Precipio Inc (PRPO) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen. All sites are now online in a listen-only mode. I'll now turn the program over to your moderator for today, Deb Schneider. Please go ahead.

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

This afternoon, we issued a press release outlining our financial results for the three and nine months ended September 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 on 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 afternoon, and thanks for joining today's call.

For the third quarter, we achieved revenues of $5.4 million. These revenues were comprised of WAVE Bioinstrument sales of $474,000; Cytogenetic System sales of $700,000; Service Contract sales of $1 million; and WAVE Bioconsumables revenue of $2.2 million.

In comparison to the prior year's quarter, Q3 2008 was up by $200,000 over what is historically our weakest quarter. We believe this increase is due to the continued success in our Molecular Clinical Reference Laboratory selling efforts and the increasing awareness of mitochondrial disorders and their diagnosis using mitochondrial DNA mutation assessment.

Breaking down our services revenue further, our Molecular Reference Laboratory grew to $736,000 in the quarter, as compared to $443,000 the previous year, an increase of 66%. This clearly represents our strong diagnostic offering to neurologists for our mitochondrial disease analytical expertise coupled with our recent launch of microarray assays and oncology tests, particularly KRAS testing.

Our Pharmacogenomics Services business achieved $236,000 in the quarter, compared to $224,000 in the prior year. We continue to have a strong relationship with three preeminent pharmaceutical company partners which continue to contract services from us. Equally important, we are beginning projects for new pharmaceutical partners which will continue to fuel this service business.

Although our instrument sales were below expectations for the quarter, our reagent and service revenue held level or exceeded previous quarters. Our service revenue reached $1 million in the quarter compared to $928,000 in the prior year, and reagent sales were $2.2 million compared to $2.1 million in the third quarter of 2007.

For the fourth quarter, we are confident of closing many of these system sales' opportunities that we've been working on, as well as further growth from third quarter in both of our service laboratories.

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

Thank you, Craig. I'll start off with the results for the quarter, and then go on to the nine-month period. I'll try not to duplicate too many of Craig's comments as I go through mine.

To date -- I mean, total net sales for the quarter ended September 30, 2008 were $5.4 million compared to $5.2 million in the same period in 2007. While total net sales have stayed stable in comparison to the prior year, we have seen changes in our product grouping. Our Instrument-related business, what we consider our legacy business and then our Laboratory Services business are our two different product groups.

The Instrument-related product group that we mentioned includes the net sales from instruments, including service contracts and consumables, which totaled the $4.4 million in 2008 and represented a 2% decrease from the previous period.

The decrease was due to fewer WAVE instruments, as Craig discussed. Two WAVE systems were sold during the three months ended September 30, 2007, compared to 14 during the same period in 2007. However, we did sell three OEM instruments this year, as compared to 0 in the same period in 2007. These OEM instruments somewhat mitigated the decrease from the WAVE instruments. Within this product set, instrument sales were $2.2 million, and consumable sales were $2.2 million. Last year, consumables, as Craig already discussed, were only $2.1 million. Bioconsumable sales remain stable with 4% growth year-over-year.

The second product group, our Laboratory Services business, includes the Molecular Clinical Reference Laboratory and our Pharmacogenomics Research Services.

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.

Craig already discussed the growth around the Laboratory Services Clinical Reference Lab. The Pharmacogenomics Research Services sales growth was relatively flat compared to last year.

Gross profit was 54% during the third quarter of 2008, up from 51% during the third quarter of 2007. The Laboratory Services business was the major contributor with gross profit of 40% in the third quarter this year, up from 10% in 2007.

Selling, general and administrative expenses increased by 3% or $85,000 in the three months ended September 30, 2008. The increase here is really related primarily to the new executive staff, the sales team and our scientific advisory board that was started up earlier this year, investments that we believe will help drive growth in the business.

Research and development expenses in the third quarter of 2008 were $686,000, or 13% of net sales, as compared to $720,000 last year, or 14% of net sales.

