Aspira Women's Health Inc (AWH) 2004 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Ciphergen Biosystems Announcement of Quarter three 2004 earnings results. (OPERATOR INSTRUCTIONS). Miss. Carruthers, you may begin your conference.

Thank you. Good morning, ladies and gentlemen. With me today are William Rich, President and CEO; Matt Hogan, CFO; Martin Verhoef, President of the Biosystems Division; and Gail Page, President of the Diagnostic Division. Copies of the earnings press release were distributed last night and are available on our Website. 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 report filed by Ciphergen with the Securities and Exchange Commission. 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 Website. I would like to now introduce you to Matt Hogan. Thank you.

Thanks, Sue. I am going to begin with the discussion of our financials and I will turn the call over to Bill for a review of other corporate highlights. Ciphergen reported third quarter 2004 revenue of 11 million at the low end, but in the revenue guidance range we previously provided. This is a 31 percent decrease over the same quarter of 2003 and a 3 percent increase over the second quarter of 2004. The year-over-year decrease was mainly due to lower system sales and BioSepra sorbents revenue partially offset by increases in Array sales and service revenue. We have reported revenue from the sale of 27 systems of which 3 represented trade-ins or upgrades of existing systems. Asia was solid and the US improved over the second quarter but Europe was soft during the third quarter. 7 of our orders were for our older PBS II Series system, 1 was for ProteinChip interface, and 19 orders were for the Series 4000 of which 13 were enterprise additions and 6 were personal additions.

Instruments sales, which include upgrades and accessories generated about 36 percent of total revenue in the third quarter was 4 million in sales compared to 8.1 million in the third quarter of last year.

Total consumable revenue, which consists of our ProteinChip Array sales and chromatographic sorbents was 4.8 million in the third quarter or 44 percent of total revenue. Of this, 2.3 million represented Array revenue, which is an increase of 19 percent in the third quarter compared to the third quarter of last year. Our BioSepra Process Proteomics business units generated 2.5 million in sorbents revenue, which compares to 3.9 million in the third quarter of last year. This business is always a little lumpy since orders can be as large as a $0.5 million to $1.5 million and the third quarter was in line with our expectations going into the quarter. The remainder of our revenue was related to service activities. For the quarter, total service revenue grew to 2.3 million as compared to 2.1 million in the third quarter of last year. Collaborative service projects accounted for about 286,000 of the total in the third quarter with the remainder coming from providing maintenance services for our customers in paid training activities.

Our gross profit for the third quarter was 7.2 million, which represents a 65 percent gross margin. Sales and marketing expense excluding deferred comp was 7.4 million in the third quarter of 2004, versus 5.9 million in the third quarter of 2003. However, our sales and marketing expense was actually lower by about 11 percent in the third quarter as compared to the second quarter of 2004 due to our actions taken in July. Research and development expense, excluding deferred comp, was 4.7 million in the third quarter of 2004 as compared to 5.4 million in the third quarter of 2003. Our R&D expense was actually about 22 percent lower in the third quarter than it was in the second quarter of this year, but the majority of the reduction related to our research tools business as opposed to our diagnostic efforts.

General and administrative expense, excluding deferred comp, was 3.5 million in the third quarter of 2004 versus 3.1 million in the third quarter of 2003. Our G&A expense was actually about 3 percent lower in the third quarter of this year than in the second quarter of this year, despite an increase in costs associated with complying with Sarbanes-Oxley.

Due to actions taken in July, total operating expenses declined by 2.3 million in the third quarter as compared to the second quarter of 2004. This reduction exceeded our previously stated goal of reducing operating expenses by an $8 million annualized run rate by the fourth quarter. This reduction in operating expenses bodes well for our ability to reduce our losses quickly when revenue growth is restored. Our operating loss was 8.8 million in the third quarter and our net loss was 9.5 million. We ended the quarter with 19 million in cash and investments.

Looking ahead for a minute, the forward-looking statements I am about to make are subject to risks and uncertainties as described at the beginning of this call. We do not intend to update these comments or forecasts prior to our next earnings conference call.

