Precipio Inc (PRPO) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to today's program. At this time, all participants are in a listen-only mode, but later we will have the opportunity to ask questions during our Q&A session. (Operator Instructions) Please also note that this call may be recorded and I'll be standing by should you need any assistance whatsoever.

At this time it's my pleasure to turn the conference over to Mr. Brett Frevert. Please go ahead sir.

Thank you. This is Brett Frevert, CFO of Transgenomic. Thanks to all of you for joining our call today. With me are Craig Tuttle, President and CEO, and Chad Richards, our Chief Commercial Officer.

Today we reported financial results of the first quarter of 2011. If you did not receive this news release or you would like to be added to our distribution list, please call Donna Christian in our Investor Relations department at 402-452-5416. I would like to extend a warm welcome to anyone who is listening on the webcast. I hope you had a chance to look over the press release.

Before we start to review the results I'll take just a couple minutes to get the administrative matters out of the way. This conference call will be archived and accessible via both phone and the Internet. Please refer to the press release, or you may get our website, transgenomic.com, for further details.

We're here to discuss our first-quarter 2011, financial results 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 come to fruition. 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 our other 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 of this presentation is rebroadcast, retransmitted or redistributed at a later date, Transgenomic is not responsible for reviewing or updating the material. Thanks for your patience.

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

Thank you Brett. Thanks everyone out there for participating in today's call. Brett, Chad and I look forward to covering our first quarter of 2011 results with you.

I'm happy to initiate this call on a very positive note. We are pleased to report our top-line revenue for the quarter of $7.5 million with what we believe is equally important, a near break-even modified EBITDA in Q1, which provides a solid indication that our business model and value proposition are continuing to gain momentum in the market.

This solid quarter of revenue growth was primarily due to the addition of the newly acquired diagnostic business from Clinical Data, which includes a suite of proprietary genetic commercial tests for inherited cardiac disorders, which we have branded our FAMILION reference lab business.

We are well on the way to meet our goal of integrating both of our CLIA lab facilities, as noted in last quarter call, and our cost reduction and integration efforts across both organizations, while maintaining our top-line revenue, has resulted in a dramatic swing in EBITDA earnings.

Equally important, we have worked hard with our new FAMILION team to maintain high retention of our current customer base, as well as to continue to expand aggressively with new customers. We have effectively managed the transition, and I'm happy to report that our testing volume has returned to the same run rate as it was just prior to the transition.

We were able to complete sales on some key OEM instruments and wave systems in the quarter as well. On balance, we see global economic activity growing, and we're well-placed to benefit from a pickup in capital expenditures. As such, we expect this level of instrument sales to continue throughout the year.

One area of the business that I want to highlight is our pharmacogenomics services lab, where we perform mutation testing services for many pharmaceutical, diagnostic and device companies. Our announced total revenues for Q1 were $270,000. More importantly, we succeeded in contracting for a significant number of high-value projects during the quarter, which will swell this business to $1.5 million or more in the second quarter, plus significant revenue throughout the remainder of the year.

Some of the newly contracted projects that are multimillion dollar clinical trial studies with projected time frames of 18 to 24 months, which should provide balanced growth in this area of our business. Equally significant, we saw a mix of project contracts for both our standard high-sensitivity mutation testing, based on our wave and surveyor technology, being used to augment standard sequencing analysis, as well as of several new projects with top pharma company partners for our Ice COLD-PCR and BLOCker-Sequencing technologies.

We continue to believe that Ice COLD-PCR and BLOCker-Sequencing will become integral technologies for pharma companies' oncology drug trials due to a variety of issues. And we believe that these technologies will also enable us to pursue diagnostic approaches for earlier detection of cancer, monitoring therapy effectiveness, treatment selection and recurrence monitoring.

Our strategy remains to offer these technologies as part of our service offerings through our pharmacogenomics lab business, and to develop new assays that are requested by pharma partners for proprietary tests that we run in our labs, as well as simultaneously developing tests as kit products that can be sold directly to clinical and research end-users for much broader adoption. We are rapidly achieving critical mass operationally, and the commitment among our employees has never been higher.

I'd like to turn the call over to Brett now to highlight our financial progress in the quarter.

Thanks, Craig. Again, good afternoon everyone.