At September 30, 2008, we had a cash balance of $4.8 million. Our working capital was $11.3 million. We believe we have sufficient cash to meet our current operating needs into 2009 with the cash and resources currently on hand.

Moving on to the results for the nine months ended September 30, 2008, net sales were $17.9 million, as compared to $16.7 million for the comparable period in 2007, or a 7% increase. Net sales for our Instrument-related businesses totaled $14.9 million and were flat year-over-year for the nine-month period.

Within this category, instrument sales were down 5%, from $8.4 million in 2007 to $8 million this year. Consumable sales, however, were up 5%, from $6.6 million in '07 to $6.9 million in 2008. We had 44 WAVE sales in 2007 year-to-date, as compared to only 16 this year in 2008.

OEM instrument sales were up from 2007. We had 3 in 2007, and we have had 10 year-to-date in 2008. You can kind of see the shift there.

Laboratory Services revenue for the nine-month period ended September 30, 2008 increased $1.3 million, or 74% over the same period in 2007. Year-over-year growth in the Clinical Reference Laboratory was $691,000, or 55% growth, and the Pharmacogenomics Services sales growth was $564,000, or 126%. We continue to see significant growth in these two areas.

Gross profit was $10.3 million, or 58%, during the nine months ended September 30, 2008, as compared to $8.8 million, or 53%, during the comparable period in 2007. Gross profit increased due to a shift in sales to our European market, with higher average sales prices on WAVE instruments, lower manufacturing costs and the leverage related to the Laboratory Services net sales. Laboratory Services costs do have a large fixed component, and we do see the increase in sales drive gross profit margin.

SG&A expenses for the nine months ended September 30, 2008 were flat as compared to 2007. Increases, as discussed in the three-month section, were offset for the full year by $475,000, as previously discussed in the second quarter call, of positive foreign currency translation. There was no impact in the third quarter related to foreign currency translation.

We continually look 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. I wanted to conclude our call, prior to accepting any questions that you may have, with some updates on the progress we've made across our many growth initiatives. One key event during the quarter was our formal CAP inspection audit. As you know, a key additional validation of a clinical laboratory's quality performance and expertise is College of American Pathology, or CAP, certification of the CLIA-certified lab. It takes months of preparation to reach this high level of quality, and it's certainly a goal for any proficient clinical reference lab.

Our CAP certification audit went very well, and we expect that CAP certification will be granted during fourth quarter. We've also completed licensing efforts for a key portfolio of patents for mitochondrial-linked disease assessment and diagnosis. We are actively developing our assay technology permitted under this license and will soon begin clinical validation of the disease indications that are covered under this license. A press release on this license will be out shortly and provide greater detail.

We also continue to validate our market-leading sensitivity for detecting cancer pathway gene mutations. This is from using the WAVE system coupled with our SURVEYOR enzyme. In particular, we continue to demonstrate significantly better sensitivity for finding mutations in key growth factor genes such as EGFR, KRAS and BRAF than can be obtained or identified by sequencing alone or other molecular approaches. In addition, we can scan these entire genes for mutations rather than just small specific portions of these genes, and thus, we are able to find mutations that are novel or missed in other sequencing studies.

One of our pharma studies has recently been published at a cancer research meeting, and we expect to see more validation of this kind for this key sensitivity capability.

Finally, we will be presenting at the upcoming Rodman and Renshaw Annual Global Investment Conference in New York City on November 12th.

That concludes my remarks for our Q3 performance, and Deb and I are now happy to answer any questions that you might have.

(OPERATOR INSTRUCTIONS). First we'll go to the site of [Don Steincamp]. Please go ahead.

Yes, congratulations on a good quarter, and I wonder if you're going to be able to expand your testing facilities operations by buying or -- licensing or buying other company's testing operations?

Don, that's certainly a good question and something that we spend a considerable amount of time on in our business development efforts. So, for example, I did mention a portfolio of patents that we just licensed that link to our ability to do testing for, in this case, atherosclerosis, hypercholesterolemia, cancer and diabetes. And of course, each of those indications would have to be clinically validated, which would take some effort on our part, but also each of them represents a large market that would add to our reference laboratories' revenue prospects.

