What's also important that -- recognize that FoundationOne CDx already includes MSI. Remember, when Merck's pembro, some time ago, got approval agnostic to tumor type for MSI, we already had that on our test. And within 24 hours, we were guiding patients, doctors, with those that were MSI positive, to that therapy option. And so likewise, we have TMB today, and that is reported out in Page 2 of our report. And in time, as we get to TMB CDx approval, that will move to Page 1. So turning to your specific question on FACT, it's huge, right? We believe that TMB -- more data to play out, certainly, across more tumor types. But we believe ultimately that TMB will be a better predictor, and proven so, a better predictor of immunotherapy response and relevant to, if not all, most of all tumor types. And so having that built in -- and no one has processed more TMB than us. No one has published more TMB than us. And so our real expertise in that -- and of course, with MSI already in there, this will be important for those patients that don't have tissue available to also look at what I affectionately call the new sheriffs in town, guiding immunotherapy. TMB and MSI are really important, and that's why we think this will be a step change of acceptance over the marketplace of our new and improved FACT product downstream.

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Operator [51]

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This concludes our question-and-answer session. I would now like to turn the conference back over to Troy Cox for any closing remarks.

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Troy Cox, Foundation Medicine, Inc. - CEO, President & Director [52]

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Thanks, operator. We appreciate the support of our employees, customers and shareholders. We're well positioned for continued growth and value creation and, most importantly, enabling a personalized medicine approach for patients fighting advanced cancer. Thanks again for joining us today. Have a good evening.

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Operator [53]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.