Precipio Inc (PRPO) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to today's program.

(Operator instructions).

Please note today's call will be recorded.

(Operator instructions).

And it's now my pleasure to turn the conference over to Deb Schneider.

Thank you, Beth.

Good afternoon, everybody. I'm Deb Schneider, Chief Financial Officer for Transgenomic. I would like to welcome all participants to our third quarter 2009 conference call, where we do plan to discuss our results for the three and nine months ended September 30, 2009. I would also like to extend a welcome to anyone who may be listening on the webcast. I hope that you have had a chance to look over our press release that we did issue a short time ago. We also plan to file our 10-Q with the SEC yet today.

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

We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Accordingly, the Company claims protection of the Safe Harbor for forward-looking statements contained in the Private Securities and Litigation Reform Act with respect to such statements. Thanks for your patience.

I will start with our third quarter financial results for the three months ended September 30, 2009. Today we reported net sales of $5 million for the three months ended September 30, 2009. This was a decrease of $321,000, or 6%, as compared to the same quarter in 2008. Our instrument-related segment showed a decrease in net sales of $543,000, or 12%. In our laboratory services segment, we had an increase of $222,000, or 23%. I'll break both of those down in more detail.

Our instrument-related business had net sales of $3.9 million for the three months, as compared to $4.4 million in the same quarter in 2008. Within our instrument-related business we break it down into two components, bioinstruments and bioconsumables. Bioinstrument net sales were $2 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. Bioinstrument sales decreased $197,000. In 2009 we sold six total instruments, compared to five in the same period in 2008.

While we did sell more instruments this year, we sold more WAVE sales in 2009 and less OEM instruments. We sold five WAVE instruments in the third quarter of this year, compared to two in the previous year, and then we had one OEM instrument sale this year, compared to three OEM instruments in 2008. The OEM instruments typically have a larger average sales price. Therefore, there was a slight decrease this year. The decrease was also driven by a reduction in service contract net sales, primarily related to the European market. This decrease included lower volume and foreign currency exchange impact of less than $100,000.

Bioconsumables net sales for the three months ended September 30, 2009 were $1.9 million, down $346,000 as compared to the prior year. The decrease was split between volume and foreign currency fluctuations of the Great British Pound to the US dollar. In the third quarter of 2008, the Great British Pound was at 1.82 compared to the US dollar, and this year it's at 1.59, or a 13% decrease. We have seen some stabilization around that exchange rate, though.

Laboratory services net sales for the third quarter were up 23%, or $222,000, over the same period in 2008. The laboratory services business does include both our molecular clinical reference laboratory and our pharmacogenomics research service business. The molecular lab net sales were up $187,000, or 25%, for the three months ended September 30, 2009.

We did add 26 new customers in the third quarter as compared to the second quarter. The increased customer base, along with increased test volumes, drove this growth. However, our test volume has increased 42% over the prior year, and our average revenue per test has decreased 12%, so the combination of those is driving that 25% increase. The average test revenue decrease is due to the mix of tests performed and increased Medicare and Medicaid test volumes, which drive lower reimbursements for those tests.

Pharmacogenomic services net sales were up 15%. The pharmacogenomic net sales are project based, so the net sales are more likely to have spikes between quarters. In the current quarter, we had a number of small projects for pharmaceutical companies that, while the revenue associated with these was small, we believe will drive participation in larger full clinical trial studies in the future with these same customers. We are very excited about these opportunities in this area. While the actual net sales you see this quarter may not portray significant growth at this point, we do believe that there are a number of opportunities that have potentially large outcomes.

Gross profit was $2.8 million, or 55%, during the third quarter of 2009, as compared to $2.9 million, or 54%, the previous quarter, or the previous year.

In the instrument-related business, the gross profit margin was 58%, which is flat to the same period in 2008. Included in our cost of sales for the instrument business in the third quarter of 2009 was an expense of $229,000 related to a review of our slow-moving and obsolete inventory. The inventory reserve is related to control plasmas used for our SURVEYOR kit.

The laboratory services division had gross profit of $524,000, or 44%, in the third quarter of 2009, as compared to 40% gross margins in the comparable quarter in 2008. We have seen improvement in these gross profit margins with the laboratory business. Obviously, there will be investments here as we grow. However, we hope to continue to leverage our infrastructure, as well.

In the third quarter ended September 30, 2009, we reported a net loss of $366,000 as compared to a net loss in the previous year of $499,000.

