Precipio Inc (PRPO) 2008 Q1 法說會逐字稿

Good day and 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 and, as a reminder, this call may be recorded, and I would now like to turn the program over to Ms. Deb Schneider. Please go ahead.

Thank you, Carrie. Good afternoon. I am Deb Schneider, Chief Financial Officer for Transgenomic, Inc. I would like to welcome all participants to our First Quarter 2008 Conference Call where we plan to discuss our first quarter results. We are very excited to be able to share this news with you today.

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'll just take a couple of minutes to get the 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 website, www.transgenomic.com, for further details.

Certain forward-looking statements may be made during this call that reflect management's current views and estimates of future economic circumstances, industry condition, 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 Litigation Reform Act of 1955 with respect to such statements.

Thanks for your patience there.

I would now like to turn the call over to Craig Tuttle, our President and Chief Executive Officer.

Great, thanks, Deb. Good afternoon and thanks to everyone who has joined us for this call. This is Transgenomics first quarter 2008 conference call and, as Deb just mentioned, I am Craig Tuttle, the Company's President and CEO.

I am excited to report another solid quarter for the Company in Q1. In addition, reporting revenues of $6.3 million, we again achieved profitability with an after-tax profit just over $120,000. Our strong revenue result and profitability are consistent with our guidance plan for the year and represents our second straight quarter of profitable performance.

We achieved this quarter's revenues with consistent revenue performance in our bioinstruments business, continued healthy revenues in our pharmacogenomics research services business, and sound growth in our molecular diagnostic laboratories sales.

So, again, these revenues coupled with the cost reduction efforts completed last year have enabled us to achieve a profit, which adds to our now expanding cash total.

We are particularly excited to announce the collaboration with the National Cancer Institute for our mitochondrial mutation analysis of the NCI-60 cancer cell line. This analysis is the first of its kind in the NCI-60 panel of cancer cell lines, and one we hope results in valuable data and opportunities for both cancer detection as well as uncovering linkages between mitochondrial mutations and drug responses across several cancer types.

In addition to our sound revenue performance in mitochondrial collaboration, we are continuing our efforts to secure new tests and technologies in our molecular diagnostics lab and, in addition, are pursuing a variety of really exciting collaborations.

For the quarter, our instrument sales included nine wave systems and four Hanabi harvesters. Total sales on our legacy bioinstruments business totaled $5.3 million. Our combined laboratory services business totaled just under $1 million and represents growth of 160% compared to Q1 of '06 -- I'm sorry -- of '07.

Our pharmacogenomics lab grew almost 500% compared to the same quarter in 2007, and the molecular lab grew about 75% from the prior year.

In the quarter, we worked on 21 pharmacogenomics projects and added 24 new hospital clients into our molecular laboratory. On top of all this, we were able to improve our gross margins to 58% for the quarter due to the leverage that we are gaining in our service businesses and efficiencies in our legacy business.

In conclusion, it is rewarding to be able to report a second successive quarter of strong revenue and profitable performance. We are justifiably excited about our prospects for the year and certainly the future of the Company.

With that, I'll turn it over to Deb.

Thank you, Craig. There may be a few overlapped comments between the two of us. I think we're both trying to cover some of these exciting numbers in both of our discussions.

I will take a few minutes to discuss our first quarter results also. When I am done, Craig and I will be happy to answer any questions that any of you may have.

Today we reported net sales of $6.3 million for the fourth quarter ended March 31, 2008. As Craig said, this was an increase of just over $1 million or 20% as compared to the same quarter in 2007. In our first quarter 10-Q, when you read that, we have changed the breakout a little bit on how we're doing our sales by product lines that we disclose in footnote K in the Q. We will be following that format as we do our discussion here today, too. We are really breaking our product groupings down into two businesses.

First, we have our instrument-related business, which includes the instrument sales and the consumable sales, and then we do a subtotal for those. The second product group, or sub-business, is our laboratory services business, and that category includes both the molecular clinical reference laboratory sometimes referred to as our CLIA lab, and then the pharmacogenomics research services project work.

