Aspira Women's Health Inc (AWH) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ciphergen conference call. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded, Thursday, February 16. I would now like to turn the conference over to Mr. Matthew Hogan. Please go ahead, sir.

Good afternoon. Copies of the earnings press release were distributed a short while ago. 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 note it cannot be recorded, transcribed or rebroadcast without Ciphergen's permission. Your participation implies consent to our recording this call. If you do not agree with these terms, please drop off the line.

Our discussion today contains some forward-looking statements including Ciphergen's expectations of future strategic plans and operational results. Various risks may cause Ciphergen's actual results to differ materially from these expectations. For a list and description of some of these risks and uncertainties, please see the reports filed by Ciphergen with the 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 Gail Page and others for a review of other corporate highlights.

Ciphergen reported fourth quarter 2005 revenue of $6.6 million, as compared to 10.1 million in the fourth quarter 2004, and 7.1 million in the third quarter of 2005. We reported revenue from the sale of 19 systems in the fourth quarter, none of which were trade-ins or upgrades to existing systems. Instrument sales, which include upgrade and accessories, generated about 40% of total revenue in fourth quarter. With 2.6 million in sales compared to 5.3 million in the fourth quarter of 2004, and 2.4 million in the third quarter of 2005.

As mentioned in our last call, we have a product development agreement with a company called Techcomp, which is also our distributor in China. We paid Techcomp 200,000 during the quarter for achieving a development milestone, and according to an accounting rule, EITF 019, we recorded this 200,000 not as an R&D expense, but as a reduction of revenue. We could actually record negative revenue of up to another 200,000 in 2006, assuming Techcomp achieves our product development goals.

Total ProteinChip array sales were 1.9 million in the fourth quarter, or 28% of total revenue. The remainder of our revenue is related to service activities. For the quarter, total service revenue was 2.1 million, or 32% of total revenue. Collaborative service projects accounted for about 517,000 of the total in the fourth quarter, with the remainder coming from maintenance services and paid training activities.

Our gross profit for the fourth quarter was 3 million, which represents a 45% gross margin. Gross margin continues to be impacted by discounting at generally lower volumes than in the past. Our belief is the gross margin will rebound with greater volumes as well as recent steps to reduce our manufacturing costs.

Sales and marketing expense was 3.8 million in the fourth quarter of 2005, versus 6.2 million in the fourth quarter of 2004. This is a 38% decrease year-over-year in sales and marketing expense.

Research and development expense was 3 million in the fourth quarter 2005, as compared to 3.7 million in the fourth quarter of 2004. This is a 20% 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 3.7 million in the fourth quarter of 2005, as compared to 3.4 million in the fourth quarter of 2004. Although we reduced headcount in G&A by 32% year-over-year, the underlying decrease in expenses was obscured by about 400,000 in extraordinary expense in the fourth quarter related to the earnings restatement and by the accrual of about 630,000 in employment expense that will be paid out in 2006 related to two executives no longer with the Company.

We've been carrying about 2.5 million in goodwill on the balance sheet, which we review for impairment at least annually. As a result of that review and analysis, we're writing down the carrying value of goodwill by recording a noncash impairment charge of 2.5 million.

We also recorded $1 million as Other Income during the quarter. That amount was released from escrow due to passage of a year since the sale of our BioSepra business.

As part of integrating our two divisions and refocusing our business around our key translational proteomics effort, our current headcount is approximately 27% below our level at June 30 last year, and 8% below that on September 30.

Our net loss from continuing operations in the fourth quarter of 2005 was 10.2 million, as compared to 7.4 million in the fourth quarter of 2004. Our overall net loss in Q4 of 2005 was 9.2 million. Again, these 2005 figures included the 2.5 million non-cash goodwill impairment expense.

Our ending cash and investments at December 30 was 28 million, at which point we still had an additional 7.5 million available to borrow under our loan facility with Quest. A decrease in cash position during the quarter was 3.2 million. Our gross cash burn during the quarter, if we exclude borrowings from Quest in the escrow fund, was 5.4 million.

Now, I'd like to turn the call over to Gail Page for additional comments.

