Precipio Inc (PRPO) 2004 Q1 法說會逐字稿

Good day, all sites are now on the conference line in a listen-only mode. I would like to turn the program over to your host, Mr. Mitch Murphy.

Thank you. I would like to welcome all participants to our first quarter, 2004 conference call, and also to any who may be listening on the webcast. I am Mitch Murphy, Vice President, Secretary and Treasurer and interim CFO for Transgenomic. Hopefully, everybody has had a chance to look over the press release we issued earlier today. This call is going to be archived and accessible via telephone and Internet. You can refer to our press release from May 7th or go to our website at transgenomic.com for details of how to access that.

Take a couple of minutes here to take care of some necessary legal issues regarding forward-looking information that may be given during this call. Then I will turn it 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's reports to the Securities and Exchange Commission. 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 Litigation Reform Act of 1995 with respect to all such statements. With that, I will turn the call over to Collin.

Thanks, Mitch. As detailed in our press release and attached financials, we've posted sequential revenue growth now for the second consecutive quarter, and this marks our eighth consecutive quarter of bioconsumables revenue growth. We've also continued to achieve incremental reductions in expenses on a sequential basis. Taken together with trends that we see for our products in the marketplace, we believe these results reflect the progress we've made in our continuing effort to improve our operating results.

In our biosystems business unit, we continue to see signs of increasing strength. Continued expansion of our installed base of WAVE Systems is being driven by a platform's history of strong performance in the area of mutation detection and also by its use in a broadening set of additional applications. Including analysis of DNA methylation, microsatellite instability and loss of heterozygosity. All of these applications were represented in customer presentations at the recent American Association of Cancer Research annual meeting in March.

Bioconsumables revenue growth continues to benefit from increased WAVE System use as well as our ongoing efforts to expand the products portfolio. Our consumables product mix now contains a balance of WAVE related and platform independent offerings, providing us with an increased number of total offerings to our target markets. Our discovery services business is well positioned to expand its list of large pharma clients while continuing to benefit from emerging trends in the translational and clinical research oncology markets.

Recent interest in the press regarding the role of particular mutations in determining the efficacy of a target therapeutic agent in lung cancer patients serves to highlight ongoing efforts to match therapeutic strategies to the mutational status of specific drug targets in individual patients. As documented in numerous publications and presentations, our WAVE technology enables highly sensitive mutation detection using both scanning and scoring methodologies, offering a value proposition that resonates with clinical investigators in this area. This is also underscored by recent customer publications that cite use of the WAVE System to identify mutations associated with the emergence of resistance to targeted therapeutic agents which is likely to be an ongoing issue in oncology research.

Our customers continue to demonstrate productivity with the WAVE System on this and other fronts. As shown by these publications and a variety of other new publications that have now gone to press during the quarter, total independent publications citing use of our WAVE Systems now approaches the 1,000 mark. In addition, both our customers and our own scientists have continued to make strong presentations at key scientific meetings throughout the world.

In our nucleic acid business unit, we have gained a degree of near term revenue visibility for our building block manufacturing facility in Glasgow, Scotland. Current capacity there should be effectively utilized in the near term, based on orders on hand for the next two quarters. In addition, our Boulder, Colorado, CGMP oligonucleotide manufacturing facility posted a sequential increase in its revenues for the quarter, coupled with continued positive response from early stage biopharma customers. Despite recent high profile set backs associated with large, late-stage nucleic acid-based therapeutics trials, we believe the future remains positive for many of our customers who specifically have drug candidates that employ novel chemistries or mechanisms of action. It is this market segment that stands to benefit most from our ability to provide a comprehensive set of solutions supporting the transition to production scale manufacturing.

In closing, before I pass off to Mitch, we continue to leverage the established strength of our biosystems business segment in the global research market. To really take advantage of opportunities in the translational research area, associated with a growing trend of applying genomics in the clinical development of targeted therapeutics, especially in oncology. With that, I would like to turn it over to Mitch to discuss the details of our first quarter financial results and then come back to take questions.

