Aspira Women's Health Inc (AWH) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ciphergen Systems first quarter 2005 financial results event. During the presentation, all participants will be in a listen-only mode. After remarks from management, we will conduct a question and answer session. (Operator Instructions). I would now like to turn the call over to Ms. Sue Carruthers. Please go ahead.

Good morning, ladies and gentlemen. With me today are William, President CEO; Matt Hogan, CFO; Martin Verhoef, President of the Biosystems Division and Gail Page, President of the Diagnostics 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 descriptions of some of these risks and uncertainties, please see the reports filed by Ciphergen with the Securities and Exchange Commission. Information in this conference call related to projections or other forward-looking statements made 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 now like to introduce you to Matt Hogan, our CFO.

Thanks, Sue. I'm going to begin with a discussion of our financials and I will then turn the call over to Bill for a review of other corporate highlights.

Ciphergen reported first-quarter 2005 revenue of 6.6 million as compared to 13.3 million in the first quarter of 2004 and below our expectations going into the quarter of 8 to 9 million, but in line with our revised guidance in early April.

We reported revenue from the sale of 16 systems of which three represented trade-ins or upgrades of existing systems. Instrument sales, which include upgrades and accessories, generated about 32% of total revenue in the first quarter with 5.3 million in sales compared to 6.8 million in Q1 of 2004.

Total ProteinChip Array sales were 2.4 million in the first quarter, or 36% of total revenue. Array revenues were about flat on a year-over-year basis. The remainder of our revenue was related to service activities. For the quarter, total service revenue was 2.4 million, or 33% of total revenue. Collaborative service projects accounted for about 330,000 of the total in the first quarter with the remainder coming from providing maintenance services to our customers and paid training activities.

Our gross profit for the first quarter was 3.5 million, which represented a 53% gross margin. Our lower gross margin was a function of discounting during the quarter, lower volume which affected cost and increases to inventory reserves. Sales and marketing expense was 5.3 million in the first quarter of 2005 versus 6 million in the first quarter of 2004. Our sales and marketing expense was actually about $1 million or 17%, lower in the first quarter than compared to the fourth quarter of 2004 due to the early impact of various cost reductions.

Research and development expense was 3.5 million in the first quarter of 2005 as compared to 5.8 million in the first quarter of 2004. Our R&D expense was about 0.2 million, or 5%, lower in the first quarter than in the fourth quarter last year with the majority of the reduction related to our Biosystems Division.

General and administrative expense was 3.5 million in the first quarter of 2005 versus 3.7 million in the first quarter of 2004. Our G&A expense was up about 2% in the first quarter compared to the fourth quarter due to an increase in cost associated with complying with Sarbanes-Oxley. Total operating expenses in the first quarter declined about 9% or 1.2 million as compared to the fourth quarter of 2004. As previously disclosed, in late January we took further steps to reduce operating costs in our Biosystems Division to better align with revenue and business conditions. Our headcount is currently down approximately 15% as compared to the end of 2004. Cost reduction steps taken in January targeted the Biosystems Division while not affecting our investment in the Diagnostics Division. Due to the timing of these actions, further decrease in operating expenses should be helped (ph) in the second quarter as compared to the first quarter. Because of our progress in reducing operating expenses, once we can restore revenue growth and return to a normalized gross margin we should be able to record a rapid decrease in losses.

Our operating loss was 8.8 million in the first quarter and our net loss was 9.3 million as compared to 7.5 million in the first quarter of 2004.

Looking ahead to the second quarter and based on a detailed review of our active prospects, we expect that revenue for the second quarter will improve over Q1 and be in the range of 7.5 to 8.5 million.

Let me just say a word about our funding strategy. We ended the first quarter with 32.2 million in cash, which represents a decrease of 5.4 million from the end of the year. We've taken steps to reduce our operating expenses and we will remain vigilant on this score going forward. As a result, we believe that our net losses can decrease significantly as we restore revenue growth.

