Aspira Women's Health Inc (AWH) 2003 Q4 法說會逐字稿

Good morning. Welcome back to Ciphergen Biosystems fourth quarter and year-end 2003 earnings release. [Operator Instructions] Here with our opening remarks is Ciphergen Biosystems Investor Relations representative Miss Sue Carruthers. Please go ahead, ma'am.

Thank you. Good morning ladies and gentlemen. With me today, William Rich, President and Chief Executive Officer, Matt Hogan, Chief Financial Officer, Martin Verhoef, President of the Biosystems Division and Gail Page, President of the Diagnostics Division and others who may participate in Q&A session.

Copies of the press release were distributed earlier this morning and are available on our Web site. I would like to remind everyone that this call is for information purposes only. This call is being recorded and is copyrighted, and therefore, please note that it cannot be recorded, transcribed, or rebroadcast without Ciphergen's permission. Your participation implies consent to our recording this call. If you do not agree with these terms, please drop off the line.

Our discussion today contains some forward-looking statements including Ciphergen's expectations of future strategic plans and operational results. Various risks may cause Ciphergen's actual results to differ materially from these expectations. For a list and description of some of these risks and uncertainties, please see the reports filed by Ciphergen with the SEC. The information in this conference call related to projections or other forward-looking statements may be relied upon subject to the previous Safe Harbor Statement. As of the date of this call and may continue to be used while the call is maintained on our Web site.

I would now like to introduce you to Matt Hogan, our Vice President and Chief Financial Officer.

Thanks, Sue.

I'm going to begin with a discussion of our financials. And I'll then turn the call over to William for a review of other corporate highlights.

Ciphergen reported fourth quarter revenue of $15.2 million, a 12% increase over the same quarter 2002. For fiscal 2003, revenue was $58.4 million, which is 49% growth over 2002. During the quarter, we recorded revenue from the sale of 33 ProteinChip systems, about 25% of which were systems of some additional level of automation or advanced software packages. Ciphergen has now passed the 500 systems sold benchmark. Instrument sales which include upgrades and accessories generated around 45% of total revenue in Q4 with $6.8 million in sales compared to 6.0 million in the fourth quarter of 2002, a 13% increase.

For the year, instruments revenue grew 39%. Total consumable revenue, which consists of both ProteinChip array sales and chromatographic sorbents, was $5.9 million in Q4 or 39% of total revenue. Of this, 2.3 million represented array revenue, which is an increase of 49% in the fourth quarter, compared to the fourth quarter of last year. We think there's plenty of room for an acceleration of chip usages, automation becomes more widespread and as customers mature from discovery studied into routine as they use. For the year, Chip sales grew 81%.

Our BioSepra process proteomics business unit generated 3.6 million in sorbents revenue, which is a bit below the 4.2 million in Q4 in 2002. But this business is always a little lumpy as orders can be as large as a half million to a million dollars each. And Q4-2002 was quite strong. For the year BioSepra sorbents revenue grew a solid 45%.

The remainder of our revenue was related to service activity. In the quarter, total service revenue grew to 2.4 million as compared to 1.8 million in Q4 of 2002. Collaborative service projects accounted for about 900,000 of the total in the fourth quarter with the remainder coming from providing maintenance services to our customers and paid training activities. For the year, total service revenue grew 64% and collaborative service revenue grew 23%.

Our gross profit for the fourth quarter was $9.9 million, which represents a 65% GM or around 67% if one excludes the impact of our litigation settlement reached in the second quarter. Sales and marketing expense excluding deferred compensation was 6.8 million in the fourth quarter of 2003 versus 5.6 million in the fourth quarter of 2002. This increase was driven by the growth of our sales and marketing organization and promotional activities. We resumed hiring program managers and field scientists in the fourth quarter after slowing the growth of the sales force earlier in the year. Deferred compensation in sales and marketing was 67,000 in the fourth quarter of 2003.

R&D expense excluding deferred comp was $6.1 million in the fourth quarter of 2003 essentially unchanged from the fourth quarter of 2002. Deferred comp attributable to R&D was 16,000 in the fourth quarter of 2003. G&A expense excluding deferred comp was 3.3 million in the fourth quarter of 2003 versus 4.4 million in the fourth quarter of 2002. That decline is largely due to the fact that we had considerable legal expenses in last year's Q4 due to litigation that was settled in the second quarter of 2003. Deferred compensation attributable to G&A was 196,000 in the fourth quarter of 2003. Our operating loss was 6.9 million was slightly better than the 7 million in the fourth quarter of 2002.

