Precipio Inc (PRPO) 2008 Q2 法說會逐字稿

Welcome to today's teleconference. At this time, all participants are in a listen-only mode. Later you will have the 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. Ms. Schneider, please go ahead, ma'am.

Thank you, Sarah. Good morning, everyone. I am Deb Schneider, Chief Financial Officer for Transgenomic. I would like to welcome all participants to our second quarter 2008 conference call, as well as anyone listening on our webcast. Today, we plan to discuss our financial results and provide a corporate overview of our recent accomplishments.

Yesterday, we issued a press release, outlining our financial results for the three and six months ended June 30, 2008. Those of you who haven't had a chance to read the release can obtain a copy by visiting our Investor Information section of our website, at www.transgenomic.com.

Today's conference call will be archived and accessible via telephonic replay and the Internet. Please refer to our press release or website 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 our 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 1995 with respect to such statements.

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

Thanks, Deb. Good morning, everyone, and thanks for joining us on today's call.

Well, I'm very excited to announce our financial results for the second quarter of 2008. For the quarter, we achieved revenues of $6.25 million. In addition, we achieved profit of over $100,000.

Most importantly, this represents our third profitable quarter in a row. We are very excited about these results, and believe that this is a new trend of growth and profitability that we can build on in the future. These results demonstrate our continued success in maintaining our bioinstruments business, and layering in growth from our two service businesses -- our Molecular Diagnostics Lab, and our Pharmacogenomics Lab.

Within our Laboratory Service businesses, our Molecular Reference Laboratory grew to over $700,000 in the quarter. This represents growth of 40% over first quarter 2008, 35% over second quarter 2007, and 49% for the first six months of this year, compared to the same period in 2007.

This continued growth is being driven by our strong sales effort to gain new customers, and the compounding effect on revenue that these new customers have as they increase the number of tests that they order from us. We had sales from 20 new customers in the second quarter.

We continue to add new tests into the Lab to enhance our menu, and our sales effort to attract incremental ordering institutions. We believe that this growth can be maintained in the future, and we recently hired additional field sales professionals to extend our Molecular Lab's sales presence in the West and Northeast.

We also realized revenues of over $300,000 in our Pharmacogenomics Service Lab in the second quarter. Although not as high as revenue in the first quarter, we are actively sourcing new projects with several new pharmaceutical customers, and repeat contracts with current customers, which will impact our project revenue in the coming months.

Our two Pharmacogenomics Business Development Directors, in concert with our scientific team, are continuing to reach new pharmaceutical contacts, which should result in substantial new contract opportunities.

In the quarter, we completed cancer gene pathway analysis for four pharma partners, and are working diligently to leverage these projects' successes for incremental business. We continue to leverage our unique ability to discover and detect cancer-related gene mutations at more sensitive levels than any other technology available today, and this message is now gaining further awareness and the understanding across more potential pharmaceutical partners.

Our Instrument business achieved total revenues of $5.2 million in the quarter. This included Instrument and Service revenue of $2.8 million, and Consumables revenue of $2.5 million. In total, we sold five WAVE systems in the quarter, but were rewarded to see several service contracts from former users who have begun using their systems again. This adds to our confidence that the WAVE system continues to fulfill a unique market performance requirement, namely, the ability to find and detect mutations at much higher sensitivity levels than standard sequencing.

Included in our Instrument business was a $0.9 million for sales of our Cytogenetics system. Gross margins for the quarter grew to 60%, compared to 58% that we achieved in Q1, and the 54% that we experienced in the second quarter of '07. It's certainly rewarding to see the ongoing impact of the cost reductions that we made last year, coupled with greater leveraging of our service businesses, as these businesses continued to grow.

With that, I will turn the call over to Deb Schneider, our CFO.

Thank you, Craig. I'll start off with the results for the quarter, and then go on to the six-month period.

Total net sales for the quarter ended June 30, 2008, were $6.2 million, and flat year-over-year. While total net sales have stayed stable over -- in comparison to the prior year period, we have seen changes in our product groupings, our Instrument related business, or what we consider our legacy business, and then our Laboratory Services business.

