Precipio Inc (PRPO) 2010 Q2 法說會逐字稿

Welcome to the Transgenomic conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. (Operator Instructions). As a reminder this conference is being recorded August 12, 2010.

I would now like to turn the conference over to Kim Golodetz. Please go ahead, ma'am.

Thank you. This is Kim Golodetz with Lippert/Heilshorn & Associates thank you all for participating in today's call. Joining me from Transgenomic are Craig Tuttle, President and Chief Executive Officer, and Brett Frevert, Interim Chief Financial Officer. Also, Chad Richards, Senior Vice President of Sales and Marketing will be available during the Q&A session.

Earlier today, Transgenomic issued financial results for the second quarter of 2010. If you have not received this news release or would like to be added to the Company's distribution lists, please call Lippert/Heilshorn in New York at 212-838-3777 and speak with Alexis Miletko.

Before we begin, I would like to say that certain forward-looking statements will 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 in Transgenomic's periodic filings with 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. Transgenomic expressly disclaims 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.

With that said, I would like to turn the call over to Brett Frevert. Brett?

Thank you, Kim. Good afternoon, everyone. I will review with you our financial results for the three and six months ended June 30, 2010. At a high level, there are a couple items to note. First, sales were down while we did maintain our gross margin rates. On the expense side, we managed very well our typical G&A expenses, but we were hit hard during the quarter with the expense of foreign currency valuation. At a more detailed level, today we reported net sales for the second quarter of $5.1 million, which is a decrease of 7%, compared to the second quarter of 2009. Sales in our Instrument segment decreased 8% to $3.9 million, while sales in our Lab Services segment were down slightly at $1.2 million.

Within our Instrument segment, we break the sales into two components, bioinstruments and bioconsumables. Bioinstrument net sales include the instruments, as well as the service contracts, and have decreased 4% to $2.2 million. We sold 14 of the WAVE instruments in the second quarter of 2010, compared with only six in the second quarter of 2009. The WAVE average sales price was higher in 2010, versus 2009. We did not sell any of the OEM instruments in the second quarter of 2010, compared to the three we sold in the second quarter of '09. Average sales price, of course, can be affected by a number of factors, including the type of instrument, the geographic mix, and our foreign currency exchange rates. Bioconsumable net sales for 2010 second quarter were $1.6 million, which is down by $267,000 compared to last year.

The Lab Services business includes both our molecular clinical reference laboratory and our pharmacogenomics research service business. The molecular clinical reference lab sales were down 8%, compared to '09. Average revenue per test decreased 9%, due to the mix of the tests performed and the contractual adjustments due to higher Medicare and Medicaid test volumes. The decrease in average revenue per test was slightly offset by a 1% increase in volume. Pharmacogenomic research services net sales grew 23%, totaling $310,000. These sales are project based so they are likely to be lumpy quarter to quarter. Existing signed contracts have approximately $600,000 of potential net sales remaining. That's our backlog. In addition, we currently have around $6 million in proposals outstanding, compared with the $2 million disclosed on our first quarter call. We see significant tune opportunity here for our pharmacogenomic research services group. Please remember, however, that both of these figures are based on estimated number of samples from our partners for each project. Actual results can vary significantly from the estimate.

As the project goes through the process, samples received can be more or fewer than what was originally estimated. We do require change orders when the samples increase to give us the opportunity to update the projections. But on the flip side, we may not know if there are going to be fewer samples until we are further along in the process and we do not penalize a partner if the samples come in lower than estimated. We have seen situations where the final work may produce net sales significantly higher than the first signed contract. And likewise, we have closed a project out with significantly less net sales than originally projected.

Total gross profit during the second quarter was $2.5 million or 49% of net sales, compared to $2.7 million or 48% a year ago. In the Instrument business, gross margin for the quarter was flat at 54% compared to last year. The Lab Services division had gross profit in the second quarter of $418,000, or 34% of net sales, an increase compared to the 31% gross margin a year ago. We are reporting a net loss for the second quarter of $1.1 million, which compares with the net loss of $730,000 for the same period last year. Operating expenses were $3.5 million in the second quarter of 2010, which is an increase from the $3.4 million for the same quarter last year. Note, however, this included $424,000 of foreign currency revaluation loss in 2010 or nearly $0.01 a share, compared to only $152,000 in foreign currency revaluation loss during the second quarter of 2009. Excluding this foreign currency loss, operating expenses are actually down $145,000. Decreases include lower stock option expense as well as lower research and development costs.