I'll briefly review the financial results for the 3 months ended March 31. We reported net sales of $7.5 million. This is an increase of 37%, or $2.1 million, compared to last year. Sales in the lab services segment were up 196% to $3.8 million, which is due primarily to our acquisition of the FAMILION family of tests. The lab services business includes both our molecular clinical reference lab, the CLIA lab, and our pharmacogenomics research lab, Pharma.

CLIA sales were up 270% to $3.5 million; this, of course, is where the FAMILION tests were included. Pharma for the first quarter net sales were down slightly $59,000 to the $270,000 at Craig mentioned. These continue to be project-based, so they can jump around a bit quarter-to-quarter, and as Craig mentioned, we'll see a pretty strong second quarter in the Pharma lab.

Within the Instrument segment, we break sales into 2 components; the instrument, and the consumables. Instrument sales, which includes instruments and the service contracts, decreased 22% to $1.8 million. We sold 3 fewer instruments in the first quarter compared to the same quarter last year. Consumable net sales, though, were up $67,000 compared to last year, to $1.9 million. Total gross profit for the first quarter of 2011 was $4.2 million, or 56% of net sales, compared to $2.9 million, or 53%, a year ago.

The Lab Services division had gross profit for the first quarter of $1.8 million, or 48% of net sales, compared to $483,000, or 38% gross margin, a year ago. In the instrument business, gross margin increased to 64% compared to 58%.

We did report a net loss available for common stockholders for the first quarter of $3.0 million, or $0.06 a share, compared to a net loss of $324,000, or $0.01 a share for 2010. These numbers include 2 significant items; one, we received a $230,000 federal grant under the Qualifying Therapeutic Discovery Project. It's an R&D credit that we received from in the fourth quarter of last year that we reported and we received this additional $230,000 this first quarter.

We also had non-cash items of $2.5 million related to the FAMILION acquisition, namely $300,000 of amortization of the intangibles, and another $2.3 million related to the preferred stock, which is really an interesting situation. The accounting rules require us to value the components of the Class A convertible preferred stock and the warrants, which is driven heavily by the price of the common stock into which they can be converted.

So as our stock price increases, the accounting rules deem us to have an expense, even though we will never pay cash for this liability. In fact, to exercise the warrants, the investor would pay Transgenomic another $3 million. It's interesting, it's frustrating, but it is the accounting rules.

From an operating basis, we continue to be very frugal; closely managing the expenses. Our SG&A did increase from $3.3 million to $4.9 million this year, or $1.6 million, but again, this included $300,000 of amortization expense. The rest of the increase is due to expenses related to FAMILION. Note however, that on a modified EBITDA basis, the prior businesses were losing an average of $2 million quarterly. We brought this to near breakeven for the first quarter.

At March 31, we had working capital of $6.3 million, including cash and cash equivalents of $3.2 million. For more specific details, please refer to the MD&A and the 10-Q, which we anticipate filing Friday. This concludes my financial update. I'll turn it back over to Craig for some comments on the business.

Thanks Brett.

Well, I am sure that you've heard about personalized medicine many times as the concept for how cancer and many other diseases will be diagnosed and treated in the future. The premise is straightforward; treating patients with the right drug and the right amount of that drug at the right time. In reality, personalized medicine is generally still a theory, and very few diagnostic or drug products fall into the true category of personalized medicine.

Paradoxically, personalized medicine has been with us for many years. For those of you who remember, microbiologists and infectious disease physicians have been practicing true personalized medicine for the last 20 to 30 years for infection control. The diagnostic tools for determining bacterial identity and resistance have not been as robust as needed, but the technology has been available and in use for this long.

But these results occur generally too late in the disease process, since the testing required laboratorians to grow these organisms in culture, and challenge them with antibiotics to find those that inhibited growth.

Now, new genomic techniques are beginning to offer better and much faster turnaround times in infectious disease diagnosis and treatment selection, demonstrating the power of genomic technology evolution. In cancer, however, due to the complexity of the disease, it has taken much longer than anyone would have predicted for true personalized treatments and earlier diagnosis to make their way into the clinical regimen.

There are still very few companion diagnostic tests that provide useful treatment selection or diagnostic value. An example of one, however, is testing breast cancer patients for HER2/neu and then treating these patients with Herceptin if they are positive for this test.

KRAS and EGFR status in colon and lung cancer are also employed, as patients with EGFR mutations are known to respond to some of the most recent inhibitor drugs, whereas KRAS mutant tumors are known to be resistant to some of the same drugs, and thus performing this test has improved treatment outcomes in these diseases.

