Precipio Inc (PRPO) 2009 Q1 法說會逐字稿

Good day, everyone and welcome to today's program. Later, you will have an opportunity to ask questions during the question-and-answer session. (Operator Instructions). And it is now my pleasure to turn your conference over to Ms. Deb Schneider. Please go ahead, ma'am.

Thank you, Dawn. Good afternoon, everybody. I'm Deb Schneider, Chief Financial Officer for Transgenomic. I would like to welcome all participants to our first quarter 2009 conference call, where we plan to discuss our first 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 look over our press release that we did issue a short time ago. Before we start to review the results, I'll 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 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 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 Litigation Reform Act of 1995, with respect to said statements. Thank you for your patience. I would now like to turn the call over to Craig Tuttle, our Chief Executive Officer and President.

Thanks, Deb. Good afternoon, and thanks for joining today's call. For the first quarter of 2009, we achieved net sales of $5 million. These sales were comprised of $3.7 million from our instrument related business segment, which includes both our WAVE platform and OEM cytogenetic system and laboratory services sales, totaling $1.3 million. In comparison with the prior year's first quarter, first quarter 2009 sales were $1.3 million lower, due primarily to declines in instrument sales and the effect of foreign currency on WAVE, consumables and reagents.

I wish that I could state that we are not experiencing any of the impact from the ongoing economic turmoil. Obviously, this isn't the case. We do believe that our decreased instrument placements in the quarter are a direct result of potential customers delaying purchase decisions or worse, some losing funding. This impact has rolled over to our molecular diagnostic lab as well. We added 24 new customers during the quarter. However, overall testing grew at its slowest rate over the last several quarters, reaching a total revenue of $1 million.

As a result of this quarter's sales shortfall, we have taken what we believe are essential cost saving steps to mitigate these issues or these losses. We have reduced staffing and taken other cost-saving actions, which we believe will allow us to maintain a reasonable cash level through the year, while still enabling us to continue development and validation of our new assay products and technologies. I'd like to turn the call over now to Deb for greater detail on the quarter.

Thank you, Craig. I will take a few minutes to discuss our first quarter financial results for the three months ended March 31, 2009. I may have some comments that Craig has already communicated, so I apologize for the duplication. Craig has touched on our sales performance. However, I will go a bit deeper. As Craig said, today, we reported net sales of $5 million for the first quarter ended March 31, 2009. This was a decrease of $1.3 million or 20%, as compared to the same quarter in 2008.

Our instrument related segment showed a decrease of approximately $1.5 million or 29%. Our laboratory services segment was an increase of $283,000 or 29%. Our instrument related business had net sales of $3.7 million for the quarter ended March 31, as compared to $5.2 million in the same quarter in 2008. Within our instrument related segment, we break our sales into two components, bio instruments and bio consumables. Bio instrument sales were $1.9 million. This component of net sales does include both the actual instrument sales, as well as the ongoing service contracts we sell on the instruments. Bio instrument sales decreased $1.1 million compared to the same period in 2008.

The largest decrease here was attributable to the OEM instrument sales. We sold one OEM instrument in the first quarter of 2009, compared to four in the same quarter in 2008. In addition, the one OEM sale was at a lower average sales price than the four in the previous quarter. These instruments typically have a sales price in the range of $150,000 to $300,000, depending on the model. There were seven WAVE instruments sold in the first quarter of 2009, compared to nine in 2008. In addition to two fewer, the average sales price for WAVE sales in the first quarter of 2009 was also slightly lower due to the geographic mix and the models of the WAVE instruments sold.

Bio consumable net sales were $1.8 million. Bio consumable net sales for the quarter ended March 31, 2009, were down by $432,000, compared to the same period in 2008. Craig previously noted this but the decrease was primarily all related to the foreign currency fluctuations of the great British pound to the US dollar. The great British pound to the US dollar exchange rate was $1.997 at January 1, 2008, compared to $1.421 at March 31, 2009, or it was 29% lower on our conversion of our international subsidiary in this quarter. We have seen these rates stabilize somewhat as we've been going through 2009 and we did anticipate this in our 2009 planning process.

Laboratory services net sales for the first quarter were up 29% or $283,000 over the same period in 2008. Our laboratory services business includes both the molecular clinical reference laboratory and our pharmacogenomics research services business. The molecular clinical reference laboratory net sales were up $447,000 or 88% for the first quarter of 2009, as compared to the same period in 2008. Sales focus and increased customer base and expansion of our test offerings; has driven this growth. As Craig noted, we have added 24 new customers since the fourth quarter of 2008.

Pharmacogenomics research services net sales were down 35% or $164,000. Again, the pharmacogenomics net sales are project-based, so the net sales is more likely to have spikes. In the first quarter of 2008, we also completed one large project, which equated to approximately $325,000.

Gross profit was $2.8 million or 56% during the first quarter of 2009, as compared to $3.6 million or 58% during the comparable period in 2008. The 2% decrease in gross margin percent is primarily attributable to the foreign currency impact from translation of our foreign subsidiary that I noted, specifically, in the bio consumable portion of our instrument business. The bio consumable gross margin decreased from 56% to 52%.

Laboratory services division had a gross profit of $611,000 or 49% in the first quarter ended March 31, 2009, as compared to 40% margins in the same quarter in 2008, or a 9% increase. We continue to see improvement in the laboratory services gross margins, as net sales increase, due to a large fixed expense base. While we do add additional costs, as our volumes in this area grow, specifically, we add laboratory technicians, consumable supplies and equipment as needed. We are still leveraging the existing infrastructure of that laboratory.