The first product group I mentioned includes the net sales from instruments, including service contracts, and consumables, which totaled $5.2 million in the second quarter of 2008, and represented a 7% decrease from the year ago period.

The decrease was due to fewer instruments sold -- five WAVEs in 2008, as compared to 16 in the same period in 2007, partially offset by an increase in the average selling price per instrument. Within this product set, Instrument sales were $2.8 million, and Bioconsumable sales were $2.5 million. For the second quarter '07, Instrument sales were $3.4 million, and the Consumable sales were $2.2 million.

The second product group, our Laboratory Services business, includes both the Molecular Clinical Reference Laboratory, sometimes referred to as our CLIA lab, along with our Pharmacogenomics Research Services projects.

As part of our overall growth strategy, we are evaluating collaboration opportunities for both our Molecular Clinical Reference Laboratory, and our Pharmacogenomics Research Services business on an ongoing basis.

During the second quarter of 2008, Laboratory Services' net sales of approximately $1 million were up 52% from the year ago period. This robust growth reflects the Company's strategy to expand our services within this business segment, and was largely driven by year-over-year growth of $182,000, or 35% within the Molecular Clinical Reference Lab, and Pharmacogenomics Research Services sales growth of $164,000, or 113%.

We see substantial leverage in these two laboratories, and the productivity of our sales resources for Laboratory Services will be critical for maintaining continued significant growth, which we believe is attainable throughout the rest of 2008. We now have seven Sales Directors focusing on our Laboratory Services business. Five are focused on the Clinical Reference Laboratory, and two are focused on Pharmacogenomics.

Gross profit was 60% during the second quarter of 2008, up from 54% during the second quarter of '07. While we saw gross margin improvement in all of our product groups, the Laboratory Services business was the major contributor, with gross profit of 45% in the second quarter of 2008, up from 29% in 2007.

Selling, general and administrative expenses were flat year-over-year. Foreign currency translation adjustments decreased SG&A expense by $278,000 in the three months ended June 30, 2008. The foreign currency adjustment in 2007 for the same period was immaterial.

This favorable adjustment was offset in SG&A related primarily to the new executive staff, the sales team, and our scientific advisory board that was started up this year.

Research and development expenses in the second quarter of 2008 were $560,000, or 9% of net sales, as compared to $492,000 in 2007, or 8% of net sales. This slight increase was related to higher expenditure for collaboration projects aimed at further validating our mutation detection and discovery capabilities.

At June 30, 2008, we had a cash balance of $5.7 million, the same amount that we had as of December 31, 2007. There has been no use of cash in the six-month period. And our working capital was $11.8 million. We believe we have sufficient run rate to meet our current operating needs for the remainder of 2008 with the cash and resources currently on hand.

Moving on to the results for the six months ended June 30, 2008, net sales were $12.5 million, as compared to $11.5 million for the comparable period in 2007, or a 9% increase. Net sales for our Instrument related business totaled $10.5 million, and were flat year-over-year for the six-month period ended June 30, 2008.

Instrument sales were down within this category 4%, from $6.0 million to $5.8 million. Consumables were up 6%, from $4.4 million in 2007 to $4.7 million in 2008. We had 30 WAVE sales in 2007, as compared to only 14 year to date 2008.

OEM Instrument sales were up from 2007. We had five in 2007, and we had seven in 2008.

Laboratory Services revenue for the six-month period ended June 30, 2008 increased $1 million, or 91% over the same period in 2007. Year-over-year growth in the Clinical Reference Laboratory was $399,000 of this, or 49% growth, and the Pharmacogenomics Services net sales growth was $551,000, or 246% growth. We continue to see significant growth in these two areas.

Gross profit was $7.4 million, or 59% during the six months ended June 30, as compared to $6.1 million, or 53% gross profit margin during the comparable period in 2007. Gross profit increased due to a shift in sales to our European markets, with higher average sales prices, lower manufacturing costs, and the leverage related to the Laboratory Services' net sales. Laboratory Services costs do have a large fixed component, so increases in net sales do drive gross profit margin.

