Precipio Inc (PRPO) 2007 Q3 法說會逐字稿

Welcome to today's teleconference. At this time, all participants are in a listen only mode. Later, there will be an opportunity to ask questions during our Q&A session. Please note this call may be recorded. I would now like to turn the call over to Deb Schneider. Go ahead please.

Thank you, Tanya. Good afternoon. I am Deb Schneider, Chief Financial Officer for Transgenomic. I would like to welcome all participants to our third quarter 2007 conference call to discuss our third quarter results. I would also like to extend a welcome to anyone who may be listening on the webcast. I hope that you have had a chance to look over our press release that we did issue a short time ago.

Before we start to review the results, I will just take a couple of minutes to get some administrative matters out of the way. This conference call will be archived and accessible via both the telephone and the Internet. Please refer to our press release from earlier today or you may go to our Web site www.transgenomic.com for further details.

Certain forward-looking statements may be made during this call that reflect management current views and estimates of future economic circumstances, industry conditions, Company performance, and financial results. Such statements are subject to factors, risks and uncertainties described from time to time in Transgenomic, Inc.'s report to the Securities and Exchange Commission. Any changes 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 Litigations Reform Act of 1955 with respect to all such statements. Thanks for your patience.

I will now discuss the third quarter financial results and then I will turn the call over to Craig Tuttle, our President and Chief Executive Officer. At the end of the call, we will both be happy to take any questions you may have. Today, we reported net sales of $5.2 million for the third quarter ended September 30, 2007. This was an increase of $232,000 or 5% as compared to the same quarter in 2006. Bioinstrument sales were $2.4 million, bioconsumable sales were $2.1 million, and discovery services sales were $667,000. The bioinstrument sales were down 6% compared to the same period in 2006. We actually had a fairly strong quarter for our WAVE sales in all of our markets, except to Europe. There were nine WAVE sales sold in the third quarter of '06, as compared to 14 in this current quarter.

The area in the instrument sales that was down was related to our OEM instruments. OEM instruments are those where we provide the sales channel for the instrument sales. However, the instruments are manufactured externally. We may or may not provide ongoing customer support depending on the arrangement with the company who manufactures the instruments. So, when we refer to OEM, it really stands for original equipment manufacturer. We had six OEM instrument sales in 2006 compared to zero this year in '07. So that's really where we saw the decline in the instrument sales. We did have one instrument up until the last day of the month that we planned to close, but because of some -- due to some internal complications in a customer's purchasing group, they were doing an instillation of new purchasing software, that sale did flip and we closed it the first week in October. We are confident that our OEM instrument sales will be stronger in the fourth quarter, and with that one closing so early, we are off to a good start.

Bioconsumable net sales for the third quarter were flat as compared to 2006. Discovery services net sales which includes both our CLIA Laboratory sales and our Pharmaceutical Research Group were up 116% or $358,000 over the same period in 2006. CLIA Laboratory sales made up this entire increase. I will let Craig talk a bit more about this discovery services research group in his comments later.

Gross profit was $2.7 million or 51% during the third quarter of '07 as compared to $2.3 million or 47% during the comparable period in 2006. Gross margins did increase and have been and remain above 50% for the -- all quarters in 2007. The discovery services group was a major contributor with gross profit of $69,000 or 10%. That may not seem like a lot, but as compared to the prior quarter in '06 where we had negative gross margin, we are making tremendous progress here.

Bioinstrument and bioconsumable group also both had gross margin improvement in the third quarter as compared to the previous year. For the third quarter ended September 30, 2007, we reported a net loss of $1.3 million as compared to $1.7 million loss for the comparable period in 2006. The reduction in the net loss in '07 is primarily a result of gross margin improvement of $339,000, a reduction in operating expenses of $500,000 and that reduction is before we consider the restructure impact which I will talk to in a minute, and we had slight improvement in discontinued operations, we had a loss of $164,000 in 2006 and we no longer have the discontinued operations this year in the third quarter. We did record $681,000 of expense related to the restructure activity in the third quarter. That brings the total number up to $1.3 million, which is within the projections we gave earlier in the year.

Both of those consolidations in England and France are substantially complete. Our production is now being done in Omaha, Nebraska and all European administrative functions that were previously handled out of France are now being performed in our one remaining international site in Glasgow, Scotland. We continue to work on finalizing the closure of these two facilities.

At September 30, 2007, we had a cash balance of $6.5 million and working capital of $11.2 million. One item I want to note here around the cash balance is our increase in our inventory balance since the beginning of the year and even over second quarter. I talked a little about the OEM instruments earlier, and our OEM instruments, specifically our HANABI instrument has a lead time of three to four months on purchasing it from the external provider. We have four specific models of the HANABI instrument that we sell, a PIII model that was introduced earlier this year, and the PII model which we continue to sell. We also have two specific models of each of those brands, because we need a U.S. specific one and a European specific one. Because of that lead time, this has caused to build up an inventory and carry a larger inventory than we have in the past in order to allow us to respond to our customers needs and to be able to make these sales. Year-to-date that inventory increase is $1.8 million and the largest component by far is the HANABI inventory.