In the first quarter ended March 31, 2009, we reported a net loss of $953,000, as compared to net income of $122,000 for the first quarter in 2008. Operating expenses during the period ended March 31, 2009, included $238,000 of foreign currency revaluation loss, which increased expenses for the first quarter of 2009. This is compared to $175,000 foreign currency revaluation gain in the first quarter of 2008, which reduced expenses in that quarter, or a variance of $400,000 related to foreign currency revaluation. Without the impact of the foreign currency gain or loss, operating expenses for 2009 would have been $3.6 million, as compared to $3.7 million in the same period of 2008. There was no bonus accrual done in the first quarter of 2009.

At March 31, 2009, we had a cash balance of $4.8 million and working capital of $10.4 million. The working capital decreased by $977,000 from December 31, 2008, all really attributable to a lower accounts receivable balance. Cash was unchanged from December 31, 2008. Our balance remains at $4.8 million, with $299,000 being provided from operations in the first quarter and $214,000 used for purchases of primarily plant, property and equipment in the laboratory services segment.

We continue to work toward our objective of generating income from continuing operations and positive cash flows from continuing operations. To accomplish these goals, we must generate sequential growth in our net sales and continue to control manufacturing and other operating and other expenses. As a result of the current economic outlook in 2009 and our first quarter sales and profit performance, we have implemented a number of cost management initiatives in April of 2009. This was necessary to ensure that we remain financially strong and work to maintain a reasonable cash balance through the 2009. Craig touched on that a bit earlier.

A little more detail around our cost management initiatives. They included a reduction in force. A freeze on new hires and backfills. We gave no merit increases for 2009. And effective June 1, there will be no further 401(k) Company match. We have done a reduction in travel that is not sales related. And we have eliminated, at least for the short term, our investor relations firm. In addition, based on the results of the first quarter, the Company's incentive bonus plan, which has targets related to both net sales and Company profit would not have been achieved. So as I noted earlier, no bonus was accrued.

These initiatives are anticipated to generate just over $2 million of expense reductions in 2009. Hopefully, some of these initiatives are shorter-term in nature, until we can see a turnaround in the business. We continually review our expense base to ensure that we are operating as effectively as possible. We encourage operations groups to look for new ways to be more effective in their day to day operations. Investments in the business continues to be focused on the higher-growth opportunities. That is the end of my formal financial update. I would now like to turn this back over to Craig for some final comments before we open it up for questions.

Thanks, Deb. Although it is difficult to predict when the current economic turmoil will resolve or at least prove more predictable, it is somewhat comforting to see some improvement in instrument sales in the current quarter. And although we are not providing guidance for the quarter, we certainly see more instrument opportunities moving through the purchase process than last quarter.

I'd also like to take a moment to describe some of our recent progress towards bringing our new products or assays to market. As you may recall, we are currently working on four key areas for sustained growth. One focus area is in further development of assays and assay kits for mutation assessment in key cancer pathway genes that affect treatment selection in cancer. In particular, we are completing the development of a KRAS kit, which will run in parallel with our WAVE system. The kit employs our SURVEYOR recognizing enzyme.

This combination will provide, we believe, the best solution for detecting KRAS mutations in lung and pancreatic cancers, compared to other techniques on the market and can also be used in colon cancer. A recent poster at the American Association For Cancer Research last month showed that our KRAS assay, performed in our pharmacogenomics services group, was able to match the KRAS mutation state to patient response to the drugs being tested; better than any other test or standard sequencing. Now, this kit will enter clinical validation testing at several clinical sites late next month. Following the completion of this kit, we are planning to move forward quickly with developing a full line of key cancer gene mutation kits.

The second area we are focusing on is mitochondrial DNA damage. As we have mentioned previously on earnings calls and in press releases, we have obtained an exclusive license for measuring reactive oxygen species, or free radical, damage to mitochondrial DNA. The patents we have licensed allow us full rights to apply this test to cancer, cardiac disease, diabetes, neurodegenerative diseases and aging. We've completed development of a robust assay for measuring the damage to mitochondrial DNA and have already begun initial screens in cancer. We have also submitted the challenge grants for supporting the cardiac application. This cardiac study is intended to uncover the value of this assay for diagnosing short-term cardiac risk.

We have also submitted an RO1 grant for evaluating this assay in the diagnosis of diabetes and pre-diabetes. Finally, we have begun looking at specimens from pharmaceutical companies to evaluate this assay for measuring drug toxicities. We continue to believe that the mitochondrial space is rich in new testing applications and more research continues to clarify how important and involved mitochondria and mitochondrial regulation is in many disease states.

The third area where we are completing validation studies is anticipation of a key commercial launch for our assay technology for Alzheimer's and Parkinson's disease diagnostic tests, licensed exclusively from Power3 Medical. These assays were introduced at the American Academy of Neurology Conference earlier this month. Clinical validation studies are ongoing and we anticipate a commercial launch of these assays through our CLIA certified molecular reference lab before the end of the year. Early indications from ongoing studies have demonstrated the utility of the Parkinson's assay to both accurately diagnose Parkinson's disease patients, compared to normal controls but also to discern disease severity. We hope that this same application can be verified in Alzheimer's disease testing, which would lead to potentially diagnose these diseases earlier and permit earlier therapeutic intervention.

And finally, the last area where we are concentrating is on evaluating the mutation enhancement or enrichment technology, which we recently took a license option on from Dana-Farber Cancer Institute. Combining their Cold-PCR technology with our WAVE and SURVEYOR technology could dramatically extend the sensitivity of mutation detection significantly. Our interest is to quickly determine if there's an application in detecting cancer driving mutations in circulating DNA in blood that would permit an earlier warning that a patient is at risk for or experiencing early stages of cancer development.