We currently expect fourth quarter revenue to be in the range of approximately 11 to 13 million, of which 9.5 to 11.5 million would be related to our continuing operations excluding BioSepra. These revenues are based on the launch of the Series 4000 and associated marketing programs, and the anticipation that we'll close the sale of our BioSepra business to Pall Corporation on November 30. To provide a basis for comparison, the revenue for our continuing operations in the third quarter would have been 8.5 million, so we are forecasting sequential revenue growth in the 12 to 35 percent range for the fourth quarter.

Before turning the call over to Bill, let me provide some more detail on the financial aspects of the sale of BioSepra to Pall Corporation. Assuming in November 30 closing, during the fourth quarter we would have 2 months worth of revenue and operating expenses from BioSepra. At the closing we will receive approximately 28 million in cash, with 1 million going into an escrow account for 1 year, and Pall assuming roughly 3 million in debt at BioSepra [SA]. In 2005, we expect that total operating expenses will decline by approximately the following figures as compared to 2004. Sales and marketing down by about 4 million, R&D expense down by about 1.2 million, G&A expense down by about 0.8 million and amortization of intangibles down by about 0.8 million.

Now, I would like to turn the call over to Bill Rich for additional comments.

Today, I will be covering three main topics, one is the sale of our BioSepra process chromatography business; two, the product launch of the next generation ProteinChip system, Series 4000 and associated marketing programs; and three, the progress in the diagnostics division.

BioSepra, BioSepra has been a fine acquisition for us. We generate a significant R&D synergy by combining BioSepra's chromatography expertise with our chip chemistries. We have pioneered the concept of SELDI assisted process proteomics, it’s bound by Sepra's revenues from the time of acquisition. We signed the business for a price considerably higher than we paid for it 3 years ago. We are retaining rights and key personnel in R&D to pursue manufacture, use in selling other BioSepra's technology and products in the research and diagnostics bioseparations markets. However, the large-scale sorbents business requires a specialized sales force and entails a very long sales circle to generate orders of significant size. And our judgment is that we are better served to focus our resources -- financial and managerial -- on our research tools business, and Diagnostics business. We've been talking to Pall for a long time about their strategic interest in acquiring chromatography product lab and BioSepra is a unique property in that regard. It is a wonderful fit for their membranes business and their large worldwide sales force and likely grow the sorbents sales at a faster rate than we can on our own. There are several very important aspects to this transaction such that we are not just walking away from business.

Dr. Egisto Boschetti and a small research team in Cergy will remain with Ciphergen while providing transition consultant to Pall. We have achieved a market and technology curve out, we'll get the right to make, modify, buy up to an undisclosed amount -- and amount quantity of each sorbent for a year for use and sale outside the process scale market. We are entering into a sales and marketing collaboration where by we'll jointly market process proteomics to the industrial scale market. Pall sees this as an important means of differentiating themselves from the competition and fueling sorbent growth. Meanwhile, we expect to generate considerable ProteinChip System and Array sales in this market segment.

Next, the Series 4000. In July we launched the marketing program and started shipping the new ProteinChip System Series 4000. The Series 4000 features the Pattern Track biomarker discovery-to-assays process and integrate Ciphergen's proprietary ProteinChip Arrays, SELDI-TOF-MS detection, and Biomarker Patterns Software in a single system to enable rapid biomarker discovery and development of predictive high throughput SELDI-based assays. It provides an improved system sensitivity, protein resolving power, and reproducibility for biomarker discovery. The pattern recognition software selects the optimal combination of biomarkers from hundreds of biomarker candidates and rapidly allows translation to validated high predictive assays. It is automated single or multi-marker assay optimization and further validation can be achieved.

Rapid purification and identification of biomarkers can also be achieved on the system. And finally, automated high throughput SELDI-based quantitative chromatographic and immunoassays can be conducted on the system. The Series 4000 is an easy to use bench-top system with a lower cost of goods allowing a lower price point than previous systems and has features consistent with our continued strategy of promoting decentralized proteomics by enabling researchers and about 50,000 potential research labs to perform their own work rapidly and with higher performance. The Series 4000 provides 4 biomarker modes in one including, discovery, purification, ID and assay modes, which are each optimized to provide maximum speed, ease of use, and performance for implementing the Pattern Track discovery process.