Transgenomic is moving to become a leading personalized medicine company in several ways. One, we are offering our alter sensitive mutation detection technologies to pharmaceutical companies for determining the mutation status of cancers for drug discovery and clinical trials.

Examples of gene mutations we look for routinely include key cancer-involved genes such as the EGFR, KRAS, partner NRAS, BRAF, P53, PIK3CA BHL and many others. We are also converting the assays that we performed in our labs into assay kits that customers can run at their clinical sites where patients are being treated.

Our first commercial kit for mutations in KRAS was launched last year, and we followed that up with mutation kits for additional genes that are known to confer resistance in several cancers. These newest kits were for mutations in BRAF and PIK3CA genes. All of these kits are now commercially available.

3 key benefits of our kits are that first, they offer the best sensitivity in the market; second, they scan for all the possible changes in these genes known to confer resistance to the newest drugs, rather than competing kits which must develop an assay reaction within their kits for every possible mutation that could occur within a specific gene region. And third, these mutations are confirmed with Sanger sequencing, the gold standard in DNA mutation analysis. These key strength to our methods set them apart from others in the marketplace.

In addition, the final shortcoming of competing mutation detection kits, besides their lower sensitivities, is that they are more expensive to use because they must design the kit to include these reactions for every possible mutation that is important in that cancer, whereas our kits will detect any mutation that occurs in the gene. This is an added strength to our technology and commercialization.

We have also licensed and introduced Ice COLD-PCR and BLOCker-Sequencing into our testing quiver. These combined technologies now allow us to begin testing for these resistance-conferring mutations in cancer patient's blood, rather than just in their tumors. This is important because noninvasive samples such as blood, draw a much higher uptake for screening and monitoring in these patients than a forced tumor biopsy.

We believe that this will open up a significant market opportunity for us for using our tests with the pharma partners for patient selection into oncology drug trials, for higher response rates in these trials, and therefore earlier adoption and approval of their drugs.

We will also soon begin testing to understand if these techniques will be a cost effective and useful means for determining how effective a cancer treatment is. By monitoring these patients while they undergo treatment, which is far easier by using blood than biopsying their tumors repeatedly. We will be using these assays and blood to look for the emergence of new mutations that will show if a patient's cancer has recurred and perhaps has a new resistance pattern.

Longer-term we also believe that these technologies can be used to screen for and detect developing cancers much earlier than currently possible. Of course, this will require deep clinical validation studies with leading academic cancer researchers and drug companies. But our early testing with pharmaceutical companies and their drug development process and clinical trials should shorten this and afford us an earlier view to patient testing from participation in the drug clinical trials.

Our ultimate goal is to have easy-to-use, ultra sensitive cancer detection and drug selection assay kit supplied with an automated instrument system which we can distribute worldwide.

We've also begun working with the National Cancer Institute's division dedicated to earlier cancer detection biomarkers and techniques. This group is called the Early Detection Research Network, and through an NCI-requested recruitment process, I have just been nominated and appointed to lead the industry forum group within the EDRN.

Another way we are a personalized medicine company is through our FAMILION lab business acquisition. This business is a reference lab that tests for inherited cardiac disorders.

Cardiologists use these tests to help them determine what treatments or interventions are needed in these patients and families who are positive for these mutations, since these mutations are generally inherited and can reside in other members of an affected individual's family. So this testing leads to intervention based on the patient's genetic makeup.

The process to commercialize these technologies and products includes multiple paths. One is our continued and expanding efforts with pharmaceutical companies to employ our Ice COLD-PCR and BLOCker-Sequencing into an increasing number of trials. As I've mentioned before, we have a number of early contracts already completed or underway with several large pharmaceutical companies to prove the accuracy and utility of these technologies for measuring cancer gene mutations in blood.

We are also in discussions with academic partners to begin looking at these technologies for detecting cancer in earlier-stage disease, and we have begun submitting for grants to support these efforts. We have a number of new pharma projects contracted as well to apply these technologies to their clinical trial patient pulls.

Another factor that is driving our growth in cancer trials is the recent understanding within pharmaceutical companies of the FDA's requirement that pharmaceutical companies supply gene mutation data employing Sanger sequencing, rather than other mutation-specific technologies, with their drug FDA submissions.