Our BioSepra business unit recorded other income of about 770,000 in the fourth quarter related to a cancellation fee. We had originally expected this to be revenue in Q1-2004 but we've determined with our auditors that the proper accounting treatment is to book it in Q4 as "Other Income".

We are now booking an income tax provision as our BioSepra operation as rapidly using up to (inaudible) Such that we'll wind up paying taxes there this year. This impacted our net loss by 178,000 in the quarter. We reported a net loss for the fourth quarter of 6.7 million essentially flat for the fourth quarter of 2002. We ended the year with 47.3 million in cash and investments, which compares to 49.3 million at the end of the third quarter.

Before getting into guidance for 2004, let me circle back to our Q4 revenue, which came in below our prior expectations and make some high level comments that influence the guidance we're giving to that.

The Q4 revenue shortfall to our expectation really came down to new system placements from the US. Japan and China did extremely well and Europe did reasonably well. The US is where we had a very disappointing drop in productivity and a large number of orders we expected to receive just didn't come in by quarter end.

As we'll describe, we think the majority of these orders will prove to have been delayed and not permanently lost. Chip sales did reasonably well in the quarter. Accessory sales from high-end systems did fine. BDC revenues were on plan and BioSepra did slightly less than expected but on the whole, they did pretty well. So again, the main issue came down to new system placements in the US or large number of orders that we anticipated did not come in by the end of the year.

So, what happened in the US? The issue seems to be increased competition, probably 80% of that was indirect competition from in-house centralized core labs as these groups fight for control of biomarkers and to provide services rather than let one of the labs they could be erratically served us by one of our systems. May be 20% whose direct competition from other mass spec companies claiming biomarkers discovery capability.

The trend to our biomarker should be very favorable for us in the long term but increasingly in the second half of last year as the core labs attempt to play a role in biomarkers now and there's confusion over how biomarker efforts should be conducted within institutions and pharma, this work begins to support multiple accounts. NIH spending did not comeback for us in the fourth quarter, and neither did Pharma Biotech, which is probably a function of resorting how to exactly how to go about incorporating biomarker discovery efforts in their programs.

However, we believe there will be an increase with spending in 2004 in a biomarker Proteomics worldwide and are assuming a modest increase in NIH activity as well as more substantial increase in former biotech covering both capital equipment and services.

We took some action steps to address these issues.

First, we've drilled down hard on the orders that we'd expected to get in the fourth quarter but which didn't come in. We planned to convert a high percentage of them in the Q1 orders by returning to our historically successful sales model (inaudible) focused more on pre sales activities, which we believe will have a rapid positive impact on sales efficiency. This has gotten off to good start for us in January and early February.

Second, because we believe there's going to be increased spending on biomarker Proteomics worldwide in 2004, we've launched a new advertising and sales program in Q1 of this year based on exploiting our leadership in biomarker discovery. Also we're actively recruiting and adding to our sales force. We'll probably add roughly ten salespeople next year, up around 30 to 40% on average, which slowed our hiring greatly in quarters 2 and 3 last year with now going back to aggressively hiring additional salespeople including field scientists.

Even with only historic productivity rates per sales person, this will add to our system placements in 2004. Even our high GM, an incremental $1 million in revenue generates nearly 700,000 in gross profit, so the return on these salespeople is attractive.

New product introductions are planned for 2004. We really can't get into what they specifically are for risk of jeopardizing sales in quarters before pharma launch and for competitive reasons, but we have product introductions planned for this year that represent significant advances and should trigger additional sales especially in the second half of the year.

Collaborations. Again, I can't get into details, but we're in active discussion mode with several parties about expanded co marketing relationships that would boost our research tools and process Proteomics businesses.

And lastly, as William will discuss, we established a formal diagnostics in (inaudible), which should aid our growth (inaudible). First, continued growth in our BDC service business. It grew nearly 25% last year to around 2.6 million. But it should grow at a faster pace than that this year for two reasons. First, we now have our Japan center fully marketing this service, and they started to generate their first revenues in the fourth quarter last year. And also, we're making headway with several key Pharma accounts, anyone of which could generate substantial revenues in 2004 against the backdrop in which Pharma's now focusing resources on biomarker discovery.