Operating expenses during the period ended September 30 included $127,000 of foreign currency revaluation gain, which decreased our expenses for the third quarter. This is compared to a very nominal amount of foreign currency revaluation gain in the third quarter of 2008. Without the impact of this foreign currency gain or loss, our total operating expenses for 2009 were $3.3 million, as compared to $3.4 million in the same period in 2008.

While this number is relatively flat, there were a number of decreases in operating expenses surrounding no employee bonus accruals. We had a number of open positions that were not filled, lower commissions related to the net sales shortfall, lower travel and lower stock option expense. Offsetting these savings were increased research and development costs, primarily related to ongoing collaborations and internal development.

Included in the third quarter of 2009 was $225,000 of research expense related to our Dana-Farber Cancer Institute collaboration related to the development of high-sensitivity mutation detection technology called Cold-PCR, or co-amplification at lower denaturation temperature PCR. Craig will discuss this further. We also continued to validate our NuroPro assay in our research group.

At September 30, 2009, we had a cash balance of $4.7 million and working capital of $9.9 million. Our cash position remains constant and strong. Working capital decreased by $1.4 million from December 31, 2008, due to a lower accounts receivable balance, more collections, lower inventories, offset by lowered accrued expenses. We believe the Company continues to have a strong working capital position. Cash has only decreased $110,000 since December 31, 2008, with $237,000 being provided by operations and $347,000 used for investment activities, primarily to purchase purchase (sic) and equipment in our laboratory services business segment.

Moving on to the results for the nine months ended September 30, 2009, net sales were $15.5 million, as compared to $17.9 million for the same period in 2008, or a 13% decrease. Net sales for our instrument-related business totaled $11.8 million, as compared to $14.9 million, which is a decrease of $3.1 million, or 21%. The reasons for these decreases are similar to the three months. The instrument net sales decrease was due to a change in product mix as well as a decrease in service-related net sales in the nine months ended September 30, 2009. The number of instruments sold are in the details in our MDNA in the 10-Q.

Laboratory services revenue for the nine months ended September 30, 2009 increased $752,000, or 25%, over the same period. Again here the explanations are similar -- more customers, higher test volume and then some lower average revenue per test. Gross profit was $8.2 million, or 53%, during the nine months ended September 30, as compared to $10.3 million, or 58% margin, during the comparable period in 2008. The decrease in the margins for this nine-month period is related to the instrument business.

For the nine-month period ended September 30, 2009, we reported a net loss of $2 million, compared to a net loss of $276,000 in that same period in 2008.

Operating expenses during the nine months ended September 30 included $262,000 of foreign currency revaluation loss, which increased expenses for that period. Operating expenses during the 2008 period included $456,000 of foreign currency gain, which decreased operating expenses. Without the impact of this foreign currency gain or loss, operating expenses were $10.1 million for the nine months ended September 30, 2009, as compared to $11.1 million, or $1 million more, for that same period in 2008. The lower expenses in selling, general and administrative, which are similar to the three-month discussion, are offset by the increased spend in the research and development. Please refer to our MDNA analysis, also, in our 10-Q, which has been filed with the Securities and Exchange Commission yet this afternoon.

That is the end of my formal financial update. Craig will take you through a discussion on, I think, some of the strategic opportunities, and then we will open it up for questions.

Thanks, Deb. Good afternoon, everyone, and thanks for joining today's call.

As most of you recall, third quarter is typically our lowest revenue quarter of the year. Historically this has been due to the heavy summertime vacation travel in Europe, where a large amount of cancer and inherited disease testing is performed on our WAVE instrument systems, and this quarter was similar in that trend. However, we also now have the impact of summer vacation schedules in the US that now impact our molecular testing labs revenue as well.

Most importantly, our cash level was not affected significantly this quarter. Even more significant, a majority of the instrument sales opportunities that we had expected or had anticipated late in the third quarter, which, by the way, did not come in, did occur early in the current quarter. That, coupled with an upswing in our lab testing level up to our previous run rate, will result in what we believe will be a very strong finish for fourth quarter.

In addition to seeing the level of instrument sales in process or in quote return to levels that we experienced throughout 2008, we also achieved several key developments or business development milestones in the third quarter that will significantly affect our success in the future.

