Aspira Women's Health Inc (AWH) 2005 Q2 法說會逐字稿

Welcome to Ciphergen's Second Quarter Financial Results and events. During the presentation all participants will be in a listen-only mode. [OPERATOR INSTRUCTIONS]. As a minder this conference is being recorded Monday, August 8, 2005. I would now like to turn the conference over to Matthew Hogan, Chief Financial Officer of Ciphergen. Please go ahead, sir.

Good afternoon. Copies of the earnings press release were distributed about 1:30 today. I would like to remind everyone 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 the these risks and uncertainties please see the reports filed by Ciphergen with the Securities and Exchange Commission. The information on this conference call related to projections or other forward-looking statements may be -- may be relied upon subject to the previous Safe Harbor statement as of the date of this call and may be continued to be used while the call is maintained on our web site.

I am going to begin with a discussion of our financials and I will turn the call over to Bill Rich and Gail Page for a review of other corporate highlights. Ciphergen reported second quarter 2005 revenue of 7.5 million as compared to 8.3 million in the second quarter of 2004, and 6.6 million in the first quarter of 2005. We p -- we reported revenue from the sale of 18 systems of which three represented trade-ins or upgrades of existing systems. Instrument sales which include upgrades and accessories generated about 44% of total revenue in the second quarter, with 3.3 million in sales, compared to 4 million in the second quarter of 2004, and 2.1 million in the first quarter of 2005. Total ProteinChip array sales were 2.1 million in the second quarter, or 28% of total revenue. Array revenues were down by about 3% on a y -- on a year-over-year basis largely due a soft quarter in Japan.

The remainder of our revenue is related to service activities. For the quarter total service revenue was 2.1 million or 27% of total revenue. Collaborative service projects accounted for about 326,000 of the total in the second quarter of 2005, with the remainder coming from providing maintenance services to our customers and paid trading activities. Our gross profit for the third quarter is 3.7 million which represents a 50% gross margin. Our gross margin was impacted by discounting during the quarter and generally lower volumes which affected our costs. Sales and marketing expense was 4.8 million in the second quarter of 2005, versus 7.4 million in the second quarter of 2004. This is a 35% decrease year-over-year in sales and marketing expense.

Research and development expense was 3.6 million in the second quarter of 2005, as compared to 5.5 million in the second quarter of 2004. This is about a 34% reduction in overall R&D expense year-over-year, even as we continued to increase our investment in biomarker discovery and diagnostic activities. General and administrative expense was 3.7 million in the second quarter 2005 versus 3.6 million in the second quarter of 2004. Our G&A expense was negatively impacted by large legal expenses associated with establishing the Quest Diagnostics Alliance in the second quarter. Our net loss in the second quarter 2005 was 9 million as compared to 13.1 million in the second quarter last year and 9.3 million in the second -- in the second quarter of this year.

As part of integrating our two divisions and refocusing our business around our key accounts which we'll discuss in greater detail in a minute, we've taken steps this quarter that will result in headcount being approximately 20% lower in the fourth quarter as compared to the second quarter. We estimate that this will reduce our operating expenses by about 2 million per quarter, starting in the fourth quarter as compared to the second quarter. Looking ahead to the third quarter, we expect that revenue will be in the range of six to eight million. While our ending cash and investments at June 30 was 23.5 million, the equity investments by -- investment by Quest Diagnostics and the availability of the loan facility with Quest has increased our cash position after quarter end. Now I would like to turn the call over to Bill Rich for additional comments.

Thank you, Matt. As Matt just mentioned, we are restructuring and repositioning Ciphergen as a Biomarker Discovery Company with emerging diagnostic and pharmacoproteomic business. Our mission is to be quote, the leader in translational proteomics. Our new business plan includes reorganizing to consolidate the biosystems and diagnostics divisions into a single company with complementary biomarker discovery and diagnostic businesses that create a strong synergy and focus on translating proteomic biomarker discovery to high-value diagnostic and theranostic tests, or quote, taking biomarkers to the bedside and to the drug side. Gail Page will be leading the effort in her new role of President and Chief Operating Officer of Ciphergen.

