Precipio Inc (PRPO) 2010 Q3 法說會逐字稿

Welcome to the business update conference call. At this time, all participants are in listen-only mode. Following Management's prepared remarks we'll hold a Q&A session. (Operator Instructions) As a reminder, this conference is being recorded December 6, 2010.

I would now like to turn the conference over to Kim Golodetz. Please go ahead.

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, Chief Financial Officer, also Chad Richards, Senior Vice President of Sales and Marketing, will be available during the Q&A session.

On November 15, Transgenomic reported third quarter financial results and on November 29 the Company announced the acquisition of select assets of Clinical Data. If you have not received these news releases 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 Naletko.

Before we begin I'd 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 and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to a variety of matters including, but not limited to, the payment by the Company of any additional consideration, the timing and anticipated completion of the pending asset acquisition of the biomarker business, other statements that are not purely statements of historical fact. These forward-looking statements are made on the basis of the current beliefs, expectations and assumptions of the Management of the Company and are subject to significant risks and uncertainty.

Investors are cautioned not to place undue reliance on any such forward-looking statements. All such forward-looking statements speak only as of the date they are made and the Company undertakes no obligation to update or revise these statements whether as a result of new information, future events or otherwise.

Factors that could cause actual results to differ materially from the forward-looking statements on this call include, but are not limited to, any operational or cultural difficulties associated with the integration of the assets being acquired, potential adverse reactions or changes to business relationships resulting from the announcement of completion of the pending asset acquisition, unexpected cost, charges or expenses resulting from the pending asset acquisition, litigation or adverse judgments relating to the pending asset acquisition, risks relating to the consummation of the contemplated asset acquisition including the risks that the closing conditions will not be satisfied, the failure to realize synergies and cost savings in the transaction or delay in the realization thereof, any difficulties associated with requests or directions from governmental authorities resulting from their reviews of the transaction, and any changes in general economic and/or industry specific conditions.

Additional factors that could cause actual results to differ materially from those described in the forward-looking statements are set forth in the annual report on Form 10-K of the Company for the year ended December 31, 2009, which was failed with the Securities and Exchange Commission on February 25, 2010, under the heading Item 1a Risk Factors, and in subsequent reports on Forms 10-Q and 8-K and other filings made with the SEC by the Company. 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 Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act with respect to such statements. With that said, I'd like to turn the call over to Craig Tuttle. Craig?

Thanks, Kim, that was a remarkable mouthful, I appreciate that. And good afternoon, everyone. First of all, I want to note how excited we are about the acquisition that we announced last week noting our upcoming purchase of Clinical Data diagnostic business. This deal not only catapults Transgenomic to a new level with respect to total revenues and strong future growth, but also allows substantial synergies and cross pollination of our technologies and resources. We anticipate completing this transaction before the end of the year with the rapid integration of both businesses following the close. I'll talk more about this acquisition in a moment and about our progress in our continued quest to become a leader in the ongoing development of personalized medicine. But as we have not spoken with you about the third quarter yet, I'll turn that call over to Brett Frevert, our CFO, who will discuss our financial results. Thanks, Brett.

Thanks, Craig. Good afternoon, everyone. I will briefly review with you the financial results for the three and nine months ended September 30, 2010. We did report net sales for the third quarter of $4.4 million, which is a decrease of 12% compared to the third quarter of 2009. Sales in the Instrument segment decreased 18% to $3.2 million, while sales in the Lab Services segment were up slightly at $1.3 million.

Within the Instrument segment we do break our sales into two components, bio instruments and bio consumables. Bio instrument net sales, which include instrument sales as well as the service contracts, decreased 32% to $1.4 million. We sold four WAVE instruments in this third quarter of 2010 compared with five in the second quarter of 2009 and we did not sell any OEM instruments this year. The WAVE average sales price was lower in 2010 versus 2009. The average sales price of course is affected by a number of factors including type of instrument, geographic mix, as well as some foreign currency exchange rates. The bio consumables net sales for the third quarter were $1.8 million, down 3% compared to 2009.