First, we initiated field clinical trials of our SURVEYOR base kit for detecting mutations in the K-RAS gene. As a reminder, K-RAS mutations cause activation of K-RAS signaling in a variety of cancers that makes these cancers resistant to some important new cancer inhibitor drugs, specifically Pfizer's Vectibix and ImClone's Erbitux, which are targeted against colon cancer. Patients with these colon cancers that have K-RAS mutations will not respond to these newer therapies, in fact will do worse when given these drugs. K-RAS mutations occur at 40% of colon cancer patients, but also 20% in lung cancer patients and at least 90% in pancreatic cancers. Thus, detecting these mutations is essential for selecting the best treatment regimen for these patients.

As of today, these trials are now complete, and we will be launching our K-RAS kit into Europe, as this kit runs on our WAVE system and we have an extensive network of installed WAVE instruments throughout Europe, along with a direct sales and service team to drive sales. For the US, we are completing an application of our kit onto a high throughput instrument which we plan to obtain on an OEM basis and begin selling this system and K-RAS kit during first quarter. We are doing this because we do not have a similar customer profile of WAVE systems installed across the US clinical market.

In addition to our K-RAS kit, we have a number of follow-on cancer gene mutation kits that will fill out a thorough menu of critical cancer genes. Some of these kits, like K-RAS, demonstrate resistance-conferring mutations and others are more cancer-regulating genes. As a critical reminder, our WAVE SURVEYOR or SURVEYOR kit assay continues to demonstrate superior performance compared to standard Sanger sequencing, as well as the allele-specific PCR kits currently available. In the case of this latter kit, the false positive rate seen in our clinical trial is similar to what was reported in the literature and demonstrates to us that our kit provides superior results.

Equally important, our technology scans for mutations, compared to other kits, which are designed to solely detect known mutations. So when a new mutation is discovered that confers resistance, our kits will already be capable of reporting its presence, whereas the other kits will have to be redesigned for each one as they are reported.

In addition to our developing kit opportunity, another key event for us was converting our license option for Cold-PCR from the Dana-Farber Cancer Institute into a full license that is exclusive for Sanger sequencing applications and all mitochondrial applications, as well. We took this step based on the success we had with this technology in our R&D lab and because of keen interest from some of our pharma customers for evaluating key cancer genes and circulating DNA in blood, compared to looking at these mutations in tumor DNA.

As many of you may have read, Cold-PCR was discovered in Dr. Mike Makrigiorgos' lab at Dana-Farber, and we've had a long -- we've long been a fan of his work and were excited when he alerted us about this discovery. Now, Cold-PCR works specifically by amplifying mutations compared to normal DNA. In our hands, at this time we are able to amplify DNA mutations at up to a 50-fold increase. We believe this is critical for detecting disease through measuring DNA mutations in blood, and immediate applications include looking for key cancer gene mutations to detect ongoing cancers as well as host of other conditions or diseases.

Clearly, as Dr. Makrigiorgos pointed out in his interview on Cold-PCR with GenomeWeb, this technology will also allow us to detect fetal DNA more sensitively than other techniques, so that Cold-PCR could also be used for prenatal screening. Ultimately, our first target will be to verify if we can detect cancer-causing or cancer-related DNA mutations in key cancer genes earlier or much earlier during cancer development rather than after a tumor is discovered.

I think a little background will shed some deeper insight onto our plans here. As I've noted for some time, our combined WAVE and SURVEYOR products allow us to find genetic mutations at extremely high sensitivity. However, combining SURVEYOR with WAVE for increased sensitivity is a relatively new application which we have only employed for the last three years or so. Prior to that, we used just our WAVE system, which was, at that time, the most sensitive method to detect and discover unknown mutations, certainly much more sensitive than standard sequencing.

Several years ago, we completed an evaluation of gene mutations in lung cancer, comparing both mutant gene detection in patients' tumors and, importantly, also looking in their blood to see if we could see these same mutations. In these lung cancer patients we were able to see these mutations in roughly 75% of the patients. Remember, this was without using SURVEYOR and was also after the tumors had already been discovered in the patients' lungs.

So our goal now is to apply Cold-PCR to try and find critical cancer genes with mutations in blood before a tumor is discovered. This would prove revolutionary for cancer detection. Of course, the clinical development of this will take some time and resources, but we have clinicians that are already very interested in collaborating with us on these studies, as well as pharma clients who want us to begin projects now for testing these mutations -- testing for these mutations in circulating DNA.

Our third clinical program also remains on track. This is our licensed NuroPro assay technology for Alzheimer's and Parkinson's disease detection. We have completed the transfer of this technology to our CLIA-certified laboratory and are now establishing clinical collaborations with some key opinion leaders in the country for sourcing the disease and control samples that we need to complete our internal validation of these tests. We remain on track for launching these assays early next year.