Secondly, the diagnostics division is led by a proven industry leader Gail Page with 25 years experience in diagnostics. This along with announcements around the division should add to our credibility in biomarker discovery and our efforts to deliver robust, high value diagnostics assays on a platform which would boost both our clinical Proteomics research tools business and our BDC service.

Third, collaborations with diagnostics companies including reference labs and in vitro diagnostic companies. Specific diagnostic task for developing such as against ovarian cancer or Alzheimer's efforts etc. One of our corporate objectives for the years to form collaborations whereby we get a combination of license fees, milestones, royalties, research support and a supplier agreement out of these deals. And of course, we had no such revenue last year.

So, financial outlook for 2004.

Taking into account the competitive environment but also improved likely funding environments for biomarker Proteomics and all our proposed actions steps that I just described, the company provides the following financial guidance for 2004.

With respect to revenue, Ciphergen expects to see revenue growth of approximately 30 to 40% in 2004. For total forecast of 2003 revenue was 76 to 82 million. Based on seasonality and other factors, we would expect approximately 20% of annual revenue to be in the first quarter approximately 23% in the second quarter, approximately 26% in the third quarter and approximately 31% in the fourth quarter. We expect our GM to be in the 67 to 70% range during 2004 and we anticipate a net loss in 2003 of approximately 16 to 19 million. The losses are expected to decline in sequential quarters driven by the anticipated growth in revenue.

Now I'd like to turn the call over to William Rich for additional comments.

Thanks Matt and good morning everybody. Let me cover at a high level some of our accomplishments last year and then speak to our key objectives for 2004.

With nearly 50% revenue growth in 2003 and expectations of another 30 to 40% in 2004, we remain among the fastest-growing protein research tools companies in the industry and the leader in biomarker-based clinical Proteomics or web biomarker Proteomics. We had considerable success introducing automation accessories to our installed base last year, which is a promising indicator for future growth in our consumable array sales.

Next, our customers continue to have major successes with our SELDI ProteinChip technology. We have accounted so far over 70 publications stemming from this work in 2003, 48 presentations at the American Association of Cancer Research, 26 presentations at the American Society of Mass Protrametry (ph). We were named Proteomics Technology of the year by Frost & Sullivan.

Our focus on process Proteomics customers, that is, customers needing to peer for protein at large or small scale continue to yield excellent results. BioSepra has gone from about $5.5 million in sales two years ago when we bought it to approximately $15 million in 2003 in sales of sorbents and services.

Our R&D investment produced several new products introductions including, first, our interaction discovery mapping or IDM platform, which enables rapid protein interaction studies and compliments our proven expression difference mapping capability for biomarker discovery while providing significant improvements in functional Proteomics applications.

We introduced the first of a new generation of ProteinChip array surfaces. These novel patented SEN, which stand for surface enhance need desorption surfaces are revolutionary in resolving the remaining problems associated with laser desorption mass Protrametry including chemical noise reduction and other interferences caused by so called matrix molecules.

SEN chips did not require additional organic acid matrix to function and provide significant improvements in the detection of drug candidates, tabloids and peptides. And they allow the potential for approaching interaction studies involving simultaneous detection of drug, molecules, protein targets and interactors. These SEN surface represent 1 of 16 new or improved ProteinChip arrays and kits introduced in 2003.

Improvements in ProteinChip technology for complete automation of the biomarker discovery process.

During the year, Ciphergen introduced CiphergenExpress, a powerful new data base manager, which in combination with biomarker patterns are recently patented, pattern recognition software plus hardware automation accessories offers our customers a fully automated ProteinChip biomarker system, and processes for routine protein biomarker discovery, validation and assay all on a single platform.

The growing interest in biomarker Proteomics has heightened competition as we expected and we are reacting aggressively. Major competitive advantages we feel we have include first, the proven power of our ProteinChip Auto Biomarker System, biomarker patent software, and powerful biomarker discovery processes to go from discovery to purification, identification, and assay on a single platform.