SG&A expenses for the six months ended June 30, 2008 were flat, as compared to the same period in 2007. The components within this are the similar -- as to the three months. Foreign currency favorable adjustment, offset by the increased sales and scientific advisory board costs.

As Craig has already mentioned, we are very pleased with our second quarter financial results, which gave us three consecutive profitable quarters. We are happy that we have been able to invest in sales and marketing, which will drive increased sales and growth for the Company.

We continue to focus on containing operating expenses, looking at ways to improve productivity, and to invest in the right areas to position the Company for future growth.

I would now like to turn this discussion back over to Craig for some further comments.

Thanks, Deb. Well, in addition to results for the quarter and first half of the fiscal year, I also wanted to comment on the many initiatives that we are pursuing to continue driving overall growth for the Company.

One key area of growth will be the addition of several new assays into our Molecular Diagnostics Lab. Through our expertise in mitochondrial disorder testing, we are adding new assays for gene mutations which cause mitochondrial disorders, and that were not available in the market previously. Also, we are bringing MicroRay technology into use.

We have also refocused our selling efforts on our key oncology assays due to the recent interest in the marketplace for the cancer gene -- for these cancer gene analyses. In particular, we will be focusing on our K-Ras assay, which can detect all of the prevalent mutations that occur in this gene, compared to other methods, which only look for mutations in two specific areas of this gene.

For a reminder, K-Ras testing is being used for patient assessment and treatment in late stage colon and lung cancer, with ImClone's Erbitux and Pfizer's Vectibix drugs. If the K-Ras mutation is present, these agents are no longer being used in treatment.

And I'm pleased to say that we are already receiving test request for K-Ras analysis.

In addition, we are making progress in developing assays and licensing technology in the area of mitochondrial damage and related diseases. This technology will give us opportunities in a variety of diagnostic testing areas, including cancer, cardiac disease, and other neurological conditions, as well as toxicology testing for drug-related toxicities. These assays will be useful for both clinical and pharmaceutical company customers.

Also, we have a very active business development effort ongoing to continue uncovering new proprietary tests and methods to increase our menu and expand the services offered within both our Clinical Reference Lab, and our Pharmacogenomics Service Lab.

To further our accreditation of the Molecular Diagnostics Lab, we have applied for C-A-P, or CAP, certification. That was done several months ago. This certification constitutes further validation of our lab's testing and practices quality, and we expect to complete this certification in late Q3 or early Q4. In addition, we'll soon be applying for New York and California licensure for our lab. These licenses should allow us to continue expanding our Molecular Diagnostics reach in those two states.

In the coming weeks, we plan to update you on additional collaboration agreements relating to mitochondrial damage detection in the areas of atherosclerosis and several cancers.

In our Pharmacogenomics Service Lab, we have collaborated with several companies for their Phase II clinical trials, and are confident that the continued validation of our technology through these customers positions us to sign larger and more lucrative contracts and collaborations with pharmas as they move from their Phase II programs into larger Phase III clinical trials.

That concludes my remarks for our Q2 performance, and Deb and I are now happy to answer any questions that you might have.

(Operator instructions). And it looks like we do have a question from the site of Chrystyna Bedrij with Griffin Securities. Your line is open. Please go ahead.

Good morning, Craig and Deborah. Thank you for taking my question. And congratulations on the quarter.

Could you share just a little bit more on where you plan to be in three years, based on your new and in-licensed technologies such as mito and the various tests?

Well, good morning, Chrystyna. Good to hear from you. Great question.

Clearly, we've worked very hard of late on a strategic plan, and focused our efforts from that strategic plan on licensing and internal development efforts.

So, one answer is that we look at our business in the base case of just growth driven from our current activities, meaning our installed instrument base, selling new instruments, and our Reference Services, Molecular Lab and our Pharmaco Lab, and just adding sales resources with the current menu, and then, small menu expansions as necessary. And we think that that will be a sound business with the potential for 10% to 15% growth.

