Precipio Inc (PRPO) 2003 Q3 法說會逐字稿

Good day. All sites are now on the conference line in a listen-only mode. I'd like to turn the program over to your host, Mr. Mike Draper.

Thank you. I'd like to welcome all participants to our third-quarter 2003 conference call and also to anyone listening on the webcast.

I'm Mike Draper, Chief Financial Officer for Transgenomic. Hopefully, everyone has had a chance to look over the press release we issued earlier today.

This conference call will be archived and accessible by both telephone and internet. You can refer to our press release issued this afternoon, or go to our website at Transgenomic.com for details.

Before we get started, I will take care of some legal issues regarding forward-looking information that may be given during this call. Then I'll turn the call over to our CEO, Collin D'Silva.

Certain forward-looking statements may be made during this call that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance, and financial results. Such statements are subject to certain factors, risks, and uncertainties described from time to time in Transgenomic, Inc.'s reports to the SEC. Any change in such factors, risks, and uncertainties may cause the actual results, events and performance to differ materially from those referred to in such statements. Accordingly, the company claims protection of the Safe Harbor for Forward-Looking Statements contained in the Private Securities and Litigation Reform Act of 1995 with respect to all such statements.

With that, I'll turn the call over to you, Collin.

Thanks, Mike. I'd like to first make some opening remarks. Then Mike will discuss the financials in greater detail, and then we'll be both back for questions and answers.

As detailed in our press release today, a weakness (ph) in the therapeutic customers segment of our nucleic acids business has been the primary determinant of our disappointing results for the quarter. Nevertheless, we remain cautiously optimistic regarding the long-term value of this business, and we expect improvement in its revenue in the fourth quarter.

We believe demand for pharmaceutical-grade chemical building blocks has been in decline as certain sectors of our customer base experience varying degrees of success in the clinical development of their therapeutic candidates. However, after the scaling of our cost structure of our manufacturing facilities to be in line with conservative estimates of future demand, we believe we are now well-positioned to benefit from the depth and breadth of our expertise in nucleic acid chemistry to support commercialization of advanced next-generation synthetic nucleic acid molecules for incorporation into research diagnostic and therapeutic products.

For example, we announced in September a follow-on agreement to provide phosphoramidite building blocks to Geron Corporation for use in synthesis of a novel oligonucleotide that is in clinical development as an oncology drug candidate. We began providing manufacturing support for this clinical development effort in 2002.

In June of this year, we expanded our licensing agreement with Geron to cover the manufacture of phosphoramidite building blocks and oligonucleotides for other customers in biopharmaceutical and diagnostic industries, a significant extension of our original license covering manufacture of these compounds for research purposes only.

This new class of synthetic nucleic acids has demonstrated a number of advantages over earlier-generation chemistries, including enhanced, sequence-specific DNA- and RNA-binding activity; a higher resistance to degradation; and improved cellular uptake and biodistribution. These properties offer significant potential for the development of improved synthetic nucleic acid molecules to be used in a variety of research, diagnostic, and therapeutic applications.

Realization of this potential is dependent upon the ability to efficiently synthesize high-quality phosphoramidite building blocks in increasingly larger quantities. This is significantly more challenging than large-scale synthesis of many of the more conventional building blocks currently in wide use, and represents an area where we have demonstrated enabling capabilities.

We're also making progress in our efforts to position our Boulder, Colorado facility and its team as a leading provider of the services and manufacturing support needed for emerging biopharmaceutical or diagnostic companies seeking to commercialize synthetic oligo products. We recently signed an agreement to develop a manufacturing process for production of an oligonucleotide to be included in vaccine formulations. This agreement also calls for the development of analytical methods, specific studies to support regulatory filings, and manufacture of preclinical material. In addition, we have now successfully completed quality reviews with several customers and prospective customers and a general sales pipeline for this business is building.

Going on to our biosystems business unit, our biosystems business unit continues to post year-over-year growth, and we see continued potential in this business on several fronts.

First, we continue to expand our installed base of WAVE systems in laboratories around the world, with continued prospects for future growth. The pace at which our customers are generating publications and presenting data at scientific meetings continues to be rapid, coupled with the use of our technology in a broadening range of applications. For example, the WAVE system has recently been demonstrated to offer a novel approach to the molecular analysis of polymicrobial species such as those observed in infections for transplantations.

Yesterday, our WAVE-HS system, our new high sensitivity model, was highlighted in a presentation given at the third international symposium on circulating nucleic acids in plasma and serum. This novel application involved high-sensitivity mutational analysis of small amounts of tumor DNA present in the blood of colorectal cancer patients. We believe such studies will prove to be important in advancing the understanding and the emergence and progression of cancer and in formulating strategies to monitor disease before, during, and after therapy.

In addition to continued proliferation of our WAVE technology, our biosystems revenues are also beginning to benefit from the expanded offering of consumable products, including our Optimase proofreading polymerase, our MitoScreen kit for detection of mutations in mitochondrial DNA, and other mutation detection kits. Based on this broadening demand of our biosystems products, we're actively pursuing various strategies for widened distribution of these products globally.