Our strategy remains to continue adding new assays and technologies to our two laboratories to continue the strong growth we've enjoyed in our molecular diagnostics lab, along with the growth in pharma companies utilizing our pharmacogenomics services lab. As well as developing cancer gene mutation kits to drive both kit and associated WAVE system sales. And we want to aggressively manage our cash reserves to ensure that we can continue developing these new products and services to further drive our growth. We are now happy to take any questions that you might have.

(Operator Instructions). Our first question comes from [James Bishop] from -- he's a Private Investor. Your line is open.

Thank you. Mine isn't so much questions as observations and comments. Reading the letter to the shareholders from Craig Tuttle. It says, "We are very proud of our progress this past year," which would be the year ending December 31, 2008, "achieving near breakeven performance." I question why that would be a proud thing? And also equally significant, "We are growing the Company." And it grew a whole 3%. As a stockholder, I look very strongly, as other stockholders do, at value, and see great losses in what I have purchased it. The stock closed at $0.57, you had a high of $0.87 on June 6, 2008.

I would look at reducing expenses and question if these salaries are in line with where they should be. They seem rather high for a Corporation that continues to lose money for the key people -- the three key people listed. I would also -- I'm glad to see that, finally, the contribution to the 401(k) has been discontinued because that was going to be a question of mine, of why we would have in a Corporation that continues to lose money, contributions of $159,000. Although, I do wonder why it isn't going to be discontinued before June 1.

And my last comment would be a comment that kind of ties into one that I made previously at another call, and it refers to page K-16, where it says, "We will need to increase net sales in order to meet our liquidity needs on a long-term basis. We may not have sufficient sources of liquidity to continue operations indefinitely. In the event we do not have net sales growth, we will continue to make cost reductions to align our expenses with our net sales." It just doesn't seem to me -- and obviously, I'm not involved in the Company other than as a stockholder, but that this Company is going to turned around and make money. And make money, I'd be happy to see a $0.05 to $0.10 share of profit down the road. But I just wonder how long this Company is going to be able to continue? And also, I wonder if, in fact, it isn't time to see if there is a possibility of selling this Company to somebody else? And that would be the end of my comments. And I realize they're not real favorable.

Well, I appreciate your opinion. And I think every investor has every opportunity to voice their opinion, both to management here, as well as in the ownership of their stock. I think, first of all, you have to look at the entire industry. If your interest is in seeing biotech stocks perform well, clearly in this current economic climate that's proven difficult. And two, there's roughly 200 biotechs and biopharmas that are burning cash at a level that will not permit them to sustain operations through this year. We don't think we're in that situation.

Third, I think that we're very proud of reaching breakeven performance last year, short of the goodwill that we wrote off, because the Company has a history of large losses under losses under the former management. I think the total was $125 million. So, our team has come in and done a tremendous job of reducing expense, focusing the Company on growth opportunities and beginning to grow the Company again after a number of years of sales declines. Now, whether that speaks well to having stock ownership or not, that's up to the individual investor.

And I think, lastly, we've done a fairly remarkable job, for a small Company, in bringing talented individuals to the Company, compared to maybe where the Company was historically. But in particular, for finding new key opportunities that all have good to potentially very large growth opportunities. So, I in effect, I have to say I disagree with you. I don't think it's reasonable to look at selling the Company right when it's poised with a variety of exclusive licenses, where it has patent protection or it has novel technology that only it can commercialize. I think that would be my complete answer.

Our next question comes from the site of Al Shams from MidSouth Capital. Your line is open.

Yes. More specifically, it looks like general and administrative expenses were higher than the previous year, although our sales revenues were lower. Could you explain that or talk about that?

I'm sorry, general and administrative were higher in which year?

In 2008, than they were in 2007.

Year over year again?

Yes.

Well, hi, Al. That makes sense because -- Deb will get to the specific number. But do remember, that we increased our sales staff to drive our growth in both our pharmacogenetics services lab, as well as the molecular diagnostic laboratory.

And actually, Al, I'm looking at K-28 in our annual report, SG&A expenses in 2007 were $11.5 million. And in 2008, they were $10.8 million. So there was a reduction but within that -- and within that number --.

I'm looking at the news release, operating expenses from continuing operations were $3.8 million versus $3.5 million.

Okay, I'm sorry. You're looking at the quarter.

Yes.

Okay. Within that number, the largest thing in there is -- and I kind of talked to it in the call. We have foreign currency revaluation gains or losses that hit our operating expenses.

Okay.

And there was a $400,000 swing between the two years. So we had a gain in the '08 numbers, which reduced expenses of close to $200,000. And then, in '09, we had a loss of $238,000. So, the swing was $400,000. If you adjust those operating expenses to $3.5 million and $3.8 million for that anomaly -- and I'm flipping my pages. The numbers really become --.

Okay. That's a good explanation.

So after you adjust for that, the number in '09, if I take that as really $3.6 million and the number in '08 was $3.7 million. So they've been fairly flat. But what we have done is increase our sales-related expenses, lowering some other expenses that are trying to focus on the growth of the Company.

Okay. And it looks like we had a modest negative cash flow from operations for the year -- or excuse me, for the three months?

We -- modest, yes. Pretty much, we maintained our cash. From operations, we actually had a positive $299,000. And then we had $214,000 of investment we did as round equipment, primarily for the laboratory services group, which is growing. So, when you net those, we're pretty much plus or minus $100,000 on cash between December and March.