And then we are always looking for, or trying to find internally, new markers that are representative or early detection vehicles for disease states. We are sponsoring some research as UCSD right now along those lines, but since the goal of that research is intellectual property, I really can't speak to that now. Hopefully that answers your question.

Okay. That sounds good. And you have a large amount of stock owned by one of the big mutual funds. And I think it's good that they have continued to buy. Do you have any comments on that?

Well, one key investor was Lehman Brothers, but we are pleased to see that that position has been transferred to Barclay, and the manager of that portfolio has also moved to Barclay, so we're excited about that.

So, that hasn't hit the market then. Okay.

So, that continues, and certainly that fallout in Wall Street will affect many businesses and stock valuations in the market, but we're at least glad to see that one continue, and of course we try and maintain close relationships with all of our investors and, in particular, with some of the larger investors.

Okay, good.

We'll take our next question from the site of Chrystyna Bedrij. Go ahead please.

Hi. Good afternoon, Craig and Deb. Thanks for taking my question. Just briefly, can you expand -- you mentioned it briefly, but can you expand your thoughts on how you see the WAVE and the SURVEYOR having an impact on the key cancer market testing for therapy selection and the whole sensitivity discussion that you started a little bit during the call?

Thanks, Chrystyna. Yeah, that's a great question and one that we continue to push on pretty hard, but in particular, we think that we can expand both from a clinical trial perspective in the future to really validate that different, and, as well, the pharmacogenomic studies that we do.

Basically, the issue is that when you have a tumor that is prepared for analysis by a pathologist after being removed from a patient, that's very difficult to -- that material -- it's called an FFPE, as you know, but just for -- for us dealing within the lab, it's a small slice of tissue that's been formalin-fixed and then dipped in wax. And so, that material doesn't always have a large amount of tumor cells in it. So, if you're trying to do an analysis on that tumor to predict the most appropriate therapy, particularly these newer inhibitor therapies that are quite expensive, it's difficult to find these gene mutations that are either driving the cancer and yet allowing the cancer to respond to a treatment or preventing the cancer from responding to a treatment.

What we've seen is a large number of studies where when you have these FFPEs, even half -- 50% to 60% of these patients' tumors -- you can't find enough DNA to actually do the analysis. Those are published studies, and we see that routinely. In our hands, we typically get 97% to 100% of those specimens.

So, on one hand, the sensitivity just allows us to dramatically improve the amount of patient samples that can be analyzed correctly. The other side of that is our technology sensitivity also permits us to find mutations that you just simply don't see. Even if you have enough material, many times with sequencing, if it's below 20%, the mutant load there, you just won't see it in the sequence grams, or the data output in sequencing.

So, in both cases, using WAVE and SURVEYOR in our hands or in other customers' hands would provide you with better information to ensure that more patients are discovered to have mutations that will respond to a cancer therapy, or that won't respond to the therapy, and therefore, you don't give it to them unnecessarily.

Hopefully that answers your question.

No, it's obviously such a hot area right now, and obviously when you validate them -- I guess you're validating that -- it should bring a lot of interest, I think over to your camp. But anyway, thank you.

I have a couple more questions, if that's okay.

Absolutely.

Can you just share what's next in the pipeline for the lab? You started a little bit on some of the discussions, but I don't know if you can expand on that?

Sure. We've licensed a couple more markers -- NF1 and NF2 -- and we're bringing those up for the laboratory right now. And the other ones I mentioned are really in the mitochondrial space. So, on one hand, we've licensed the patents that gave us diagnostic or clinical testing capability for arthrosclerosis, hypercholesterolemia, diabetes and cancer in a blood specimen based on DNA damage or reactive oxygen species created by the mitochondria.