And with speed and assay performance unmatched by any other method we know of, the discovery and development speed sample through-put and discovery and assay reproducibility of our system along with our propriety processes, allow clinical researchers or drug development groups to discover bio-markers, create and validate high predictive accuracy, multi-marker assays in months versus years using their current technologies. And then use the same platform for high throughput, high-performance multi-marker assays for clinical research, clinical trials or drug development studies.

Second, we have a highly technical and productive Ph.D. level sales force including field scientists that offers real on-site problem solving to customers and unparalleled after sales application success support. This unique to the industry sales force is a major differentiating factor to other firms, which rely on traditional instrumentation salespeople and limited application support.

On the diagnostics front, we're delighted that Gail Page has joined Ciphergen as President of our Diagnostics Division. As Matt said, she has over 25 years of experience and a deep understanding of all aspects of the diagnostics industry, which is precisely what we need at this time to convert our many exciting biomarker discovery programs into commercially viable diagnostic tests.

The new diagnostics division offers shareholders a major new business opportunity in the $22 billion in vitro clinical diagnostics market and a strong synergistic boost to our clinical research tools business. Our aim is to become the leader in proteomic diagnostics. By commercializing high value, high predictive accuracy multi-marker tests that revolutionize the current protein diagnostics market which the current market currently utilized low value single marker tests.

We believe these multi marker tests can provide a break through in early detection and prognosis of disease as well as able to search for surrogate markers which have great importance in pharmaceutical clinical development which will lead to real implementation of personalized medicine and diagnostics. The following is what Gail inherits to build the diagnostics division on.

First, over four years of biomarker discovery center based research plus more than 200 clinical researchers in oncology, cardiovascular, neurology and infectious diseases who are employing Ciphergen's technology and know-how, are focused on a variety of clinical questions including early detection, classification, treatment response, prognosis, and monitoring of disease. This has yielded a pipeline of discovery programs from which we are selecting the most promising scientific and commercial biomarker test candidates to advance into commercial diagnostics.

Second, a burgeoning patent to stay around biomarkers and panels of biomarkers.

And finally, five fully functioning biomarker discovery centers worldwide including our Johns Hopkins University Medical School Center. These centers are equipped with our state-of-the-art equipment and staffed by very experienced team in biomarker discovery, biostatistical analysis and design of clinical trials.

During 2003, we made significant progress in implementing a number of biomarker discovery projects and associated multisite clinical studies on the way to diagnostics commercialization.

Ovarian cancer is our best example where we and our collaborators at the Johns Hopkins University School of Medicine completed a multisite study employing over 500 patient samples in which we identified a protein multi marker test panel that has high productive accuracy in the early detection of ovarian cancer where the impact of early detection dramatically alters patient's survivability. We are currently conducting a large follow-on validation study using over 1,000 patient samples obtained from multiple sites around the world.

This larger study is the next step in our plans to commercialize this test with a clinical diagnostic partner or partners hopefully by year-end. Our biomarker discovery and development collaboration with Johns Hopkins is now in its fourth year and truly bearing fruit as evidenced by the ovarian cancer program. During the upcoming years, Ciphergen and the team at Johns Hopkins led by Dr. Dan Chan will focus on studies in ovarian, breast, prostate, and pancreatic cancers. About two weeks ago, Hopkins team published a study in the Journal of Clinical Chemistry on Pancreatic Cancer. Secondly, a multi marker panel for breast cancer that was previously published is currently undergoing a 500 patient multi center validation and finally there's a large study on prostate cancer that is commencing in Q1 of this year at the center.

Other areas of focus, which we are conducting outside of the Johns Hopkins collaboration, include Alzheimer's disease where we present an encouraging result from a discovery study at the society for neuroscience meeting Cardio class disease, we have partnered with BioSide and other disease areas we are going to announce collaborations.

Now, let me finish up with a description of some of our key objectives for 2004.

First, to achieve the rapid revenue growth we've described in our guidance, as well as other financial parameters we've outlined including seeing our losses decline throughout the year. Next, to continue to introduce new and improved products that enhance our leadership position in the field of protein biochip based proteomics. Third, to establish collaborations and alliances that can expand our process proteomics business and the exception of facility protein chip technology by (inaudible) of labs. Fourth, to complete our 1,000-plus patient sample ovarian cancer study by midyear and assuming successful results focus on translating that project into a commercial assay by year-end. Fifth, to simultaneously collaborate with the distribution partner or partners for ovarian cancer test as well as other projects in our pipeline.