Moving on to the results for the nine months, net sales for the nine months ended September 30, 2007 was $16.7 million as compared to $17.6 million for the comparable period in '06. Bioinstrument sales were $8.4 million, bioconsumable sales were $6.6 million, and discovery services were $1.7 million. Bioinstrument sales were down 19% or $1.9 million. We had 56 WAVE sales in '06 as compared to only 44 year-to-date '07. In addition, OEM instrument sales were also down primarily as I discussed earlier. We had net OEM instrument sales of $1.5 million in the nine months period in 2006 as compared to only $745,000 year-to-date this year. [To please] your memory, in 2006, we were also selling this [somatic] instrument prior to that company going into receivership in the third quarter last year. Bioconsumable sales were flat for the nine-month period, discovery services net sales again which includes both the CLIA Lab and the Pharmaceutical Research Group were up 154% or $1 million over the same nine-month period in 2006. The entire increase was related to CLIA Laboratory services.

Gross profit was $8.8 million or 53% during the nine months ended September 30, 2007 as compared to $8.3 million or 47% during the comparable nine-month period in 2006. The largest factor in the gross profit and the gross profit margin improved similar to the quarter is the discovery services group. This group contributed $837,000 of improvement and their gross profit margin was from the negative 99% in 2006 that nine-month period to a positive 10% margin for the nine months ended September 30, 2007. I would like to know -- I mean, as we add sales in this group, it is going to continue to help us drive those profit margins, because we now have pretty much overcome our fixed base of costs in those areas.

The bioinstrument and bioconsumable business, both also had improvements in their gross margins, but because of the $1.9 million decrease in instruments, the true dollar gross profit is down. For the nine months ended September 30, 2007, we reported a net loss of $2.3 million as compared to a net loss of $2.4 million in the comparable period in 2006. The 2007 results do include a gain from discontinued operations of $66,000, where we had a $304,000 loss in the same period last year.

Other unusual items to note in these results for 2007 include two items we have already discussed, either today or in previous quarters. The year-to-date 2007 results include the $937,500 gain from the sale of the Pinnacle stock that we did -- discussed in the second quarter release and then please remember we have year-to-date expenses associated with the restructuring activity of $1.3 million.

That is the end of my formal financial update. I would now like to turn the call over to Craig Tuttle, our President and Chief Executive Officer.

Thanks, Deb. I would like to further discuss our financial results in the quarter. Following that, I will cover some of the key accomplishments that we achieved which we believe will have an increasing impact on our future results. As Deb just mentioned, revenue in Q3 was $5.2 million, which is $200,000 higher than the same quarter in 2006. We did experience a typical seasonal downturn in our European business for instrument sales during the quarter. However, at the same time, our top line benefited from the growth in our Laboratory Services Group compared to previous years. We believe that this Laboratory Services revenue will be sustainable and in fact growing in the coming quarters with a continuing positive impact on our sales and profitability. We didn't achieve profit in the third quarter due to $300,000 in system orders that fell over into Q4, a small decrease in our reference lab revenues due to summer schedules from our ordering positions and hospital customers, and the bulk our consolidated -- consolidation efforts that took place during the quarter that resulted in restructuring charges of nearly $700,000.

As I noted last quarter, we've increased our focus on research contract services to pharmaceutical companies rather than concentrating on academic and institutional projects and we are now seeing positive results from this change in strategy. During the quarter, we completed work on seven pharma projects and completed negotiations to begin a Phase II clinical trial for an important cancer drug for a major biopharmaceutical partner. This project will have a positive impact on our discovery services revenue over the next two quarters. We are also negotiating contracts with three new potential pharma customers and in addition, we completed projects for several academic customers including the discovery of a unique gene that causes an inherited disease. This discovery will be further described in an upcoming press release.

For key accomplishments in the quarter, I'm pleased to announce that we've completed the bulk of our planned facility closers in the U.K. and France. We should now begin realizing the impact of these cost savings in Q4 and our projected minimal annual expense reduction will be at least $1.5 million. There will still be some final restriction charges that will occur in Q4, but we are now through most of that effort. We have a significant transition in our Board leadership in the quarter. We have experienced several key changes in our Board's makeup this year and I am pleased now to announce that Dr. Rod Markin, the CEO of the Medical Associates at the University of the Nebraskan Medical Center has assumed the role Chairman of the Board. This position was previously held on an interim basis by Greg Sloma. Greg will continue to chair our Audit Committee and I want to publicly thank him for leading the Board during its transition and to Rod for assuming this key role for us.