But then, layering in the new opportunities that we're working on, we see tremendous increases available to us, both in the mitochondrial area as well as in cancer and overall oncology detection, and then in the pharmacogenomics area as well.

In the mitochondria area, we are looking at expanding our capability, both for research efforts as well as, of course, diagnostic services. And the research area, as you know, we have a study with the National Cancer Institute to look at mitochondrial genome defects that occur in the NCI-60 panel.

To elaborate a little bit, the NCI-60 panel is a series of cancer cell lines that the NCI perpetuates, and it's used across the world for cancer research. And we proposed a mitochondrial assessment study of the NCI-60 panel, and it was approved within 30 days. So we're in the process of doing that analysis now, and we expect to find some key mutations in the mitochondrial genome, as well as some nuclear genes, that might prove to be very viable biomarkers for cancer detection.

And the reason we're intrigued by mitochondria alone, for oncologic early detection, is that they are so numerous. As you know, there's about 1,000 mitochondria per cell, so there's a substantial amount of DNA. And so, if there is a means to see cancer early by using mitochondria, it makes sense that -- with this high volume of mitochondria, you could sense very early these detections -- or, these changes that are causing and/or driving cancer.

The other side of what we consider a key opportunity in the mitochondria area is the involvement of mitochondria in -- noted in the literature in so many other diseases, particularly in neurodegenerative diseases -- Alzheimer's, Parkinson's disease, metabolic diseases such as diabetes, and then, linking into cancer.

So, we think that we're centrally located in an area that isn't typically on everyone's research map, and as such, we're unique in that space.

So to answer the -- the final answer to that question is, where do we expect to be in three years, and I can see a growth in the business that exceeds 20% to 30% a year as these new tests and techniques are validated and brought on line, with each one representing, ostensibly, a 10% to 15% growth, just because they are large markets. You know, as I have mentioned earlier, we're in the process of licensing technology to perform atherosclerosis testing, and that's a very large market. And we are looking at some other cancer assays.

So when you compound all of that, we definitely see the runway for this Company to reach $200 million in sales within 5-plus years.

Wow.

So I hope that answers the question.

Yes, well -- no, that's great. Thank you. Just a follow-up, just on the mito side. Very intriguing, just your thoughts on how big that opportunity could possibly be.

That's actually a good question, because we just finished submitting a study to National Institutes of Mental Health yesterday for the linkage, and to develop the data between autism and underlying mitochondrial disorders. So obviously, that's a very large market, because at the moment, one in 100 -- out of 150 newborns is developing autism. So it's a tremendous impact on the healthcare system and on the population of the US, and it seems to mirror the overall increase in vaccinations. And it's believed, in certain cases, that an underlying mitochondrial disorder in a child that's given a large number of vaccinations could lead to developing -- or, causing the creation of, the development of autism.

So that's a study that there isn't much data to really denote. But if it was important to sense underlying mitochondrial mutations in all newborns before given vaccinations, that's a substantial market, and one that would be huge for us.

And the further answer to that question is that, since mitochondria generate energy and heat for the body, they're so centrally involved in all regulatory processes either by providing energy for them, or for deep communication with the nuclear genes to understand the body's processes and support them -- that they are involved in any, it seems, almost every disease state, whether it sets a representative signal, and/or many times, causing or creating the disorder.

As such, we think that we're centrally located to have the capability to sense mutation differences at very minute levels that can't be sensed by any other technology at this time. And as such, that's why we believe that our involvement in the mitochondrial space is so strategic.

Thanks much. I mean, that's excellent. Thank you.

Oh, my pleasure.

Thank you. And our next question comes from the site of [Mike Kearns] with Kopp Investment Advisors. Your line is open. Please go ahead.

Hi. Can you hear me okay?

Yes, I can.

Great. Two questions for you. One, you may have hit one or both of these in the prepared remarks, but I didn't hear them. One is, what are -- what should be our expectations for Instrument sales in the back half of this year? I know the third quarter is generally seasonally challenging for you folks. I wanted to get a little better feel there.