Thank you, Matt. I have now been the CEO for six weeks, and I am pleased to be leading a company that has tremendous assets in both the [inaudible]process research and diagnostics marketplaces. Ciphergen's ProteinChip systems and ProteinChip arrays have been cited in over 500 peer reviewed research articles and are being used by some of the most renowned investigators at the most prestigious research institutions in the world, including Dr. Daniel Chan at Johns Hopkins, Dr. Bob Bast at MD Anderson, Dr. [Gina Folkman] at Harvard, and Professor Ian Jacobs at the University College of London. Ciphergen's ProteinChip systems have been instrumental in starting the biomarker revolution that will profoundly change the understanding, treatment and diagnosis of the most complex diseases we face today.

In spite of these successes, we have not seen the growth in the systems and chips businesses that we had anticipated. We still believe that properly leveraged, SELDI technology, chips and systems have the opportunity to grow and continued impact in biomarker research. It is our task to develop a strategy that properly leverages the strength of SELDI technology either alone or in conjunction with a partner.

In addition to this impact on the marketplace as a whole, SELDI systems have been used to develop a deep diagnostic pipeline at Ciphergen. In fact, it was the potential of this pipeline that attracted me to Ciphergen two years ago, and has enabled me to bring together a set of top executives with broad experience in the diagnostics marketplace to further develop the pipeline and bring that potential to fruition. The value of this asset was confirmed last summer when we cemented our partnership with Quest Diagnostics, the world's largest clinical reference lab.

In addition to partnering with us, in their efforts to promote development of proteomic-based initiatives within their organization, Quest became Ciphergen's largest shareholder. With the management team, the Quest partnership and a deep pipeline, I'm as excited as ever about the opportunity for Ciphergen and the diagnostics marketplace.

During the first six weeks of this year, the new management team has focused on the following initiatives: Developing a strategic plan to address the tools business while building our diagnostic business, reorganizing our staff to better execute on the strategic plans, determining cost-saving initiatives throughout the organization, and ways to get more out of our assets, and creating a company-wide focus on our strategic alliance with Quest.

Let me discuss these in a little more detail. First, let me state that I personally come from an operational background, having spent many years at LabCorp [inaudible] the organization. Ciphergen in the past was largely a research-driven company, and I am now bringing a commercial focus to all aspects of [inaudible]. We have undertaken a complete review of our operations and are already implementing several changes that will make a difference to our performance and bottom line.

For example, we have implemented for really the first time a true commission program rather than a bonus program for the sales force. This program is intended to incentivize our entire sales organization to focus on revenues from all sources, not just concentrating on the number of systems sold. We have a major effort underway to increase the number of customers renewing their warranty programs with us after the first year of service. We're doing a full facilities review, and we'll be trimming our facility costs by subletting space or letting existing space go as leases terminate. We've reviewed all outside contractors and implemented greater control over our use of consultants.

As mentioned earlier, we continue to trim our headcount which drops not only salary and benefits, but other employee-related expenses. We have evaluated all of our research programs and have discontinued those that are tangential to our immediate goals. We're committed to providing strong support to those projects that are very important, allowing us to avoid being stretched too thinly.

We've imposed greater oversight over our travel expenses, reduced our shipping costs by putting more stringent controls over our methods of shipment, and have committed to trimming inventory levels.

These are just some examples of the kinds of items that collectively will have real impact on our cost structure as the culture of the Company changes. In short, we have tasked each department with reducing costs in all that they do without compromising our critical goals, which at the end of the day are tied to our getting our first diagnostic test launched.

Now, let's focus on our progress toward building the diagnostics business. During August and September of 2005, Ciphergen ran what we referred to internally as our mega assay, which to our knowledge was the single largest SELDI study on ovarian cancer yet performed. In the mega assay, we ran over 1,000 patient samples, testing assays that we had developed specifically for the ovarian biomarkers in our anticipated tests to distinguish between benign and malignant pelvic mass, as well as utilizing deep proteome tools on a subset of the patient samples in order to identify biomarkers that might predict patient outcome.

We successfully validated our biomarkers using these prototype assays, as well as discovered candidate biomarkers for the patient outcome clinical question. We presented preliminary data the European Society for Gynecology Oncology Meeting in Turkey in September. Based on the information we gathered in the mega assay, in December we ran an additional validation study on a carefully designed perspective pelvic mass study with the aim of specifically quantifying the degree of improvement and positive predictive value that our marker panel has in distinguishing a benign versus malignant pelvic mass. The study employed our last improvements in the ovarian cancer assay protocol to examine 202 meticulously collected patient samples, which were divided into training and [inaudible]. Results of this pivotal study were previewed at the winter Society of Gynecological Oncologists Meeting on February 7, where we hosted a roundtable for about 30 physicians, our clinical goals, and previewed our recent data.