Okay. And then lastly, Craig, are you starting to see some traction on the revenue side? That's where we need to go here is, is to grow these revenues.

Well, obviously, that's been our interest all along. I think we continue to see traction on the customer side. In the molecular diagnostics lab, I think we're more than 65 customers above where we were in Q1 of '08. And actually, we're up over 100 but some of those have ordered one test and then we haven't seen them for awhile. And so that lab, I think, is growing substantially.

In the pharma services area, although revenue is very lumpy, we're doing work now with all of the large pharmas. And most of what we're doing are very early studies to look at where our technology finds very sensitive mutations that are now pretty well known and gaining interest and focus by these pharmas to set up then larger clinical trials. So we're doing a lot of work right now on small sample projects that will then have fairly significant or extremely large, for us, clinical trials associated with them. But obviously, yes, we want to grow revenue.

And then the third area we're trying to grow revenue is with all of the new assays and technologies that we've licensed and re trying to commercialize or are developing ourselves.

Okay. Well, thank you very much. I need to go to another meeting but thanks for your time.

Our next question will come from the site of Chrystyna Bedrij from Griffen Securities. Your line is open.

Hi, good afternoon, Craig and Deb. Thank you for taking my question. First of all, in terms of your KRAS solution, could you be so kind as to expand on how your solution compares to others, if you can? I know you had that paper you mentioned and in terms of accuracy and detection in that aspect? And also your thoughts on how and which segments of your business will benefit most and maybe the timing of such a rollout?

Sure. I'm happy to.

Thanks.

The specifics around KRAS, as a new assay, that has somewhat taken the market by storm. With the finding published by the ASCO, American Society of Clinical Oncology, meeting last year, where it was noted that a lot of -- well, two new drugs in particular. Pfizer's Vectibix and MClone's Erbitux target the EGFR. They target EGF receptor. And the EGFR, when you shut that down, it can be very successful in stopping further cancer signalling through the RAS pathway. Unfortunately -- and EGFR sits at the cell membrane. Below that cell membrane is KRAS and then a variety of other signalling proteins that tell the cell to grow. And if there's a mutation in KRAS, then these patients will no longer respond to the inhibitor drugs. Worse yet, these patients tend to do worse when given these inhibitors.

And so, you range -- in colon cancer, I think it's, on average, 20% of these patients will have a KRAS mutation. If you give them these drugs, they have a shorter progression-free survival and a shorter overall survival time. And as such, you have to exclude them from getting that drug. And the only way to do that is to do KRAS testing. So with 200,000 colon cancer tests and an average CPT payment of $500 per test, you can see, it's -- a very large market was created almost instantly. In Europe, they require KRAS testing and before either of these drugs can be selected. And it's becoming much closer to that in the US.

So where we've seen success is actually in our lung cancer studies that we've done for pharmas, where we see KRAS mutation, with our technology that is more sensitive than standard sequencing. I think standard sequencing runs about 20%. And we're running as high as 25%. So, we're actually finding more patients, where they shouldn't be getting the drug but we also then can confirm which patients should get the drug.

Not only that, when we compare it to other techniques, it was actually done through a pharma partner and presented in a poster at AACR. We matched, in lung cancer, very close to the patient outcomes as compared to some of the other techniques. One of the techniques had a much higher false positive rate, which is actually the worst scenario because you then tell patients they shouldn't get the drug, even though they should.

So we think that our solution is a very strong one, not only to sell these assay kits but because it works with WAVE as a system. So we have the opportunity of selling more WAVE's. Now, I think that that rollout, obviously, will occur as a launch for that product in the early fall. But where it will gain, I think, it's most traction is once applications become understand for treatment selection for lung and pancreatic cancer, although it will still be used in colon cancer. So, we haven't forecasted what we think will be the overall growth based on that but we do believe it will be currently the best technology for doing this testing. And with colon cancer and lung cancer, the number of cases per year about the same, it's a significant opportunity.

And then, of course, there are our plans to develop the whole pathway of these key genes. In the RAS pathway in particular, for monitoring for cancer detection and diagnosis, as well as in treatment selection. Hopefully, that answers your question.

Yes. So, you definitely think this will flow through to your systems as well?

Yes, exactly. And, first, we think it will flow through to current users that have the instrument system. And do remember, in Europe, that testing is regulated now. So, you have to test before you can treat. And obviously, our systems are already the selected system technology, or selected platforms across the European consortia labs for doing Breca 1 and 2 testing. So these are already the cancer testing labs. So we think that there will be quick interest and uptake in those laboratories for doing this testing.

That's quite incredible. Is it possible -- the AACR paper, your name is not on that paper but obviously, it's out there.

It's like the PKD 1 and 2 paper that came out of Cornell that said that SURVEYOR is a better technique to use to find mutations and sequencing. It's more cost effective and you only need to sequence when SURVEYOR tells you there's a mutation there. We have to continue to support more publications to validate that and prove it. Certainly, independent publications that show that it's not just internal data. And that does take time. But that's why we're doing the clinical trials with this at a variety of clinical sites worldwide.

That's hugely impressive. Can I ask one more question before you jump to another person?

Of course.

Just also, since we're talking about the different assays, can you just touch on the utility of the Parkinson's test? I know you mentioned a little bit but I don't know if you can just explain exactly how it works, and is it proprietary to you now? And just why it's such a unique offering.