The other question I have is, did you update what we should have in terms of levels of expectations for overall revenue growth for the year? Did you make any modifications to your previous expectations?

Certainly good questions. I'll answer the second question first. We're not changing our guidance for the year. We're still forecasting 10% to 15% growth. I think we're comfortable at -- we have achieved 9% growth already.

We have a little more work to do in the third and fourth quarter, but in terms of Instrument sales, we do know that Q2 is a little lower than we expected, and that was mostly by Instruments falling out of the quarter, which we believe will occur in Q3 and Q4. So we're looking at some really good sized Instrument orders around the world -- from Europe, in Asia, and still in the US.

So we aren't going to change guidance as a result of that, and we're really -- we were very happy to see the increase in Consumables revenue, suggesting that systems are being turned back on as well.

No, that's great news, and it's -- so it sounds like we should look for a little bit of a rebound in Instrument sales despite the fact that it is a little bit seasonally challenging in the third quarter, and then even an upward movement into the fourth quarter?

That's our belief, certainly. Last year, Q2 was our strongest quarter without the impact of the service businesses. And so clearly, with the -- at least, a minimum of $1 million new revenue coming out of the service labs with good -- certainly good net, or at least, good gross margins coming from them, and increasing margins, we expect to see that overall impact compound. But we did have systems in Q2 that just slipped over the end of the quarter, and even though, as you mentioned, that Q3 is oftentimes a challenge in Europe and Asia, and oftentimes in the US, we have enough systems falling through that we think both Q3 and Q4 should allow us to achieve guidance.

The other thing that's encouraging is, already, this is -- we're one month into Q3, and we've seen very sound growth in our Reference Laboratory. So the lab is already up over Q2. So we believe that that should -- and that's because of the new customers that we have. And as such, that indicates to us that we're not going to have as soft a Q3 as we had last year, because we've got that increasing service business to rely on.

Well, that's all great news. Congratulations on a tremendous progress.

Well, thank you.

Thank you. And our next question comes from the site of Steven Becker with Greenway Capital. Your line is open. Please go ahead.

Good morning, Craig. Can you talk a little bit about growth of the sales force? Have you hired anybody recently? Do you have plans to hire?

Hi, Steve -- good morning. Yes, we hired two new sales professionals for the CLIA Laboratory, or the Molecular Reference Lab that joined us a month ago -- a month and a half ago. And one's in Texas, and the other is in the Northeast. And we're going to obviously continue expanding the sales group, but we're giving those two folks time to get their feet on the ground and get settled, and start impacting their current territories.

And the next growth moves will be when we get formal licensure in New York and California, that allow us to attack those two largest population centers in the country.

And what -- when do you expect that?

We are submitting New York, I believe, next month. We already have a restricted license, so we can accept samples from New York, but at this time, we're not permitted to do active selling there. In California -- so that will -- we'll apply for that next month, and by the year, we will have finished all the necessary steps for California licensure.

And how long does it take a salesperson to get up to speed?

That's a great question. Truly, it looks like about three to four months. You know, they -- I will tell you, they all hit the ground running. They're all professionals, they know their territories, and they're all experienced people. But they've still got to learn the nuances of the -- not only the market, but the technology. And in some cases, starting to call on neurologists, which they haven't done before, or on oncologists, depending on their level of expertise.

Terrific. Thank you. We appreciate it.

Of course.

Thank you. (Operator instructions). Our next question comes from the site of [Larry Hoftsenberger]. Your line -- or, private investor. Your line is open. Please go ahead.

Good morning, Craig. I tuned in late, so I don't know if this question has been asked. But last quarter, you announced an association with the American Cancer Institute, and I know that Eric has a fellowship with the National Cancer Institute, as well as the National Institute of Health. And I was wondering, will there be any consequences down the road with this association?

Oh, hi, Larry. That's certainly a good question. Just to go back onto -- Dr. Eric Kaldjian is our Chief Scientist. He's been with us since the end of the year. I think he joined us December 31st. And he's had a remarkable impact on the business, because he has experience at Pfizer, and Hoffman-La Roche, and Gene Logic, and having done a fellowship right out of med school with NIH and NCI.