There was a general consensus that the clinical question we are addressing, namely, gratification of a woman with a suspicious pelvic mass remains to be met and is of great value. We noted that two papers in a recent issue of the Journal of the National Cancer Institute demonstrated that patient care outcome is better when a woman with ovarian cancer is operated on by a specialist gynecologic oncologist. Therefore, the general gynecologist would benefit greatly from this type of assay we are working on developing.

In addition, the physicians at the roundtable agreed that a second clinical question we are addressing, prediction of recurrence, would be highly valuable to the gynecologist oncologist in assisting treatment decision-making.

Finally, the data was previewed was greeted with much enthusiasm and a large number of the attendees of the winter SGO meeting asked whether they could participate in upcoming clinical trials. We are discussing these plans with several of these groups as important potential sources of samples, and as a means of recruiting additional thought leaders in support of our efforts. A formal presentation of the results from our prospective clinical trial will be presented at the Annual Meeting of the Society of Gynecologic Oncologists in March.

Finally, as an additional validation step in our ovarian program, we are in the process of analyzing an additional data from a new set of 300 samples obtained from a collaborator in Japan.

In summary, we've accomplished a lot in these last six weeks to focus and structure the Company in a manner that will allow us to concentrate on the development of our molecular diagnostics business. As I look to 2006, I see the following key drivers to our success: Leveraging the tools business to allow us to exploit our diagnostic opportunity, continuing to build a world-class diagnostics management team, supporting our growing relationship with Quest, bringing our first test to the FDA clearance process, and continuing to invest in our diagnostics pipeline. The management team and I are looking forward to a great year.

I think I'll stop there and take questions, operator.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from Constance [Sykes] Cowan.

Hi. thank you for taking my question. First, just a quick question. Will you -- I presume you're not going to be providing guidance today for 2006?

That's right. Constance, we thought about it. You know, 2006 should be a pretty pivotal year for the Company, as we anticipate transferring our technology over to Quest, so they can launch an initial diagnostic test, and we obviously think that's going to have a positive impact on our revenues. But sitting here today, we're not in a position to talk in detail about what launch plans might be, or quantify their impact, or when they might occur. So, I think we prefer to hold off on formal financial guidance right now.

I guess I would comment on, in terms of some of the expenses, we will have to adapt new accounting rule to expense option, and, so, although we're not in a position yet to quantify that. I'd also say that when you look at our Q4 operating expenses, if you were building some kind of a model, I would suggest that our sales and marketing and R&D expenses should be in the first quarter a little bit lower than they were in the fourth quarter. And I want to point out that the G&A expense should be substantially lower in the first quarter than the fourth, for the reasons I talked about earlier, some extraordinary high accounting expenses in the fourth quarter and the severance expenses that we accrued in the fourth quarter.

Okay, great. That's helpful. And then in terms of this additional validation test that you're running for the collaborator in Japan, was this something that was requested by someone, or something that you've chosen to do yourself?

This is Gail. This is something that we chose to do as part of our continuing dialogue with the regulatory agencies and with our partners.

Are you able to comment on whether or not you will be able to deliver the first diagnostic test in partnership with Quest in the first half?

What I can comment on is that we are very engaged with our partner, Quest Diagnostics. The alliance is off to a great start. It has always been the goal and remains the goal of Ciphergen to have a test on the market. It's just very cumbersome for us to discuss anything confidential that we're doing with Quest, but it certainly is the goal of Ciphergen to make that happen.

Okay. I know you can't talk too much about it, but maybe you can elaborate a little bit more about what tests are left that you need to move forward with? Is it -- are they things that are on your end, or is it stuff that's coming from Quest?

I mean, I think there are two pathways that you have to think about: One, is that we have the opportunity through this alliance to launch a test with the Quest organization. There will be some opportunities for us to also go direct in other parts of the world with the assay. So, a lot of the commercialization strategy is dependent upon the alliance, and therefore is real dependent upon the Quest organization. As far as how we launch in the rest of the world, that is a program that the new management team will be unfolding.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from Cheryl Turnbull with [Veronis Partners].

Hi Gail, hi, Matt. I guess I was wondering -- I missed the last question. I accidentally got cut off, so I'm not sure it was what you were talking about. But, I guess you've been so successful with your mega assays and all your tests [inaudible], at what point do you have to -- do you get to stop running tests on your own dime and this becomes part of your alliance?