Sure. I'd be happy to. Thanks. That's a good question, and my comments will roll over to the Alzheimer's test as well, other than some of these findings have to be validated in the clinic. But in Parkinson's, in particular, there was a presentation at the AAN or American Academy of Neurology meeting in the first part of the month. And one of the clinical trials that we are working with, from Greece, actually, showed that this assay found or diagnosed patients but also could determine the severity of the disease. So obviously, what's so important there is that if you can see it at an early stage, you can diagnose earlier and then get treatment started earlier.

I don't know how effective that is in Parkinson's compared to Alzheimer's. But certainly, the faster you can put a patient in either of those diseases on treatment, the quicker they get a response. And at least with current drugs or drugs in the clinic for Alzheimer's, the longer the benefit is from those drugs, you can maintain their cognitive function longer. You asked you asked -- proprietary. Yes, of course. And what's the design of the assay? I apologize.

Sorry. I ran a little long.

It's also the end of the day. So there's two answers there, obviously. One, the assays are proprietary. There's patents submitted for them and we have the exclusive rights through the license signed with Power3. And the design of the assays, they are protein biomarker-based or proteomic assays. And that's somewhat new in the market.

There's been a tremendous work in the proteomic space over the last 10 years but only now are there a variety of assays working their way to market. Because of some operational difficulties in performing these tests, the technique that we are using with Power3 tends to avoid a lot of the scale-up issues that have been experienced to date. So what they look for is roughly just over 30 of these different proteins. And by looking at how they change in concentration in a patient's blood versus a control or someone without the disease, you can make a prediction that this individual has the disease state. And then there's actually some of these biomarkers that are more sensitive to the disease severity.

And so, that was preliminary data that came out of the study in Greece, as well as some samples that we've looked at in the US. But both of those have to undergo further clinical evaluation and publication. We're already in the process with our partner of drafting the first publications for both diseases. And so, peer reviewed articles are really important to validate this technology and also to educate the physicians as to what the test is, how it works and what it can do to help them. So hopefully that's a little more color on your question.

That's very helpful. Thank you. And timing, you said, is the end of the year, right?

Yes. We announced the assays at the AAN meeting, just to say they're in clinical validation. That there is a platform presentation, meaning, one of the presentations during the meeting was given by our collaborator there, from the University of Thessaly in Greece. And that we would be commercializing them through our CLIA lab by the end of the year. And of course, --

That's fantastic, Yes.

Well, what's important to me is to find exclusive licensed technology that has very large markers -- or very large markets.

Yes.

So the first question I was asked is; Why weren't you growing the Company? Well, in fact, we have been growing the Company compared to prior years. And in particular, we first had to reverse the declines in revenue, and then -- we started to do that, although the economic climate has hit us, just like most companies in the market. But we are looking at very large opportunities. if you look at the Alzheimer's market, there's 5 million patients in the US, predicted to go to close to 12 million by 2015 due to the aging population. And if we can secure $1,000 per test, you're talking 125,000 new patients a year and growing for Parkinson's disease, it's 1.5 million patients. So, these are both $50 million to $100 million to several hundred million dollar testing opportunities. And then, to complement that, of course, we're looking at the mitochondrial DNA damage, which is exclusively licensed. And we're already seeing some results in cancer. And we're hoping to get onto diabetes and cardiac indications with collaborators and external clinical trials soon.

And really all these, there's nothing available of its class? Is that a fair statement?

There is clearly work going on in the mito-DNA damage space. Fortunately, we own the exclusive license to that. So, that testing should come to us. But I think what's most impactful to us is that this, assay in particular, has five opportunities for it. From drug toxicity testing, through to cardiac indication. And remember the cancer assessment, through a presentation at the AACR. One of the Johns Hopkins researchers was discussing bladder cancer. And after a large review of a number of different biomarker opportunities, said in the presentation, that actually the best marker he had for bladder cancer was mitochondrial DNA damage. So obviously, we're going to try to establish collaboration there and also with the EDRN, which is the Early Detection Research Network through NCI, to try to bring these methods to greater sample populations faster, which is the whole reason behind the EDRN.

Well, that sounds very promising. But correct me if I'm wrong but your lab is the most accurate in terms of mito, I would say, genomic assessment?

Absolutely, because of the WAVE and SURVEYOR technologies that we have, you see what is termed heteroplasmy in the mitochondrial genome. An standard sequencing can routinely miss this heteroplasmy because it can occur down below the 10% cutoff that standard sequencing has. And so, yes, we believe we have the most accurate mechanism of seeing that and the most efficient processes to do that. So we've really stepped up from being a small molecular player to being one or two in the mitochondrial disease testing space.

Well, it sounds very promising. I appreciate all of the feedback. Thank you.

Sure.

Our next question will come from the site of [Larry Hopkinsberger,] a Private Investor.

Hello, everyone.

Hi, Craig. How are you doing?

Good. How are you?

Good. Congratulations on your cash going up by roughly $100,000 in these times.

Thank you, Larry.

I've seen heavy erosions in other companies. I want to ask you, I keep track of how long people have been at their post. You've been at your post from July -- it will be three years ago in July.

That's correct.

So, you've cauterized the wound, stopped the flow of blood. How does it look now as compared to how it looked then?

Well, not to unsettle any investors that were with the Company three years ago. But when I joined, we were looking at a $1 million to $2 million loss per quarter, declining sales and an instrument focus that was also declining, as a business. And we had spent some money on developing the technology and the initial staff for the two laboratories but there was the internal opinion to shut them down. And so, almost three years later, the laboratory is up to at least a $4 million a year run rate for molecular diagnostics. And at least $1 million a year run rate and potentially more, for the pharma services lab. So you add that contribution to what has been a relatively stable WAVE platform reagent and service business and the Company has a different perspective and outlook, I think. Certainly, a better future, completely.

