Aspira Women's Health Inc (AWH) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ciphergen earnings conference call. During the presentation all participants will be on a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Mr. Matt Hogan. Please go ahead, sir.

Good morning. Our copies of the earnings press release were distributed yesterday. I would like to remind everybody that this call is for information purposes only. The call is being recorded and is copyrighted and therefore please know it cannot be recorded, transcribed a 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 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. I'm going to begin with a discussion of our financials, and then I will turn the call over to others for a review of other corporate highlights.

First I would like to cover our second-quarter restated financials. As previously disclosed on November 7th we put out a press release that our audit committee was conducting an investigation primarily regarding revenue recognition in connection with certain transactions. On November 16 we issued a press release that the Company had determined it should restate its financial results for the second quarter and that the investigation was ongoing.

That investigation was recently concluded and details as to the restatement are described in our amended 10-Q. In short we have reduced our reported revenue in the second quarter by 552,000, and increased our net loss by 354,000. Most, but not all of the revenue will be recognized in future quarters, some in Q3, some in Q4 and some later. As part of this process we've carefully reviewed our internal controls and have added a number of new controls to ensure this won't recur in the future.

As a result of the delays in filing our 10-Qs, we received a delisting notification from NASDAQ and our symbol was changed to CIPHE, bringing the SEC filings current addresses that issue at NASDAQ. We subsequently received another notification from NASDAQ that we're not meeting their continuing listing criteria. We presented a plan to NASDAQ's listing qualifications panel to address this other issue and are hopeful that the panel will accept our plan.

Turning to the third quarter, which we had not previously been in a position to report, Ciphergen reported third-quarter 2005 revenue of 7.1 million as compared to 8.5 million in the third quarter of 2004. We reported revenue from the sale of 23 systems in the third quarter, none of which were trade ins or upgrades of existing systems. Instrument sales, which include upgrades and accessories, generated about 34% of total revenue in the third quarter, with 2.4 million in sales compared to 4.0 million in the third quarter of 2004.

I should mention one unusual transaction in the quarter. During Q3 we sold 9 systems for 601,000 to one customer, a distributor, with whom we also entered into a product development agreement. The product development agreement may involve us paying that other company up to a total of $500,000 if they hit certain development milestones. We paid them 100,000 during the third quarter for their development work. And according to a complicated accounting rule, EITF 019, we record this 100,000 not as an R&D expense, but as a reduction of revenue. So effectively we recorded net revenue in the third quarter of 501,000 from this customer. The reason I go into this detail is to make you aware that in future periods if this third party hits its development milestones, which is a good thing for us, we will actually record negative revenue of up to 400,000.

Total ProteinChip array sales were 2.1 million in the third quarter or 30% of total revenue. The remainder of our revenue was related to service activities. For the quarter total service revenue was 2.6 million or 36% of total revenue. Collaborative service projects accounted for about 945,000 of the total in the third quarter with the remainder coming for maintenance services and paid training activities.

Our gross profit for the third quarter was 3.7 million which represents a 53% gross margin; about a 5% improvement in gross margin over the second quarter of 2005 but down about 12% from the third quarter last year. Gross margin continues to be impacted by discounting and generally lower volumes than we had had in the past. Our belief is that gross margin will rebound quickly with greater volumes.

Sales and marketing expense was 4.1 million in the third quarter of 2005 as compared to 6.5 million in the third quarter of 2004. This is a 37% decrease year-over-year in sales and marketing expense. Research and development expense was 3.1 million in the third quarter of 2005 as compared to 4.3 million in the third quarter of 2004. This is a 28% reduction in overall R&D expense year-over-year even as we continue to increase our investment in biomarker discovery and diagnostic activities.

General and administrative expense was 3.5 million in the third quarter of 2005, the same figure as in the third quarter last year. We did reduce head count and G&A by 32% year-over-year but expense didn't go down largely due to increased legal expenses as well as other items. As part of integrating our two divisions and focusing our business around our key translational proteomics accounts, we took steps during the quarter to reduce headcount cow by about 20% as compared to the second quarter. Even during this implementation quarter our operating expenses declined about 12% in the third quarter of 2005 versus the second quarter of 2005 with further cost reduction expected in Q4.

Our net loss in the third quarter 2005 was 7.5 million as compared to 9.5 million in the third quarter last year. So even on 1.4 million less in revenue between those two periods our net loss declined by 2 million which reflects the cost-saving measures we implemented in late July.

Looking ahead to the fourth quarter we expect that revenue will be in the range of 6 to 8 million. Our ending cash and investments at September 30th was 31.1 million at which point we still had an additional 8.75 million available to borrow under our loan facility with Quest.

