Precipio Inc (PRPO) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, all sites are now online in a listen-only mode. Please note today's conference may be recorded and please note there will be a question-and-answer session later on in the call. (Operator Instructions).

I will now turn the program over to our moderator for today, Brett Frevert. Please go ahead, sir.

Thanks, Blake. This is Brett Frevert. I am the CFO at Transgenomic. Thanks, everyone, for participating today.

Before we review the results, I'll take just a couple of minutes to get some of the administrative matters out of the way.

This conference call will be archived and accessible via both the telephone and the Internet. Please refer to the press release from yesterday or you may go to our website, Transgenomic.com, for more details.

We are here to discuss the fourth-quarter and full-year financial results of 2010 and recent developments for Transgenomic. Our comments today will contain forward-looking statements. Forward-looking statements are any statements made that are not historical facts. These forward-looking statements are based on the current expectations of Transgenomic's management team and there can be no assurance that such expectations will prove to be correct.

Because forward-looking statements involve risks and uncertainties, Transgenomic's actual results could differ materially from management's current expectations. Please refer to the press release, our 10-K, and other periodic SEC filings for information about factors that could cause different outcomes.

The information presented today is time-sensitive and is accurate only at this time. If any portion of this presentation is rebroadcast, retransmitted, or redistributed at a later date, Transgenomic will not be reviewing or updating the material. Thanks for your patience.

With that, I'll turn the call over to Craig.

Thank you all for participating in today's call. This is Craig Tuttle. We look forward to covering our fourth-quarter and year-end financial performance with you.

Also on the call is Chad Richards, our Chief Commercial Officer.

We will also be discussing the recently completed acquisition of the Clinical Data FAMILION business and providing you some expectations for the combined company going forward.

I will note that our Instrument business continues to experience effects from the global economic crisis. And while the markets for our instrumentation appear to be opening up slightly, capital acquisitions remain a very difficult option for labs and hospitals worldwide.

As such, we are not forecasting significant growth in this business over the next few quarters. I will add, however, that we do include our cancer gene mutation kits in our Instrument division. And as such, we do have several potential growth opportunities for our current K-RAS kit as well as the follow-on kits being added to this expanding product line.

But I will discuss our kit business in more detail following for Brett's analysis of the quarter.

On a positive note, both laboratory service businesses grew during the year as forecasted and anticipated. Our clinical reference lab business grew 2% for the year and more significantly 25% in Q4. Even more encouragingly our pharma services business, which we call our pharmacogenomics business, grew by 34% for the year and 96% in Q4.

Much of this recent growth has been fueled by our progress with COLD-PCR and new projects that we are gaining by having this technology working in our lab, with early performance data coming out that is very encouraging. Again, I will discuss these efforts and our expectations for this business following Brett's discussion.

So with that, I would like to turn the call over to Brett to discuss our financial results. Brett?

Thanks, Craig. Again, good morning, everyone. I will briefly review the financial results for the three and 12 months ended 12/31/2010.

We did report net sales for the year of $20 million which is a decrease of $2 million compared to last year which occurred entirely in our bio instrument business. Sales in the Labs segment were up 9% to $5 million.

And to clarify, these P&L results do not include any sales related to the FAMILION business as we closed that acquisition at the end of the business day Wednesday, December 29. Our assets increased from $16 million at December 31, 2009, to $32 million at December 31, 2010 -- primarily, of course, from the FAMILION acquisition.

When we say the Lab Services business, that includes both our molecular clinical reference labs which we call CLIA and our pharmacogenomics research lab which we prefer to as Pharma. CLIA sales were up slightly 2% to $3.6 million. Going forward, this is where the FAMILION results will be included in this first quarter.

Average revenue per test decreased 4% due to the mix of tests performed, especially increases in the Medicare and Medicaid volume and they, of course, generate some lower reimbursement rates. The decrease in average revenue per test was offset by the 6% increase in volume.

The Pharma lab net sales grew 34% in 2010, totaling $1.4 million. These continue to be project-based so they can jump around a bit quarter to quarter. But the increase is due largely to the -- an increase in the number of clients and the average revenue per client. Both good signs.

Within the Bioinstrument segment, we break our sales into two components, the Bioinstruments themselves and the Consumables. Bioinstrument sales, which include the instruments and service contracts decrease 18% to 18 -- $8.3 million. We sold 25 WAVE instruments this year compared to 32 last year, including -- which included a very unusual fourth-quarter 2009 in which we sold 14 WAVE instruments.

The WAVE average sales price was lower in 2010 versus 2009. Average price, of course, is affected by a number of factors including the type of instrument, the geographic mix, as well as foreign currency exchange does have some impact on the average price.