And then in addition, I think we've really worked hard with the additions to the team. You might go through the all that list but Deb is new to the team probably two years. Chad Richards is relatively new to the team. We brought Chad here from Quest, where he was their National Director of Oncology Sales. And then, we brought Kaldjian here. And Dr. Kaldjian, as our CSO, had a tremendous amount of experience in biotechnology and in biopharma and in oncology pharma. So those additions, coupled with some of the key staff that we had here, like Dr. [Cole] in our laboratory, have been able to look at the panoply of tests and technologies that are in the market and select a few that are, we think, very strategic for our growth.

Clearly, genomics is a very complex space that moves very fast. And discoveries comes through academics and through company research very quickly. And you need to sort through all of that and make some good decisions. So we think we've done that and we think we'll continue growing the Company based on some of those.

And then the other comment, which you touched on briefly, I mentioned as well. But there is a large number of biotechs, well above that 200 number, that are bush burning cash at a significant rate and at such a rate that they will not be in business much longer without raising more money. And clearly, we've tried to avoid that and I want to avoid that in any case. And that's really where I see the biggest change in the stability of the Company. We're not happy with first quarter and we didn't want to see that decline in sales but it is, I think, understandable in light of the current economic conundrum out there. And fortunately, we do see some customers that are now in a position to make decisions on instrument sales this quarter or even some countries.

Can I ask you, on your four applications, the -- and you touched on some of it but on the four applications, in the probable timeline to sales and the arrange of what revenue could be from each one derived? And starting with the Dana-Farber Cancer diagnostics, when could that possibly be commercialized? And what kind of range of revenues could you possibly have?

Well, you start with maybe the most speculative one. That's -- if this -- and there is some data behind it.

Well, I'm going to ask you about the other ones, too.

I understand. But if you look at -- and you'll see publications coming out of Dana-Farber for this technology, looking at key cancer driving mutations. They are more sensitive with this technology than any other technology, short of our own. And then, when you combine the two, they're even more sensive. So, we think that you might be able to get down to 1 in 10,000 copies of mutant DNA. And not to get into the technical detail there. But what we think that means is that you can look for these key mutations in circulating DNA, in blood or in urine. That give you the ability to find folks at risk for cancer or undergoing the first stages of cancer development. Now, obviously, the win in cancer is not to find it at stage four.

Unfortunately, the statistics there are just really quite sad and that will continue for sometime. But if you find many cancers at stage one, then you have significant improvement in survival and side effects and long-term quality of life on top of survival. So if you look at lung cancer alone, usually found stage three or stage four, with an average of six months left to live. Whereas if you find it at stage one, you do surgery, you don't even do chemo in these patients and they have a 90% chance of survival. So, that's the difference there. So, if that works, I would say that the opportunity for that is pretty unlimited if it becomes a cancer screen.

I can give you the other example. Myriad Genetics, right now, tests for two mutations -- or mutations in two genes that cause 5% to 10% of the breast cancer that we see right now. And they're running about $80 million a quarter. And they have -- you're talking breast cancer. So there's 200,000 cases a year of breast cancer and only 10%, at the most 20,000, of those are patients that have this mutation that's causing the cancer. So in a screening mode, this company is doing far more than are predicted based on family histories or what have you. At any rate, that's the model. So you could easily that a test that would screen for all cancers, in particular or many cancers, could easily be a $500 million a year assay.

Okay. What about Parkinson's and Alzheimer's.

Well, I just went through the patient load there. You're talking about 1. -- I'm sorry. 125,000 new cases of Parkinson's disease per year.

Okay. You already mentioned that. 100 to -- several million for each, right?

Well, if you take 125,000 times $1,000 per test. That's the math that we look at.

All right.

So, it's easy to see $150 million to $250 million opportunity there long-term. And remember, there's adoption curves in the medical community and training that has to go on along -- in addition to publications. And by the way, there's an excellent series that just started on HBO on Alzheimer's disease. And I watched it last night and one of the clinical evaluators that we're working with, Dr. Marwin Sabbagh, at Banner Sun Health is featured on that program. So it's a large number of patients suffering from this disease and Parkinson's. And so, that's a significant opportunity. And you can ask the question but I guess I'll just keep going. But where we don't have as much color is about the mitochondrial DNA damage assay. If every drug company needs to use that as a measure for drug toxicity, that would be a very large market, tens to hundreds of billions of dollars. If it's the key assay to measure near-term cardiac risk, well, then that's as big as potentially the cholesterol screening market. Because 50% of cardiac or MI patients don't show typical symtomology prior to a cardiac event. So, you're talking about large screening applications there as well.

So what kind of number, Craig On -- using the toxicity and the cardiac test? What kind of range of numbers?

I would say between $100 million and $500 million, again.

Okay.

And I know you'll hold me to those but they're very broad markets. And what you have to do in each case, Larry, is as we've spoken about, you need to have the discovery, do the work. Get publications done. Do marketing. Go to the conferences that support it and have speakers. Go out and go to grand rounds and train physicians in the use of it. And finally, get it included in medical care pathway directives, so that it becomes routine.

And KRAS?