Last month we announced the hiring of Chad Richards as our new Senior Vice President of Sales and Marketing. He joins us to lead worldwide sales and marketing activities. Chad brings a wealth of reference laboratory selling skills from his numerous positions with Quest Laboratories and he has very strong skills in understanding in the oncology market both from his previous experiences at Quest and Ventana Medical Systems. We also completed hiring several new field sales representatives in Q3 to build on the rapid growth that we have experienced in the molecular diagnostics lab within our laboratory services group. These new team members are proven sales professionals with successful track records and hospital reference lab testing sales. We expect to see continued impact from their efforts in the future quarters. I'm also pleased to announce that we just received figures for last week's work received in our molecular diagnostics lab and is by far the best week the reference lab has ever seen. We are attributing this to the efforts to the new sales team and we are every excited about this revenue impact on Q4.

Lastly, we continue to strengthen and grow our business as we do and we have engaged in investor relations firm to aid us in effectively communicating our progress and building increased visibility with the financial community and market awareness for the tremendous potential we see ahead. In closing, Deb and I have been speaking to our many efforts to reduce our cost structure and improve margins, increase revenue and move the Company to profitable performance. Because of the many efforts that we as a Company have accomplished during the year and the strength of our expanding libratory services division, please remember that is comprised of our molecular diagnostics lab and pharma and genomics research lab.

Along with continued sales of our WAVE system and consumables plus our OEM products, we fully anticipate reaching a net profit in Q4 and enjoying continued net profit growth in subsequent quarters. We would now be happy to take any questions that you have.

(OPERATOR INSTRUCTIONS) Our first question comes from Steven Becker from Greenway Capital. Go ahead please.

Hey guys, congratulations on a good quarter. I had a couple of questions. First one, if I back out the one-time charges in the quarter and assume a 50% gross margin, that would imply to get to breakeven in the fourth quarter you need to generate an incremental $2 million of revenues or $1 million of gross profit. Am I looking at it correctly?

Steve, this is Deb. We believe in order to reach breakeven our revenues need to be in $6.1 million to $6.3 million range. Obviously that depends on the mix.

Okay. Second question, can you talk about the opportunities shared or however you want to discuss that, either backlog or RFPs or just a general sense of the market on the reference lab side?

I will take that one, Steve. We do contracts with individual institutions. But in terms of RFPs, that -- it doesn't work on that basis, so we just have ongoing samples that we get delivered to us on a routine basis. So there isn't really -- as the backlog we have as when we get a sample in, it takes roughly two to three weeks to complete the testing on that sample and report the results.

So in other words, obviously that business has been growing kind of at an exceptionally strong level. Can you help us to understand what's going on there? Is it -- are you taking market share, is it better pricing, better testing? I mean how is it that you are able to grow that business at this rate?

That's a good question, Steve. I think there is three things contributing to the growth. Number one, we provide a testing service with our WAVE systems that is unique in terms of its sensitivity. So, we are actually providing a better value test result that better describes the underlying inherited mutations that are causing disease, particularly compared to the couple of laboratories we offer tests against. Another thing is now better awareness in the marketplace as we start to get stronger selling efforts and we have picked up, I think, half dozen new clients in the quarter and several maybe a similar number so far in this quarter, so you got that ongoing effort. Third is we do provide probably the fastest turnaround in the industry and we know that and we sell on that point, so that's another competitive advantage.

And so, it was in that business that you had the biggest volumes, this past week that you had historically?

Correct.

Okay. And that's where you're now sufficiently covering your overhead, so the incremental profitability there is meaningful?

Yes, and should accelerate certainly.

And then, can you address a little bit the pharma opportunity you talked about doing Phase II for somebody. How was that business evolved and kind of what are the opportunities out there in that business?

Yes, unfortunately that one is, that is contracted in confidence, so I can't --

I mean not that specific opportunity but kind of the general opportunity.

The general opportunity, it's I guess I would say, it's our meat and potatoes type study, where we look at mutations and specific genes, and sometimes -- coupled with that we'll look at the methylation in these genes or copy number, all the things that are contributed -- are contributing to the [angiogenesis] that are found in these patient samples. And then it's up to the customer to actually do the research and analyze what the impact is on treatment from their drug based on these gene mutations. But the news is most of the projects we do are like this, except some of the research projects that we do for academics. So, I think what's to me encouraging about this is that there is a larger number of pharmas that are doing this type of analysis with us and so, they are beginning to see great value and understanding really the core of what is prescribed as personalized medicine and they need to see the mutations that are driving the differences in their patient response.

Steve, I truly do believe it's just us building those relationships and we just continue to build on each time we do something small and they are happy with our services and we continue to build those relationships which are helping us even spread across those companies.

Terrific. Okay, keep up the good work. Congratulations on a good quarter and we look forward to the fourth.

Thanks, Steve.

Thank you.

(OPERATOR INSTRUCTIONS) It appears we have no questions at this time.

All right, well, thank you very much. Certainly, we look forward to reporting Q4 to you where we are looking for a significant quarter and perhaps historic performance from the Company. So, stay tuned and thanks everyone.

Today's conference has concluded. You may disconnect at any time.