Moving on to the results for the six months ended June 30, net sales were flat at $10.5 million for each of the periods this year and last year. Net sales for our Instrument business totaled $8 million, compared to $7.9 million in 2009, an increase of 1%. Lab Services for the six months ended June 30, were flat at $2.5 million. Gross profit was $5.4 million or 51% during these six months compared to $5.5 million or 52% during the same period last year. For the six month period ended June 30, 2010, we reported this net loss of $1.5 million, compared to a net loss of $1.7 million in the same period last year. Operating expenses during the six month period included $476,000 and $390,000 of foreign currency revaluation loss, which increased the expenses for the six months ended June 30, 2010, and 2009. Without the impact of the foreign currency losses, operating expenses were $6.3 million for the six months ended June 30, 2010, compared to $6.8 million for the same period in 2009, or a $500,000 decrease.

We are closing our research and development facility in Gaithersburg, Maryland, and expect to take a charge of $0.2 million during the third quarter. As of June 30, 2010, we have cash and cash equivalents of $5.4 million, and working capital of $8.9 million. During the six months ended, we used $27,000 of cash for operating activities, and $126,000 for asset purchases which was offset by $42,000 in proceeds from the issuance of common stock for employee stock options. Working capital decreased from December 31 by $1.5 million. For more detail, please refer to our MD&A and our 10-Q, which will be filed tomorrow.

That concludes my financial update. I would now like to turn the discussion over to Craig for some comments on the business before we open it up for questions.

Thanks, Brett. I would like to add my thanks to everyone who has joined us on this call or on the webcast. As a follow-up on Brett's commentary, our Q2 financial results were not as robust as we had anticipated, and they were impacted by both the decline in the Euro as well as lower consumable and service revenue. This, in spite of a very strong Instrument sales quarter. We have relatively a good quarter in Lab Service revenue as well. As I mentioned we had a strong quarter for Instrument sales with 14 WAVE systems placed during the quarter. Instrument sales would have been even more robust had a multi system order been completed, but as is often the case in the current economy, the sale was delayed. Our instruments and bioconsumable sales combined were $3.9 million during the quarter, which is down 8% from the prior year, but this decline was due to an unexpected shortfall in service contract revenue and consumables revenue. We have not experienced that shortfall in consumables revenue previously at quarter end. For the service contract revenue, we still anticipate that these delayed service contracts will be realized. And we were quite pleased with the total number of WAVE systems that were sold.

Although revenues from our molecular laboratory and pharmacogenomic services were little changed from last quarter, some of this was due to a short-term quality problem, which slowed everything down at the end of the quarter, along with a shortfall in some of the samples we had anticipated receiving from a pharma partner. But we did grow the pharmacogenomics business by $100,000 over the previous quarter but that was offset by a billing error. Currently we've committed projects, as Brett discussed, for a considerable amount of revenue and a large volume of new business proposals out for review and hopefully approval. There are no guarantees that we will realize all of these proposed studies but both our backlog and committed business volumes from our pharma partners continues to grow sharply, and our pharma partners are keenly interested in our testing capability and certainly our new COLD-PCR technology.

Now one key measure that we are taking to further address the cost structure of the Company, as Brett noted, is that we are closing our Gaithersburg facility and consolidating all of our R&D efforts under Dr. Katherine Richardson in our Omaha lab. We don't anticipate significant impact on our new project time lines due to this transition, but we will, of course, focus heavily on a swift and complete integration process. We believe that this action will provide significant savings and give us the benefit of a more concentrated R&D group and lab support team working together in Omaha.

Turning now to our initiatives to grow the business, I'm speaking to you today from Washington, DC where I'm attending the annual planning meeting for the Early Detection Research Network, or EDRN, which is a division of the National Cancer Institute. EDRN is charted with funding and promoting research in clinical studies to accelerate the development and validation of technologies and biomarkers for earlier detection of cancer. My efforts at this meeting are to expand relationships with key clinical centers and academicians where we can pursue clinical evaluations for testing our licensed COLD-PCR technology across several cancer types. At this moment, we are discussing clinical validations of COLD-PCR with our combined cancer mutation kits in pancreatic, lung and colorectal cancers through the EDRN.