Well, KRAS, the math is really easy. if you're doing the testing, like we do it here and the reimbursement is $500 a test. There, right now, is 200,000 colon cancer patients per year that have to have that testing done. So obviously, that's a quick $200 million market -- $20 million market, sorry. But you can extend that to lung cancer, which is another 200,000 patients, pancreatic cancer, which I believe is 36,000 patients a year. And these are only US numbers. And as a kit business, you would look at maybe 20% of that. That's what the typical pricing is per kit and we might price at an advantage to that to drive adoption. But that's the size of the KRAS market.

But then, KRAS is just one of the genes that you really should look at in this whole RAS signal pathway. There's other is PCCA. It's not a -- there's a variety that one should look at for mutations that are contributing to the growth or the development of the cancer.

So bottom line, it looks like you could be in the billions in revenue? If all these clicked?

If everything clicked, yes. Quite frankly, that's why we chose these opportunities because they're all large markets. And on one hand, you would just say, We just want one of them to click. But each of them will take their own evolutionary process to commercialize successfully.

And that's what you described to me one time, instead of a symmetrical growth, you're going have asymmetric growth, which is a quantum jump in your potential revenues?

That's our strategy, certainly. And we expect really a variety of life cycle jumps with each new technology as is it emerges and gains traction.

At one time, Craig, we talked about -- I asked a question, if, in relationship to Sequenom, SQNM, that jumped from $2 to $28 on their test for Down Syndrome. And now, the company itself came back and questioned its own test. What are you doing to prevent the likelihood of that happening to you?

That's a great question, Larry. The Sequenom case is a really sad story in that, quite frankly, their test does work. And that test will work to work to find indication in maternal blood of the condition of the fetus as regards to some key genetic disease. But unfortunately, all of their early data was never validated externally, no publications resulted. And then they had to, at the end of the day, come up and say that the data seemed to be mishandled. But also that they were going to delay launch by at least six months and maybe more.

And right now, their burn rate is about $20 million plus a quarter and they've got -- I think they claimed $80 million in the bank. And it could be $60 million. So as such, just reaching the end zone now of getting the assay to market but with all of the shareholder litigation that's going on, that's going to be much more difficult. So it's really -- it's just a sad outcome. But to prevent that here, on one hand, you have to trust the integrity of the scientists. But we clearly, try and get some independent validation of our results moved towards publications as quickly as we can, in peer reviewed journals. And have more than one hand on the data. So we work closely with our collaborators, whether it be at the Dana-Farber or elsewhere.

I think clinical trials for KRAS is an example. They'll run the data and they'll be able to report and contribute to the publication. It won't be just all internal data. And so, any technology that we have or that we're developing, we want to move very quickly. Like Power3, we want to move that to our lab to have, first of all, have an independent evaluation of all of the data that they've created to date or discovered. And then, work with our collaborators to make sure that that data is validated as we move to publications.

Now to address the first gentleman's question, as far as cash goals, and all you have going on in your mind and your confidence level, and I appreciate that your share numbers haven't gone up, but staying right around 49 million. Are you going to be able to make it from where we're at here, to seeing a successful commercialization of one of these applications without having to do another equity raise?

Well, on one hand, it does force us to be very frugal as we do it. And so, I won't say that it won't impact our turnaround to market but that's already included in our plans. So by being very frugal, we sometimes have to choose partners or we'll look for grant money from the government to help fund these. And if we don't get a grant, we might not look at the application as early as we would some others. But no, I don't see shortcomings to our current cash flow that will preclude us continuing the progress that we're making on these assays.

And so, for example, on the mitochondrial damage assay, we basically developed that assay in our Gaithersburg R&D facility. And we are just opening that up to researchers to send us samples to take a quick peek at different cancer types or degenerative diseases or diabetes, for example. And just run short pilot studies, which would be -- and with pharmas, just to be clear there. To see what we -- what data results. And then, once we have those data, we'll then get to select which ones we move forward with. Again, in trying to employ those collaborators.

And I have to mention it because we heard the question from the first person on the call. And quite frankly, I will tell you that I get a call now just about every week from a biotech company that is in trouble and is looking for some help. Whether it's for us to participate, acquire, merge or what have you. And so, I think we're in a far better situation than certainly a lot of the biotechs that are in the marketplace today. So, I'd rather be in our shoes than in the shoes of the calls I'm getting.

Thank you, Craig.

Sure, Larry.

Our next question will come from the site of Mark Merrill from Griffen Securities. Your line is open.

Good afternoon, Craig.

Mark.

Thank you for taking my questions. I just have two quick questions. First, I was wondering if you could elaborate a bit on your cardiac risk assay? Specifically, its application in a heart patient's care cycle.

That's a great question. In fact, the current process for cardiac care involves a large number of biomarker studies from initially cholesterol and LDL, to ApoE to scans. Leading up to just a significant cost. I have a great presentation from the discoverer of this assay on that, who's now at the University of North Carolina, Dr. Marshall Runge. And it's his finding that in the initial study, that the best indicator he had for near-term cardiac risk was to look at mitochondrial DNA damage caused by reactive oxygen species or free radicals. So, that's the application that has to be validated. So our plans to do that included one of the challenge grants that just went in to fund that test application and clinical trial.

Okay. Second, I was wondering if you happened to see the ACLU Myriad Genetic story today? And if you have seen it, I was wondering if you had any comments on the story?

Yes, absolutely, we saw that. And as a biotech with IP and IP interests and the exclusive licenses in IP, one could either view that as very enlightening or very threatening. The recent Supreme Court decisions on patent law include the requirement that something now, rather than being an observation, has to be really inventive in the space and very specific to the application. So gene patents don't seem to be not, only in favor, but allowed going forward.