That's a very good question, and we did somewhat address that, and I'll do the best I can. You can only respect how influential Quest is to us, and how the need for us to respect the confidentiality of the launch plan, or the commercialization plan. It is heavily dependent -- it's the part of the relationship with Quest, but there are two paths that we have, and that's what I was just commenting on. Obviously, we will be working the commercialization strategy with Quest, and those activities are part of the alliance, and Quest is very engaged. We couldn't be happier with that relationship. But there will also, as part of this new strategy for Ciphergen moving forward, the management team that we have in place will also be unfolding, and we can talk more about it at a later time how we will penetrate the other parts of the world, the rest of the world. So, there are two strategies that we will have in launching this assay: One will be with our partner Quest, and one will be in a more direct method in the rest of the world.

Do you have a timeline on launching with Quest?

I can't divulge that for competitive reasons, but what I can say, it is still the intent of Ciphergen to have a test on the market this year with its partner.

Okay. Two tests or one?

Pardon me?

Two tests or one?

I probably shouldn't comment on that. You'll get me in all kinds of trouble there.

Okay. All right. Then let me switch topics, then. The FDA came out with their oncology biomarker qualification initiative. Do you see that as -- how do you view that relative to Ciphergen?

I'm going to give you a couple of comments and then I'm going to punt to a gentleman on the phone, Bill Sullivan, who is our Vice President of Operations and just came back from Washington, where we have engaged with several people up there relative to the FDA. We are totally adept and aware of all these things that are going on. One of the reasons I think it's important today, I wanted you to have exposure to the management team, is to understand the depth and breadth of the people that I've recruited to help us with this effort. Bill Sullivan has an extreme amount of experience in the regulatory and the manufacturing world with GMP and FDA. Bill and I actually worked together years ago at Roche for about 10 years. So, Bill, would you like to comment?

Yes, sure. I think the operative word that was there with the new initiatives and the new guidance that they provided, and it is fairly new. We have had some -- we're just reviewing now our position as to how it will affect us. I hate to waffle on it, but the reality is that our whole plan is to address directly agency concerns to meet with them and discuss them head-on to avoid any type of misunderstanding about our intentions and how we're working. So, I'm going to have to basically say that our direct response to the new regulations -- or, new guidance as opposed to regulations -- from the Agency have not been completely formulated, and it's premature for me to decide, to represent exactly what we will do. But it is our goal, as Gail has stated, all along to take a test to market, to go through the appropriate trials, to meet with the agency to find what they find acceptable, and to submit for clearance. We will be doing that, and that's our firm commitment.

Does that mean that they haven't accepted SELDI, and that's what you're trying to get done?

Well, SELDI would represent a new application for an IBD product, that's for certain. So as we bring things to clearance, we'll have to accommodate what their requirements are for that. Hopefully, it will be something that will be less than a PMA, and hopefully it will be a 510(k) de novo, or some other route, but our plan is to do whatever is required, but as a new application, we would have to meet those expectations on that front.

What do you think of the FDG-PET scanning they're talking about using for their first project?

I don't have enough information about that right now to make any informed judgment.

Okay.

Your next question comes from Greg [Venete] with Smith Barney.

Good afternoon. I'm trying to understand. Your agreement with Quest is exclusively within the United States, which allows you the ability to partner with somebody outside the United States?

That's accurate.

So, a Japanese pharmaceutical company or diagnostics company you could partner with and offer the test over there. Quest does not have first right of refusal; is that right:

I really couldn't comment. You know, a lot of the agreement is obviously very confidential. But what I can say is that we do have certain rights to go to market in the rest of the world however we choose. That could be in a direct -- we could go out and do a contract sales force, we could partner with an IVD company, we could partner with another clinical lab. So it's specific by territory, and there are all kinds of options that they have allowed for.

Are you currently pursuing that in other areas of the world with another partner?

I can tell you that all activities are being reviewed and we are looking at all the different alternatives and opportunities that present themselves to us. So, just like we pursued -- when I first came here, I laid out the strategy for everybody and said, look, now, I'm going to go and I'm going to look for an IVD partner or a clinical lab partner, whatever makes sense, and it depends on the country. In different countries you might want one strategy versus you might want a different one, but the new management team has just, as you know, just been in place for the past six weeks, so it's just really prudent that we go through this planning process to understand what are the alternatives for us and what makes sense for us moving forward.

Is it a possibility to get approval for marketing in other countries prior to the United States?

I would say yes. And, Bill, would you not agree with that?