Speaking about the science of biomarker discovery, there continues to be a great deal of interest in personalized medicine with expectations for exciting market growth in this area. Although personalized medicine is of keen interest to all parties across the clinical setting, particularly patients who will benefit most from better and earlier detection technologies, personalized medicine in the form of companion diagnostics are most important at this time to pharmaceutical companies, as these new biomarkers and diagnostic technologies help support success in their drug development efforts, drug selection and patient targeting. This expanding capability will lead to better patient selection and drug and treatment outcomes as patients are receiving the best drug options at the right time in their treatment. We have positioned ourselves to play an important role in these advances.

Also significant for our pharmacogenomics business, we have recently obtained a proposal request for a worldwide clinical trial mutation testing program, which would include our China facility. This is the first study to reach this stage in China and should undoubtedly lead to similar studies through that laboratory and country in the future. During the second quarter, we continued to work on developing our COLD-PCR technology which is able to locate genetic mutations with sensitivity, as much as 100-fold greater than competing technologies. If you recall, we licensed this technology from the Dana-Farber Cancer Institute in September of last year. Our expectation is that COLD-PCR can be developed as a companion diagnostic for selecting the appropriate drug for patients based on testing mutations in their blood or other body fluids rather than in the tumors directly. We are advancing this technology, and are currently working on two projects identifying mutations in EGFR pathway genes with a pharma partner right now. Our goal is to develop a kit product that will be able to detect mutations in very complex genes such as P53 and, of course, other key cancer regulating or promoting genes, and to use the combined technologies, both COLD-PCR and our mutation detection test kits, based on SURVEYOR, to uncover cancers much earlier than possible currently.

Also during the quarter we continued to refine our platform technologies for use in drug discovery and diagnostic screening and I'm pleased that in recent weeks we have achieved a number of milestones. In Europe we concluded the first sale our new K-RAS test kit which uses our SURVEYOR nuclease technology. We continue to work on developing additional test kits to add to a panel that we are developing to test for resistance to cancer treatment with epidermal growth factor receptor inhibitors. We also have plans to continue extending this menu of important cancer gene mutation assays and combining it with COLD-PCR.

We are working on obtaining a CE-IVD mark in Europe for the kit, and this certification is for an in vitro diagnostic that will allow more users such as clinical labs across Europe to adopt the technology and expand the permitted use from research purposes to commercial use for the kit. We are almost finished with this process and we will realize this milestone shortly.

We also met one of the milestones mentioned during our last conference call by completing our initial commercialization of the ARISk autism risk assay. Since that time in Q2, we have also completed our first sales of this test. As a reminder, this test determines if there's an increased risk of autism in a newborn with an autistic older biological sibling. According to the Centers for Disease Control, one in 110 newborns in the US will develop autism. As a result of these high numbers, we expect demand for this test to be significant, because early intervention can have a significant impact on the outcome for those affected with autism, and because currently the average age for diagnosis of the disorder is 53 months, an age too late for significant intervention. We have our ARISk web site up for quick access by patients, families and clinicians, and our sales team is now actively selling the assay country-wide. We initially launched the assay at the United Mitochondrial Disease Foundation meeting in June and at the Autism Society of America meeting in July. This latter meeting was a gathering of parents, physicians and educators of autistic children and other advocates to discuss and disseminate the newest information and key services available for treating the condition. The interest in the ARISk test at these meetings was understandably quite high.

We now plan a more aggressive launch and are preparing a mailing to developmental and behavioral pediatricians to support our upcoming participation at the Society for Developmental Behavioral Pediatrics meeting next month. We believe this autism risk assay represents a significant market opportunity for our molecular lab business. And while it's still early in the test launch, I'm delighted to report that the test is running exactly as expected. In addition to performing the tasks in our CLIA certified laboratory and selling the assay through our field sales organization, we are working alongside our licensed partner for the assay, IntegraGen to more effectively market the assay. We also expect these selling efforts to drive higher sales for our chromosomal micro array test as a combined test panel for identifying autism.