Bioconsumables net sales for the year were $6.7 million, down 7% compared to last year. Total gross profit for 2010 was $9.8 million or 49% in net sales, compared to $11.6 million or 53% a year ago. The Lab division had gross profit for the year of $1.4 million or 29% of sales compared to $1.7 million which was 38% [post] margin a year ago.

In the Bioinstrument business, the gross margin dipped slightly at 55% compared to 57% last year.

We reported a net loss for the year 2010 of $3.1 million or $0.06 a share compared to a net loss of $1.9 million or $0.04 a share for 2009. This included two significant items which merely offset each other. We did spend $800,000 in an acquisition -- in acquisition expenses that ran through the P&L. This was offset somewhat by a $600,000 R&D credit which we received during the fourth quarter.

We continue to be very frugal, closely managing our expenses as we have announced in the past. And for the year, our SG&A expenses, excluding the foreign exchange and the M&A expenses, were down 2.3% to $9.8 million for the year compared to $10 million last year.

Moving onto the three months ended December 31, the fourth quarter, net sales were down to $5.1 million compared to $6.5 million last year with a decrease again due entirely to our instrument business as we had that large sale in 2 -- fourth quarter 2009 that we did not expect to repeat.

Lab Services revenue for the three months increased dramatically, 41% to $1.2 million from $852,000. Likewise gross profit was up 82% to $370,000 last year. The Pharma lab nearly doubled to $387,000 versus $197,000 in 2009 while CLIA grew 25% to $816,000.

As I mentioned earlier, the FAMILION business will be included here in the first quarter.

Net sales for the Bioinstrument business totaled $3.9 million for the quarter compared to $5.7 million last year, a decrease of 31% as we sold only three WAVEs this year compared to 14 during the fourth quarter last year. Consumables likewise dropped 12% to $1.5 million versus $1.7 million last year.

At December 31, we had working capital of $6.8 million including cash and cash equivalents of $3.4 million. For more details, please refer to the MD&A and the 10-K which we will be filing Monday.

This concludes my financial update. I will now turn it back to Craig for some comments on the business before we open it up for questions.

Thanks, Brett. I think this is a great time to update on recent activities and program progress here. Most importantly, we have formally completed the acquisition of Clinical Data FAMILION's clinical reference labs business.

This laboratory performs D&A mutation testing for a variety of inherited cardiac abnormalities abnormalities, all of which are life-threatening. This business is based in New Haven, Connecticut, and brings to Transgenomic a high complexity CLIA lab, highly automated processing capability and a great integrated genomics lab business. In addition to the great team of people that joined us from the lab business, this FAMILION business also has very strong billing experience and tools plus significantly managed care contracts that reach a total of 280 million covered lives.

The lab currently enjoys revenues at over $12 million and we expect to grow this business further. As part of our integration plan for the combined CLIA lab businesses, we do plan to consolidate all of our CLIA lab operations from Omaha into the New Haven lab and have already begun this activity. We expect all of CLIA laboratory operations to combine in New Haven by the end of the summer.

This consolidation includes billing as well as lab operations activities and sample management. Our Transgenomic lab business will benefit from the integration due to the more extensive managed care contracts that we can access as well as the higher capacity lab operations tools that we gain from this FAMILION business.

Another key benefit from the acquisition is one of the biomarkers that was included in this asset purchase. This marker is called [Fcgamma]. It is a critical marker for gauging how effectively the newest class of oncology antibody-based inhibitors will bind to their targets for cancer therapy. We already enjoy a very healthy revenue -- royalty revenue stream from current licensed sales to this biomarker that are sold to pharma companies from the license partner. But additionally we are launching the test through our own pharmacogenomics sales team to our pharma customers, and we expect to enjoy sales from these customers.

In addition, we enjoy exclusive rights to market this test to the clinical market when it becomes a companion diagnostic test.

Finally, our New Haven FAMILION lab team has already launched a new assay for Marfan Syndrome. You may have heard of this disorder before, as it was suspected that Abraham Lincoln suffered from this condition as does the swimmer Michael Phelps. So as you can understand, we are very excited about the addition of the FAMILION lab business into Transgenomic and, as a combined business, we are anticipating revenues for 2011 in the $34 million to $38 million range.

Earlier, I noted that I would discuss our kit activities as well as our further efforts for developing a cold-PCR. In our kit product line we have expanded our assay menu from K-RAS, a well-known mutation marker to include assays for two similarly important gene mutation assays. Our first two new tests are for B-Raf and PIK3CA mutations.