And, finally, we continue to establish clinical collaborations for validating our licensed mitochondrial DNA damage assay. This technology detects mutations or alterations in mitochondrial DNA rather than nuclear DNA and mutations caused by reactive oxygen species, or free radicals. This cause of damage and inhibiting it is the basis for a variety of current clinical drug programs, and this damage appears to be involved in many if not most disease processes. My belief is that these applications will clearly develop over time but will require much deeper clinical evaluation, key clinical collaborations and further work before we would begin commercializing it.

But with that we are now happy to take any questions you might have.

Thank you.

(Operator instructions).

Our first question comes from Chrystyna Bedrij, with Griffin Securities.

Hi, Craig. Hi, Deb.

Hello, Chrystyna.

Hi. Thanks for taking my question, and congratulations on the K-RAS and Cold-PCR efforts, in particular. It would be great if you could just share your thoughts as to which of your product lines you believe will contribute most to your profit margins going forward and which ones are the most scalable. And then the second part of that question is maybe, depending on the product, what kind of IP protection or competitive advantage you have --

Okay.

-- with regards to those products, yes.

That's a thorough question, Chrystyna. First of all, just looking at the business in total, our laboratory services group is where we see the most rapid opportunities for growth and profit. For the CLIA laboratory, the issue, I think fairly clearly, is just to continue adding new assays to our assay mix or menu, and each of those comes at different price points, and so our immediate goal is to add the NuroPro assay as well as a variety of new gene tests along the mitochondrial disease line and still continuing to find applications for our mitochondrial DNA damage and copy number assays.

But equal to that and finally, I think, rewardingly, we are starting to see some pharma partners sign up for clinical trials to use our testing services as opposed to doing smaller pilot products that then justify to them that our techniques provide deep sensitivity and scan for all the mutations that are present. And so those discussions are now -- or rather negotiations are complete for more than one clinical trial, and unfortunately our partners require confidentiality on our projects, so I can't name them or the total number that we're doing. But that area is scaling now, and these are large programs that will begin either later this quarter or early in 2010, so I see scale increasing on that side. And we are also seeing interest in companion diagnostics from these partners, in particular employing our kit-based technology for these important or critical key cancer pathway genes and mutations in them.

So all told, I have to say broadly it's our service business where we expect to see the greatest impact. But then there are the two feeder programs that will come behind that. We already have a project coming to us for looking at Cold-PCR, and a substantial amount of interest with other pharma partners to begin applying that, and so we expect fairly short-term return on that license, and obviously the long-term rewards could be incredible for it.

And then finally, as I said, we're bringing the NuroPro assays. I should also mention K-RAS, because we have an installed base of several hundred instruments that can perform K-RAS testing. So that's a ready-made market in Europe, where we have a strong sales and service organization. And I guess, similar to my comments that I've already made, now we look at launching that and other kits in the US. So throughout the remainder of 2010 we expect to see increasing sales and, of course, associated profit with both of those endeavors.

That's extremely helpful. Just as a follow-up, can you -- I know you can't discuss who you're working with or what the clinical studies are, but can you just discuss what the types of projects are in terms of the pharmacogenomics business unit?

Well, we typically look at key cancer pathway genes that are either regulatory for cancer, whether they're tumor suppressor genes or known signaling genes to drive cancer. And our premise has long been that we have the most sensitive technique to find those, but, coupled with that, our technique also lets us scan and find all mutations. And using SURVEYOR now with WAVE, again, that helps us in terms of deeper sensitivity but also as an indication to where the mutation is. So we -- our premise remains for a pharma company that's interested in finding these mutations and how they relate to their drug discovery program or treatment outcomes and resistance, versions of resistance, that this is critical for them to understand.

And I would say that is -- that contrasts sharply with a lot of oncology research that has been done over the last dozen years in the genomics space, where every effort was primarily based on sequencing. And, as you know, Sanger sequencing doesn't see these mutations below a 10% load, even with laser capture, so they're missing mutations. And so the reward for me is to have been discussing our capabilities and now seeing pharmaceutical partners understand that difference and come to us to secure those services from us.

Oh, that's super and helpful. And are those -- can you discuss if those are like Phase 1, Phase 2, Phase 3 projects, or is that going too far?

Deb's shaking her head, so I will say all of the above.

Okay. Fair enough.