This has led to an immediate uptick in our Pharma testing business, but also suggests that Ice COLD-PCR and BLOCker-Sequencing will aid us in increasing this business dramatically, since both work in standard Sanger-sequencing procedures, and obtain data in the Sanger-sequencing format, which the FDA is very comfortable with; they understand it well and they expect it in drugs and missions. But our technologies are also more sensitive than any similar Sanger method.

Again, we believe that this is another of the key drivers that will be make these technologies well established and desirable now with key pharma partners, and then more broadly in the clinical markets, since they can be run immediately on any Sanger sequencing platform, which almost all clinical labs have experience with today.

And finally we continue to pursue a variety of license and M&A opportunities to continue bringing new genomic tests into the company that will expand our menu, and provide us with proprietary assays for our current reference lab businesses, as well as new areas within those businesses. Of course cardiac and oncology opportunities are our highest priorities.

A final area that will be evaluating shortly with appropriate partners will be applications of Ice COLD-PCR and BLOCKer-Sequencing in prenatal and circulating tumor cell applications. At this time, Chad, Brett and I would like to take any questions that you have.

(Operator Instructions)

Christina Bedridge. Once again, Christina Bedridge, your line is now open.

Oh hi Craig, Chad, Brett, sorry I had it on mute. Congratulations, it's really looks like you had a turnaround quarter here.

We are very excited with both the revenue and EBITDA performance, of course.

And just a couple questions if I could?

Absolutely.

Just if we could go right to your COLD-PCR business and obviously congrats on the uptick in the Pharma testing business. Can you just provide some clarification maybe as to why COLD-PCR and BLOCker-Sequencing will be desirable, is desirable, and you're seeing this uptick, as well as, eventually the potential to convert these Pharma projects into your clinical test opportunities, and then ultimately for broader use kits?

That's a great question, and my response is going to be thorough, I hope, but it's going to involve some explanation. So number 1, as I mentioned, Sanger sequencing as what's required me the FDA for a variety of the new cancer drugs that are being submitted. The FDA's very comfortable with the format, the data output and the testing systems. And so it's simply a requirement and so drug companies that are looking at using other mutation detection techniques are also having to duplicate their work with Sanger sequencing.

The problem with Sanger sequencing, as we've spoken about many times, is that it has about a 10% sensitivity cutoff of the mutation to the normal DNA in a sample. COLD-PCR completely overwhelms that and enriches for mutations at a significant level, sometimes as much as a thousand-fold, and potentially even greater. So we have a much more sensitive technology that runs exactly on the same equipment that Sanger sequencing runs on, so the data output is the same, but much more sensitive, and in fact, only showing in some cases, just the mutations rather than the wild type, based on how COLD-PCR works.

So the reason that we believe COLD-PCR plus BLOCker-Sequencing become very widely used and a clinical advantage as well as a diagnostic advantage is that you get the entire range of mutations that can exist in any sample, it's not a kit that's designed specifically for a single mutation, and it's the only technique that can provide the same level, or better sensitivity, than the newest next or third-generation sequencing technologies.

Another advantage of COLD-PCR , in that competitive scenario against the newest generation sequencing techniques is that, you don't get an overwhelming amount of data, you get specific data to the mutations that you're looking for and you enrich for them.

So we think that that's just a very powerful mechanism such that will be used to screen patient's mutations, tumor-based mutations in blood, rather than in the tumor, and as I mentioned, the newest information coming out in cancer treatment is that -- a thought that patients should be re-biopsied routinely to measure the impact of the drug on the actual tumor. So instead of just imaging the patient to see a tumor shrink or not, the newest thought is to recommend biopsing that tumor repeatedly. As you know, biopsies are a difficult and invasive procedure, painful and present the risk of infection amongst many other difficulties, in addition to the cost. In comparison with COLD-PCR, you just need to take a blood sample; just like a simple diagnostic procedure that's done every day.

So that's the key that we see for both selecting patients for clinical trials, as well as to monitor them during treatment. The other advantage that we think COLD-PCR will provide is, again, using the same test, same technique and applying the right gene set and look for these mutations in circulating DNA in blood as an early screen.

And then I also mentioned in my prepared remarks about using it to monitor patients, not just for treatment effectiveness to show that the mutation goes away, which shows that cell line is dying under chemotherapy, but also to measure if that mutation or a different mutation comes back. So again, the power of COLD-PCR, you don't have to know what the mutation is. But if we see another mutation in KRAS or another mutation in one of the other follow-on pathway genes that confers resistance, this is a patient that's going to recur and not respond to treatment.