So, again, we're continuing our main focus on the mitochondria as a key involved organ or organelle in disease initiation or progress, and we feel that that is just essential for not only our growth and technical superiority but also that it's an overlooked space in all of clinical medicine and only now becoming a hot topic. I'll add to that that of course there is a potential link between autism and underlying mitochondrial disorders that predisposes a patient to develop autism following vaccination. So, that's an active area of research that we have submitted a grant on and hope to find some validating data so that we can understand that.

And of course, if that is the underlying cause, it would be a tremendous opportunity for us because you would really need to do large scale testing of children before they're vaccinated.

And so, the next step for the laboratory, we would predict, is, of course, the popularity of KRAS, BRAF and testing in the cancer market area, and hopefully we'll just continue to validate that and be able to show leadership there. So, those are some of the key things that are coming up or that we've teed up for the laboratory. In the mito space, we're really positioning capabilities on DNA damage to look at drug toxicities, known and unknown, so that we can do screening for pharmaceutical companies, and then, of course, look for the impact on the mitochondrial damage from environmental sources as a measure of aging, or quality aging, and DNA damage because the mitochondria just don't repair DNA as well as the nuclear DNA is repaired. So, it's a better marker for that kind of damage.

So, we're really continuing to focus most of our development efforts in the mitochondrial space, but of course, looking outside that space to try and find additional tests that are in large markets that we can license, particularly on an exclusive basis.

Well, that's amazing to me. I don't know if you can quantify this, but what kind of growth do you see for the molecular labs for the balance of this year and maybe the plan going forward?

Well, certainly good growth in Q4. As you know, Q3 is weak for us because of the instrument cycle that occurs with vacations in Europe, or I would say the European shutdown. And in the laboratory business, there's the summer vacation area or timing that affects us. So, Q4 is always a better quarter, and we are forecasting a large number of instruments in the quarter. And the laboratory, it's the end of the month, and already we've brought in over $400,000 worth of business in the lab. So, I'd love to see that grow, but of course we're facing another holiday season at the end of the year that impacts that sample flow.

But we definitely feel we can get the lab up to close to $1 million in the quarter and then have it continue to grow. I think since we spoke on the last conference call, we did add two sales reps -- one in Texas and another in the northeast, and they're already productive. So, the Lab business continues to grow, and more customers have come online, and certainly we're servicing them as well as we can so that we not only keep them, but then their testing volume grows.

Well, thank you. Thank you so much, and congrats on the progress. I can really feel your progress, and I also just am amazed at the new in-licensed technologies that you're pulling together and the strategic fit.

Thank you.

(OPERATOR INSTRUCTIONS). Next, we'll go to the site of [Larry Hoffinsberger]. Please go ahead.

Yes. Hi, Craig. Congratulations on your quarter. Last quarter -- or last quarter, you mentioned that -- and I think you might have just answered it without elaborating on it. But you mentioned that you were opening up diagnostic testing in California and New York. And have they been opened up? And how will that add to the revenue?

Good question, Larry, and good to hear from you. I'm -- I'll have to clarify that a little bit. The process that a laboratory typically -- a CLIA-certified laboratory typically follows in terms of offering services and selling efforts to gain additional revenue and certainly testing volume is that, one, following certification as a CLIA lab, the next major step is to get CAP certification. And the capabilities and procedures and quality documentation that goes into being prepared to do a CAP certification can then be turned around and used to apply for New York certification as well as California certification. And once those certifications are in place, then you can actively sell into those markets.

So, we expect an uptick in business, although those certifications will still take through the end of the year, we think. But actually, we can receive specimens from those areas without active sales efforts, and we already are doing so. So, there's an impact, but that just means additional business opportunity for us when those certifications are complete.

On the ovarian testing that you're doing with Key Genomics, what's a timetable for that? How big, potentially, is that market for you?

The clinical validation of that is going to take, in my estimate, a couple of years. On one hand, the testing can be done relatively quickly and in terms of looking at a set number of ovarian cancer specimens and patients and the outcome data for those patients and comparing that to the algorithm that will predict their response to therapy.

