Precipio Inc (PRPO) 2006 Q3 法說會逐字稿

Good day. All sites are now on the conference line. Please note this call may be recorded.

I will now turn the call over to our moderator, Mr. Craig Tuttle, President and CEO of Transgenomic. Thank you.

Hi. Good afternoon. Thanks for participating. This is our Q3 earnings announcement.

First I would like to have Mike Summers start and cover our financial results.

Thanks, Craig. Let me begin with the results for the third quarter of 2006.

For the third quarter of 2006 we posted losses from continuing operations of $1.5 million compared to $526,000 during the comparable period of 2005. This decline resulted primarily from a gross profit reduction of $813,000 and increased operating expenses of $442,000.

The decline in gross profit resulted from a $1.7 million reduction in net sales to $4.9 million for the quarter. Net sales were down in all three reportable categories. Bio instruments were down $1.2 million or 33%, bioconsumables were down $110,000 or 5% and Discovery Services were down $399,000 or 56%.

These decreases resulted from lower demand in all major geographic markets and among both research and diagnostic users, particularly in our largest market in western Europe. Increases in operating expense is resulted primarily from changes in foreign currency transaction adjustments, non-cash stock compensation of $152,000 and increased costs associated with research and development and sales and marketing.

Loss from discontinued operations during the third quarter of 2006 of 164,000 was largely attributable to an impairment charge associated with our only remaining nucleic acid facility in Glasgow, Scotland and the related equipment. The book value of this facility at September 30, 2006 of $2.6 million is based on a contingent offer that we have received and accepted.

We expect related agreements to be executed by December 31, 2006, and the transaction to fund during the first quarter of 2007. In the meantime we expect to incur expenses of $15,000 per month to maintain this facility.

Net loss for the third quarter of 2006 was $1.7 million or $0.03 per share compared to net income in the third quarter of 2005 of $111,000. Despite operating losses during the third quarter of 2006, cash and cash equivalents at September 30, 2006, of $7.3 million was only slightly off the June 30, 2006, balance of $7.4 million. This resulted from better working capital management, particularly better collections and inventory efficiencies.

We were notified during the third quarter by one of our OEM suppliers that they are in receivership. We are aggressively pursuing alternatives that would allow to us serve our customer base in the event the supplier is unable to continue to provide proprietary bioconsumable, component parts and technical support. We have yet to determine the impact, if any on our financial position, results of operations or cash flows.

Moving on to the results for the nine months ended September 30, 2006. For the nine months ended September 30, 2006, net loss was $2.4 million on net sales of $17.6 million compared to $3.8 million on net sales of $20.5 million in 2005.

The 2006 loss was comprised of loss from continuing operations of $2.1 million compared to $3.2 million in 2005 and loss from discontinued operations of $304,000 in 2006 compared to $618,000 in 2005. The 2005 results from continuing operations included interest expense of $1.9 million related to debt facilities that we fully repaid in the fourth quarter of 2005.

A few comments about liquidity and capital resources. During the nine months ended September 30, 2006, we generated cash from operations of $480,000. We deployed $187,000 in investing activities and cash from financing activities was nominal.

Overall, cash increased during the nine months ended September 30, 2006, to $7.3 million from $6.7 million at the beginning of the year. As previously mentioned, we expect to enhance this source of liquidity through the sale of the Glasgow facility for $2.6 million during the first quarter of 2007.

With that I will turn it back to you, Craig.

Thanks, Mike.

I would like to start off by expressing our disappointment with the third quarter revenue levels. We expected typical seasonal effects to weaken European way system and consumable sales, however, the impact was greater than expected.

Coupled with this downturn in Europe, we experienced atypical weakness in the Asia Pacific region for WAVE sales. We expect both situations to improve in the fourth quarter with WAVE system sales reaching our typical quarterly total of 15 to 20 units.

The WAVE system remains one of the essential tools for mutation discovery in cancer and other significant genetic disease analyses. The system continues to shows unmatched sensitivity for discovering or detecting rare or low concentration mutations, mutations that impact and contribute to or cause many severe diseases.

With that being said, we must also acknowledge that WAVE system and consumable sales alone will not drive us to profitable operations. To that end, we plan to enhance the profitability of the WAVE product line with further cost reductions and beginning to transition some fixed costs to more variable cost structure. In addition to our WAVE products we expect to increase our instrument revenue base with sales of a unique automation solution into the clinical cytogenetics market.

Clinical cytogenetics laboratories in hospitals, reference labs, In Vitro fertilization clinics, human genetic labs and cancer centers analyze chromesomes to aid in the diagnosis of inherited disorders in cancer associated chromosomal abnormalities. These analyses are used to gauge the level of mutations that cause inborn errors or to classify solid tumors and leukemia and to monitor certain leukemia during therapy. The procedures used are cytogenetics laboratories are typically performed manually and have very labor intensive.