In addition, we believe we will be able to increase our cash position through the diagnostic partnership that we are pursuing. We're confident that we have options and plans in place to ensure that we can adequately fund our operations. And now I would like to turn the call over to Bill Rich for additional comments.

Let me directly address a few topics that are undoubtedly on everyone's mind. First, how is progress going in our Diagnostics Division and second, how is progress going in our Biosystems Divisions, what happened in Q1 and what are we doing about it.

First, regarding the Diagnostics Division progress, we continue to work hard on forming a commercialization partnership which we continue to believe can occur during the second quarter. Beyond that, because of the sensitive nature of the topic, we cannot go into any details as to the structure of the partnership, who the other party is or what financials might be involved. However, we believe it will be a significant announcement for Ciphergen.

Second, let me comment on progress with our ovarian cancer test. As followers of Ciphergen are aware, we published an important paper in cancer research in August last year describing a 503 sample multi-site study in which we discovered and independently validated a three-marker panel of biomarkers that showed the promise of improved detection of ovarian cancer.

To take these findings to a clinical diagnostic test, we needed to perform assay development and clinical validation and we've been making progress on both fronts. We have created an internal assay development team that has evaluated multiple approaches to creating a reproducible and precise assay on our ProteinChip System Series 4000. Our team has improved the reproducibility to a level that we believe will allow us to more aggressively pursue clinical validation. As you may appreciate because of the scarcity of ovarian cancer samples, we must be judicious in how and when we use them. Our assay development team has also been (technical difficulty) factors that impact the stability of these markers. Our asset development team recorded positives results of their assay development efforts at the American Laboratory Automation meeting in January where we achieved analytical reproducibility of approximately 10% using the Series 4000.

On the clinical validation side, we reported initial results of their assay development efforts at the International Gynecological Cancer Society meeting in October. This study confirmed findings reporting on the cancer research paper regarding the down regulation of two specific protein fragments in the early stage ovarian cancer science well. In fact, one of the most important finds of this study was that these markers seem to track with therapy and outcome would suggest a biological basis for these markers which is comforting to many physicians as well as suggests uses of these markers beyond detection of early stage disease.

In December at the M.D. Anderson Memorial Sloan Kettering International Conference on Ovarian Cancer and at the AACR meeting in April this year, we reported similar validation from yet another sample set. Finally at Society for Gynecological Oncology meeting in March of this year, we reported the results of assays performed on our new ProteinChip System Series 4000. To accelerate this work, Ciphergen and M.D. Anderson Cancer Center signed a collaboration agreement recently involving analysis of clinical samples provided by M.D. Anderson for ovarian cancer using Ciphergen's Deep Proteome and PatternTrack of proteomics tools. Ciphergen had exclusive rights to license discoveries made during the course of this cooperation. This work will address multiple clinical questions, including validation of markers described in the cancer research paper, discovery of markers that distinguish ovarian cancer from other gynecological masses and prediction of treatment response.

We also announced -- recently announced an agreement with the National Cancer Institute's Clinical Proteomics Reference Lab. Their mandate is to develop and validate a pattern-based clinical diagnostic test and device to file for FDA approval for ovarian cancer diagnostics. At the annual meeting of the Association of Laboratory Automation in February, the CPRL presented results of a study of ovarian cancer sera (ph) with total entry (ph) day precision of 6 to 12% based on the use of the ProteinChip system. They will now do similar evaluation work on the new Series 4000 and will test archived ovarian cancer samples on assays constructed on this platform.

Operationally we achieved a number of milestones recently to prepare Ciphergen for the commercialization of potential diagnostics tests. Our Chip Automation Project with its anticipated benefits in terms of improved chip quality, reproducibility, cost reduction and scalability represents one meaningful step forward. In addition, we have completed a GAAP analysis of our operations assessing what steps will be required to move from our current ISO status to CGMP status. We have set up an internal team and are committed to achieving CGMP status during 2005.