You will see all four product breakouts in our sales disclosures, going forward.

Instrument-related net sales were $5.3 million as compared to $4.9 million in the same quarter in 2007. This represents what Craig and I both will refer to occasionally as our legacy business.

Within this product set, instrument sales were $3 million and bioconsumable sales were $2.3 million. Instrument sales were up 15% as compared to the same period in 2007. The increase was primarily attributable to sales of the Hanabi harvester instrument. We had four Hanabi sales in the first quarter of this year as compared to one Hanabi sale in the first quarter of '07 and one SpectraMedics instrument sale.

Bioconsumable net sales for the first quarter were flat with the same quarter of '07. Laboratory services net sales for the first quarter were up 164%, or $604,000 over the same period in 2007. The molecular clinical reference laboratory portion was up 74% for the first quarter over the comparable period in 2007. As a note here, in addition, sales for the molecular laboratory business were also up sequentially over Q4 by $76,000, or 18%. We continue to see solid growth there.

Pharmacogenomics research services sales were up 491% over the first quarter of 2007.

Craig has already given some comments on these areas of our business and noted how excited we are about the opportunities here. The leverage in these two laboratories is fantastic, and the productivity of our sales resources for laboratory services will be critical for us to continue to achieve this significant growth, which we believe is attainable throughout 2008.

Gross profit was 3.6 million, or 58% during the first quarter of 2008 as compared to $2.7 million, or 52% during the first quarter of 2007. While we had gross margin improvement in all of our product groups, the laboratory services business was a major contributor with gross profit of $390,000 in the first quarter of '08, or 40%. This is compared to the first quarter of 2007 where we had negative gross margins of 24%. We are making tremendous progress in the laboratory services.

Also contributing to the gross margin improvement was the instrument sales with improvements from 62% to 66% in gross product margin. Product mix here comes into play when we have product mix between the Hanabis, new waves versus refurbs waves, and we will see that jump around a little bit depending on the product mix by quarter.

In the first quarter, we reported a net income of $122,000 as compared to a net loss in the first quarter of '07 of $1.3 million. The improvement in 2008 was primarily a result of two areas. First, gross margin improvement of $932,000, and that gross margin improvement was on increased sales of just over $1 million. I would take that kind of fall through any day. The other component -- we had a reduction in research and development expenses of $486,000 going back to 2007. We had higher collaboration expenses related to some wave applications we were working on as well as legal costs in the first quarter of '07 around some provisional patent filings that were not recurring this year.

At March 31, 2008, we had a cash balance of $5.8 million and working capital of $11.6 million. Items affecting cash flow for the quarter or cash flow provided by operating activities of $225,000, which was offset by cash used in investing activities of $85,000.

As Craig has already mentioned, we are very pleased with our first quarter financial results. They were right in line with our first quarter plan. We believe we are off to a great start and look forward to Q2.

This is the end of our formal remarks. We would now like to open it up for questions. We will be happy to take any that you may have. Carrie will facilitate this process for us.

Thank you. (Operator Instructions) Steven Becker, Greenway Capital.

Congratulations on a good quarter. Given the success of growing the lab businesses and the productivity of the sales force, what are your plans to grow the sales force in that area?

Hi, Steve, thanks for your comment, and it's a great question. Absolutely, our plan includes doubling the sales resources for the molecular diagnostic lab this year. However, as we bring in enough assays and see good marginal return per new-rep hire, we'll go ahead and exceed that plan if it can pay for itself.

And that will be over the course of the year?

Yes, sir. But we are interviewing shortly. So we're already making moves to bring in new reps in the molecular diagnostics lab field sales organization.

Steve, we'd like to have them on board by June, and we did just hire the new pharmacogenomic reps in March so, hopefully, they'll be productive in the very near future. We do have quite a few more heads that should be showing productivity.

I'm sorry, you just hired your first two or --?

We just hired the first two in pharmacogenomics in March, yes.

And they have already been productive?

I'll say very productive in terms of approaching potential customers and leveraging our CSO's time in front of them as well as our key laboratory staff, particularly Dr. Cole here, in the lab here in Omaha. So they're both businesses, but all the directors are very aggressive and talented, so we expect to see substantial return on that effort.