We now offer a unique automated system solution to harvesting chromosomes for down stream testing procedures and this system has a significant impact on the labor costs and quality of the chromosomal collection in these laboratories. Today we've sold six of these instruments and expect to double our sales in 2007. This represents an opportunity of nearly $3 million for the product line next year.

I would now like to comment on two offerings we expect to make larger contributions to growth in 2007 and beyond. First, is our surveyor mutation detection product and second our discovery services group.

Surveyor is a company proprietary product that does one thing. It cuts any DNA mismatch mutation wherever it occurs in the DNA specimen. This allows a much more sensitive detection of these small mismatched mutations and DNA than typical sequencing or most other DNA analysis procedures.

This is especially important in cancer related mutation detection and discovery where the total amount of mutated cells is too low in a typical tumor for the mutation to be detected by standard sequencing systems. Surveyor works hand-in-hand with our WAVE system to enhance the level and speed for mutation discovery and analysis. Surveyor also works extremely well with the standard capillary electro frequencies platforms and our standard CE based DNA sequencer often times can't identify a mutation caused by a mismatch due to system noise and other sensitivity issues where as with Surveyor it rapidly and efficiently indicates where the mutation occurred and where to look for it in the sequencing analysis.

So he combination of Surveyor with our WAVE System or with typical sequencers significantly expands the mutations that can be detected and therefore should have a growing impact on cancer related genetic variation discovery and detection. We will be launching this CE sequencing application this quarter and are actively looking at distributor partners as well as beginning conversations with sequencing system manufacturers to find the right partner to realize the total value of this product.

Turning to our discovery services business, I am please to note that the division grew $100,000 in revenue for the quarter compared to Q2, and we're forecasting similar growth in Q4. Our discovery services division is now composed of three different groups, one is our discovery research group in Gaithersburg, Maryland. This group works closely with the NIH institutes including the National Cancer Institute and several leading cancer research centers across the country.

We're also now beginning or performing research projects with six pharma companies. Our two groups in Omaha are the clinical diagnostic group which supports a variety of molecular specialty tests based on our expertise in [mydocondrial] genome and mutation analysis plus a variety of cancer and inherited disease marker tests.

We're also moving to begin a translational medicine group to better serve our customers who are moving product candidates from our Gaithersburg research group into preclinical testing. For the total Discovery Services division we believe that it can achieve a revenue target next year of nearly 10% of our total revenue.

Part of our excitement regarding the Discovery Service business relates to the increasing interest in cancer treatment in detection in which mutations and key cellular signalling pathways are linked with drug targets for improved cancer patient outcomes. Clearly there is an additional path to creating value for patients, physicians, payors and investors for companies who successfully identify key mutations that can aid in the diagnosis, therapy selection and ongoing monitoring of cancer patients and their disease status.

Utilizing our Surveyor and WAVE mutation discovery tools, internal efforts at Transgenomic have led to a number of promising albeit early discoveries we hope are of this nature. We are currently beginning to develop intellectual property for a large volume of cancer link mutations.

Once patent filings have been completed we will begin clinical validation studies of these discoveries to determine their ultimate clinical utility. We will also be identifying the appropriate collaborators to further explore the development of any novel predictive tests we hope will result based on this intelectual property.

Transgenomic has been a leading contributor to the cancer research market place for over ten years, and we believe the unmatched sensitivity of our technologies, our in-house capabilities to support clinical research and the development of validated diagnostic assays with our network of customer and collaborator relationships places us in an ideal position to pursue such opportunities further.

Once we have better validated the clinical utility of these new mutation discoveries, we believe that we have the capability to convert these new discoveries into proprietary diagnostic tests so we can commercialize through our own clinical reference laboratory. We will provide further updates on our efforts in this arena as we're able.

Finally, in working to turn Transgenomic around we clearly face significant challenges and opportunities. While we're optimistic about our capability to grow our business, and we are excited about the potential upside opportunity from our internal discoveries, we're also keenly aware of the finite nature of our resources and the rapidly changing landscape faced by our entire industry.

Thus in addition to the activities and initiatives I've summarized for you today, we have also engaged the investment banking firm of Thomas Weisel Partners as an advisor to help the Company maximize shareholder value over the long-term. In closing I would like to personally thank Mike Summers for all of his support while CFO of the Company and the interim CEO of the company as well, and in particular his tireless support in assisting us with completing our quarterly analysis and reporting.

We wish Mike the best of luck in his new position and although we're disappointed to see Mike go, I am happy to announce that we have engaged an extremely talented and experienced CFO to fill his role in the organization. That concludes my prepared remarks. We're now open to taking questions.

[OPERATOR INSTRUCTIONS]

Mr. Tuttle, it appears we have no questions at this time. Do you have any concluding comments?

No. Thank you very much.

This concludes today's teleconference. You may disconnect at any time.