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

Thank you, Matt. Today I would like to take the opportunity to announce my retirement as CEO of Ciphergen, and sincerely thank the many people I have had the privilege to work with and come to know over these past ten years. Ciphergen has come a long way from a fledgling technology startup to a successful public company that now is the leader in the field of proteomics.

Many talented people worked very hard over the years to make this dream happen, and I am proud of what we were able to accomplish together. To all of them I feel a deep gratitude. Now it is time for a new team to lead Ciphergen. Potential to significantly advance protein translational research and bring new diagnostic tests to commercial success are our next exciting goals.

Today it is my honor and pleasure to announce the promotion of Gail Page to President and CEO of Ciphergen. I recruited Gail into the company in early 2004 to run our newly formed diagnostics division. At the time I was struck by many qualities in her, not least of which was her impressive 25-year background in the diagnostics field which include an extremely successful 14-year tenure with Laboratory Corporation of America. Including senior management positions with both LabCorp, and its predecessor Roche Biomedical.

Since joining Ciphergen, Gail has succeeded in building a strong diagnostic management team, a pipeline of potential diagnostic tests, concluded a number of significant academic and pharmaceutical translational research collaborations, and a major strategic alliance with Quest Diagnostics. In the past six months as President and Chief Operating Officer, Gail has unified our discovery and diagnostics business units and created operating synergies we can now fully exploit in our ongoing business strategy to enable biomarker discoveries to be rapidly translated to clinical diagnostic theranostic tests. In short, be the leader in translational proteomics.

Gail Page brings a wealth of knowledge and expertise to Ciphergen, and I believe her leadership will successfully carry us forward to a new growth phase. With that I would like to introduce Gail Page as the next President and CEO of Ciphergen. Now let me turn things over to Gail.

Thank you, Bill. First I would like to thank Bill and the Board of Directors for giving me this opportunity. I would also like to recognize the significant contribution Bill has made to Ciphergen over the last ten years. His vision and tenacity was the key to taking a newly discovered technology from an academic environment and driving it into a commercially important technology that has generated 400 scientific publications. And was the key to generating the content for a rich pipeline of potential diagnostic tests.

It is our goal now to take Ciphergen to the next step and achieve the vision he set out. Let me begin with an update on a number of steps we took in the third quarter. First, we merged our Biosystems and diagnostics division to ensure greater synergy and focus on translating proteomic biomarker discoveries to diagnostic and theranostic tests. Our goal was to create an environment where our expertise and diagnostics would work synergistically with our sales force to increase and improve system placement and collaboration services.

This effort would in turn become a major source of potential tests for our pipeline. We are well on our way toward implementing this on a worldwide basis by having the persona of one company with one goal. Second, we focus our selling proposition on delivering assays to translational medicine practitioners. We have focused on what researchers really want; assays they can use for their particular scientific issues. This is key to differentiating what we offer, the ability to go quickly from biomarker discovery to functional assay.

During the quarter we fully trained our sales force and have implemented this new selling strategy with positive feedback as measured by increased prospects and interest. Third, we have elevated our pharma program based on emphasizing success-based collaborations around delivering assays and providing our new Deep Proteome suite of technologies.

Fourth, we created a centralized customer success group to drive greater revenue and profitability out of our 650 plus customer base. By centralizing this function and structuring it more likely a traditional profit center we expect to increase revenue while servicing the accounts far more efficiently.

Fifth, we've reduced operating expenses significantly. As you saw already from our Q3 results operating expenses fell by 1.4 million or 12% as compared to Q2, which is impressive since our refocusing steps did not occur until the end of July.

Finally we concluded our strategic alliance with Quest Diagnostics. Matt has covered the financial details of the relationship with Quest but more important from my standpoint is that they truly are the ideal commercialization partner for our initial tests. We have had multiple working group meetings with Quest since the deal was signed, largely focused on identifying the market opportunities and the specific actions steps required. Quest is fully engaged and the alliance is off to a great start.

In addition to the above, let me comment on some of our progress towards developing our diagnostic tests. The ovarian cancer diagnostic progress during August and September, Ciphergen ran what we refer to internally as our mega assay. This is the single largest SELDI assay yet performed to our knowledge. In the mega assay we ran 1050 patient samples with three replicates in three assay formats on two ProteinChip systems, thereby generating 18,900 spectra. In addition we utilized our Deep Proteome tools on 800 patient samples and generated over 51,000 spectra through the number of conditions we ran. This study as aimed at validating biomarkers described in our August 2004 cancer research paper. These biomarkers that could distinguish between benign and malignant pelvic mass and those identifying biomarkers that could predict patient outcome.