Before I open the call up to your questions, I would like to reiterate that we are pleased with the current molecular diagnostics position and potential for future growth of these businesses. We continue to expect both our K-RAS assay and our autism test to be additive to 2010 revenues. We are hopeful that some of our pharma programs will be expanded to larger clinical trials this year, thus enabling us to show additional growth in pharmacogenomic services revenues throughout the year. And we expect to complete further validation studies on the use of COLD-PCR to detect key cancer gene mutations and circulating DNA in blood and other body fluids as a means for earlier cancer diagnosis. We also expect that as we further develop COLD-PCR, the number of development projects and clinical evaluations that we have with pharmaceutical companies and clinical validations of the technology with academic partners will increase. We further expect to be able to add to our portfolio of tests and services via acquisitions and/or end licensing. An area that has been extremely busy for us over the last few months. We continue to manage our SG&A expenses tightly and I will note that Q2 expenses included some modest costs associated with these M&A activities. We see considerable opportunity in terms of acquisition candidates becoming available in the current market and we expect to be very opportunistic and disciplined in acquiring some important new assays and technologies.

That concludes my prepared remarks for the afternoon so I'll now open up the call to your questions. Operator?

(Operator instructions). Our first question is from the line of Chrystyna Bedrij with Griffin Securities. Please go ahead with your question.

Good afternoon, Craig, Chad, Brett. Thanks for taking my question. Obviously, great results in the pharmacogenomic area and great backlog there. Maybe you can just provide additional detail on the types of tests that are being requested and are there any interesting trends developing. Or perhaps you can review the key strengths or the confluence factors that are driving business there and the proposals in the pharma space. And why you think they are interested now. Is it because of more marketing or is it other factors, or is it the menu that has changed? Because that's a big jump in the pipeline. And how it relates also to personalized medicine, treatment selection and why a more sensitive answer is required. And just the changing dynamics you may be seeing in the drug development area.

Well, that's a thorough question. I'm happy to go through that progression. Number one, we definitely equate some of the success with marketing. We have been in the marketplace now for over four years meeting with pharmaceutical companies and discussing our key sensitivity capabilities around DNA mutation detection. And that message is finally, with a lot of hard work, it's finally being recognized as important. In fact, we are much more sensitive, as I said before, than typical Sanger sequencing. And the impression at some point, or some time ago in the market, was that if you couldn't see a mutation by Sanger sequencing, it didn't exist or it couldn't be validated and I think I have gone through that previously on this call. So that was the situation four years ago.

Since that time, several new drugs have been approved whose choice or selection is based on the mutation profile of the patient. And, in fact, in particular with colon cancer and one drug, Cetuximab, if that patient is mutation positive, they actually do worse if given that drug. So now it is becoming increasingly important for pharmaceutical and for therapy selection that one understands clinically the relevant mutation profile of a patient. So that's accelerating interest in mutation studies.

And third, the interest stems from our ability to use a more sensitive technique, which is COLD-PCR. So we are now getting projects using COLD-PCR, and actually funding from pharmas to develop methods and particular assays around key cancer genes in blood. And so obviously the assumption is, and the hypotheses that we are trying to test, are for deeper sensitivity with COLD-PCR that is at least equivalent to what's in the tumor as it's discovered, and then hopefully for us, of course, through EDRN and other types of organizations and academic partners to do studies to show that we can find cancer potentially earlier. So, I think all of that is leading up to much more interest in our pharma business.

And the other side of that is we do have some progression in those contracts from what was discovery projects to validate that our techniques work to now into clinical trials, and the trials are then, of course, larger. And the only issue with those trials that we are then dependent on the pharmaceutical partners for their recruitment, success and efforts. So if their recruitment lags the expectation, then we have that impact on our revenues.

That's helpful. And just a follow-up, if I could?

Absolutely, please.

Just switching to the WAVE system, same thing. It's a good quarter and a pick up. And in terms of -- can you describe maybe who the recent buyers are? Is it the same buyers that switched? Where are they based geographically and do you see any interesting trends developing there? Also any specific applications that may have changed and is the audience changing?

Clearly the bulk of our business remains the committed cancer consortia labs that are doing BRCA1 and 2 testing as well as other inherited diseases in Europe. Hence our euro pricing issues. And Brett will be looking at what we can do on the arbitrage area going forward. Yes, we had a bulk of instruments go to the Middle East this quarter. So there's increasing interest for an instrument system that we see in the Middle East, at least, that's highly validated and utilized in more than one geographic area. So with the key success of that system in Europe, that's helping to validate the purchase interest for the system in the Middle East and certainly sales continue in Asia, as well. So that's what we are seeing with the WAVE business.