The Lab Services business includes both our molecular clinical reference lab and our pharmacogenomics research services. The molecular clinical reference lab sales were flat compared with 2009. Average revenue per test decreased 4% due to the mix of tests performed and the contractual adjustments due to some higher Medicare and Medicaid test volumes. The decrease in average revenue per test was of course offset by an increase in volume. The pharmacogenomic research services net sales grew 28% compared to 2009, totaling $346,000. These sales are project-based, so they're likely to be lumpy from quarter-to-quarter.

Total gross profit during the 2010 third quarter was $2 million, or 46% of net sales, compared to $2.8 million, or 55% a year ago. In the Instrument business, the gross margin for the quarter was up one point at 59% compared to last year. The Lab Services division had gross profit in the third quarter of $168,000, or 13% of net sales, as compared to a 44% gross margin a year ago. This decline in gross margin is due to some increased staffing as well as some higher operating supply costs.

We did report a net loss for the third quarter of 2010 of $898,000, compared to a net loss of $366,000 for the comparable period 2009. Operating expenses were $2.8 million for the third quarter 2010, which is a decrease from the $3.2 million for the same quarter last year. This included $161,000 of foreign currency revaluation income compared to $127,000 in FX income during third quarter of 2009. Excluding the FX gains, operating expenses are still down $275,000. Decreases in operating expenses include some lower R&D costs, which is offset of course by the restructuring charges related to the closure of the Gaithersburg facility.

Moving on to the nine months ended September 30, 2010, net sales were down to $15 million compared to $15.5 million for the same period last year. Net sales for the Instrument business totaled $11.2 million compared to $11.8 million last year, a decrease of 5%. Lab Services revenue for the nine months were up slightly to $3.8 million from $3.7 million, and gross profit was $7.4 million, or 49%, compared to $8.2 million, or 53% during the same nine months last year. For the nine-month period ended September 30, 2010, we reported a net loss of $2.4 million compared to a net loss of $2.0 million in the same period last year.

Operating expenses during the nine-month period included $16,000 and $262,000 of foreign currency revaluation loss, which increased expenses for the nine months-- for both nine-month periods. Without the impact of the FX losses, operating expenses were $9.3 million this year compared to $10.1 million for the same period in 2009, or a $797,000 increase-- decrease. That's a decrease of $797,000 in operating expenses. The decrease is due primarily to lower R&D, some open positions not filled and some lower stock option expenses. As of September 30, we had cash and equivalents of $4.6 million and working capital of $8.2 million. During these first nine months we used $884,000 of cash for operating activities, $166,000 for asset purchases and $15,000 for some financing. Working capital decreased by $2.2 million from December 31, 2009. For more detail, please refer to the MD&A analysis in the 10-Q we filed in November. That concludes my financial update. I would now like to turn this back to Craig for some comments on the business before we open it up for questions.

Thanks, Brett. Well clearly we experienced a lower revenue total than the peak seasonably slower third quarter due to family vacations in the US which affects our Reference Lab business, and business vacation closures in Europe. This trend and the ongoing capital funding issues across the clinical market required the incremental cost savings measures which we have recently taken. Our goal and expectation is to structure the Company to be operating above breakeven going forward. Our additional goal is to create a stronger cash flow positive business and growing business following the closure of the Clinical Data business acquisition.

Before covering more detail on the Clinical Data business acquisition, I want to discuss some of the key activities we have underway which herald some significant growth opportunities both immediate and long term for the Company. I will focus on our efforts in COLD-PCR assay development, some discoveries that enhance this technology and our mutation kit business.

Our strategic objective with COLD-PCR is to develop and commercialize ultra sensitive mutation assessment capability for detecting clinically useful mutations much earlier than currently possible. This involves continued assay target development, such as our recent advance in EGFR mutation detection, as well as further application work, development and patenting of an improved technique that we discovered which dramatically improves the sensitivity of COLD-PCR. The key reward in this effort has been the contracted work on behalf of a pharmaceutical company partner for applying our COLD-PCR technology and enhancement discovery together to measure EGFR mutations in blood. Rewardingly we were able to detect all the mutations present in the samples tested compared to competing testing technology.