Yes. No, that certainly is a pathway that's open to us.

The regulatory or scrutiny somewhere else may be less cumbersome than in the United States?

It's very common that if you go back and track a lot of the diagnostic companies, they will often launch in Europe, if not first, you know, very concurrent with trying to seed the market in the United States.

Okay. Assuming that there was a test that was launched in the United States for this -- and I don't want this to be a forecast, but there must be some guesstimate about what the potential market size might be for an ovarian cancer test.

Yes.

Again, not a forecast that you're going to make that, but what is the potential market size for a test like that?

Let me give you an example. Let's just say that -- with ovarian cancer, you have to be very careful, because people talk about a lot different indications, right? There are people who publish 100 samples and now they say they're going to screen every woman, which we all know that they are years away from doing that off of that much data. But we see a particular need and application. We have gone out, and I specifically went to this meeting with [inaudible] at the winter SGO meeting. They were very, very helpful to us, because as you all know, I came out of the lab industry. It's really important that as you begin to define the criteria for a test, figure out how to position it, that you engage with all leaders, and you engage with the audience that you're going to try to market that test to. We're very high on our benign versus pelvic mass application. If you think about that market, there is somewhere around 4 to 5 million CA-125s run today. There are approximately 10 million women that are at high risk, so those are the types of numbers that we're building our models off of. So it's in the millions, and it varies per application, if you will, for the test.

There are 4 to 5 million C-124 tests in the United States.

The CA-125.

The 125.

Yes. If you look at that number, about 4 million of those are run off label, so these are pretty sizable markets for us. We do have a lot of that data and some modeling, so if you'd like to catch up with me and Matt tomorrow, we would take you through that in quite a bit of detail.

I'm just wondering what the gross revenue of one of those tests -- what do the tests like that cost?

Well, I think we haven't formulated all of our pricing strategy, because that's something that we're engaged with, with our partner, and things like that.

What I'm trying to get at is, if you go to your physician and your physician asks for that test to be run, this is something that's obviously out there, what does the insurance company pay for a test like that?

Well, it depends again on what your claims are going to be. So I would just speculate -- and this is pure speculation, because this is nothing that we've cemented -- but a test that you might look at benign versus malignant pelvic mass, you're looking in the hundreds of dollars, so maybe $300 to $500. The test that we would put out there for recurrence, we think the value of that test might command more like a $2500 price point. So right now we're working with Northwestern University and other health economists to help us understand the value of these tests and then translate that into a price point.

Okay. So the basic price would be somewhere between $100 to $200 per test today, the regular C-125 test?

No, that's not what I said. I said the test that we would launch for benign pelvic mass versus a malignancy, we think would be in the $300 to $500 range.

Okay. And how many of those kind of tests do you think might be run in the United States?

I would say -- Matt, what did we actually put in the latest model? I think we talked in the 5 to 10 million.

Yes, I think, Greg, we're a little bit uncomfortable saying too much here, because a lot of this is confidential and tied up with Quest, and it would not be comfortable.

I think people just want to get an idea of what -- if you are successful --

I understand what you want.

We're just trying to get an idea of --

I understand. And if -- what Gail suggested is total market potential of maybe 5 million patients, and I think she also laid out for you possible pricing of $300 to $500, and I think you can multiply those two figures to get a total market size. How much of that we would capture and over what time period, what your ramp would be, not clear. But I think that would suggest that it's a pretty substantial market opportunity.

I'll ask one more question and I'll let somebody else get in. Are you aware of, at this time, any other potential competing tests out there for ovarian cancer?

Well, I think that's a very broad question, because, as I said, there are people that are working on multiple indications around ovarian cancer. We have tried to develop what we claim an ovarian cancer program, so out of all the work that we've done, we won't just have one test; we think that we will have at least two to three tests in that program. We have a test that we've targeted for the initial launch, we have another test, another indication, and then we have a third indication. So we feel like we have an entire ovarian program.

One final question. Will insurance companies pay for this type of test, do you believe?

Yes, I do believe they will.

Okay, I'll let somebody else get in. Thank you for your --

No, no, no. And I really would encourage you to follow-up with Matt and I, and we'll be glad to work on some of the modeling with you.

Thank you.

(OPERATOR INSTRUCTIONS) Ms. Page, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Okay. I'd just really like to thank everybody for joining us. We think it's a great time, it's a great opportunity for this Company, and we encourage you to stay tuned. Take care.

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.