And finally, to advance several other projects from our pipeline into larger, multisite validation studies, assays and potential diagnostics for commercialization. We expect to have a lot of accomplishments to report to shareholders in 2004. We believe it will be a highly significant year of progress for Ciphergen. I think I'll stop there and take questions. Operator?

Very good and thank you Dr. Rich. And representing Thomas Weisel and Partners, we go to the line of Paul Knight. Please go ahead.

Hi, good morning. This is Tim on here. You mentioned that Sepra cancellation fee $0.77 million in the quarter. I would imagine that's a sizable contract that was canceled. How good visibility do you have for CalSepra revenue in 2004?

Well, BioSepra has visibility is actually pretty good because customers typically order one or two or three quarters in advance when they need this much material. So notwithstanding that one transaction, our visibility's fairly good at BioSepra. I guess I'd give one more sentence on what happened with this cancellation fee. We got BioSepra had one pharmaceutical customer who has been using a sorbent as part of their production process for quite some time. And actually the end user sales of their drug are not sort of ramping as quickly as they had hoped and expected.

So, what they concluded was the amount of material they had in hand, these sorbents was great enough for their need going out quite some time. They came to that realization sort of in the third or fourth quarter, by late third quarter, early fourth quarter. But they already, of course, put in a binding purchase order with us for the first quarter. So, what we did is we just renegotiated it and since they don't need the material, we canceled the contract. But they made good on their commitment to us. So that's a little bit more background on that particular transaction.

OK. I have another question. I think you mentioned 80% of competition came from (inaudible) competition from BioSepra labs. What percentage of those (inaudible) is using SELDI technology versus other (inaudible) company technology?

Let me take this question. Martin Verhoef here. I'm not sure if I understood the question correct. But about 80% of the competition came out of core labs and about 20% from direct (inaudible). And I don't know the percentage. The way we measure is all the core mass spec labs obviously have a lot of mass Spectrometers. About 10% of our sales of systems in the core mass spect facilities.

Sorry. What percentage again?

10%. 1-0. 10%.

You're trying to sell SELDI technology into core labs to -- are you trying to use your BDC in, to compete these core labs directly?

We actually have most sales to the core labs directly through our sales force, and in exceptional cases they will also embark on the small BDC project. But that's more an exception. Mostly, this is direct instrumentation sales.

OK. Thank you.

You're welcome.

And thank you very much. Next we go to the line of Adam Chazan with Pacific Growth Equities. Please go ahead.

Hi guys, thanks for taking my call. A few quick questions. Can you detail for us the sales pattern in the quarter, perhaps the percent of sales that came either in the last month of last two weeks of the quarter and then looking forward, can you talk a little bit about the split in R&D spend, diagnostics efforts versus the core business?

It's Martin Verhoef again. Let me take the first part of the question. The capital goods business, it's very typical that the majority of the orders come in at the very pale end of the quarter. It's not unusual to see 60% to 80% of our orders come in the last two to three weeks. This is very typical again for this kind of industry. So with the second part of the question, let me ask Matt Hogan here on the R&D split.

Adam, I've kind of tried to avoid giving that data, because I'm trying to avoid giving segment reporting as long as humanly possible. But I think while we've formed, I would say, about historically 80% of our R&D dollars have gone on the tool side roughly and maybe 20% on the biomarker discovery center side, I would expect that we're going to moderate that ProteinChip system tool side R&D investment and increase our investment in the BDC's and on the diagnostics front. But not quadrupling it or anything like that. I think what we're doing is incrementally increasing how much R&D we put into the BDC's and diagnostic effort and being very cautious on the tool side which we think is now at an adequate spending level.

This is William Rich. Adam, One of the things we need to point out is in terms of product development side of hardware development side, that's one of the advantages of having both divisions. They both share dramatically in the development of new hardware products and software products this time. The only independent R&D that goes on is biomarker discovery process that goes on in the BDC. These are partially offset, of course, by the revenues we generate there with our service business. But both divisions benefit strongly from our product instrumentation and software and chip product development. R&D.