We're also addressing reimbursement issues around the ovarian cancer assay. We recently received the first draft of an ovarian cancer economic analysis from a group at Northwestern that we had commissioned. Given these efforts in assay development, clinical validation, achieving CGMP compliance status and reimbursement, although there can be no assurance that this will be the case, it remains our goal to introduce our first diagnostic test as an ASR during 2005.

Let me move on to discuss a few of the many additional programs underway at the Ciphergen Diagnostics in addition to the ovarian cancer work. Our customers at the Children's Hospital in Boston, Dr. Judah Folkman's group, working in collaboration with scientists from Ciphergen presented results in December at the American Society of Hematology's 46th annual meeting followed by a special invited talk at the recent AACR meeting in April suggesting proteomic analysis of circulating platelets can potentially be useful for early cancer diagnosis.

Next, we have an active program to identify biomarkers for the detection of early stage breast cancer. With our collaborators at Johns Hopkins, we are engaged in several multi-site validation studies to confirm markers that we have discovered in our preliminary studies. We have submitted the first study for publication and expect to complete the next validation study this summer.

With our collaborators at Johns Hopkins, we have performed two large studies to address clinical issues around prostate cancer. One study is looking at the diagnosis of prostate cancer in this traditionally difficult grey zone while the other study is looking at the issue of recurrence in prostate cancer to help physicians determine which patients require more aggressive treatment. We will report preliminary results from both of these studies at the American Urological Association meeting later this month.

Now let's turn to the Biosystems Division. The first quarter was a disappointment in terms of system orders. The shortfall against expectations was primarily due to a substantial shortfall in U.S. orders. One major reason for our difficulties in the U.S. was the impact of reductions we made to the sales force in late January and also changes to U.S. sales management made during the same quarter which contributed to the majority of these orders being delayed into Q2.

In addition, despite an extraordinary increase in quantity and quality of publications coming out on the SELDI technology with nearly 50 new publications already so far this year, we are finding market acceptance is still constrained by confusion over which methods are best for biomarker discoveries; in particular, the question of whether Ciphergen's pattern-based proteomics approach which we call PatternTrack is the best approach to biomarker discovery. Scientific publications critical of pattern-based approaches that are different from Ciphergen's which do (technical difficulty) identified proceeds or where the study design was questionable has fueled a great deal of criticism of this approach. Ciphergen's PatternTrack method is very different from the methods criticized in the literature. Our PatternTrack process is yielding rapidly growing numbers of scientific successes from our users as reported in the literature and at scientific meetings.

In short, our advocates are publishing their success in record numbers, yet our detractors thus far have been more effective in influencing market perception. We believe strongly that the scientific success of our clinical and biology research users will ultimately prevail and our technology and products will soon become essential goals in the biomarker proteomics markets.

What are we doing to accelerate sales? First, we have appointed Paul Smith as Vice President of North America and European Sales. Paul has been with us for nearly five years initially successfully running Canada prior to taking over additional responsibility for Europe about three quarters ago. His has extensive experience in sales management and understands how to successfully position our technology in the translational proteomics marketplace.

Second, we're promoting a significant number of our field scientists to technical sales positions to increase our overall sales effectiveness. Pilot studies done now by field scientists will be centralized in our central lab facilities of North America and Europe, including biomarker discovery centers to improve project efficiency and allow for expanded sales efforts. This program has been successfully piloted in Europe already by Paul and we expect the program to have immediate positive impact in the U.S. as well.

Third, we've engaged a marketing communications firm to lead the launch of a major marketing campaign to begin in Q3 of this year. Their primary mandate is to create market awareness for Ciphergen's biomarker proteomics success stories and drive positive market perception and advocacy for our technology and products and services.