To accomplish this we developed quantitative SELDI-based assays to specifically measure the three biomarkers identified in the cancer research paper. And we employed our Deep Proteome tools. The results of this study were consistent with our prior studies in terms of changes to the three biomarkers and our panel in the disease states. And we discovered new potential biomarkers that may have additional diagnostic value.

In December we are running an additional validation study using 202 new samples, obtained in a perspective collection using our latest assay protocols. Results for this pivotal study are expected to be concluded in January. To further our research and assay development activities in ovarian cancer diagnostics Ciphergen has recently entered into two agreements with leaders in the field. The first is with the University of Kentucky, which operates one of the largest ovarian cancer screening programs in the world and performs more than 500 gynecological operations annually.

The second is with University College London where our principal investigator, Professor Ian Jacobs, is recognized as the world authority on ovarian cancer. He and his team manage the largest screening trial in the world, the United Kingdom collaborative trial of ovarian cancer screening involving 200,000 women. In both cases we will be working with our collaborators to acquire suite of proteomics solutions, the Deep Proteome, Pattern Track process and ProteinChip systems to address multiple clinical questions, such as differential diagnosis of a pelvic mass, differentiation of ovarian cancer from endometriosis, assessment of risk in asymptomatic high-risk patient groups, separating responders to treatment from non-responders and monitoring the patients undergoing treatment.

Let me mention another diagnostic initiative that we haven't highlighted in the past but which I think has considerable potential. Over the last several years Ciphergen and a number of its customers have discovered sets of biomarkers that may be useful in the diagnosis of liver cancer. Several of the same overlapping biomarkers have appeared in these independently conducted studies. Some of the clinical questions we are now focusing on are tests to monitor the roughly 3 million Americans who are chronically affected with hepatitis C to detect progression to liver cancer, as well as to identify those that will respond to interferon therapy. We view this as a major unmet medical need. We have recently signed an agreement with the University of Texas MB to take this step further and are right now running a study to address these clinical questions with results anticipated in January.

Ciphergen has also launched a breast cancer diagnostic development program building on multiple studies our collaborators and customers conducted and published in scientific forum. The results of the latest two studies were presented in early December at the San Antonio Breast Cancer Symposium. We are now embarking on multisite studies including with University College of London, to validate several candidate biomarkers that could form the basis of a multi-marker assay to detect ductal carcinoma in situ since the majority of women at this stage can be cured.

In summary we feel we accomplished a lot in the second half of 2005, to focus and structure the Company in a manner that plays to our leadership role in translational proteomics, and positions us to drive revenue growth in the coming years. I think I will stop there and take questions. Operator.

Eric Schmidt, SG Cowen.

Matt, do you have any Q4 expense or net loss guidance for us? I'm trying to figure out what the extent of these legal fees might be in the current quarter.

Normally we don't give that but I will say that you have pinpointed one item that I should comment on. I think that the total cost of the restatement between legal fees, the investigator, auditor fees etc., I would say that that will be approximately 400,000 in the fourth quarter. And I will give you that comment.

And then when do you hope to regain compliance with NASDAQ?

Literally today we will contact them or our lawyers will, and point out to them the filings that were made yesterday to bring us current. I can't say with any precision what their process is to exactly when they will come back to us. But we will contact them today, and I believe that we are back in compliance at the moment. But I don't have great visibility into how quickly NASDAQ acts.

And the distributor that you mentioned selling to in Q3, could you just provide a little bit more information about what kind of relationship that is?

Actually it is in China where for a long period of time we sold in a direct manner. And basically we have moved to a different selling model over there, and we struck up a relationship with a company called Techcomp Limited, which actually is a pretty substantial company. They are Hong Kong stock exchange listed. They had revenues last year of over 40 million. They are a distributor of products in the life science instrumentation business for companies like Hitachi and others. And besides being a major distributor in China, they also do a lot of manufacturing for other companies on an OEM basis. So for instance, for Hitachi. And so going forward they are going to be taking over the roll of distributor for us in China. And they've been working with us for over six months actually; quietly in China, taking over the operation.

Thanks a lot. Bill, good luck in the future.

(OPERATOR INSTRUCTIONS) Ladies and gentlemen, there are no further questions at this time. I would now like to turn the call back to you. Please continue with your presentation or closing remarks.

Maybe I'll just close by saying that we are all available by phone to answer additional questions if people would like to call at a later time. And thank you all for your participation.

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