I also want to mention new bioseparations accessory tools that further enhance the discovery and assay power of the Series 4000. One, our new Deep Proteome trademark tools feature Protein Equalizer beads, invented in collaboration with the American Red Cross this powerful, combinatorial chemistry-based bead technology allows a deeper search into the proteomes of biological fluids such as serum to detect low abundance proteins when used with Series 4000. Biomarker Pathways tools including protein interaction Discovery Mapping kits and protocols enabled improved Series 4000 capabilities to discover novel protein interactions and build quantitative SELDI-based immunoassays to study biological pathways, functions, and drug development processes.

We believe our pattern-based approach to biomarker proteomics combined with well-engineered system features and specifications that optimize pattern-based proteomics designed into our Series 4000 product will be of significant interest to both core proteomics labs by offering a complementary approach to their current top-down and bottom-up biomarker proteomics methods and our main target market, clinical research labs. The main bottleneck today in biomarker proteomics is rapid translation of biomarker discovery to assays. And our Pattern Track process provides the state-of-the-art capabilities in this area.

As you know, we have a strong list of publications based on the technology, now over 300 strong, demonstrating scientific progress enabled by our technology. We expect to see even more high-level scientific publications using SELDI in the coming quarters. In short, the initial customer and prospect feedback for Series 4000 launch has been very positive and very encouraging. Our current active prospect list is substantially higher than it has been in prior quarters and we expect sales to increase in the near term.

Diagnostics. Now, let me move on to Diagnostics. Our Diagnostics Division continues to make solid progress. We are advancing our discovery programs and working toward potential commercialization of our ovarian cancer assay by targeting collaborations with reference labs and in vitro diagnostic companies.

First, our ovarian cancer program. The ovarian cancer paper that describes our 500-sample, multi-site study with Johns Hopkins School of Medicine, MD Anderson, and others, came out in the journal Cancer Research in mid-August. The Company is now actively engaged in a series of retrospective and prospective follow-on studies to validate these findings and determine their utility in addressing 3 clinical questions -- early stage detection, late stage detection, and treatment monitoring for recurrence. We reported initial results from a study utilizing 436 samples at the International Gynecological Cancer Society Meeting in October. This study confirmed findings reported in the cancer research paper regarding the down-regulation of 2 specific protein fragments in early stage ovarian cancer. We anticipate providing additional scientific data in early December at the MD Anderson Memorial Sloan-Kettering International Conference On Ovarian Cancer, in Houston. We are also assisting our customer, the National Cancer Institute's Clinical Proteomics Reference Lab in developing and validating ovarian cancer pattern-based study using SELDI. Their mandate is to develop a diagnostic application for FDA approval.

Now, Alzheimer Disease. In approximately 4 months and working with collaborators and well-characterized sample collections from the University of Kuopio and Sahlgren's University Hospital, a scientific team from our Diagnostics Biomarker Discovery Center Laboratory in Copenhagen has discovered 44 biomarkers, which were elevated or depressed in AD, Alzheimer's disease, relative to controlled non-AD samples. Over 20 of these biomarkers have been purified, sequenced, and characterized using our ProteinChip System. The markers characterized in this study are linked with many different aspects of AD neuropathology including plaque and tangle formation, neurodegeneration including synaptic loss, neurotransmitter dysfunction, lipid metabolism, inflammation including microglia activation, insulin signaling, iron metabolism and oxidative stress The research team applied our Biomarker Patterns Software to select critical combinations of biomarkers to discriminate early stage AD from dementia and controls individuals. A resulting multi-biomarker assay yielded a diagnostic performance of approximately 86 percent accuracy in detecting early stage Alzheimer's disease. Some of the markers overlap with known markers from the literature while others are completely novel full-length protein markers or biologically relevant processed forms previously not detected by other proteomic methods and hypothesis-driven studies. Such assays, when confirmed in validations studies, may prove useful to physicians in differentiating AD from other forms of dementia as well as by pharmaceutical companies for therapeutic monitoring assays in both preclinical and clinical development. Follow-on studies are underway in CSF fluids and serum samples.

Operationally, we have taken a number of steps recently to prepare Ciphergen for the commercialization of potential diagnostic tests. As described in our press release, the completion of our chip automation project with anticipated benefits in terms of improved chip quality and feasibility was one meaningful step forward. In addition, we have completed a gap analysis of our operations, assessing what steps will be required to move from our current ISO status to a cGMP status. We have now set up an internal team and committed to achieving cGMP status during 2005. Lastly, we have commissioned a reimbursement study on ovarian cancer from a leading academic center and expect to receive their report in this quarter. In short, we are preparing for commercialization of diagnostic tests. Now, let me finish up with few more remarks and then we will take questions.