Lastly, we see significant opportunities to expand our services provided in support of clinical trials, based on our growing pipeline of current business, various market indicators, and on the unique value proposition that our technology and expertise offers prospective customers. We have completed multiple projects now for three of the top ten pharmaceutical companies in the world, and believe that we stand to benefit from increasing interest in the discovery of important genetic biomarkers. We have initiated actions to optimize utilization of our existing personnel and facilities to address these opportunities on a global basis.

With that, I would like to now turn it over to Mike Draper to analyze the financials in greater detail, after which we will come back for questions. Mike?

Thanks, Collin. I would like to start with a few high-level comments in regards to our third-quarter results.

We're disappointed with our overall results -- overall revenues and cost of sales. The results for the quarter were below our internal projections. However, we are encouraged by the continued year-over-year revenue strength shown in our biosystems operating segment, and the progress we are showing in controlling and reducing our operating expenses. Additionally, based on orders received and sales forecasts, we believe we will show a sequential increase in revenue for the fourth quarter of 2003. I will discuss this further in a few minutes.

As compared to third-quarter 2002, our biosystems unit revenue increased 13 percent. Our operating expenses were 6.7 million in the current quarter as compared to 9.1 million in the third quarter of 2002. This represents a decrease of over 25 percent. Additionally, our operating expenses declined sequentially from second quarter 2003.

Now, I will discuss our third-quarter results in more detail. Revenues for the third quarter were 7.5 million versus 9.1 million in the prior year. This represents a 17 percent decrease year over year. Breaking down the total revenues, biosystems segment revenues were $6 million during the current quarter versus 5.4 million in 2002. Instrument and related service revenues were 4.3 million compared to 4.1 million in 2002. Bioconsumable revenues were very strong, showing a 40 percent increase to 1.7 million as compared to 1.3 million in 2002.

Going forward, as it relates to our instrument revenue, we continue to see strength in Europe and indications of expanding demand in North America and other areas of the world. Additionally, we see continued expanding sales of our bioconsumables, due largely to growth in sales of new product offerings such as our Optimase product and various mutation detection kits.

Revenues in our nucleic acid segment were 1.5 million in the current quarter compared to 3.7 million in revenues in 2002. We continue to struggle with sales visibility for our nucleic acid products, specifically our chemical building block products. This decrease is largely due to a decline in current demand from our biopharma and pharmaceutical customers for our phosphoramidite products. As we have noted in our previous filings with the SEC, we may see large variations in revenues for this segment based upon the degree of success these customers experience in their product development.

Additionally, our new oligosynthesis facility in Boulder, Colorado began to generate revenues in the current year and has shown steady increases each quarter in 2003. We expect this trend to continued. Revenues from products and services related to the Boulder facility were approximately $400,000 in the third quarter of 2003 as compared to none in 2002.

Gross margins -- overall gross margins for the quarter were 10 percent compared to 47 percent in the prior year. Margins were adversely affected by excess manufacturing capacity, mainly on our nucleic acid business unit, and inventory charges taken related to our chemical building block inventory.

biosystems business unit margins remained consistent and within historical averages. This portion of the business had gross margins of 55 percent in the third quarter of 2003 as compared to 57 percent in 2002.

Nucleic acid gross margins were a negative 177 percent, as a result of our excess manufacturing capacity and other manufacturing costs being absorbed across a lower revenue base.

During the third quarter of 2003, we recorded inventory-related charges for our chemical building block inventory of over $700,000. These charges included write-offs of inventory, inventory markdowns, and additional costs related to inventory that was reworked in order to maintain product specifications for sale to our current customer base.

Operating expenses -- our total operating expenses were 6.7 million. This compares to total operating expense of 9.1 million in the third quarter of 2002, representing an overall decrease of 25 percent year over year. We continue to challenge ourselves to further control and reduce our operating expenses and look for further declines in our total operating expenses going forward.

Our net loss for the quarter was $6.1 million, or 25 cents per share, as compared to 4.7 million, or 20 cents per share, in the third quarter of last year.

Now I will discuss briefly our year-to-date results. Year-to-date revenues were 25.5 million versus 28.3 million in the prior year. This represents a 10 percent decrease year over year. Biosystems segment revenues year to date were 19.7 million versus 17.1 million in 2002, or a 15 percent year-over-year increase. Year-to-date revenues in the nucleic acid segment were 5.4 million versus 11.2 million in 2002, or a decrease of 48 percent.

Year-to-date gross margins were 27 percent compared to 50 percent in the prior year. Biosystems year-to-date margins remained consistent and within historical averages at 57 percent. Nucleic acid year-to-date margins were a -70 percent.

Operating expenses -- year-to-date total operating expenses in 2003 were 21.1 million, and include restructuring charges related to our expense reduction efforts of $738,000. This compares to a year-to-date total operating expenses of 26.7 million in 2002. There were no restructuring charges included in the year-to-date 2002 operating expenses. On a GAAP basis, operating expenses decreased 21 percent year over year.

Our year-to-date net loss, including the restructuring charges of $738,000, was 14.4 million, or 61 cents per share, as compared to 12 million, or 51 cents per share, in the prior year.