And, you know, when you look at the revenue in the quarter you can -- and we don't announce, I think, the number of projects that we do, but you can see that some of them are still discovery projects that are in the tens of thousands, and then when we sign up to do a fuller clinical trial they can be in the hundreds of thousands. And then we expect once they reach a higher number than that in a larger trial that they'll be even bigger. But we're across that mix. It's just a matter of when samples come in and get tested. And some of the trials might be very large, but we could see samples come in in ones and twos as compared to 300 at a time. All of that occurs.

Which is ideal, right? I mean, very helpful. Thank you. Thank you, Craig. Thank you.

It's a pleasure.

Thank you.

(Operator instructions).

Our next question comes from Mark Merrill, with Griffin Securities.

Good afternoon, Craig and Deb, and thank you very much for taking my question.

Hi, Mark.

I was just wondering quickly if you could elaborate a bit more on some of the synergies with the Cold-PCR technology and your overall bioinstrument business and your future assay portfolio.

That's a great question. Obviously, that's one that we considered very thoroughly before proceeding not only with the license option with Dana-Farber for Cold-PCR, and I think I'll pronounce it better than Deb did, but also to go ahead and execute that into a full license. So I will say right now in our hands SURVEYOR plus WAVE was reaching a sensitivity of finding a mutation amidst or amongst a mix of wild-type DNA at around the 1% level. And there are a couple of other technologies that can achieve that level of sensitivity. But in our hands with Cold-PCR we're going at least an order of magnitude above that already, and that's with WAVE and SURVEYOR. So we see that as a very effective combination to apply to it.

But, again, remember that our K-RAS kit can also gain that same level of sensitivity just with SURVEYOR. So it's easy to imagine that for K-RAS for looking at mutations in the tumor, our current kit is adequate. But if you consider the cancer, early cancer detection scenario, where we're looking for, say, circulating DNA which has K-RAS mutations in it that signify an ongoing disease that hasn't been found yet, you can use Cold-PCR to further amplify that genetic mutation so that we see it and can actually screen for that cancer. So, clearly, our long-term goal for that technology is that you will use it to find underlying oncogenesis rather than once a tumor is apparent in a patient.

Okay. Sounds good. Thank you.

Sure.

Thank you.

At this time there are no further questions in queue, but we'd like to give everyone a final opportunity.

(Operator instructions).

Our next question comes from Matt Arens, with Kopp Investment.

Hi. Can you guys hear me okay?

Hi, Matt. Absolutely.

Hi, Matt.

Hi. Thanks for taking the question, and congratulations on the continued progress on a lot of different fronts. A couple of things to touch on here, you've laid out a lot of things that can really drive growth for the Company in the midterm and in the long term. If we could just maybe spend a little bit of time on the short term, there was some commentary in the prepared remarks and in the press release about your enthusiasm for sales growth in the fourth quarter due to, it sounds like, an improving environment along with some push-out of some sales that you thought might take place during the third quarter and now have taken place early in the fourth quarter. I'm wondering, if we go back and look at the results, the Company had a nice little string of profitable quarters prior to the broader economic difficulties that have hit the US and the world. Should we be looking for the December quarter to get back to that marginal profitability, or would that be getting ahead of ourselves?

Well, I'll tell you, we're very confident that we're going to once again return to, at least for that quarter, as well as what we can see immediately, with a very positive result. So, you know we haven't been giving guidance this year, but this will be a great quarter for us, and I can't remember the specifics, but we were looking at several hundred thousand dollars worth of instrument sales at the -- even up to the last day of the quarter which we anticipated would come in, even including to a large reference lab. So, although they didn't hit by the last day of the quarter, they've already been consummated. So, yes, we have a strong quarter coming, and that's where I'll leave it, Matt. But --

Matt, we had two OEM instruments that we were going down to the wire at the end of the third quarter with one customer here in the US, and we just couldn't make that final push through the purchasing department. They had one more review of ROI for them and stuff, and that then came in in October. That was two OEM instruments for approximately $550,000. So that is what kind of popped over the cusp from third quarter to fourth quarter. Plus we have actually seen very strong closure of instrument sales so far this quarter. Obviously, there's still more progress that needs to happen. But we have sold another four or five WAVE instruments already this quarter, too, which is really good progress early on in the quarter.

Right, and the other -- again, we're talking about halfway through the quarter, not quite halfway through the quarter, but we're also seeing a return in run rate for the molecular lab to Q2. So that, again, adds confidence to us. And we also have better visibility on the pharma projects that are coming in. So in all in all we're happy with Q4.