So all of these are extremely useful keys to monitoring and managing these patients in the future, and we think COLD-PCR is the ideal technology to do so.

And I'll add one more thing, because it works on standard sequencing equipment, there are a variety of automation solutions currently available and in use for years in the market that make it a very robust and easy-to-perform and high throughput, highly automated technology as well.

To me it's amazing, and to as much as you can comment, can you say how your's stacks up against Keogen assays or vermillion tests or others like exact scientist that are screening for mutations in colon cancer?

Yes, that's a good another good question. So one of the issues with cancer diagnostics and/or treatment selection techniques right now, whether they're mutation-based or Proteomic based, first of all, there's a treasure trove of research being funded and ongoing, but there are no winners, so to speak.

If you look in the Proteomics area, the assays like the vermillion test has a reasonable sensitivity, it can tell you you have cancer if you have cancer, but it has a very poor specificity; 50% or less. And that means you can't really tell someone they don't have cancer, whether they do or do not. And so it's not as cost effective a technique.

We don't have the right mutation panel in mind right now for screening patients for ovarian cancer, but once that's discovered, clearly we can do so in blood, and we hope that we can do that much earlier and much more accurately than you can with proteomic approach. And not to throw darts at every other technology out there, that's just the state of the technology.

If you look at the exact test for colon cancer screening, the goal of that test is to tell a patient, we think you might have cancer, meaning high sensitivity, and certainly as well not as high a specificity, and the goal there is to get patients to have a colonoscopy. That test is stool-based and I think the market knows how successful stool-based tests have been to date.

So in terms of COLD-PCR, we're fairly convinced that you could perform the same test and look for the mutations that are being analyzed in the exact test, but to do it in blood; be a much easier specimen to acquire, laboratories are much more used to it, and they don't turn their nose up at it.

Agreed. Just a couple more quick questions. Just out of your pharma work, what you think is potentially commercializable from those projects and maybe just some initial target markets and potential for those if you can share that?

I can tell you our long-term goal has always been to make pharmas aware that we can test in blood rather than in the tissue. So there have been a small number of studies, and we're in discussion for more, to verify that those mutations that we find in blood are the same ones that are in the tumor.

My opinion is that we might find even more because we're able to sample more cells, or more representative cells in blood than we can in a tumor, because you can't always get the whole tumor, and if it's lung cancer there's a variety of other tumors, and there's -- it's not clear that each tumor's heterogeneity is unique or is not unique, so you could be looking at different mutations in the same patient. And I think we'll see that with COLD-PCR.

So it's safe to assume that markets that currently exist like that at Keogen are going out to HPV you can do better and those are markets that --

We think that that's an application. So yes, we think there are viral applications for BLOCker-Sequencing because you can actually discriminate between the strains exceedingly well, because you enrich for one and don't sequence the other.

But I think coming back to the utility of COLD-PCR and the disease process, or the disease monitoring and treatment, you can use it in patients to select them for a trial as a drug company, you know you're going to have better outcomes in the trial, you're going to have a higher effective rate and probably get the approvals done sooner and more cheaply. Once you have those patients under treatment, we can monitor the treatment , as I said.

So we think that that's a substantial opportunity, and that's just the number of cancers that exist to date. So it's easy to calculate that, and there are other models in the market you can look at from the screening side, like the PSA market, or on the side of treatment selection with HER-2/nue testing, even that's a $100 million market on 200,000 breast cancer patients a year. So each of these are targets that we can apply COLD-PCR to. So, no one can predict that we'll win in any or all cases, but we sure think that it's the best technology to go after many of them.

Okay thanks a lot. Just one last question. Just switching over to FAMILION for a second. Just how is the integration going? Is it done?

And then maybe what type of guidance on growth do you foresee there, and in terms of the core FAMILION business, maybe you can just share the types of tests or biomarkers you might be adding to this sales menu? And given the activity in Fc gamma, which I find very exciting, are you going to expand the oncology focus?

I'll give you three answers I think there was three questions. Number one, we expect continued growth in the FAMILION business. Our rough calculation is that currently 25% of the patients in the US that potentially have the disorder are being tested, so there's another 75% of the market roughly that isn't tested. And we continue to see the effects of that by children and teens that, unfortunately, succumb to their inherited disorder on a ball field somewhere, and are found dead.

Unfortunate.

Yes. Absolutely. So we know that that's -- so there's a test where you really have a positive intervention opportunity.