Fourth, another important initiative is to respond to the growing market demand for biomarker services and products within pharmaceutical companies which are actively incorporating biomarker strategies in their clinical development programs. ProteinChip technology is currently being evaluated by the majority of major pharmaceutical companies to identify biomarkers of drug safety and efficacy to improve drug development, to reduce late-stage attrition of compounds and to develop stratification assays for drug response for pre-clinical and clinical trials studies. We expect positive news flows coming out of these efforts in the relative near-term.

To build on these initiatives, Dr. Jim Merryweather joined Ciphergen during the quarter as our Executive Vice President of Pharmaceutical Corporate Development and will manage our Pharma Biomarker Discovery Center in Malvern, Pennsylvania as well as expand pharma collaborations and sales for our PatternTrack biomarker products and services.

Fifth, on the new products front, one of the most significant things we will be bringing to market this year is an enhancement to our PatternTrack biomarker discovery process in the form of our proprietary Deep Proteome tools. We're currently using these tools (technical difficulty) biomarker discovery efforts in diagnostics and drug development and we plan to employ them with selective collaborators in Q2 of this year. These products enable the detection of low abundant protein in complex biological fluids such as serum potentially solving a major problem today in biomarker proteomics. We consider these tools to be a major advancement that will provide our customers another compelling reason to adopt our technology.

Lastly, we believe that the strongest proof statement for our SELDI technology and PatternTrack approach is the successful development of high-value diagnostic tests. We hope to be the first proteomics company to successfully discover biomarkers with our technology and to successfully translate them to a commercial clinical diagnostic assay and also pharmaceutical pheronostic (ph) assays all on the same platform. We believe that will prove to be a powerful catalyst to sales of our Biosystems Division products and launch the Company as a successful proteomic diagnostics company as well.

In conclusion, we remain confident and committed about the remainder of 2005 and beyond, we believe that our Diagnostics Division is advancing several potentially valuable diagnostic assays towards clinical use and that we will have multiple opportunities to describe that progress during the course of the year, as well as partnerships and the launch of our first product. In the Biosystems Divisions, we believe that our leadership in translational proteomics demonstrated by the continuing successful validation by our customers and our Biomarker Discovery Center collaborators using our PatternTrack proteomics process; the changes we have made to our sales and marketing programs; the introduction of Deep Proteome tools and expansion of our Pharma Biomarker Collaborations program will bring renewed growth to our Biosystems Division products and services this year. I will stop there now and take questions. Operator?

(Operator Instructions). Cheryl Turnbull (ph), Rommis (ph) Partners.

Thank you. I was hoping you could tell me if you believe that the weakness on the instrument side, how much that had to do with general weakness in the market and confusion out in the market, or are you losing particular share to any certain technology?

Martin, why don't you take that question.

Okay. Thanks for the question. I do believe that general weakness has played a bit of a role, and what I'm referring to here is if you look for (indiscernible) at the early announcement of (indiscernible) Corporation, I think that's sort of an indication of what may be has been (ph) felt worldwide. But what I see I do think is the major reason of that weakness is the second one that you mentioned, the confusion about what we are doing. And I think that Bill actually elaborated quite a bit on that on his talk just a minute ago. It's really the acceptance of the PatternTrack process from going from (indiscernible) to an assay as a fundamental value proposition in proteomics.

Now to answer the third one, we don't necessarily see a lot of the direct competition where we lose orders to our competitors. That actually doesn't happen all that much. We typically end up in situations where the confusion takes over and therefore decisions are postponed.

Okay, thank you.

Costa Shia (ph), SG Cowen.

Hi, I thank you for taking my question. I was wondering if you could perhaps give us some more guidance on how your instrument sales might look through the rest of the year? Do you think that they will hold steady or do think that you will continue to see some decline?