Good. Well, I think that --

The listing's all not done, but we -- so I'll put that caveat in, but we do think it's looking promising at this point. Obviously, our goal as we're looking into 2010 is we are seeing some positive things, but to get through everything, I mean, obviously our goal will be looking towards profitability again. We've not finalized that whole process. And we are also making some investments right now. Our R&D costs are up a little bit from prior years, but we believe that will drive future growth, so --

Well, I'm very pleased to hear the progress on the fourth quarter. I think that's music to my ears and I'm sure the ears of other holders. And then I look forward to getting hopefully in a more normalized environment where we can get to a level where you might be comfortable talking about guidance for the year and what kind of growth we might look forward to as some of these opportunities start to hit. I think that'll be an important inflection point for the Company, as well.

Absolutely. Yes, we couldn't agree more.

Great. Okay, thank you for taking my questions.

Sure, Matt. Thank you.

Thanks, Matt.

Thank you. Our next question comes from Michael [Zimba], who's a private investor.

Hi. Thank you for taking my call, and the previous caller did get into some of the stuff on some of the timing here to start to get the revenue increase. And great on keeping the cash flow what it is on the reduced revenues, because shareholders, we appreciate that, without getting into any dilution possibilities. But zeroing in on the K-RAS and on the NuroPro for Alzheimer's and Parkinson's is a big opportunity, and that was targeted for the fourth quarter, according to the second quarter release, and now you're talking the first part of that year, next year. Is that tied in to Power3, the relationship there? In looking at their 10-Q they've got like $19,000 and one employee. I just wonder, are you protected there? Are you in charge of the timing of that?

The launch timing is really dependent on us now. Power3 is our [essential] partner on this. However, the license for NuroPro should Power3 go bankrupt would still be maintained, and we'd still have access to that technology. We wouldn't have signed a license and distribution or sales agreement without it. So the -- quite frankly, the financial condition of Power3 is unrelated to our opportunity for those two assays.

And we have taken over the scientific leadership on the scientific collaborations that need to be established, and we are -- I have to say, rewardingly, we are able to call some of the top not only opinion leaders but top clinicians in both the dementia and the movement disorder space and get them excited about collaborating with us.

We're in the process now of getting the IRBs approved and getting contracts in place. And that's, unfortunately, a lengthier process than one would like from a commercial scale basis, and that's why I'm forecasting that we will have that done and those clinical validations that we require as part of our CLIA and CAP certifications to be able to offer the test with full confidence. And that'll be Q1.

Okay. Thank you on that. And as far as the Cold-PCR now, and I admit I'm more of a market and numbers person than being well versed on the technology, when you talk Cold-PCR, and it says in the release, it says pharma studies initiated during the fourth quarter. Does that mean -- is that revenues will be produced from those studies, or is that a step to get to a commercialization, or the timing of the revenues on that particular project?

There'll be revenue. On the other hand, this is exploratory. So we need to just look and see. In our hands, we can determine the limit of detection that Cold-PCR brings to us, coupled with our other technologies. And, as I pointed out, it's an order of magnitude better, so that's great. When we were at 75% matching or 78% or whatever the ultimate data was on that study, looking at lung cancer in the tumor versus in the blood, now, if we're an order of magnitude better, does that take that to 95%, 98%? And then, more importantly for me in terms of trying to scale the opportunity, does that mean that I don't need the tumor, that I can look at in the blood? And so you need to do all of that work to realize the full value of that opportunity.

But, again, if it works, and that's our expectation, that's why we went ahead and executed the license, then that would be remarkable for cancer discovery or detection, as I pointed out. Here's a good example. Pancreatic cancer, these cancers run about 90% K-RAS positive. So the -- an important study there that we're talking with the collaborator about and submitting an SBIR grant is to look at K-RAS in a mouse model as it develops, and can we see this as a progression of disease? That would be the pivotal experiment to prove that Cold-PCR works as a potential diagnostic for uncovering underlying cancer. So that's where we're placing our bets right now on the future technology application for Cold-PCR.

But, quite frankly, it isn't just a cancer solution. So fungal disease, or fungal disorders where you have very low numbers of infectious pathogens in blood is an application. Fetal DNA detection for detecting fetal inborn errors, that's another opportunity, sepsis, there's just a whole host of things that this enhanced sensitivity allows you to pursue. So in some cases -- and we have sublicense rights on the technology, so in some cases we'll look for collaborators that will help us develop the technology so that we can bring it to our lab and then produce it as a kit after we've offered it here. And the other side of that is to find applications that we would gain royalty fees from for having it played out in a different application.