In terms of ovarian cancer, off the top of my head, I'd think ovarian represents 20,000 -- I'm told over 30,000 cases per year, new cases per year, from the [MCI]. So, that's an -- it's an important cancer and one we'd like to contribute on, but I think this is more a model of proof of principle for us because with our partner there, once we validate the ovarian cancer application, we're going to step through other cancers and then move up into the larger cancers. And to date, this algorithm looks to be the most powerful one developed in the market, and so we're excited to be involved in that collaboration.

So, you can say -- if you would link this to Genomic Health 's success in the breast cancer area, where you're looking at just under a couple hundred thousand cases per year, and their sales are roughly $70 million run rate, I'd love to see something equivalent on the same proportion. But again, more importantly, I think this algorithm will predict very strongly the impact and patient response to drug treatment. That's an added component to that test.

Earlier in the prior quarters, you had been forecasting a 15% top and bottom line. If I start with 2007 -- yet in 2007, your total sales were $23.2 million. Are you validating -- are you still validating your 15% top-line revenue?

That's a good question, Larry. Thanks for bringing it up. Our guidance for the year was 10% to 15% growth and certainly profitable for the year, and the more profit we could make, the happier we are, and hopefully you all out there as well. I think we're going to slide our guidance down a little bit to 7% to 10% range. We know we have a strong Q4 coming up, and we'll just have to wait -- we'll have to wait and see what it's at at the end of the year. But we still predict a profitable outcome to the year as well.

I just -- if you take 10% guidance, that would be $25 million, $25.5 million for the year, and you subtract $17.9 million that you've made so far this year in the three quarters, you would have to make up -- you'd have to do a quarter of $7.6 million next quarter.

We calculate it as $7.5 million, Larry, but you're right in the ballpark.

For 10%.

For 10%. So, we want to shade that a little bit. Clearly a $7.5 million quarter would be one of the largest quarters we could experience in some time, so our forecast is a little bit below that. That's why we're dropping the forecast, or the guidance.

On your sales people, on your last quarter, I think you had 11 sales people at that time, and I was wondering if you've added to or subtracted from, and are you getting the quality you need?

Yes. Well, we have nine in the U.S., three in Europe and one in Asia. So, I don't know if that totals up, but that hasn't changed, and we'll wait for California certification, and then we'll add a representative out there. So, in the short term, we see typically a three-month, sometimes even three- to six-month lag from bringing in a new experienced representative to where they are out in the marketplace with good training and driving business growth.

And Larry, this is Deb. Of those nine in the U.S., seven of those are related to the Laboratory Services business.

Mm hmm.

You say 7 in Laboratory.

Mm hmm.

Yes. 5 in the clinical lab and 2 business development directors.

That's all my questions.

Okay, Larry, thanks.

You're welcome.

(OPERATOR INSTRUCTIONS). Next, we'll take a follow-up from Don Steincamp. Please go ahead.

Yes, Craig. I wondered how many systems you have out there now in the field. How many testing units?

Well, we have placed or shipped over 1,400 WAVE systems worldwide since we started shipping that platform, and we have service contracts with -- or selling actively reagents to at least 800 of those placements, and there could easily be others beyond that. And as we've noted, there has been some increase in consumables and service revenue, so we know that some of these instruments that might have not been used in the recent past have now been turned back on. So, we're rewarded in that.

What's the typical sales price for a WAVE system? And what percent do you expect to get in consumables per year for each one?

That's a good question. List price on our WAVE instruments run roughly $90,000 to $112,000, $114,000 depending on the different capabilities of that system, and then the cytogenetics instruments that we sell average just under $200,000 to just under $300,000. And in terms of the reagent usage per instrument, we look at a rough average of about $8,000 per instrument.

Okay.

Certainly that varies by the higher throughput labs versus the ones that are doing research and not using it as heavily. Do remember that in Europe our system was selected to support all of the breast cancer inherited disease predisposition testing that's done, called BRCA. And so, those are heavy users, and then certainly in the U.S. there is more research done on the instrument, so those are a little bit lower throughput or intensity users of the system. So, it does vary. But on average, that's what we look at for the system.