Thanks, Collin. I will start off here with just a few high level comments regarding our first quarter results. As Collin mentioned, we posted a second consecutive quarter of sequential revenue growth, and along with that an improvement in gross margin. While the biosystems business unit revenues showed a modest increase, by units bioconsumables products revenues increased for the eighth consecutive quarter. Nucleic acid revenues grew by over 11% with both the oligonucleotides product from our Boulder, Colorado plant and building blocks from the Glasgow facility having double-digit growth.

We continue to make progress in controlling and reducing operating expenses. SG&A expenses were $4.2 million in the current quarter, as compared to $4.6 million in the first quarter of 2003. Research and development expenses were $1.9 million this quarter compared to $2.3 million in the first quarter of last year. In percentage terms, the year over year reductions were almost 8% for SG&A and 17% for research and development.

Now I'll move on to discuss our Q1 results as compared to the prior year in more detail. Revenues in the first quarter were $8.6 million versus $9.5 million in the prior year. This represented a 9% decrease year over year. Breaking down the total revenues, biosystems segment revenue was $6.4 million during the current quarter, versus $6.9 million in 2003. Bioconsumable revenues continued its growth, increasing 35% to $2.2 million from $1.6 million in 2003. Additionally, bioconsumables revenues were up sequentially from the fourth quarter of 2003 by 4%, which as I mentioned earlier represents the eighth consecutive quarter of sequential revenue growth. This continual growth is due both to our growing installed base of WAVE systems and the introduction of new consumable products such as Optimase, Polymerase and our surveyor Nuclease, and that's a pattern that we expect will continue.

Going forward, as it relates to instrument revenue, we continue to see strength in Europe and indications of expanding demand in other areas of the world. While in North America, instrument sales continued to be challenging. Revenues in the nucleic acid segment decreased by over 12%, to $2.2 million in 2004, from $2.6 million in 2003. On the bright side, oligo revenues from our Boulder facility had an over eightfold increase over the year as our startup efforts there begin to bear fruit. Sales visibility for Glasgow chemical building blocks products is improving but not to the levels we would like to see. As we noted in our previous filings with the S.E.C., we may see large variations in revenues for this segment based on the degree of success our customers experience in their product development.

I will move on now to gross margins. Overall, gross margins for the quarter were 33% compared to 39% in the prior year. Margins were adversely affected by approximately $800,000 for this quarter, mainly from our Boulder manufacturing unit. Biosystems margins remain consistent and within historical averages. This portion of the business had gross margins of 56% in this current quarter, which was slightly below the 58% margin in the same quarter of 2003. Nucleic acid gross margins were a negative 33% as compared to a negative 14% in 2003. These margins are a direct result of the adverse impact from our Boulder operations that I previously mentioned.

Total operating expenses were $6.2 million. This compares to total operating expenses of $7.2 million in 2003 -- and that $7.2 million included $264,000 of restructuring charge. Breaking these expenses down, SG&A expenses were $4.2 million in the current quarter, and that compared to $4.6 million in the first quarter of 2003. Research and development expenses were $1.9 million in the current quarter, and that compares to $2.3 million in the first quarter of 2003. Even though our cost reduction efforts had already impacted operating expenses in 2003, we continued to show year over year improvement. We also continue to challenge ourselves to further control and reduce our operating expenses, and look forward -- look for further declines going forward.

Other income and expense -- net other income and expense for the first quarter of 2004 was a $643,000 expense, compared with a $41,000 expense in the prior year. The increase is due mainly to increased interest expense associated with increased debt. The first quarter 2004 amount includes non-cash financing costs associated with accounting for warrants issued and the beneficial conversion premium aspect of our revolving line of credit facility and our convertible term note with Laurus Master Funds. These values calculated are recorded as a debt discount and a credit to paid-in capital. That discount has been amortized over the term of the facility, or as the warrants are exercised or the debt converted to common stock, thereby increasing the effective interest rate on the facilities. To the extent we have additional borrowings under the credit facility, that will result in additional beneficial conversion premiums to be amortized.

I will move on to the bottom-line. Our loss for the quarter was $3.9 million or 13 cents per share, as compared to $3.6 million or 15 cents per share in the prior year.