Like K-RAS, mutations in these genes are responsible for conferring resistance capability to colon and lung cancers as well as others.

The next kit products that we have planned include p53, one of the most frequently mutated genes across all cancer types.

The key to our kit strategy is that our technology enables us to find all of the mutations that exist in a sample rather than only known mutations. This is critical for determining mutations that occur across key regulatory genes like EGFR and p53 and would be too difficult or costly to design position-specific gene mutation assays for compared to our technology, which finds all of these mutations, plus adds the advantage of high sensitivity.

We also continue to make excellent progress in our licensed cold-PCR assay development. Our plans here are to develop assays for our internal use which we offer to pharmaceutical companies or that they request us to develop. These assays are then used in discovery or clinical trials that these pharma companies initiate with us.

As an example, we have several such studies are ongoing at present and are in discussion with several other companies to add more. For those COLD-PCR based assays that have broader demand, we plan to follow up by converting them to specific assay kits for testing these key gene mutations in blood and other body fluids.

Targeting detection and mutations in blood requires an extremely sensitive assay technology and COLD-PCR provides this to us. For example, when comparing our K-RAS SURVEYOR scan kit to normal Sanger sequencing, Sanger sequencing usually against missing mutations when the mutation is below 10% of the total normal target DNA.

Our K-RAS SURVEYOR scan kit can see mutations in control specimens down to 0.5% to 1%, but COLD-PCR is able to see mutations to as low as .01%. This has enabled us to develop our assays to find these key cancer gene mutations directly and circulating tumor DNA in blood. At present we have assays developed or in process for a large number of high demand gene targets.

So our strategy here is actually three-pronged. We will develop methods based on feedback from pharma companies who are our earliest adopters. We then convert these assays to methods offered clinically through our CLIA-certified reference labs once oncologists are aware of them and they understand the benefit and proof that we can perform these tests directly in blood, compared to just testing tumors.

And finally, for those assays with significant demand and validation, we will convert them to kit products for much broader use in higher sales levels and which can also be distributed worldwide.

In addition to pursuing funded projects with pharma partners, we are also embarking on discovery projects with academic partners to begin looking at mutant DNA levels in circulating blood and early-stage cancers to gauge the utility of using this ultrasensitive mutation detection approach for potentially earlier diagnosis of cancer.

Of course if these assays prove clinically useful, for earlier diagnosis of early cancers, it may also be used to monitor treatment effectiveness, select treatments from a blood sample rather than a tumor biopsy, and also as a monitoring test to look for emerging drug resistance or cancer recurrence.

We have also initiated evaluation of our COLD-PCR technology with commercial and academic partners to look at mutation levels in circulating tumor cells. We expect results in these two areas to develop during the second quarter.

Of course, validation studies of these kinds will take more thorough clinical testing, validation, and publication before becoming adopted [widely]. But our technologies overcome some of the major technical challenges these applications face currently.

We are actively submitting for grant funding to assist us in pursuing these applications more quickly. Then we are seeking academic collaborators across a variety of cancers.

So I am sure you will agree we have a very robust product development program as well as strongly emerging service business opportunities that can also be converted to research and clinical test kit products.

So at this time, I would like to open up the call for your questions.

(Operator Instructions). [Mark Merrill].

Good morning, Craig. Thank you very much for taking my question. I just have one question this morning. I am wondering if you could speak a bit more about potential growth opportunities in the acquired FAMILION tests? For example, in the media lately there has been discussions about -- for example, testing young athletes in, say, high school or college for heart conditions.

And I'm wondering if something like that could contribute to a few more test sales, or what your thoughts are on the overall market?

That is a great question, Mark, and it's certainly one that we are aware of the media blitz on the problem. In fact, Marfan Syndrome is a condition that fits, you know, has athletes suffer from that they don't know about the condition, and they succumb to that on the playing field, tragically.

So we haven't looked at nationwide programs to approach that yet, although we have just internal discussions on it. One issue is that there are -- outside of Marfan, in particular -- some of the other conditions require a large gene set to be looked at.

Sometimes like long QT, you are talking about -- as we look at it -- several hundred amplicons. So it is very expensive to do this testing and reimbursement is quite high as you might remember the list price on some of these assays from the FAMILION product line are in the $5,400 range per test. And they are reimbursed certainly at a very high rate.

But as you would imagine, a broad testing across all high school and college athletics would be a tremendous boon to our business, one that we would have to worry about the capacity requirements but also one that would be very hard to fund.

So although we look at it as an area where there will be more interest and that always brings more cardiologists to become aware of the test, or the tests, I think there is a growth opportunity there. But like all genetic testing, it the entire market will have to somehow endure the higher prices of that testing.