One more quick question, and I don't take notes, and my memory, but it was about a year ago you had mentioned the potential of some of these projects, and you can correct me, it was three or four, maybe five years being a $200 million, $250 million company. At this point a year later looking at where you're at and what's developed over the last year, are you -- I would say, give you multiple choice, wish you hadn't said it, as confident as you are then, or even more confident that this, with everything you've got, irons in the fire, that this growth potential is going to be there?

Well, there's two sides to that. A, glad I -- glad that that's a number to be discussed. But if anyone is in the short term going to be able to find cancer, it's our premise that you can do so with Cold-PCR. And so that's key. And I won't get into a lengthy discussion around stage IV versus stage II and the disparity in treatment outcomes based on those conditions and treatment -- drug regimen selection, what have you, but it's clear that the earlier you find cancer the better the outcomes will be. So that'll have a remarkable financial impact should the biology play out in our favor.

So I would think that right now we are much farther down the road of having several platforms or platform technologies that give us the opportunity to reach that sales level than ever before in our history. So in that regard I'm very encouraged. And that's not to say we aren't looking for other tests and means of acquiring those assays and even companies to bring that technology through to our laboratory and also to develop kits based on those platform technologies that we can sell more broadly. So I think that that's an integrated solution that we are certainly planning in implementing.

Great. Thank you, then.

Sure.

Thank you. Our next question comes from Larry [Hoffensterter]. He's a private investor.

Yes, hi, Craig.

Hi, Larry.

I'm trying to make sense of all the components here and how it all collectively adds together. Will you tell me if my logic is correct? You mentioned earlier that you would get back to the previous run rate that you had in '08. And I think you did $24 million in '08.

Correct.

So you would -- is that correct?

Yes, that is correct, Larry.

So $24 million divided by four for the quarter, you'd get back to $6 million run rate you -- $6 million run rate.

Yes, I was really talking about the lab testing volume run rate compared to the downturn, quite frankly, that we saw in Q3. But I don't dispute your math, Larry. So that's where we want to get initially in the year, but then we want contribution for the K-RAS kits that will have been launched in this quarter in Europe and then in Q1 in the US and follow-on kits there, as well, but also the compounding effect of the NuroPro assays that get launched in Q1 and then start to get adoption and implementation in practice throughout the remainder of the year. Where it becomes fuzzy is really forecasting that not just based on the opportunity or number of patients or surveys of physicians that are aware of it, but how does it really get brought into the practice?

We call on neurologists already, so that's a very good sign for us. But to try and project that as a forecast right now is a little bit difficult because there is a -- I won't say typical, but there is certainly an adoption curve, that publications are required, support from key opinion leaders, and that's just a strong requirement, and we're trying to establish those or have established those collaborations now, but you've got to nurture them and get them to the point where these clinicians are excited about the technology and will talk about it in conferences and be invited to speak at conferences and support the publications further. And that occurs for any disease, disease state and test against a disease.

So not to talk around your question, but we'll talk to the board about providing guidance in 2010, but we definitely want to get back to a profitable run rate like in 2008 but, more importantly, have contributions that start to mount for these new assays.

So, okay, so if you've got -- let's say if you're running then, Craig, a $6 million run rate, you're going to add on to that whatever revenue you get in Europe this final quarter of the year --

Yes.

-- from K-RAS. And then if you add on to that, some time in the next maybe 90 days you might be adding on, or 90 to 180 days, to -- three months to six months, you might be adding on potential revenues from Alzheimer's and Parkinson's tests.

Well, we'll definitely be adding in revenue for those, so it'd be great to see all that compound, and that's the reason we did it.

So, but that's what would happen, then. You'd just have -- you'd have all these different applications falling in a line adding to the top line and then potentially to the bottom. So you'd have Alzheimer's, Parkinson's, Cold-PCR, but that sounds like it's three years off.

Some of the applications are immediate, as I've mentioned, in terms of pharma partners that want to look at these samples immediately. But I think that will increase, as well, through the year, not just for pharma studies. But, importantly, for a true clinical validation and, for example, adding Cold-PCR to our K-RAS kit and then begin screening with it, that just takes clinical validation time and publications. So those are going to be scalable events, but they're a little harder to forecast. It's the work that you have to do. You have to get the publications to prove it, and then you'll get mind share in the community. But if you're building up a revenue model, Larry, I applaud that. We do the same. We're just not providing that guidance yet.

But that's the idea.

Yes.

Yes.

It falls on. You've got your base revenue and it all falls or stacks on to the base.