In addition to this recent study we have several new contracted studies for other key oncology genes from top pharma partners beginning in first quarter of 2011. And our current total of new proposed business has reached $7 million with COLD-PCR applications and our associated high sensitivity DNA mutation detection skills aiding this commercial effort significantly.

We also continue to make commercial progress with our mutation kit business. We have much more customer interest in our current K-RAS kit offering in Europe following the receipt of the CE IVD registration for this product and the completion of assay application development to a high throughput instrument platform. In addition, we have the next two follow-on assays in field trials in Europe and the US with key resistance conferring mutation assays for mutations in BRAF and PIK3CA genes. Both tests will be available commercially in the first quarter, after which we will concentrate on further extending this menu of tests with the key cancer-related gene mutation assay for P-53 due up next. Of course we are also moving forward to design COLD-PCR kits for these key gene targets as well so that we can offer these tests to our pharma customers and are also able to support sales of COLD-PCR kits to both research and clinical users. Ultimately we expect these kits to be used as key companion diagnostics for new targeted therapies as well as early diagnostic products for finding cancer earlier than currently possible.

During the third quarter we were very pleased to announce Dr. Eric Johnson joining our CLIA Certified Reference Lab as Director of Lab Services. Dr. Johnson will be responsible for leading the strategic vision and managing operations of our molecular diagnostic services lab. He is a noted researcher and laboratory director in the clinical neurology segment and his addition will help drive future growth in this area of our business.

I'd now like to turn my focus to the exciting news we announced last week. Clearly over the past few years we have been positioning the Company to strengthen our capabilities and our two services businesses on top of our long established DNA tools business. Our CLIA Certified Laboratory remains a key focus for long-term success and so we've been evaluating a number of acquisition opportunities to further impact this business. The acquisition of Clinical Data diagnostic business will meet this goal. It will bring to us a truly talented diagnostic laboratory team for proprietary diagnostic assays, a well designed and very efficient laboratory operations group and a world-class billing and customer service resource group. In addition this acquisition also brings novel and patented protect-- patent protected biomarkers, which have already enjoyed substantial clinical validation and are ready to be commercialized both to pharmaceutical and then to clinical customers.

For a quick review of this transaction, we are paying $15.7 million in cash and notes. We will obtain the CLIA Certified Laboratory business in New Haven, Connecticut, which reported revenues of $6.9 million for the six months ended September 30, 2010, based on their suite of proprietary genetic tests for cardiac channelopathies and cardiomyopathy.

Now Clinical Data has done a great job of building the commercial managed care and CLIA Certified Laboratory infrastructure and capabilities to support its currently marketed tests. These include the FAMILION family of genetic tests for inherited heart diseases and PGx predict tests for predicting drug response. The Clinical Data diagnostic business includes the FAMILION family of 11 proprietary commercial tests, contracts with private and government health insurers for test reimbursement with coverage policies that offer access to genetic testing for an estimated 280 million patients, and established academic and medical society guidelines for this testing as well as the heart failure society of America's guidelines which include genetic testing that can be identified by FAMILION tests that detect genetic mutations that cause these cardiac channelopathies or cardiomyopathies. As I mentioned just a moment ago there's also a pipeline of exciting new biomarker assays that are included in this transaction including the Fc gamma receptor family of oncology tests and a drug metabolism genetic test for measuring patients' metabolic status for drugs like Plavix or clopidogrel, the second highest prescribed treatment in the US. We also plan to take advantage of the marketing resources that come with this acquisition and use the team there to continue growing this franchise of cardiac assays as well as aiding our current reference laboratory business.

Let me provide with you some additional details regarding the price of this transaction. With the purchase price of $15.7 million, this consists of $6 million in cash, a 10% three-year $8.7 million note, with a principal repayment scheduled beginning in May 2012 and a $1 million note related to the assumption of certain liabilities for the buildout of the laboratory in New Haven. Additionally, Clinical Data will receive milestones and royalty payments on the successful development and commercialization of new products. In return we will gain from receiving a large percentage of the accounts receivables currently available. And we're working hard to complete the close of this transaction before the end of the year. I look forward to providing more information on this close as it occurs and the many benefits that we will gain from this transaction once completed. And that concludes my remarks, I'll now open the call up to your questions. Operator?