I will talk a little bit here now, about our cash and liquidity situation. We ended the quarter with $2.2 million in cash and cash equivalents. Additionally, we had approximately $4.1 million outstanding on our line of credit. In regards to our liquidity position and access to cash, there were a number of important positive developments during the first quarter of this year. First, we previously had announced that we had entered into a term sheet agreement outlining the general terms of a proposed sale and leaseback of our Glasgow manufacturing facility. As we progressed in the documentation of that transaction, certain elements of the agreement became unacceptable. As a result we looked for alternative financing vehicles.

In February of this last quarter, Laurus issued a proposal to us to expand our relationship, through a three-year $2.75 million convertible term note. We determined that the convertible note was a more attractive financing vehicle as compared to the sale leaseback. As a result we entered into the convertible note with Laurus. The transaction closed on February 19th and is convertible into Transgenomic common stock, at a fixed conversion price of $2.61 per share. Proceeds from the note were used to retire our long-term debt with the Royal Bank of Scotland associated with the Glasgow facility and provided also additional working capital. The net proceeds available from the note after repayment of the debt and transaction-related expenses were approximately $750,000.

Additionally, we had previously announced that we had entered into a new revolving line of credit agreement with Laurus. As expected, this facility has provided us with much more flexibility and access to funds as compared to our prior facility. This facility is a $7.5 million line based upon a calculated borrowing base of eligible accounts receivable and inventory. In February of this year, Laurus waived the borrowing base limitation on the line for the remainder of 2004. This is significant, as it means that we have access now to the full $7.5 million facility without limitation as to the calculated borrowing base. In January and February of 2004, Laurus exercised its conversion rights on $2 million of the outstanding debt associated with the line of credit. That translated into approximately 910,000 shares of common stock that they converted the debt into.

Based upon our current financial projections, we expect to meet our liquidity needs with our current cash, a continued focus on converting accounts receivable and inventory to cash -- and, by the way, at the end of Q1, these amounted to $10.6 million and $11.1 million respectively -- the receivables and inventory, and additional advances on our line of credit. 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 agreements, is insufficient to satisfy the liquidity requirements, we will take appropriate actions as needed.

I will switch here and talk a little bit about our outlook. It remains difficult projecting revenues, particularly in the nucleic acids business unit. We are encouraged by the continued strong interest in our biosystems business and expect this segment to remain solid. In the third quarter 2003 conference call, we noted that we believed revenues from our nucleic acid segment had bottomed out and had begun to rebound. While revenues from this segment have expanded in each of the last two quarters, we remain cautious in regard to projecting our nucleic acid unit revenues for 2004. We believe that there's potential for expanded revenues in 2004, but we also believe we may see continued fluctuations from quarter to quarter, driven by the degree of success our pharmaceutical and biopharmaceutical customers have with their product development.

With that being said, in the near term, we have sufficient confidence in our overall visibility to project total revenues for the Company as a whole for the second quarter of 2004 to be in the 9 million to 9.5 million range. Gross margins on the biosystems group remain strong, and we believe will continue in historic ranges. We continued to see no decline in the average sales price of our WAVE System. The nucleic acid business gross margins will continue to be adversely impacted by excess manufacturing capacity, mostly in our Boulder operations. Improvement in these margins will be largely dependent upon increases in revenues. We continue our efforts in reducing operating expenses and believe we will continue to see year over year declines.

That concludes my discussion of the first quarter financials, and at this time I will turn the program back to Collin to entertain questions.

Thanks, Mitch. With that, I would like to open up the call to questions.

Very good. If you would like to ask a question, press star 1 now on your touchtone phone. To withdraw yourself from the queue, you may press the pound key. Once again, to ask a question, please press the star and 1 now on your touchtone phone. We will take our first question from the site of Mr. Matt Aarons. Go ahead.

Hi, guys, can you hear me?

Yeah, Matt, just fine.

I was a couple of moments late getting on the call. So, if you addressed this, please just let me know, and I will ask you offline. But, I am wondering with the recent news out of Genta -- I am wondering if you guys are impacted at all, directly or indirectly, by the disappointment there?