Now I would like to discuss cash flows and our cash utilization. We ended the quarter with $1.1 million in cash and $400,000 in short-term investments. Cash and short-term investments utilized in the third quarter were 1.4 million for a year-to-date total cash and investment utilization of 11.7 million.

Net funds used during the quarter in operating activities were approximately 3.1 million, which included funding a net operating loss of 6.1 million, offset by noncash charges for depreciation and amortization and changes in other working capital amounts.

We made progress in reducing our receivables days outstanding and improving our overall receivables aging. Additionally, we were able to significantly reduce inventory levels.

Converting our working capital into cash remains a priority. As such, we will continue to focus on receivable collections and are hopeful that we will be able to continue to reduce inventory levels.

We also utilized approximately $800,000 in the quarter for capital expenditures. These expenditures primarily related to our nucleic acid business unit. This level of expenditure is down from the first quarter level of 3.7 million and the second quarter level of 1.2 million. As the current phases of facility expansions have been substantially completed, we expect further reductions in capital expenditures during the remainder of 2003 and in 2004.

Cash provided by financing activities in the quarter in the form of stock sales was $1.8 million. Advances on our line of credit were flat with the prior quarter.

Expense reductions mentioned earlier and the reduced level of capital expenditures are expected to help reduce our cash burn rate.

In regards to an update on our previously announced stock sale, we partially closed the transaction in September when one investor elected to purchase 1.8 million shares prior to the registration of the shares becoming effective with the SEC. We expect to close on the remaining 2.7 million shares this month.

In regard to our proposed sale leaseback of our Glasgow manufacturing facility -- in October we entered into a term sheet agreement outlining the general terms of the transaction. We currently expect the transaction to close this month, with proceeds, net-of-debt repayment, and other expenses being approximately $1.5 million.

Capital expenditures for the remainder of the year should be in the $600,000 to $900,000 range. This would give us total capital expenditures for the year of between 6.2 million and 6.5 million. This is a reduction of between 1.9 million and 2.2 million compared to the capital expenditure budget noted in our 10-K.

Based upon our current financial projections, we expect to meet our liquidity needs with our current cash and investments, with continued focus on converting accounts receivables and inventory to cash, additional advances on our line of credit, further proceeds from the previously announced sale of common stock, and net proceeds from the sale leaseback of our Glasgow manufacturing facility. These projections may or may not be realized based upon actual operating results and changes in working capital. Thus, during or after this period, if our existing cash and short-term investments, cash generated by operations, and available borrowings under credit arrangements are insufficient to satisfy our liquidity requirements, we will need to take appropriate actions.

I want to move to an outlook now. As I mentioned earlier, it remains difficult projecting revenues. We are encouraged by the continued strong interest in our biosystems business, and expect this segment to remain solid. In the second-quarter conference call, we noted that we believe that revenues from our nucleic acid segment had bottomed out. We now feel that the bottom was actually reached between the second and third quarters, and that the third-quarter revenues reflect a core base of recurring business for the nucleic acid segment. We anticipate that we will see revenues from this segment expanding the fourth quarter. We remain cautious in regard to our nucleic acid unit revenues for 2004, and believe we may see continued fluctuations in revenues.

Gross margins on the biosystems business unit remain strong, and we believe will continue within historic ranges. The nucleic acid business gross margins will continue to be adversely impacted by excess manufacturing capacity. We see this impact lasting into 2004.

We continue our efforts in reducing operating expenses and believe they will likely decline compared to third quarter of 2003.

Given the results we have just discussed, we feel that it is appropriate to provide some high-level guidance as to our expected revenues and operating expenses for the fourth quarter of 2003. Specifically, based upon current orders and sales forecasts, we expect that fourth quarter revenues will show a sequential increase of between 10 to 15 percent over the third quarter of 2003. Increases in revenues are expected from both of our business units.

In terms of operating expenses, we expect to see further reductions from the $6.7 million level achieved in the third quarter of 2003.

At this time, I'd like to turn the call back to Collin.

Thanks Mike, with that, I'd like to turn the floor open for questions.

(OPERATOR INSTRUCTIONS) It appears we have no questions, but I would like to give individuals the opportunity to re-queue.(OPERATOR INSTRUCTIONS) There are no questions at this time. I'll turn the program back over to our hosts.

Thank you. And I'll mention one more time that this call is being archived, and it will be available for listening to either over the internet or on a dial-in basis. Information as to how to do that is contained in our press release issued this afternoon. You can refer to that, or you can also visit our web site, Transgenomic.com.

Also, for the benefit of any who may have joined us after the call was already in progress, I will reiterate that certain forward-looking statements may have been made during this call that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance, and financial results. These statements are subject to certain factors, risks, and uncertainties described from time to time in our reports to the SEC. Any change in these factors, risks, and uncertainties may cause the actual results, events, and performance to differ materially from those referred to in such statements. Accordingly, the company claims protection for the Safe Harbor for Forward-Looking Statements with respect to all such statements.

With that, I'd like to thank you all for listening to the call. Thank you.

This concludes our conference call for today. You may now disconnect your lines and have a good day.