In the case of Myriad's Breca patents, and by the way, those patents were initially thrown out in Europe. And that's why our WAVE system was chosen by the consortia labs in Europe to do Breca 1 and 2 testing. So on the other hand, if they can -- if those patents are invalidated, then we plus some other companies are certainly going to offer Breca testing. So, it's really a wait and see but I think that will be a very long process. But at the current time, the revenues to Myriad are running about $85 million a quarter. So, that's a very worthwhile patent for them to have obtained. But once again, I don't think that patent would be allowed in today's more rigorous requirements.

Okay. Well, thank you very much for your comments.

My pleasure.

Our next question will come from the site of Shaun Nicholson from Kennedy Capital. Your line is open.

Hi, Craig. Thanks for taking my question. I was just wondering if you could maybe outline the two or three kind of biggest revenue generators for the next 12 months?

Sure. Number one, will be in our clinical reference laboratory. We've started CGH testing. And I didn't announce it but we did at the AAN meeting or the Neurology meeting but we run a 244K CGH ship. This is for a copy number variation and that's our fastest growing assay. And we've done some deep gene research and have noted, in the -- in our literature and on our Website that this assay is also a very good tool for looking at deletions and copy number variations, in the diagnosis -- or to aid as a diagnosis in autism, in bipolar and in schizophrenia. So, we're extending that application and that chip is growing in popularity.

What system is that running on, then?

It runs on the Agilent system.

The Agilent system.

And the reason we like the system is that you can run gene expression on it as well. So, that's one area that we're growing. Obviously, we continue to grow in our molecular lab. The other area where we are expecting some uptick in business, based on the current studies is, as I mentioned earlier, we are looking at a variety of small pilot studies with several pharmas. And any of those studies that show good results. And the good results are somewhat beyond us.

It's whether it works out or not in the terms of the testing. But that those would then -- some or all could lead to larger clinical trials, to the tune of several hundred to several thousand patients, and that will be impactful. And we're working diligently with our pharma partners to turn around the best data that we can based on our technology and expertise. So those are the two key drivers. But again, if you look out 12 months, we'll have a KRAS assay on the market, we'll have an Alzheimer's and Parkinson's test on the market. Those should be the first to market. And we'll have some indication on the mitochondrial DNA damage assay because we are already involved in several studies there.

Okay. And I know, cash -- nice job on it. A tough environment. But it just seemed like a lot was due to kind of working capital changes, which should probably come back in the next quarter, I would say. So when you look out over the next four quarters here, kind of -- we don't have the KRAS, we don't have some of these other assays coming through. The kind of loss that's projected here would put the cash balance maybe at $1 million, if you kind of just hold this quarter flat. And so, I'm just trying to get your comfort here that you won't have to raise cash, at $0.57 or wherever the price is tomorrow? Could you maybe give me some color there and why you feel comfortable where you're at?

Shaun, this is Deb. When we realized kind of how Q1 was firming up, with some of the instrument sales slipping out, that we made numerous decisions. And we have taken action on items that will reduce our expense rate by just over $2 million for the remainder of the year. So, that will certainly cover the first quarter. And we do see, as Craig said, some instrument sales at least opening up, to come back. So we're certainly not going to be at $1 million. The actions we've taken, we think certainly, should keep us plus or minus in the $500,000 to $1 million cash. I think we think that could be one of the worst case, is we could potentially use $500,000 to $700,000 of cash. And I think in Q2 with the $5 million revenue run rate, we're going to see a dip. But then with the expense actions we've taken at the tune of maybe $500,000 to $600,000 a quarter, that will certainly shore up that bleeding of $1 million a quarter like we saw in the profit for the first quarter?

Okay.

And we'll continue to watch that closely but we're hoping we see -- and we are seeing a little bit of a comeback here in the second quarter on the instruments, which is really the biggest issue.

Can I ask where you're placing your boxes, then? Who's primarily buying them? You don't have to name the customer specific but is it -- what kind of setting is that being used at?

Every setting. For example, we've had a handful of systems go into China this quarter. This quarter is Q2. Last quarter, we sold four or five to incoming quality control testing laboratories in China. And we continue to sell them to academic centers in the US and in Europe. Sometimes the consortia labs in Europe need another instrument because they have an uptick in volume, et cetera. And we're working on potential sales in the Middle East that are substantive.

So, it really across the board. Remember, our user base in the US is principally, not all but principally in academic settings. But you can go to the translational lab at the Dana-Farber Cancer Institute and see our instruments being used on EGFR and KRAS testing for their lung cancer study as an example. And in Europe, the instrument is used much more in the clinical segment and it's quite mixed in China and the rest of Asia.

Okay. And then, are you seeing any kind of pricing out there, dips, to try to place boxes by any of your competitors?

Well, no. We don't -- if you want to find mutations at a very sensitive level, we're the technology of choice. And we kind of cover our pricing by offering refurbished instruments when a customer wants them. Otherwise, we do sell at this price.

And I apologize and we can take this off line but does your product compete with like the Gene Titan that's -- the new box from [Assy], would that compete there, on gene -- or not?

We don't do gene expression. I'm certainly aware of the effort by the gene expression companies to do resequencing on their chips. But they haven't had a significant impact in that space yet. And credit to them, Illumina has done very well in the last quarter. And they're right in the correct space for the upcoming NIH stimulus funding for core labs. Where they'll probably do well again. But more than I believe is on the sequencing side with their select instruments take, which is rather than in the gene expression systems.

Okay. All right. Thank you.

My pleasure. All right. Well, thanks, everyone, and we certainly look forward to covering the next quarter's sales results with you in three month's time.

Thank you.