We just announced last week an extension in our cardiac panel for FAMILION with an important test, when we were at the heart rhythms meeting, which is a key meeting for the channelopathy disorders that we test for. We are getting -- and you asked for integration. The integration's going quite well, I think remarkably so in terms of everyone's participation in really cost effective operation.

So, I apologize for the noise in the background, our air conditioner went out and I think they're removing it above us in the building right now as I speak. But -- so that -- this EBITDA performance for both companies I think is remarkable in Q1. We were anticipating that would happen by Q2, so we're a quarter ahead of ourselves and we just feel great about that, and I thank all of our employees for working diligently to achieve that. Going forward, we expect -- we're not giving guidance at the moment, other than the total revenue line for the year, so clearly there is growth in the FAMILION business that we anticipate .

But were also looking to secure other assays. You mentioned Fc gamma, there was an important opposition to the Fc gamma patent in Europe that was just overcome this week against one of the largest pharmas, and so --

Can you share which one or no?

At the moment ,no. But the outcome of that is that clearly we know that Fc gamma is an important technology, or important test, and we are already continuing to recognize -- well we continue to recognize the revenue from the royalties on it, but we are offering that test now, and hope to secure some business from the clinical side, the clinical testing side if you will, pharmaceutical company's clinical trials, and again we're still the only company that can commercialize that.

And there are a variety of publications that support it, and will continue to add to that to prove the utility of that test. So and clearly we expect revenue in that test but as you launch one of these, it's really an adoption activity of reaching the physicians and informing them so that they do begin ordering the test, and that takes a while with any genomic test. Were less worried about the reimbursements for it. Because it --

Now that you have --

So we have 200 million covered lives within our portfolio of managed care contracts, and a great team that has established very good contact and communication across those many managed care partners.

Okay great. Thank you so much Craig.

Sure of course.

Michael Zimba.

Let me -- I've got a question; help me with my math on the first quarter. Let me first say that there are several of us that we've been involved for 2 or 3, so were not a what-are-you-going to-do-for-us-tomorrow type -- don't mean it that way.

But the way I did it was back out the business deal -- the new acquired business was doing like 3.5 over the last three quarters or so, 3.6 according to their fourth-quarter discontinued operation, and I used 5, which is really historically near the low anyways on the old-line business. So I came up with like 8.7, area, 8.5 and that's actually good for the first quarter. So, where am I looking at it wrong, I guess? I thought we'd be at least over 8 somewhere, and I understand as you consolidate the business and put it all together I thought we pretty much run flat in place of the revenues and accelerate from there.

I can help you with the math. First of all, what clinical data reported was not what they would be paid for performing these tests, they reported gross sales.

So they reported what we call MRSP, or their suggested list price, and that was never going to be collected, ever, and they knew that. So we never considered that; what we consider this is more a just short of $1 million a year run rate collectible diagnostic business, and what we did see in the first quarter, so you're right about the business as you look across it, we were roughly $5 million in total sales and the remainder came from the FAMILIAN side. That business was down a little bit in the first month. January, as you remember was a really harsh winter month. The lab was shut down a couple of times because folks couldn't get to work, but more importantly, patients couldn't get to doctors and get tests ordered and drawn and performed.

There's always a first of the year effect in reference lab businesses, as well as the rest of medicine, where patients co-pays and deductibles have to be started again. And that happened in the business. That's why we've tried to stress that, while that did occur, we're happy to see the business got up to just sort of $1 million in March. So that's our typical run rate for the business and we want to keep it there and grow from that. So that's the math.

Okay are you still a 34 - 38 million for the year then?

Yes.

As you told Christina, you don't want to give guidance, but It's been like a couple years with COLD-PCR and some of these other things and in our group, we're more numbers people, don't understand the technology. We understand the basics of what you're doing, saving money and pinpointing treatment and that, which saves money in the long run.

But we're trying to get at is as far as the lift off on the COLD-PCR, lift off and revenues as we go forward, once you get the businesses together, going into the end of the year and into next year and, once again, I don't want to quote [griffen] but they have what I would call dynamic revenue growth over the next couple of years. Is that -- I know you don't want to confirm or deny it, but what can you say about that? Are we at that point where some of the things you've been working on are ready to lift off significantly?

We certainly believe that Q2 will be well over $8 million in revenue. I mentioned the pharma business uptick, and actually just a small part of that is COLD-PCR and BLOCker-Sequencing based, to date, but we expect that to expand significantly and quickly.