Adam Chazan Thanks. I'll get back in the queue.

Thank you. Next let's go to Piper Jaffray's Edward Tenthoff. Please go ahead.

Great. First, just a quick follow-up. I don't think I could quite hear Tim's question. But should we be looking for a decline then noticeably in one BioSepra sorbents revenues? And a quick follow-up in terms of the portion of instrument revenues, which were upgrades?

Yeah, I think in the first quarter, given that we thought we were going to have this one piece of revenue in the first quarter and now we call it other income in the fourth, I think our BioSepra sorbents revenue will be down in the first quarter. Your second question was, I think about 25% of our orders in the fourth quarter came with some level of automation or higher software, so some kind of a more advanced system sale than just the basics system.

And then are you breaking out individual, are you actually upgrading older systems then, too?

Oh, yeah.

And can you break that out for us?

I don't think we really have. I think if you want some kind of a little proxy, one thing I've done in the past, Edward, is take that instruments revenue figure that I gave you in dollars and divide by the number of systems sold that period. And at least that gives you a, if you will, an average selling price.

Right.

For the hardware. You know? At least we can get to you that level. But I'm not sure whether we want it (inaudible) exactly how many copies of Biomarker pattern software we sold or how many auto loaders, that kind of level of details, which I hope you'll be sympathetic to why we don't want to do that.

Certainly. And I'll hop back in the queue. Thanks.

And Mr. Tenthoff, if you do have any follow-up, feel free. We don't have anyone else in the queue. [Operator Instructions]

Surprise, surprise. I do happen to have a few follow-up questions. Some of which you may be able to answer, some of which you probably won't. So let me start with the easy ones. With the change now in the FrenchNOL (ph), what do you expect to be paying in taxes this year?

Give me one Sec.

I would say $1 million to $1.5 million.

Great. And then I'll just ask one more question and see if there's anyone else who has anything. But this is -- well, when we look at new product revenues, what percentage of your guidance or growth, however you want to think of it, is due to this new product introductions in the second half?

Very tough to quantify. I guess the only -- you know, by way of trying to give you some kind of an answer but a different one, obviously, we've got internal targets that are more aggressive than the guidance we're giving. And we're trying intentionally to come up with a set of guidance that we could get to without assuming a significant amount of diagnostic revenue, which, of course, we're shooting for. So we think we can come up with -- make the financial guidance we gave on the basis of sort of the existing tools and services business. How much precisely comes from new product introductions really hard to quantify?

That's helpful. And I'll hop off now and see if anyone else had any questions. And if not, I have one more. I'll jump on later.

Thank you, Mr. Tenthoff. We do have a question from the line of Mark Smillie with Seidler. Please go ahead.

Good morning guys. I just have a follow-up question on the 10% of sales going into core lab facilities now. You mentioned in an earlier call or at some point in the past you guys are now focusing on really going after that market. Where do you see that 10% going? Is it likely to double, triple? Where do you want it to be?

Let me answer. It's going to be what we're doing actually is this -- one of the things we have going on is we've had a relationship with applied bio systems where we actually supply sell the programs, the interfaces to the (inaudible). We definitely see an increase in -- increase in that product and that really comes mostly out of the core facilities. In addition we would expect slowly but steadily the (inaudible) will embrace the technology because it is flat out the best technology for Biomarker discovery and Biomarker assay development. And we see the first signs of that. And we will actually be putting some more efforts in place to reach out to that group of customers.

Let me embellish that just a little bit. What's happened is the core laboratories have not been doing Biomarker discovery. You have to understand that, up until the end of last year. The emphasis has really changed over the last 12 months and really the last. six of the last 12 months. So now they're becoming extremely interested in that area. And they are applying their conventional tools at this point to try to do Biomarker discovery. What we have seen in a number of cases where we have got into the core laboratories with our technology is that they do recognize very quickly the power of the technology when they actually are doing Biomarker discovery and they're actually using our technology.

So we're very optimistic that, as soon as they begin to realize the power that we actually have versus conventional types of Mass Spectrometry that we are using today which plays a significant acceptance of technology over the next year.

Do you also foresee the competition coming in and trying to grab than as well?

Sure.

OK.