So, his relationship there allowed him to gain a lot of contacts within the institutes that were even broader than the ones that we had. And as such, with the NCI-60 panel, which I talked about in the first quarter from Chrystyna, we don't know what we're going to find.

I will tell you, when we -- we're already into the analysis there, and we're finding a lot of mutations, maybe as you would expect, in these cancer cell lines. The importance of the NCI-60 cell line -- lines, I'm sorry -- is that they represent 60 individual cell lines that are drawn from about 20 different cancers. So there are several from breast cancer, and several from prostate, etc., and different types of -- within that cancer. And there's been about 100,000 different drugs and drug modified compounds tested against them for growth impact.

And so, with that database and gene mutation data, it's very interesting to look at the mitochondrial status and the nuclear genes that control the mitochondria, to see if we can find mutations that are equivalent, or reproducible as such, that we could develop as biomarkers.

So I think that's the importance of the study, and it's also important that we were able to approach the NCI and have that study approved within 30 days. So, yes, it's good that Eric has contacts there, but it's also, I think, illustrative that we're really deeply entrenched, and have the best science available right now in mitochondrial analysis.

Speaking of biomarkers, I can't help but notice that another stock that I follow, Sequenom, SQNM, has discovered a biomarker for Down's Syndrome, and their stock has reacted explosively. Is there any possibility that you could trace such a growth rate as Sequenom, or is there any comparison to TBIO?

That's certainly a good question. I think about that all day, every day -- not Sequenom per se, but clearly trying to understand -- and it isn't just me, of course. It's the entire team here that's involved in the business development effort and the research effort.

But clearly, our goal in this current genomics land grab, if you will, is to find the best markers that we can in the mitochondrial space that will be early predictors or diagnostic for disease. As such, when and if we find one -- and I'm just as optimistic as many of you that we will -- but I can certainly see that same sort of model playing out.

So as I mentioned, there's a deep indication between atherosclerosis and mitochondrial dysfunction, and that's one where the leading cause of death in the US remains cardiac disease. So that would be a huge market for us, and we would love to see that type of success fall upon us, but hard-earned.

And the SEAL technology that we have in development, we've overcome some key hurdles, technical hurdles there, to move it forward, so we're increasingly excited about that. And that's more of a technology than a test. But if you would imagine, say, two years from now, when you're trying to do a cancer analysis, and you want to look at 1,000 cancer involved genes, instead of sequencing them all, you could use SEAL technology and just find the mutations that are there, and do that in a very quick step. And actually library them as well, so that you could go back and test against that library in the future to see if there's changes, and also to quickly look and see if there's an impact from therapy. So, we remain excited about SEAL as a technology and addition.

But I'll tell you -- we're working hard to find the -- not just the home run, but several base hits.

Great. Thank you.

Good question. Of course, Larry.

Thank you. (Operator instructions). Our next question comes from the site of James Fistott, who is a private investor. Your line is open. Please go ahead.

Hey, good morning. Many of us who have held the stock for some period of time have lost money at this present time, and are looking at the stock going up one of these days from its present level. One of the ways to do that, I suppose, would be to sell the Company. Is there any possibility of that happening?

Well, it's at 49 million shares out, and my -- certainly, I understand the situation. I think the first issue is that the Company is now profitable, which it has never been in its history, and so we're very proud of that, and look to build on that, and I think in terms of both driving profitability and substantial new opportunities, will impact the stock more than anything else.

But that said, you know, if an interesting combination opportunity occurs, we would certainly consider it, if it really enhanced our ability to create greater value, and if it had value to shareholders.

Okay, thank you.

Sure.

Thank you. And it appears we have no further questions in the queue at this time.

Okay, well -- thanks, it was a pleasure, and we look forward to speaking to you after Q3.

This does conclude today's teleconference. Thank you for your participation. You may disconnect at any time, and have a wonderful day.