One area that I didn't mention that we are working on and should have a big impact, is in circulating tumor cells. That's kind of -- one of the hot areas in cancer research, and we reported at the American Association of Cancer Research meeting in collaboration with Dana-Farber partner company in France that has a great little device for finding, or securing, circulating tumor cells and our technology works great on them.

But when you get down into the nuts and bolts of forecasting that this test is going to be 200,000 tests next year, that's a step-by-step process of getting a pharma, confirming with them that we have the technique, repeating tests with them to prove that it works on their patient pool, and then getting -- securing a clinical trial for it. So, I'm sorry to say, I don't have a model of exactly which tests, when will be adopted, but I certainly know that we have several million dollars in pharma revenues contracted for the remainder of this year that will run in through next year. And we continue to -- I guess the good news is, every company that we've approach, and we've approached just a few of the large pharmas, when we approach them with COLD-PCR, Ice COLD-PCR and BLOCker-Sequencing, to date we've always gotten samples in.

So they're excited about the technology, they know that they need to look at it and understand it and do something with us. Where that will really rebound our business is when we get their clinical trial in the cancer drug, so some of that is just timing.

And speaking of they are excited about it. It seems your technology -- what you have and what we understand about it, there's some real sex to it, a real wow factor to the standpoint in fact you might by now have more interest from analysts, and I suppose, the one's on the east coast think that Nebraska's a foreign country, but --

Come here in the winter and it could be.

I was born in Minnesota so --

I understand -- we're never quite that bad.

But I mean -- what is the-- [griffen] is excited obviously, and they seem to understand and have knowledge of it. People look at it, and say well they maybe want in, they may want to see the numbers come in before they get more excited about the company. And I -- compare it -- it's been compared to Sequinome before, which I look at them, their revenue and that, they're like 14 times revenue and they've always had a strong analyst community following them; they go 8 - 10. But this is also an advantage too of course, pickup accumulated position here before your better-known.

So when you look at Sequinome and compare the two companies, there are actually a lot of similarities. And so yes I think that we're cheap in comparison and you should pick up more now rather than wait 'til we're $40 a share or $22 a share. There'll be two key differences --

Let's start with 5 and will work our way up.

Exactly. They have a genetic analysis business, they sell an instrument system that's quite old in the market and is certainly aging and is slowing down in revenue, and they're still selling reagents that run on that system, and they've opened up a CLIA lab and a pharma services business. But they don't have anything that provides the level of sensitivity that we have with COLD-PCR.

So for their -- so where there's a dissimilarity there is the run up that occurred in their stock when it was announced that they had this down syndrome or trisomy assay that they can do in maternal blood. And of course initially they could or they reported it and they really couldn't completely, and they had many problems. But they were given the whole total market by the analysts. So I find that remarkable that analysts can say, okay, if every pregnant woman in the US gets tested for this, which would never happen, that will be $800 million and they got that valuation in their market cap. So I always question that and felt it wasn't believable, but that's okay. We're glad to see the biotech model applied to one of our sister companies.

What we think will happen with COLD-PCR is that we'll get some solid applications that will stick and that are involved in drug clinical trials, and then we'll make it as a kit, and begin selling it. We'll go through the FDA process as we need, and we can sell that in Europe and in China and there's already interest there as well. So part of what we look at at COLD-PCR is an evolutionary process for technology.

We had to spend a lot of time understanding it, learning it, and, quite frankly, improving it, and if you look at publications in the marketplace right now, there are several labs that have tried COLD-PCR and abandoned it because they're getting one- and two-fold enrichment simply because they don't do it anywhere near as well as we do, and we're getting 1000-fold enrichment, sometimes 10,000-fold enrichment, over the wild type DNA. So were getting remarkable results. Were actually hoping that kind of stays silent so that it doesn't get duplicated and we can get the kits out into the marketplace so that folks can adopt it and use it that way.

There's been some recent discoveries including the new -- well I will get into the technical details. But the new process in Ice COLD has remarkably improved the technology yet again. So we've had three evolutions of COLD-PCR and the most recent works the best, and as such, we are already taking that and forming an Ice COLD-PCR/BLOCker-Sequencing kit. So that's in development and that should be in the market as soon as possible, certainly by third quarter. And all of a sudden, people are -- laboratories are going to be able to gain the same level of performance that we can.