As we were undertaking our strategic planning the rationale for restructuring and repositioning became plane. The translational medicine revolution is creating new opportunities to advance biomarker research discoveries more rapidly into patient care. While genomics has validated this potential to the sequencing of human genome expanding molecular diagnostics and initiating the revolution in personalized medicine. Proteomics has yet to demonstrate equivalent value. Ciphergen is pioneering biomarker proteomics and intends to be the first to translate protein biomarker discovery to high volume commercial diagnostic pharmacoproteomic and theranostic assays , what we call translational proteomics.

The biomarker research products and services market is expected by Frost and Sullivan to grow from $600 million today to $3 billion by 2008, with a major component of this coming from pharmaceutical company's investment in biomarkers. Pharmacoproteomic based collaboration programs and related research product sales to pharma make up a substantial percentage of this revenue. Diagnostic products also represent a major business opportunity with the molecular diagnostics market expected to exceed $6 billion by 2008. In addition the pharmaceutical industry is aggressively incorporating various biomarker strategies into their drug development programs, driven both by the FDA and an increased recognition of the value of linking therapeutics with diagnostics. Ciphergen intends to capture a significant portion of these protein based biomarker investments by providing our proprietary [inaudible] ProteinChip and Deep Proteome technologies to the pharma industry through pharmacoproteomic partnership programs. Additionally we expect that these programs will result in pharma companies electing to bring this technology in house and unlike many companies set up around a pure service play, Ciphergen will be positioned to supply both services and products. In addition to the pharmaceutical industry there is a large and increasing segment of the academic community that is charged in translating basic research discoveries into actual clinical use. Ciphergen's, translational proteomics partnership programs, a strategic alliance with Quest, is expected to expand Ciphergen's presence and influence among these translational medicine researchers. Our ability to take investigators from research to clinical diagnostic assay and directly impact patient care management is expected to be recognized and highly valued.

When we take a hard look at all of these trends the plan for Ciphergen became clear. Let me now move to how we plan to implement this strategy. Organizationally we will be focusing on our two key business units. The discovery business will focus on biomarker discovery, validation and research assay development with customers, collaborators and for our own account. It includes all the Biomarker Discovery Centers, worldwide sales, product development and manufacturing and is responsible for both clinical proteomics and pharmacoproteomics collaborations with academia and pharmaceutical partners, product sales and service. The diagnostics business will focus on commercialization of diagnostic tests and is responsible for clinical affairs, assay development, clinical diagnostic business development, coordination of the Quest alliance and all internally funded BDC partnerships such as Johns Hopkins Medical School and M. D. Anderson Cancer Center.

Our discovery business targets high profile translational medicine laboratories in both academic and government medical institutions and pharmaceutical companies and is driven by expanded Biomarker Discovery Center based translational proteomics programs. These partnership programs are designed to provide all the means necessary for our partners to translate biomarker discovery into prototype research and diagnostic assays and solve critical questions surrounding all aspects of biomarker proteomics. Our revenues will be generated from services and products all along the translational proteomics process. Emerging market for pharmacogenomic drugs is driving pharma and bio tech to invest heavily in a variety of technologies that promise to speed clinical development and generate pharmacogenomic drugs for personalized medical care. Ciphergen's technology provides a pharmacoproteomics platform that is ideally suited to lead this same type of initiative in the proteomics field. Pharma partnership programs associated with our biomarker discovery business will target this emerging market. Our recent announcement of a collaboration with Bayer Pharmaceuticals represents one such partnership.

Academic translational medicine research is also expanding, integrating the needs of both basic and clinical research to speed translation of basic research discoveries into the clinic to provide patient care in a variety of different disease areas. Our translational proteomic partnership programs will provide academic institutions with a novel process to go from a clinical question to a high predictive value research diagnostic assay in months versus years. As well as provide novel pathway hypothesis information not easily achieved from conventional proteomics methods.

Finally our emerging commercial diagnostics business strategy is currently built around our recently announce alliance with Quest diagnostics and the further development of an in vitro diagnostics business. The source of new diagnostic tests comes from both customers, our own internal clinical Biomarker Discovery Centers and from major academic BDC collaborators such as Johns Hopkins and M. D. Anderson. This business is primarily focused on taking prototype research assays to ASR and FDA approved tests in their academic collaborators, the source samples and validate assays. The diagnostics business will also commercialize theranostic tests from our pharmacoproteomic collaborations. Quest diagnostics, our clinical laboratory and alliance partner is expected to play a key role in commercialization and in validation of our overall translational proteomic strategy.