And the one thing that is a message, which we're trying to get across, is the remarkable sensitivity of our technology compared to straight sequencing. I don't think that we've done a great job of validating that in the past, and we are certainly trying to do that now. But the bottom line there, and part of our -- the strongest component of our selling strategy, Steve, is that standard sequencing, particularly in cancer, has a broad level of somatic disease that suffers mutations well across the genome.

Typical sequencing can only see 20% at a sensitivity level, meaning the amount of mutant to wild-type DNA. And the wave and surveyor see down to between 1% and 0.5%. So that's a key selling message for them. So they are very excited about that, and they've been very aggressive in approaching customers for it.

So in terms of new projects, I won't say that we've gotten any in the door, but we are certainly discussing a variety.

(Operator Instructions) Bruce Galloway.

Congratulations, good quarter. You mentioned that there were some extraordinary expenses for legal patents and collaborative expenses. Could you quantify that? And also are you going to be getting any guidance as far as the second quarter and the rest of the year. And on the pharmaceutical research end, you know, what's your edge? I know that's pretty competitive, and there's a lot of people entering that field. How do you see yourself and your core competency?

Hi, Bruce, well --

Bruce, this is Deb. I'll take the first one. The expenses I was referring to in research and development were first quarter of '07 expenses that totaled approximately $400,000 that were not recurring this year, and that's why we saw the increase. I mean, we saw a decrease in R&D expenses year-over-year. So they were --

Okay, that was in the R&D.

Yeah, and they were in the first quarter of '07 that we incurred about $400,000.

All right, but you did mention that there were a lot of collaborative expenses this quarter.

No, those were collaborative expenses then for a project that we were conducting primarily in Italy, and that project is over, and so we don't -- we have not and will not incur them again this year.

We haven't really -- we're embarking on a variety of collaborations, and we really haven't realized any expenses on those yet.

We have about seven people on staff in the research and development area that work on different projects, and we've not had to increase that at this point.

Okay.

So to answer the second question, I think it goes right back to my comments for Steve. I'll reiterate that question if I remember -- what is our advantage when we got to the pharmas and discuss our pharmacogenomics study capability?

And on that it's twofold. On one hand we are very good at dealing with these FFPE wax blocks of tumor specimens, and we get a remarkably high level of extracted and sound-performing DNA out of them, much higher than many of our competitors.

But, in addition, when you're starting to look for mutations in somatic disease, or cancer, if you imagine, for example, lung cancer -- 10% of lung cancer patients have discernible EGFR mutations, but when you know that saying your sequencing doesn't see the lower 20% of those mutations, when you're trying to do a clinical trial, it's very confounding to have data that has an outcome that's different than the mutation data.

So we see it is just our sweet spot to be able to go to pharma partners and tell them the only way that you'll find all these mutations is to use our services or our instruments systems. So that's our sweet spot.

I think that will increase in value now, going forward, as we understand and certainly as the research and commercial industries both understand the disease more. So, again, for cancer, typically, the level of mutations that occur increase as the disease progresses, and they might be important in terms of staging the disease but also in determining or finding it earlier. And we are working on collaborations in that area as well. Those are announcements that we'll make in the future.

And you had a fourth question, Bruce?

Any projections, going forward?

Well, we are going to stand by our guidance for the year, and hopefully that's good enough in the short term.

It's still, like, a $1.5 million to $2.5 million in earnings?

No, we are 15% growth for the year and just under $1 million in profit. But if it gets better, I'll be the first to tell you.

(Operator Instructions) It appears that we have no further questions at this time. I'll turn it back over to you for any closing remarks.

Well, thanks, everyone, for participating or listening to the call, and it always is rewarding to present success in this area. I would look for some strong collaborations to come out of this in the near future and, certainly, continued growth in our key areas of focus business. And I really look forward to the Q2 report. Thanks very much.

Thank you.

This does conclude today's teleconference. You may disconnect at any time, and have a great day.