Let me just close by saying that as we followed it through the last 2, 3 years when we've been involved, with you there. We admire the -- you haven't had a lot of money when you got there, most of it had been from the IPO and been blown through, and so to try to do what you're doing and keep a limited amount of money on hand is -- we admire that anyways, and if you make it work from here, it will be a remarkable job.

Thanks. Certainly our plan.

Bruce Galloway.

Couple of questions; number 1, as he touched on the money side, you're kind of skinny on cash right now, $3.2 million, and I suspect and hope that the second quarter will be cash positive with the increased revenues and increase projects coming on. But what -- you've got this note due to the Clinical Data, [sellers], for the FAMILIAN products. What's going to be the cash situation going forward, and is there any need to do financing? Also, are there any abstracts that you could share with us on the Ice COLD-PCR since it's got such incredible sensitivity, and it's so significant?

To that latter question, Bruce, I certainly could share the poster session from AACR because it touches on a study that we did for OSI pharmaceuticals that they wanted us to publish and show the extreme sensitivity that we got. Another component of that poster is with Merck, and Merck wanted us to show that because it was great data. So some of my responses are colored by the fact that pharmas really like this technology.

So is Merck kind of like backing the thing? Are they getting behind it?

OSI has been very closely collaborating with us, of course they were just recently acquired by Astellas. So there's a whole new corporate culture to work through. They are really great people but there's new folks involved, or will be new folks involved, and that takes awhile to work through. But every company that we've spoken to out in the field, with our sales reps or at a conference or a scientific conference where we show it, we get a great response. And everyone tells us they really need to look at it, and they're just waiting to get samples or start a study with us.

To come around to the money issue, $3 million's a little thin, but we've been living on very thin cash reserves here for a while, and we do believe that were going to start throwing cash out throughout the rest of the year. And were always looking at vehicles whether we need cash on a short-term basis through a line of credit, and/or that we have some assets that we can sell. But, we're staffed at a point where we can still commercialize and grow the business and it's not significant staff hires that we'll need to drive further growth. One thing that's going on right now is, of course, we're integrating our CLIA lab into the lab in New Haven, and the resources that come out of that from the lab side are all trained genomic scientists.

So were putting them to work on this uptick in the pharma business or into R&D because we need to develop a number of COLD-PCR blocker assays and then kits. So everybody is fully engaged and we didn't really have a shrinkage in the experienced genomic lab team, which is actually good for us. We're able to leverage however the billing side and the customer support and deep relations side of the FAMILION acquisition, and that team. So, no plans right now to raise some cash, but you can always come by.

And what about the note, the Clinical Data note?

Well that note's factored into revenue plan, or rather our financial plan for the year. We service the debt in Q1, and we will continue to do so.

Bruce, the big note is interest-only.

Yes.

Okay. And then -- I noticed about a $10 million principal note. Does that balloon out in a couple of years?

Yes, it's 8.5, interest-only paid quarterly. I got the note -- obviously the notes out on Edgar, I can shoot that over to you if you want? Or obviously, it's in the footnotes in the 10-K also.

And what the percentage that [kirk] owns at this point, fully diluted basis?

Fully diluted, as if converted it'd be somewhere in the mid 20s.

That's with warrants, as well.

Yes, if you take the warrants and everything. Because it's got the two layers; it's got the Class A preferred that would turn into about 10 point some, and then the warrants to ripple those through a preferred and then convert would be another 5.

So that's always a source of cash, the warrant exercise which are in the money, solidly --

We did the transaction around 56, 58, and now we're, today were at 90 or at least were.

Closed at 90 today. So we closed at 90. So that uptick caused us a couple million dollars in expense, fortunately non-cash.

It should only go up from here.

Absolutely.

All right good luck guys.

Thanks Bruce.

I will say, before we get the next question that the strength of COLD-PCR and BLOCker-Sequencing are just now -- I mean, BLOCker-Sequencing, Katherine Richardson and our R&D team, they just discovered that it must be 3 months ago. So we've just had a just a very short amount of time with that technology under our belts, and again, everyone we show it to just goes crazy about it.

So again I'm sorry that we haven't put numbers to the opportunities, but it's one of these -- we shoot and we score. So each pharma is bringing samples to us to look at, and we're talking about the top pharma's. So I think, bear with us a couple of quarters and then we can begin to really dollarize it.

And there are no further questions at this time.

Great. Well thank you all. I trust we shared with you our excitement for our future, and we certainly look forward to providing an update during our Q2 conference call.