Okay. Well, thanks for your thoughts on that.

(Operator Instructions). [Christina Badenes].

Good morning. Thanks for taking my call and my question. Congratulations on the progress, obviously. And I know you couldn't report what is going on with FAMILION yet, but as much as you can, can you just provide a little detail on how the transition is going as it relates to any metrics you can review (laughing).

Certainly the most important thing for us in that business has been a seamless integration. And clearly, the team at the FAMILION team, as we call them, along with Chad and his team and Eric Johnson, out running that laboratory have worked very hard on that integration and there has been some outstanding contribution from all of the folks out there quite frankly.

So I call it a seamless transition and I think we are almost universally capable of saying that it's -- the integration is completed. There's always other activities that go on and including the transition of the CLIA testing efforts here into that facility where we are making progress already.

And on the collection side, we have done very well. But we will report that on -- at Q1. And of course the majority of the first batch of collections that we do up to $1 million is ours. So that is cash. That's important.

So that is it. I mean, clearly we expect to continue growing that business. We expect to utilize the tools that were available there to actually be more efficient in our billing and our collections and all of the -- one of the good news items there is that all the managed care contracts have been converted. So that helps as well.

And I think in almost every case, instead of just rolling over the contract, the insurers wanted new contracts to include that business. But it gave us an opportunity to include ours as well. So there will be a growing impact from that going forward.

So we are -- obviously we're very excited by the acquisition. It positions us as a combined company much more strongly. It certainly gives us a bigger forecast opportunity for the combined business, and quite frankly, allows us to spend more time on a couple of the really key significant growth opportunities for us in COLD-PCR in particular, as we transition the CLIA lab tests to New Haven then, and utilize our key step year to develop these tests.

Quite frankly it's, I just returned from National Cancer to institute EDRN, our early detection research network meeting. And there are a substantial number of studies that are becoming established or opening up just now on early-stage cancers. And we are --. These are some of the collaborators that we are already working with or want to work with to determine how well COLD-PCR will do with early detection of these circulating DNA mutations in blood as an early detection technology.

So we are excited about getting those done. We are also excited about the circulating tumor cell study that we have going. So unfortunately, I can't report on some of those. We don't have data yet and (multiple speakers).

(laughing). That was my follow-up. Yes.

You know, they are coming and it makes sense. And so you haven't asked the question yet but I will answer it anyway --.

(laughing).

Circulating tumor cell area, clearly these are very important measures to adopt in -- I think, in cancer detection and monitoring. And the newer technologies are isolating far more tumor cells than were previously collected. If you remember the earliest technology there on breast cancer was measuring 5 circulating tumor cells per ML of blood as a cutoff point.

And the newer technologies are isolating thousands, hundreds to thousands at that same concentration or that same amount of fluid.

So, but the issue there is you are going to have just an overwhelming amount of wild type DNA compared to at least we think and then compare it to mutated DNA in these cells, and so you have to have a technology that's both very sensitive but also able to discern minute changes in a sea of other wild type DNA. And that's what our technology does. So that is why we are very encouraged by that. And we look forward to reporting on the results of these activities quite soon.

That would be great, obviously. I don't know if you can share at all what you think the first assays, or kits coming out of that effort will be. (multiple speakers).

The easiest one to do right now, since we spent quite a while researching it, developing it and then utilizing it in our Pharma services, is a COLD-PCR and Sanger sequencing-based kit product for K-RAS. And so we initiated that program this month and hope to have that ready for beta site testing shortly.

I mean, it makes sense that, one, that's available, every assay that we have can be converted to a kit and our plans to have them available as research use-only kits, RUO kits initially, because there will be a significant amount of work that will be involved in in developing them and validating them. But there will be -- there is a significant pharmaceutical company that we assume then follow on academic research and researchers that will want to look at these mutations in blood. So we will have a kit that we can sell to them to do it which should expand that market beyond where we can reach with just calling on pharma companies.

That's very helpful. (laughing). Thanks, that's great. Just one more follow-up, if I could? And thanks for giving the outline on the product Fcgamma.

I don't know if you can't maybe provide a little more detail, maybe just potentially size up that opportunity? Or is that too early? (laughing).

Well, on the public information side, we get roughly $500,000 a year now in royalty sales from current sales of Fcgamma. So there is already -- and that's just again a small percentage of the total sales that are involved in that assay being sold and studied by pharmaceutical companies. So we would love to pick up some of that business and expand that business to more pharmas.

And then when you look at the converse to that, clearly the indications for that test right now include, of course, cancers were the most current or newest TKI antibody inhibitors are working such as Erbitux and Vectibix from Pfizer. But in addition, Rituxan, as well.