With the Hanabi business, we were dependent on laboratories and now we are talking about professional laboratories that have capital budgets and they manage them tightly. If they are expected or request proposals for systems and we expect to sell them in a given quarter, we are dependent on their management for approval of their budgets, their capital budgets and that's the impact that we had this quarter. It was almost $500,000 of impact. So, it happens.

Thanks, Craig.

(Operator instructions). Your next question is from the line of [Steven Laris] with Wells Fargo. Please go ahead with your question.

First of all congratulations on a very trying quarter. But I just wanted to add, on expenditures, a question here. You certainly have a limited marketing budget here and yet you are marketing the WAVE system in the Middle East and China. Why is that, how does that occur? Do they contact you directly? You are certainly not sending people here?

That's a good question. Good afternoon, Steve. In terms of Asia, we actually have a Ph.D who is our VP of sales for that region. He spends half his time in China and covering distributors that we use across Asia. And so those sales come with very close contact between this individual and those customers and the distributors. In the Middle East, we actually also sell those products through distributors, but we make contact with them through our European sales organization, typically, and in this case for the bulk of the instruments we sold this quarter at genetics or genomics-based conferences. And that's quite routine. That's what's happened throughout the history of the WAVE. I hope that covers why we're in those markets and certainly how we cover them from a sales basis.

Would you say that the personalized medicine now is beginning to grow again or is it kind of forgotten on the investment horizon right now? Are you starting to see new sales leads coming from customers that you normally wouldn't have contact with?

That's a great question and the answer is, yes, and that's where we expect to see an uptick, or continued uptick, in our pharma business. Right now there are 500 drugs that we're aware of that are in development for tyrosine kinase inhibition by EGFR inhibitors, Cetuximab or Erbitux, some of these really important cancer treatment drugs. And so with that large bulk there, the pharmas, as I mentioned earlier, are now very interested in the mutation profile of their patient, because they do understand not only that they do have to develop these drugs in a more focused patient population, but that the drugs will pass approvals much easier if they have a high activity rate. And thus for the pharmas here it's very important for them to find a way to select patients that will respond. So that's why -- this is a double edged sword that's driving, in my belief, that interest from pharmas. On the other hand, since drugs are not approved so quickly, and compendium diagnostics, as we call, it are very new, there's only a few on the marketplace and as such, I think this is an area where, as you point out, the investment community hasn't seen that uptick that we are seeing in the number of clinical trials that are ongoing.

Thank you.

Our next question is from the line of Chrystyna Bedrij with Griffin Securities. Please go ahead with your question.

Hi again. Just a follow-up, it was part of my first question. I just was wondering if you could just discuss what you think, the large potential proposals that are out there, the big jump, and the time line in terms of potential conversion of those proposals.

Sure. Quite frankly, I think, Chad and I just looked at it a short while ago and I believe we've got just under $2 million of contracts that we started into, and are yet to complete. And in terms of projects out, again that several million dollars figure, I can just give you a flavor. For one, we are unique in our capability with WAVE to use it to find all the mutations that exist in a sample and do so very sensitively. That's why we continue to pick up these projects. In this case, we have a customer that approached us to do that with for example, a contract that we haven't even talked about the whole value of it. We just want to see how it goes. But there's a contract that's maybe $300,000, and if that portion of the contract and the project is successful, then there's a follow on that's maybe a couple hundred thousand and then that would move into a full clinical trial, which would be well over $3 million. It could be as high as $6 million depending on how many samples come into that trial. So that's what we see on a couple of the cases that we are working on. And certainly with 20 of the top 25 pharmas that we are doing work for, we are seeing continued project requests and project revenue for small projects that if are successful, then move into a clinical trial. And so, we still look at some of these clinical trials to be $400,000, but they'll take 18 months to complete. So that's the flavor for what we see on the pharma business.

That's very helpful. Thank you.

(Operator Instructions). There are no further questions at this time. Please proceed with your presentation or any closing remarks.

Thank you. I want to thank everyone for participating in the call today and for your questions. I do want to add that I will be presenting at the upcoming Rodman & Renshaw Global Investment Conference in New York next month and I hope to see some of you there. Have a good day and thanks.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.