Actually, we have good confidence in the rest of the year's increasing growth in our instrument business. The last question, one of the -- as we looked to analyze the data, probably one of the most compelling reasons we had a shortfall in Q1 was really one of the major reasons was the perturbation in the United States where we had a reduction in staff. Most of the reduction in sales staff that occurred, occurred in the U.S. and occurred in Q1 of last year. It was part of this year as part of our reduction.

We also had a sales management change in the U.S. as well. What our belief is, is that this perturbation was one of the major reasons why that we had the shortfall in Q1 and we see that most of those orders, a substantial number of those orders, have fallen into Q2 now. They're not being lost. So as we look into Q2 and beyond, we feel very comfortable that we will do much better in the Q2 and beyond this year compared to Q1.

Okay so you do have a backlog of orders -- is that correct?

Yes we do right now. That is correct.

Okay. And then in terms of your margins, will that also improve? It's going to go up I guess with your consumables? Is that correct?

Well I don't know about so much consumables, but I think in this quarter, we took the opportunity if you will to increase our reserves for all of the old ProteinChip systems that we had as well as some older generation chips. And I think just removing the reserves going forward would take the margins back to about 60% roughly. And with the lower volume we had in the first quarter as you might imagine, you have a lot of unabsorbed overhead and things like that. So I think that we don't consider 53% to be our normalized gross margin going forward at all.

Okay, wonderful. And are there any other additional upcoming presentations of data that we might look for?

You mean in the diagnostics area or?

You mentioned at the American Neurological meeting for prostate. Are there any more for ovarian or breast?

Gail, maybe you can take that question.

Yes. As the meetings are held throughout the year, you will see us present and we will press release what meetings we're going to and what we plan to present. So we will continue to outline the milestones that we plan to get to through the next I would say six months and most of this will be in preparation for commercialization.

Great, thank you.

Adam Chazan, Pacific Growth Equities.

Hey guys, thanks for taking my call. Bill, can you remind us, where do we stand in terms of the shift of technical people from technical support to actual sales? How many people have been shifted over? Is that completed?

Let me give you a -- yes -- that is and that has been completed now this month. We have (indiscernible) -- let me just give you general guidelines on that. Approximately six to eight of the field scientists in the United States have been converted over now to direct selling processing. I think one in Canada and three more -- three additional ones in Europe. So we've really substantially increased our overall sales power by doing that. And then by moving the pilot studies that they were spending a lot of time doing with customers into a more centralized laboratory process, we think our overall sales efficiency will be positively affected.

Also, this is a qualitative factor but I think it's really important. These field scientists, the programming that we piloted in Europe to do this has been really exciting for us. These younger field scientists are really very, very enthusiastic about getting much more involved in the sales process. They have direct experience of technical success and they can translate that enthusiasm and technical belief very effectively in the sales process. So we think qualitatively as well that this will really improve the sales situation for us.

Okay. Array sales are flat, so I'm just curious as to what was the dynamic playing out. The installed base has increased, the products I think have gotten better. What's behind basically the flat performance in arrays?

Well I think for one thing, frankly if we had done the number of new instruments we had expected to do, it would not have been flat because when you first sell an instrument, people always buy chips to go with that. So I think that was one thing that harmed us.

So is growth in that completely contingent upon new placements? We don't see kind of volumes ramping or coming off through the individual systems that's in place that does not change over time?

I don't think it's quite as dramatic as you said. It's not totally tied to new placements, but I think also some of the comparisons were a little difficult. The first with of last year in one sense was an extraordinary quarter for us because especially in Japan, that was just an absolute record quarter for us. In particular, we had one very, very large multisystem order and associated chips that went to this proteome factory they were setting up, and so the comparison to that period was a little tough.

So if you strip that out, what do you get?

I didn't do the analysis, but I would say instead of being flat, it's up 5% or 10%. And then if you added in the expected extra systems and 5 or $10,000 worth of chips per system when you first place the things, then you'd be up a little bit more. First quarter for consumables tends to be a little softer too. So if you try to compare the fourth quarter, I think -- and don't think that number, to be blunt with you, it's that different than what we expected. It's not that far off.