Good question, Matt. Let me answer that. No -- to answer it specifically, we are not at all impacted in our current financials or current revenue outlook by the disappointment in the Genta Phase III clinical trials. The bulk of our business is related to parties outside of Genta, more in the development of novel nucleic acid chemistries rather than the Genta molecule. That has a disappointment in the Phase III review by the F.D.A. Does that answer your question, Matt?

Yes, it does. Let me expand on it a little bit. In that segment of your business, how has it evolved over time, in that, are you -- are you as focused on Antisense now? Or have you broadened out into other possible therapeutic areas? And I think the answer there is yes. I am also wondering what kind of opportunities do you see on the -- from diagnostic companies, as customers for those types of businesses?

Sure. We definitely have -- I mean, our customer base now is quite diverse, away from the traditional Antisense companies per se. So, we have a variety of customers with novel chemistries, outside of the generic phospho-thyroid (ph). Now with our relationship with Geron, on the Phosphoramidite chemistries which are a significant development from a chemistry perspective. Also we have customers in the aptamer area. There are different molecules now that represent the bulk of our customers that are basically second and third generation chemistries -- either chemistries or novel mechanisms of action, in terms of the therapeutic intervention strategy. In addition, we do see solid potential for diagnostic-based customers in the oligonucleotide area and, naturally, also in the chemistry building block area, because some of these chemistries offer significant advantages from a technical perspective for oligo-based diagnostic assays. So we do see a significant diversity in our customer base with definitely novel chemistries and novel mechanisms of action, which is definitely the area we have expanded over the last two-years to expand our customer base and also expand our chemistry base.

Looking, subject to your bioconsumable business -- any geographies that you would highlight as being particularly strong in the quarter? Can you comment further on any particular area of strength?

On the bioconsumable side? Did you say bioconsumables or biosystems, Matt?

Actually, biosystems is probably more appropriate.

Yes. Biosystems itself continues to be strong, outside of North America. We still are unclear as to the opportunities, because of funding issues, with public funding in the U.S. for certain research markets. But definitely, we continue to see strength on the biosystems side, outside of North America. We see some of that strength returning to North America this quarter. But clearly, Europe and the rest of the world continue to lead our efforts on biosystems. On the bioconsumables segment -- part of the segment -- we really see strong, strong revenue growth in all geographic areas on that side.

And on the bioconsumables front, are your partnerships there aiding in that growth?

On the bioconsumables side, it's a combination of our distribution -- our new distribution relationships -- but also just our global reach with our existing installed base of WAVE Systems in over 30 countries, and our new product launches over the last 12 months or so.

Okay. And, -- (multiple speakers)

And we do -- that -- that level of bioconsumables growth really continuing in the foreseeable future.

Okay. And moving to a different segment of partnerships, you have been able to utilize your installed base, especially in Europe, by signing some partners, and hopefully, without distraction, the sales force being able to look opportunistically to at least introduce those facilities to other offerings. Do you see the potential for more of those types of arrangements?

Absolutely, absolutely. We see continuing opportunities in that area on a global basis, actually.

And your announced partnerships in that area are progressing to plan?

Absolutely.

Mitch, a question for you. Moving to -- and I think you -- I think you went over this, but I didn't -- I was falling a little bit behind in my notes. Can you recap your available debt, what you still have available under your various lines of credit?

The line of credit is a $7.5 million, I think you knew that, or know that. And at the end of the quarter, we had outstanding on that, roughly $4.1 million, which leaves three, four, as of the end of the quarter.

Okay. Great. All right. Thank you for the clarification. Certainly pleased to hear the guidance for continued sequential growth. Thanks.

Thanks Matt.

Once again, if you would like to ask a question, please press star 1 now on your touchtone telephone. It appears we have no further questions. I will turn the program back over to you.

Okay, Mitch. Thank you.

Okay, I will 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. And the information on how to do that is contained in our May 7th press release. You can check that or also go to our website at transgenomic.com. Also, for the benefit of those who may have joined us after this 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 S.E.C. 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 of the Safe Harbor for forward-looking statements, with respect to all of these statements. With that, I would like to thank all for listening and participating in the call.

This concludes our conference call for today. You may now disconnect your lines and thank you for participating.