Yes, I mean, Larry, as we're looking at, obviously, 2010 plan, we're looking at a base plus potential new customers, new products, when those rollouts will happen. And then we also always take a close look at the WAVE business and make sure that we're not seeing a few service contracts not be renewed, and if we're having any decrease in some of that business, then hopefully obviously the K-RAS kits in the European market will help maybe some of that decrease slow if we're giving them other applications to use the instrument for, too.

And then one last question, on the European market, what is the market over there, and how do you compare to the competition?

Yes, the market for K-RAS in Europe is equivalent to the market in the US. Now, you're looking at mainland Europe, collectively. But there is roughly the same number of colon cancer patients in Europe as there are in the US, roughly 200,000. And the kit pricing based over there for sequencing that's done is equivalent to the US, at least in our studies and evaluations. So we expect it to be the same size market.

And I think the difference is, quite frankly, the model is more efficient in Europe right now in that if you were going to receive Vectibix or Erbitux, by government decree they won't pay for those drugs for the patients, and therefore the patients won't get them, unless they have a K-RAS test done. And I know in the US that the FDA has, through retrospective studies, has recommended that K-RAS testing be done, but there are inefficiencies yet in the US as who controls the actual tumor when it's excised, and so the testing isn't 100% yet. We hope it will grow to that level, and we certainly hope to help it grow. But in either case, these kits sell for roughly $150 to $300 a test, and the reimbursement in the US is $500 a test, although the reimbursement level is immaterial in Europe. But, so, it's also a big opportunity over there.

And in your opinion how do you compare the --

I forgot that. Thanks, Larry. That's a good reminder. We -- just like we have reported before with our finished clinical trials, we are going to put out marketing materials now, and the clinical trials showed, as I have discussed before, that we are more sensitive than Sanger sequencing and that we continue to see the specificity problem with our lead competitor, and that's good news for us, because in this case with K-RAS if you report a false positive, that means that patient would not be given drug, and in the OSI Pharmaceutical AACR poster they showed that some of those patients that were detected as positive for K-RAS by the competitor's kit, that they actually responded to drug. So we know those are clinically false positives. So, obviously, we will use that in a selling -- a competitive selling environment.

Okay, and then my favorite question, how are you comparing to Sequenom nowadays?

Sequenom. You know, the most important thing for us is to make sure that, for example, in the NuroPro assay, that we do the clinical evaluation that I noted as taking time and that we make sure that those clinicians support our results and that we publish, and we publish in appropriately important journals, and that we therefore basically guarantee the performance of our methodology. And we take that approach to every assay platform and assay that we bring to the laboratory. So I would like to say that Cold-PCR would excite investors and that we would begin to see [$500,000] to $1 million, or, say, $100 million market cap growth. But we'll wait patiently as those applications develop. But, again, I think, as we just heard from Mike's question, we have the technology platforms and development activities and licenses in place now to begin to secure and complete some of those opportunities.

Thank you, Craig.

Sure, Larry.

Thank you.

(Operator instructions).

We have a follow-up question from Matt Arens, with Kopp Investment Advisors.

Yes, just one follow-up here, the neonatal screening area seems to be such a nice fit with the technology you have with Cold-PCR. It's a market that's already fairly developed. The need is well understood. I would like to hear maybe just a little bit of discussion about where you see that fitting in as a priority, because that seems like that might be a fairly straightforward way to push this technology forward and get something that could be commercial in maybe a little bit quicker time frame than some of the other approaches. Maybe you could just discuss that, please.

That's a great question, Matt. I can tell you that I started business development on what we think are one of the licenses that would be necessary in that application, and so it's real time. And beyond that, we haven't even had a chance to discuss either with the inventor or with some other potential collaborators whether this is one that we want to pursue ourselves and have the bandwidth to pursue or if we need to go find some help with another clinical group.

And I think it's going to be that latter, so that we get the work done much more quickly than if we were to slot it in behind our cancer work in the space. But we are certainly applying more scientists in our Gaithersburg group to Cold-PCR than we have had to date. If we had more resources we would apply more resources to more applications here, because I think certainly from your comments I agree with you that Cold-PCR could be revolutionary for us.

Great. Well, exciting possibilities. Thanks for the follow-up question.

Absolutely. Thanks, Matt.

Thank you.

(Operator instructions).

It appears we have no further questions at this time. I'd like to turn it back to our speakers for any closing remarks.

Thank you so much for participating in the great questions, and we look forward to speaking to you at the end of Q4.

Thanks, everyone.