Okay. And then you know, Bill, Martin, the crystal ball looking forward, the previous question you thought you were going to see growth in the instrument business. What has changed? The crystal ball hasn't proved to be very accurate in the past. Just kind of curious as to what might have transpired in the quarter to give you that increased confidence?

Martin, why don't you take that.

I think there's a couple of factors there. It's first and foremost the pharmaceutical industry. We are feeling some pull from the pharmaceutical industry. The biomarker programs in the pharma industry have taken shape, they're getting good definition and that means that those groups are now getting interested and really sorting out what technologies they want to use because they know what they now need to do and we're getting phone calls from them and we have quite a number of examples of that. And again, with that in addition, we're bringing in Jim Merryweather onboard, I see that as one of the drivers of the revenues.

Secondly, I do believe the fact that we see such a dramatic increase in the number of publications that that will drive in those sales, particularly in the translational research sector of the market. And we are already there seeing some pull based on the publications that we're having.

And then thirdly, I think that the interest in the Deep Proteome program will also drive some of that pull in the market. Now for Q2, we have done a very thorough forecast analysis and really look at every specific process and the prospecting in great detail, and so that's why we have given that guidance and I'm really comfortable with that guidance. Now later in the year, we're putting programs in place right now that will drive the second half of the year sales.

Okay. So again, Martin, remind me what's the guidance?

7.5 to 8.5 for Q2.

7.5 to 8.5 for Q2, okay. And then lastly, Bill, the tenor of the conversations, we're now well into Q2 (technical difficulty) on the Diagnostics side, what has changed? You're not going to be able to provide much detail but what can we say about to the tone of the conversations? How long they have been persistent? It's the same group or same types of conversations that have been kind of percolating for the last six to 12 months. Can you give us any more read?

All I can say is that the discussions, the negotiations and discussions are advancing. I think what we said, and we still stick with strongly, that we believe we can get this deal done this quarter. That is of course about all I can say, except that we believe strongly that that's the case. We think it is a significant deal. Gail, if you can add any color, please go ahead.

I'm not going to add much color, other than you have to remember that when we created the Diagnostics Division, the first go-around out there was to go out and talk about what we had and talk to potential partners and the actual culmination of that came at the year-end, just like we said we would. We said by the end of the first year, we would try to identify who we thought were the right partners and who would be synergistic with this approach and we did do that and we did enter into the negotiation process. And from my perspective, I think it has moved quite nicely and I concur with Bill. I think there's a very good chance of us being able to come back and have something very interesting to say at the end of the Q2.

Okay. I hope it's really interesting. And then lastly, Bill, you had mentioned on the last pre-announcement, kind of around the pre-announcement, that thoughts on monetizing either technologies or products that might be on the shelf there at Ciphergen, have any of those conversations started or have you received any interest from any other parties?

The answer is yes. We have pursued that with a number of people. There is very good interest in it and those discussions are ongoing.

Okay. And is that something we might see sometime in the year to help us out on the cash side, or do you have any feeling or timeline associated with those?

Right now, what we're doing is we're exploring interest at this level and starting to explore and that is ongoing and I think we could say that that's strong. The next part of it really is to model the way something might look. And I would say we are probably not at that stage right now, but we should by the end of this quarter, we should be modeling what some relationships might look like and we should be in a position in Q3 to decide on what we want to do about that.

Okay, thanks very much, Bill.

(Operator Instructions) William Ho (ph), Piper Jaffray.

Hi, everyone. Actually, thanks a lot, but my question was already answered.

At this time, there are no further questions. This call will be available for replay beginning at 11:30 AM Eastern time today through 11:59 PM Eastern time on May 7. The conference ID number for the replay is 573-9907. (OPERATOR INSTRUCTIONS). The number to dial for the display is 1-800-642-1687 or 706-645-9291.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.