Of the 1,400 units, how many are of the cytogenetics that are $200,000 to $300,000? How many of those do you have out there?

There's over 20 systems in the market. I'd have to count them up personally, but we have instruments and ongoing relationships with the major reference laboratories in the U.S.

Somewhere close to 30.

Yes, close to 30, Deb points out. And that's an instrument that is in demand because it automates processing that's used to look at karyotypes and FISH analysis, or cytogenetic analysis, as it's called, and those technicians are hard to find and expensive, and it's a very logical automation step.

That's good. How many more of those $200,000 to $300,000 units do you think you'll sell in the next 12 months?

I think we have capacity for roughly the same number.

30 or so. Okay. And how many of the smaller WAVE units?

Yes, we haven't put together a forecast for next year yet. We know that short of proving and having it accepted in the overall market for using WAVE to do cancer gene pathway analysis for personalized medicine or before drugs are prescribed, that will still have an impact on WAVE. But otherwise, WAVE is the mature platform, and we know that the demand is decreasing for it.

Okay. Do you think that any brokerage firm or research outfit will write you up in the next six months?

Absolutely. Yes, we know that there is a research report in prep and close to press, and I would be happy to let you know as soon as it comes out.

Good, good. Okay.

All right. Well, thanks for your questions, Don, and it was a pleasure to bring Q3 results to you all, and I certainly look forward to speaking to you for fourth quarter.

Okay, I think we're done, Blake. There's nobody else in the queue, is there?

Actually, yes, it appears we do have a follow-up from Mr. Hoffinsberger. Next question.

Hi. You mentioned that you did in your Lab business $1 million worth of business, or you're going to do $1 million in the fourth quarter.

We did $1 million.

You did $1 million. So, your run rate is $4 million on that?

That's the math I have, Larry, but that -- you know what, that's a little lumpy, and I'm actually a little more optimistic. When I mentioned where we're at with the clinical reference lab, or our molecular diagnostics lab, that has sales over $400K for the month of October. So, we expect to, and I forecast that that will get up close to $1 million in sales for the quarter. We also have the Pharmacogenomics Services Lab business, and as you've seen in the past, that business can be lumpy -- or is lumpy. We've had as high as $600K in the quarter and as low as $200K.

So, it depends on not just getting a contract with the pharma, but their position within a clinical trial and where the samples are to perform the trial and their recruitment for the trial. We might sign a very large contract, and then the pharma company will have to go away and start recruiting patients, and we might not see any of those specimens for a year.

But when you add those together, we're certainly looking at the kinds of numbers you're talking about, so yes, I would see this as now a run rate of $4 million, at least.

So, your growth for that business over the last 12 months has been what? And how do you see it in the future growing?

Well, I have to say off the top of my head. I'm sure Deb will -- have you calculated it for us, Larry?

Have not.

So, we're talking about 74% growth over the year, and with the uptick that we'll have in Q4, we expect it's going to be 80% or more. We'd love to see it continue growing at that volume next year. But I really see that business in a step function. What I mean is we'll license in a new assay, go out and get clinical validation for it, and if it's for a large population of potential disease sufferers that could use that test for better diagnosis, say an arthrosclerosis assay, that's going to have explosive growth compared to if we bring in just another genomic marker that others -- other laboratories also provide.

So, I see it growing in a step function fashion. There'll be the continued impact of us penetrating the market for mitochondrial disease and epilepsy and cancer testing, but as well, there'll be the new assays that we bring to it that should have impact. And again, some of those won't be overnight. It might take 18 months to validate a marker for a potential $30, $40, $50 million opportunity.

Thank you.

Sure. My pleasure.

It looks like we have no further questions from the phone lines. Miss Schneider, did you have any closing remarks'?

No. Thanks very much, and I look forward to speaking about fourth quarter.

Thanks, everyone.

This does conclude today's conference call. You may disconnect at any time.