First, we believe that the sale of BioSepra process chromatography business is strategically sound and allows us to focus our resources on 2 main value drivers -- the research tools business and the Diagnostics business. Two, we are excited about the performance of the ProteinChip Series 4000 System and the initial customer and prospect feed back on the system. Three, we believe that the Diagnostics Division is making great progress on the scientific front as well as in identifying the right strategic commercialization partners. I will stop there and take questions. Operator?

(OPERATOR INSTRUCTIONS) Edward Tenthoff, Piper Jaffray.

Matt, you had gone through some details right at the beginning of the call on the actual instrument placement. Can I ask you to repeat some of that?

Sure. Sold 27 systems; 3 of which were trade-ins or upgrades of older systems; 7 orders were for our old systems, the PBS2 C; one was a ProteinChip interface; 19 orders were for the Series 4000, of those 13 were the Enterprise Edition, the more automated version; and 6 were Personal Editions.

Right, and what was the -- systems revenue versus the upgrade revenue?

I don't have it handy, but the vast majority was new systems. So the upgrade would be a really small number frankly, not a large number.

Now, can you comment on the gross profit of the product margin in the quarter?

You mean--by category?

Yes, if you could.

I will do it directionally. Systems were well north of 70 percent and chips were a little bit disappointing in the quarter a little under 60 percent, but that's a temporary phenomenon we believe. Sorbents were mid 60s and then some of the service activities were a little bit lower to 60 -- 60ish.

Eric Schmidt, SG Cowen

I don't know if Martin is there, but -- could you just give us a little bit of an update on the market environment competitively and funding-wise and what challenges are currently?

I think funding-wise the most important thing that we are seeing is the funding for a HIPAA (ph) project. We are seeing that in the US, but also outside of the US. And that should actually be very positive for practically all companies including us here. Competitively, we continue to see more companies wanting to participate into the biomarker portion of the Proteomics biomarker, but we also see as Bill mentioned that our own prospect [indiscernible] base has been growing quite significantly which actually indicates that we seem to out pace the Company -- the competition right now in this biomarker portion of the proteomics market.

Okay and then on the diagnostic side, Bill, could you just update us on your intellectual property in ovarian cancer whether you have filed for patents on these 2 markers or what you need to do there?

I will let John Storella, our Intellectual Property VP comment on that.

Yes, this is John Storella. Yes, we have filed patent applications on the ovarian cancer test, all aspects of it, and indeed the patent application that covers --- the markers that we are using has already been published. So we filed several along the way as we make new developments.

And then on Alzheimer's disease, the 44 markers that you mentioned Bill, are those serum markers or what's this biological source material?

Those are CSF markers, but some of them we are now looking for in serum. Eric Fung is Head of Clinical Affairs. He may be able to comment on that.

Right so the discovery study was done in CSF. We have identified those markers I mean, we know the actual protein identities. We are developing assays on the SELDI platform which will be used to the screen the blood of our patients list Alzheimer's disease and our validation study.

Adam Chazan, Pacific Growth Equity.

Can you do me a favor and give us a little bit a color as to where some of these boxes might have been going within the value chain? Are they going into Discovery? Are we seeing them go into Process Proteomics?

Martin, why don't you comment on that here?

The false majority is still going in to the clinical research portion of the market where people are using assistance from biomarker, discovery and translation of these discoveries into assays and with regards to Process Proteomics, that's a few systems this quarter. However, we see in our prospecting looking forward to that portion of the market is largely going to grow.

And can you just elaborate a little bit about how the relationship with Pall may or may not change that opportunity?

I think it's actually going to strengthen the opportunity. Because part of the divestment of BioSepra is actually a marketing agreement with Pall and Pall is actually going to settle this part of this whole arrangement. A number of Process Proteomics centers that they are going to equip with SELDI systems. In addition, we will continue to have a kernel in the sales force that is going to focus on this Process Proteomics customers and do this actually in collaboration with Pall. So in a way we are going to get a much broader network in that particular part of the markets or access to a much broader network and that's why I am actually pretty optimistic that that part of the market which will grow in the future.