(Operator Instructions) Our first question is from Bruce Galloway with Galloway Capital.

Hi, Craig, how you doing?

Bruce.

Congratulations. It sounds like strategically it's a tremendous fit, but monetarily it's a big bite to chew off for Transgenomic. How do you plan on financing this? And you got to finance it quickly if you plan on closing by year end.

We do. And although I can't comment on the commitment for the $6 million, we're very close to that and should have that completed very soon. Unfortunately, until that's complete I can't reveal the details of it. But I think that, coupled with the note, is the most advantageous structure for this transaction, because when you combine the two businesses and run them on a cash flow positive basis, plus the growth opportunities that we expect from them, I think that that will significantly impact both our market cap and then our ability to raise any money necessary to fund this transaction as well as generating cash to pay back the note.

So what you're saying is that this acquisition is going to be very accretive, as far as the profit and loss of the Company going forward?

That's definitely our expectations, Bruce, for two reasons. One is the ongoing business currently is growing, and it's structured very efficiently with additional capacity to grow even further. And I think equally importantly, the biomarkers haven't been substantially commercial-- commercialized to date, and they can be fairly quickly. And our goal would be to commercialize them through our pharmacogenomic services group, or sales outlet, and then offer those tests from a-- to our pharma partners. And then as tests become validated there, convert them to clinical tests that are run in the laboratory. So we see a two-pronged approach to growth here, whether it be on just a straightforward CLIA play, if you will.

And I'll add to that, Bruce, just to say that the Fc gamma assay is already enjoying substantial pharmaceutical market support to several million dollars, and that's certainly an indicator that this is a key strategic biomarker asset that we believe we can commercialize and also grow similarly.

Okay, it sounds very exciting. Congratulations.

Thanks, Bruce. We're definitely excited about it.

(Operator Instructions) Our next question will come from Larry Hopfenspirger with Hopfenspirger Investment.

Hi, Craig how are you?

Hi, Larry, good to hear from you.

Now on the integration of Clinical Data, with TBIO, if Clinical Data seems to be making about-- or doing revenue about $15 million a year, where does it look like the margins could fall, come into play there? What kind of margins would you have on their business?

Larry, for the Clin Data financials, I'd refer you, or rather I have to say I have to refer to you their publicly issued documents. I think, top of mind, they were running around 60% gross margin, as I recall.

Larry this is Brett Frevert. On November 15, they filed an 8-K that came the closest to separately disclosing the financial results of this piece of their business. They officially deemed them assets held for sale in conjunction with an offering they're doing, and as such, they gave everybody pretty full disclosure with the balance sheets as of March 31, September 30 and then P&Ls for six months ended September 30, 2010 and 2009, as well as for the last three years. So you pull up that 8-K, you start scrubbing through and throwing the revenue and cost of goods into our model, and it looks pretty good with-- they were, of course, in pretty serious growth mode, so they were recognizing some losses. And -- but take a look at the revenue and cost of goods sold margin on that 11/15 8-K.

What do you think about the purchase price? Was that favorable to us and unfavorable to them, or was it a horse a piece on that?

Well, first of all, Larry, I think it's just a great transaction for both organizations, because for us, it allows us to bring a really big punch to our CLIA Laboratory business. But it also has the second prong that I just mentioned about biomarker products that we can commercialize in our pharma business which, again the pharma services business, which Clinical Data's diagnostic business didn't have. In fact, they sublicensed the key marker to be able to do that, since they are a clinical laboratory and not a pharma services laboratory or CRO, like our combined business.

And for Clin Data, I think it's a great deal because they are heavily focused on launching their first key new drug vilazodone, and I won't say a business like this is a distraction, but as a drug development company, they've really got to be eyes on the ball for launching this drug next year. I think their PDUFA meeting is in January so that's their focus, and as such I think we came to terms on a great deal, because it's a really good price, I think. And on top of that they'll share in the success that we get from the biomarker assets that come with this, so I think it was a good deal for both companies.

Looks like we paid about one (inaudible) revenue.

Yes, sir.