But we feel like we have a real superior position in technologically and Biomarker discovery that we feel like is going to be recognized. Now that the world is really thinking and acting on Biomarker Proteomics, this will be the main theme in Proteomics today. I think we'll see that our technology will emerge really as the gold standard.

Great. Thank you.

And thank you very much. We do have a follow-up question from Adam Chazan once again from Pacific Growth Equities. Please go ahead.

Hi, guys. Regarding new products, are we expecting rollout around any particular meetings in the second half such as ASMS? And if I could ask a question or two about the sales force build. How do you expect the next ten or so people to be added over the course of the year? Is that front-end loaded number as we might expect or is it something a little bit smoother over the course of the year?

OK. It's Martin Verhoef again. Please bear with us that we can't really give any statements about when we're going to introduce new products, because this could greatly have an adverse effect on current sales. With regards to the investments in the sales force, yes, it will be front-loaded. We've already started the hiring process in Q4 and also in Q1. And the way that we actually measure this, in the way we predict productivities results, it takes typically one to two quarters for any salesperson to become really productive and up to par to the company averages of numbers systems per sales people. And that's why we front-load this hiring. We've actually already out of the ten or so people that we want to hire already got five or six of them on board already.

Great. And then a question about the diagnostics of the business. Since Gail has arrived and got established at the company, has priorities changed at all in terms of the projects that might be advanced behind the ovarian cancer assay? And if so, can you comment on what vision or changes you might be bringing to the unit?

Gail, go ahead and answer that question.

Certainly, this is Gail Page. What I would like to just describe to you is that what we've been doing is looking at the vast pipeline that is available to us. Its been creating the foundation for the diagnostics business and what we're now doing is trying to streamline that and just get it focused on those that we feel are commercially viable that generate you know, the revenue potential for us, that there's a market for, that we can launch in.

I think we'll probably be in a position if I can comment on that. Well I think we are in a position by the second half of this year to be much more definitive about the pipeline. But I think right now it's pretty vast. And we aren't doing a very serious analysis and prioritization of what the opportunities are but it's quite significant. I think it will be the second half of the year before we're really ready to unfold a lot more detail about that.

And thank you very much, sir. We will go to the line of Paul Knight with a follow-up question. Please go ahead.

Hi this is Tim here again. So should we expect as you manufacture more arrays and you may walk down the experience turf and may be potentially the cost of goods sold for arrays will come down and do you have room to lower your price for your ProteinChips?

The answer to that is yes. In fact, not just because of volume but we spent a lot of money last year, maybe about a $1.5 million putting in an automated chip manufacturing process here in Fremont.

Yeah.

Which will go online sort of middle of the year. And it's put together in modular format. And we think that plus the increased volume should bring down our cost to goods sold on the chips quite nicely. How much of that we choose to pass on in the way of lower pricing versus just capture higher GM, we haven't made that decision yet. We'll sort of decide that later. But it will give us the flexibility if we want to lower the price on our chips we usually could or we could just you know take it as higher gross profit.

Thank you.

And we go to a follow-up question from Edward Tenthoff. Please go ahead.

Right and I'll ask the final hard question. But clearly, with the sort of delays in the selling cycle here due to increased competition, profitability has been pushed out. Do you have any comments on what your goal is when to break even?

No, we really haven't gone out that far. I guess, I hear from other analysts and people thinking about the middle of the following year, 2005, and sitting here today, that doesn't sound so surround us. We think we can bring the losses down each quarter in 2004 and so I think, you know, sometime 2005, middle of the year probably is a good guess. But take that as unofficial reaction rather than some -- we've got an official budget through 2005.

Understood, thank you.

Did you have any follow-up questions Mr. Tenthoff?

No, thank you.

OK, well, you are very welcome sir. Thank you and with that, Dr. Rich and our host panel, I'll turn the call back to you. There are no further questions.

OK. Well, thanks for participating everyone.

Thank you very much.

Thanks.

And ladies and gentlemen your host is making today's conference available for digitized replay for 1-day. It starts at 11:30AM Pacific Standard Time, February 17 all the way through 11:59PM February 18. Simply dial 800-475-6701 and at the voice prompt enter today's conference ID of 719873. And that does conclude our earnings release for this quarter. Thank you very much for you participation. As well as using AT&T's Executive Teleconference service. You may now disconnect.