Do you have a feel for how many boxes that will or how many centers they’ll set up or how many boxes they will actually put in them?

They will actually set up a, I would say between 3 and 5 centers. They will grow it at overtime as this business develops. If you look at the market itself, if you look at the number of customers doing process proteomics or using these types of systems to look at protein expression and protein purification development that ranges in the 3 to 600 laboratories worldwide. That could each be equipped with as minimally 1 system.

Okay. Martin, can you comment also on where we stand in terms of the sales force, how many -- how many folks do you have on the street, what are the thoughts on potentially expanding what is in their bag?

We -- right now, we have roughly 25 program managers and about 60 field scientists on the street worldwide. And what we are doing there is actually we are more or less streamlining the sales process. We are, say, in the middle of certain open number of centers of excellence worldwide, where we are going to actually take on somewhat larger projects for our customers in the presales process to prove indeed that we can go from a discovery to an assay mode with these biomarkers. With regards to first taking on all the products, we will see an expansion in our own product lines, particularly in the Deep Proteome area. Those fractionation technologies that Bill talked about and that will be actually the expansion that we are planning to have in our sales force or in our portfolio for our sales force.

(OPERATOR INSTRUCTIONS). Edward Tenthoff, Piper Jaffray.

Great, two quick follow ups. And it's one for Matt. Matt, we saw a pretty significant step down in R&D. You have been sort of telegraphing that. Is this level sustainable going forward?

Yes, I think so. Part of it was it was high there for a long period of time, partly because we were developing the Series 4000 for its launch and now that that is out the door, I think we can go to a more moderate level. And so, yes, I think this is a sustainable kind of a level for a while.

And I should even just clarify, in fact the comments that you made with respect to operating expense reduction due to BioSepra, main why the R&D coming down by about 1.2 million next year, will that be from sort of this level annualized?

Yes.

Okay, great. And then question for Gail. Hi Gail. What is your guys' strategy with respect to PMA submission, 510(k) submission, both for the past and then also just educate me if you would with respect to what you need to achieve to actually get the system approved?

There are several paths that we can take. We are examining all of those, whether we want to do a 510(k) for monitoring purposes. Right now, if you’ll remember and if you look in the publications, we are very focused on early stage detection, not general screening. That would lend you to think that we will work with the FDA to try to do a 510(k) or a de novo 510(k). But I think that we will reserve our comments on that until we actually decide, who we are going to partner with because that is part of the partnering process, is to work with folks who have regulatory experience and people that we can decide on the whole market launch. So we will be deciding and finalizing that strategy, I would say over the next 3 to 6 months.

Okay, great. And then, just one quick follow-up question. I know the NPI (ph) have been working on their markers and intended to do a perspective randomized study in order to somewhat almost get something out there so that their (DA 510 (k) bar) (ph) . Could you comment on that?

I can just comment to the fact that we were working very closely with them. They have our system in their laboratory and that is something that we work on everyday with them. But I probably, shouldn't comment on any details because I think it would be more appropriate for them to do it.

(OPERATOR INSTRUCTIONS). Adam Chazan, Pacific Growth Equities.

Piggybacking off of that last question. Can I just ask, the process to get up to cGMP, where do you need to be to actually roll out the test or actually where do you stand right now, how long is that process, what do the hurdles look like?

I'll take that question. This is Gail. We feel like we are in really great shape because the Company had done such a good job with its ISO certification, and to move from ISO to GMP, it's just merely a matter of understanding the processes and doing a lot of paperwork and putting a lot of procedures in place. So we feel very comfortable that we can achieve cGMP in 2005, hopefully early in 2005. We will have to be GMP compliant in order to produce tests for the market even in ASR format type of test. So this is a critical step in our ability to be commercial.

Sir, at this time there are no further questions.

Okay. That being the case, thank you all for participating and we're around if people have further questions. Thank you very much.

Thank you for participating in today's Ciphergen Biosystems conference call. This call will be available for replay beginning at 8:30 AM Eastern Standard time today, 11:59 PM Eastern Standard time on Wednesday, November 3, 2004. The conference id number for the replay is 1528240. Again the conference id number for the replay is 1528240. The number to dial for the replay is 1800-642-1687 or 706-645-9291. Again, thank you for participating in today's Ciphergen Biosystems conference call. You may now disconnect.