Now I would like to say a word about Gail Page and her new role. We're excited that Gail has accepted this important new role of Ciphergen as President and COO. Gail built the diagnostic team and successfully concluded the strategic alliance with Quest over the last 18 months. Gail brings 14 plus years experience in senior management rolls at Laboratory Corporation of America, and her proven track record make us confident of her abilities to lead our corporate transformation to becoming the leader in translational proteomics and successful expansion into both the pharmacoproteomic and diagnostics business.

Let me now turn the call over to her. Gail?

Thanks, Bill. First let me convey today to everyone how excited I am about the future of Ciphergen. We are pleased to respond to the market demands in the areas we have outlined in our new strategic plan and we have reorganized the Company to support those efforts. Over the next six months we will be focused on attaining the following goals: we will be leveraging our new strategy to return to revenue growth, we will be implementing the corporate repositioning by focusing on our leadership position and translational proteomics. We will be implementing the Quest Alliance, we will be expanding the biomarker discovery business initiatives in the pharmacoproteomic arena. We will be executing our new centralized customer success program. And finally, we will be focusing our R&D effort on products that directly impact our corporate goals.

On a nuts and bolts basis we see several potential major catalysts for future revenue growth and value creation here at the Company. From a diagnostics progress standpoint, in addition to generating revenue from the launch of diagnostic tests themselves, we believe the validation generated by the launch of initial test will act as a powerful proof statement to drive the demands for Ciphergen collaborative services and products in the translational research community. We also continue to be excited by our pharma program and our restructuring in no way reflects a lack of commitment to this business or its revenue potential.

As both Bill and Matt alluded to, our recently announced Bayer deal included up front payments and success fees and represents the potential for expanded pharmacoproteomic translational proteomic partnership revenue programs. We see a major trend as pharma companies are now preparing to invest heavily in biomarker services for pharmacoproteomics. We are in a great position to take advantage of our biomarker discovery centers revenue generating potential as we work with a range of leading pharmaceutical companies to development pharmacoproteomic programs around the Bayer model. A number of factors contribute to our optimism about our translational proteomic partnership program. Our Deep Proteome technology is a catalyst for growing the BDC based translational proteomic partnership program business and enhancing our own biomarker discovery power with collaborators. This technology is [potentially] enabling to all proteomics technologies regardless of platform. Our lead program to establish a pharmacodiagnostic product is built around our Alzheimer's pharmacoproteomic program. We are currently in discussions with several leading pharma companies to use our AD assay to validate their drugs in clinical trials as a possible surrogate marker for response and partial pharmacodiagnostic product.

Next we have an install base of over 600 customers. We believe that going from a basically decentralized after sales service approach to a far more centralized after sales support approach will allow to us generate greater revenue opportunity from the install base in a very cost effective manner. Finally we are continuing to work on product development, focusing on and proving all aspects of the pattern [track] process, our proprietary process for multi-marker discovery to assay process including protocol, bio separations, hardware, software, and chipware improvements. Number two, cost reductions. Number three, our GMP manufacturing. Number four, we are, however, curtailing programs that are not directly tied to improving the Pattern track process.

In summary let me restate my excitement and my personal commitment to the future of Ciphergen. We have a great opportunity to drive our collaborative services businesses with pharmaceutical companies to allow them to accelerate drug development and related companion diagnostic products. Concurrently I believe we have the momentum to achieve the successful entree into the clinical diagnostic markets with our new strategic partner, Quest Diagnostics. I think we will stop there and take questions. Operator?

[OPERATOR INSTRUCTIONS]. Adam Chazan, Pacific Growth Equities,

Hey guys. I was wondering if you could just detail for us what the anticipate -- where the anticipated headcount reduction is going to come from, just in general, and how should we think about the mix of business going forward as you seem to emphasize the collaborative aspect of the business going forward? Will we see an uptick in the service related revenues going forward? How should we think about the sales effort going forward? Where's the emphasis really going to be in terms of the -- the instrument business or the cold core business?

Matt, you may want to comment first on just the various areas of reduction and I will comment on the strategic impact of that.