So you have the opportunity there of looking at or having tests performed on 200,000 colon cancers in the US a year. I forget the actual number in leukemias, but your -- or lymphomas, but you can look in that area as well. So I think as we get into this deeper, any more others, at least 500, 600 antibody inhibitors in development right now and each one of those could be a target for having an Fcgamma test performed.

Could this become a standard? I mean (multiple speakers)?

Yes. I think this is a perfect example of what should become a companion diagnostic. There are emerging data that depending on the Fcgamma status of a patient with lymphoma that you can -- depending on your genotype -- you can receive monotherapy with Rituxan or if do not bind these bodies well, based on again on your genetic makeup, that you would need Rituxan plus supportive chemotherapy.

So I think we will get into more of the numbers of that as each indication or each cancer has more data developed on it, but we have active clinical trials in that area. And we will continue to report on it including at AACR this year. The Cancer Research meeting as well as the oncology meeting, ASCO, that occurs the middle of the year.

Well that sounds like a very hot franchise to me.

Yes, absolutely.

And it's low hanging fruit and abundant fruit. (laughing).

Agreed.

(laughing). Alright, well, thank you so much. I guess one more question and I promise to let you go. Just a little bit more detail on pharmacogenomic's backlog and I know you mentioned new projects, and new clients, and anything else you can add there?

Sure. I can. I guess I am [rewarded] in saying that each time we visit a pharma with COLD-PCR and sequencing combined that they're just immediately excited by the opportunity for two reasons. One, because I think everyone has the same issue of trying to detect cancer in the tumor or in blood. In the select patients from the pharmaceutical company perspective they really want to be able to select patients that will respond to their drug in clinical trials which I call that personalized medicine. I think they do as well. Or targeted therapies.

So if you can select patients who are responding well, that is just going to help expedite the approval for the drug and, certainly, expedite the confidence that they have in the drug working within a select patient population. So they are very interested in that. And I will say that for the most part almost every pharma we visited we've gotten immediately interest in a project.

So I don't have a running total today because I just got back late last night from the NCI meeting. But clearly that total list projects is growing. And we do think we will double that pharma business. I said that before. So, we think we will double that business for the year. Both with the signed projects that we have as well as clearly new projects that we expect to get because of COLD-PCR.

Thanks so much. Appreciate it.

(Operator Instructions). Bruce Galloway.

Can you give us some indication on where you stand going forward with your cash flow? I know that you got some payments and some royalty payments, the clinical data. You mentioned a revenue number of $34 million to $38 million. What should that generate in free cash flow and do you have adequate cash to pay those royalties?

And also can you give us an indication on where you stand with your autism test? You've been talking about that in the past.

Sure, I'm happy to answer those questions, although you know we aren't giving guidance on earnings. We do think that we will have EBITDA of about several million in the year. And we believe that we will be able to service the debt and royalty payments due to clinical data from current cash flows or expected cash flows across the year.

At the same time, I wouldn't say that we wouldn't enjoy the benefit if we were able to raise a little more cash simply to drive COLD-PCR activities. Almost every -- I'm not out in the field as much as I would like to be, but I know every day that we call on a new pharma and -- or even a current customer and let them know about our capabilities in that area, they want an assay maybe specific to a drug target that they have. And they want it immediately and if we have it developed then we will get a project.

And clearly the standard players there are EGFR and K-RAS and PIC3CA, p53, etc. So we are trying to develop and extend that line as quickly as possible and in the fall, [our activity] would be to convert them to kits. So if we add more cash we would fuel it into that effort. But at the same time, we think we can exist as we currently are without more cash.

You did ask about the autism test. I will say that a recent evaluation of the benefit of that test shows that it needs more activity on the academic side to really prove its worth. And so we are letting our partner take that lead in terms of further studies. And maybe selecting some more genes that go into the panel.

But I will say autism is a tough test -- or a tough disorder to diagnose and the tools are really still just emerging. I won't consider that a big growth opportunity for us in the short term.

Okay. (multiple speakers).

Clearly where the growth opportunities exist for us is moving COLD-PCR from the bench into more assays that meet the needs of pharma companies and then from there converting that into assays that run in our clinical lab as they become validated. And of course, our new FAMILION business.

Great. Thanks, Craig.

Sure.

And it looks like at this point we have no further questions from the phone lines.

Okay. Well, thanks, Blake. Thank you all for participating in the call today and for your questions. I certainly hope we have shared with you our excitement for the efforts that we have here, and I look forward to providing an update, particularly for the FAMILION business, to be included from when we do our Q1 call. Thanks very much.