Is that a favorable purchase?

I think that's great in today's model of what CLIA Labs tend to go for. But in addition, Larry, I think what's an added benefit to us from this business, to talk about the specifics of the transaction that I can, in terms of their payment reimbursement from insurers, one key difference that they've had just recently that will contribute to the growth of this business is a change in the Blue Cross payments based on the new contracts. So previously, and I have to say, you'd have to look at their test menu and price per test, but most of their assays are priced above $5,000, and as such, with the previous contracting that they had with Blue Cross, based on the Connecticut issue, the reimbursement for those tests was actually being sent to the patient, and then it was supposed to be forwarded along to the company. So with the greater than $4,000 payment arriving, collection has been historically an issue.

But fortunately with some recent contract changes, many of those -- many of the state contracts in Blue Cross are going to begin paying the company directly. So we think that there's going to be an immediate impact. There already has been an impact on higher recovery of the accounts receivable. So I think that adds to the benefit that we would receive with this transaction. So again, all combined, we just think it's a great deal.

You said that they come with a strong sales force, and that they could improve our marketing. Is there anything we can do to improve their marketing and our marketing at the same time?

In terms of marketing, I mean I do split sales and marketing. They definitely have a strong sales group that has grown this business year in and year out, and that's great news, and we rely on that. We look to them to continue growing this business. As it stands currently, they've actually jut added a new assay, and so we hope for growth from that, and they're an experienced team. And on the marketing side they certainly had more resources than we do. And as such that's how we'd look for some complementarity and collaboration. So I look for them to help us grow the business by being able to throw a little bit more marketing [lead] behind what we do.

So with the acquisition of their business, we-- what you purchase from them is that greater than what we already had as far as a value proposition?

I think it's significant because most of their business comes with clear IP [census]. On our side, the IP [census] that we had really are related to the new technologies we're developing and not to the portfolio of assays in our CLIA business. We're second sized in our mitochondrial disorder genetic screening, but that is not a proprietary market or marker. So I think it -- it's significant for us to be able to pick up this great acquisition with that IP coverage.

Any -- with the acquisition, will it increase the rate of growth of revenues from where we were as a percentage, do you think?

Absolutely, we're counting on that, again for two reasons. One, is because that Lab business is growing, but equally because there are several biomarker assets, if you will, our new biomarkers that can be commercialized with increasing levels of sales and clinical validation, and therefore, revenue. So again, I just think it's more than a win-win.

All right, thank you, Craig.

My pleasure, Larry. Thanks for your questions.

(Operator Instructions) Our next question will come from Bruce Galloway with Galloway Capital.

Can you just kind of extrapolate a little bit on the financing on how you're going get this done? I mean if you want to do it by year end, you're probably going to do a pipe. I can't foresee you doing a registration statement over here if you go above like 19.99% dilution. So is it going to be maybe a sale of assets, or a private placement in the public entity?

We'd love to answer it, Bruce. I should be able to clarify that with another press release within a week or two. And that will permit us to get the transaction done. And we don't anticipate a registration by any means.

Okay, great.

Bear with me.

Our next question will come from Matt Arens from Kopp Investment.

Hi, Craig congrats-- my congratulations as well on the acquisition. A follow-up question, if I may, from the previous question. I know you can't give us the specific detail here, but could you speak to whether you are contemplating a pipe transaction transaction?

I can't. Sorry, Matt.

Can't give any detail at this point? Okay, I understand. I just wanted to ask the question.

So we are-- we're very close to the end of a process, and I think investors will be very excited about that outcome.

Okay. All right well we certainly look forward to more detail on that aspect of it.

Absolutely. All right, thanks, Matt.

All right, thanks for taking the question.

And there are no further questions at this time. Please proceed with your presentation or any closing remarks.

Great, thank you. Well, thanks, everyone, for participating on the call today, and with your questions. I hope we've shared with you our excitement that we have for Transgenomic's future certainly with the technologies that we have in development in-house but as well, and more importantly, from this great acquisition that we're trying to wrap up. I look forward to providing an update during our Q4 conference call as well as further information as the transaction moves forward. Thank you.

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