Adam, I think the -- we really, this time, went across all functional areas, operations and manufacturing, sales and marketing, R&D and G&A were all affected, and we are trying to bring cost down across all of those. But if I were to generally speak, I would say that the sales and marketing complement of people is down -- is going to be down by 30%. And they probably bore roughly 60% of the reductions. And then the next -- next heavily affected were R&D. And then after that was a combination of manufacturing, which would affect gross margin, and G&A. Maybe one comment on the revenues that you were asking and then Bill will elaborate on it. Is certainly for Q3 we see very healthy increase in the BDC collaborative service revenue, in no small part due to the Bayer project, but also some things that we are working on.

Basically our strategy, Adam, is that we are consolidating our approach to -- to rather than going to just large numbers of -- of laboratories and selling directly, trying to sell them basically instrument -- instrumentation. We are consolidating our sales efforts into teams of people that will be approaching key accounts both in pharma and large -- and large academic accounts. We are approaching them more on a biomarker discovery partnership opportunity rather than selling them instruments basically, whether it's pharma or academia. So our selling strategy has changed. We consolidated it. The effect of that is going to be a far -- we believe a far more efficient sales process. We do see that in fact the collaborative services element of our revenues will probably be increased as well but we also believe it will have -- have a positive effect even on our instrumentation sales just because we are basically offering -- basically we're offering people biomarker discovery is what's for sale here, not instrumentation is what's for sale. However, to implement that they are going to have to -- to have instrumentation at some point in the sales process.

We also are consolidating our customer, what we call our customer success group. We are actually increasing our customer support capabilities when we do this. We expect both the profitability and revenues of the -- of basically products that we sell to our install base to increase both services and products. And we also expect the -- the efficiency that we have in doing so to improve as we centralize our customer success group. So those are the main strategic -- I think the main strategic issues.

William [Hall], Piper Jaffray.

Hi guys. First of all I guess, Gail, congratulations on your promotion. A cup -- first of all, some housekeeping, can you give me the cost of goods for the services versus the system sales?

Let's see. Cost on the products, 2.8 million, on services, 1.0.

And just in regards to revenues and how revenues are going to go forward I guess this is the third time you've repositioned your sales strategy. How do you think that this is going to improve sales and how are you positioning those systems as a bio-discovery tool versus what were you doing before? And when do you think we will see revenues grow again including the first revenues from the Quest collaboration?

I'll comment on this and then maybe Gail will maybe want to add something as well. One of the -- one of the market dynamics that has changed here in the last -- the last 12 to 24 months is that the pharmaceutical industry has now really gone from being interested in and evaluating technology, various [inaudible] -- buying various [inaudible] technology to evaluate them with respect to potential biomarker programs to where they have become much more interested in the end game. They need assay now to stratify clinical trials, they need assays to stratify toxicoproteomic aspects of their toxicology programs. And instead of basically just buying technology to evaluate for these purposes now we are seeing them come to us and ask us, can you give us assays that can actual will be used for these different kinds of -- of biomarker applications and pharma. I think that what that's done is it's opened up the potential then, which we've seen, in approaching pharma with a -- with a broad-based collaborations revenue generating collaborations program which when implemented creates that kind of revenue. But when you're successful then in producing assays for that particular problem, they immediately, then of course they follow up then by buying the -- the systems that are required to do the assays. So we see a real flip here from technology evaluation to an end game of can you give me an assay that has high-value. And so our selling strategies are really aimed at the latter now, rather than trying to aim at being a technology evaluation strategy.

Thanks Will. What was your other question, I'm sorry?

I was just -- let's say, have you been able to demonstrate the production of, I guess, validated assays on the system to pharma companies thus far?

It's hard to answer the question without -- we are in the process of doing that now with a number of customers and we do have some successes which we haven't -- which we haven't and can't report on right now but the answer is yes, we have. But the word validated you have to be careful with it. It means different things to different people. Let me just say this. There are assays being done in the pharmaceutical industry on a routine basis on the [inaudible] system at various levels of validation. Rather than getting in a discussion of what validation means but is being used routinely to do a number of assays in a number of different pharma companies today.

[OPERATOR INSTRUCTIONS] Mr Hogan, there are no further questions at this time. I will now turn the call back to you. Please continue your presentation or closing remarks.

Okay. Well, thank you for participating, all of you that listened in. And I'm sure in the coming days if someone has additional questions we'd be happy to chat with them. Thank you very much. Thank you very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.