Precipio Inc (PRPO) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. All lines are now online in a listen-only mode. Please note today's conference may be recorded. (Operator Instructions) I'll now turn the program over to our first speaker for today, Brett Frevert. Please go ahead, sir.

Thanks, Blake and thanks, everyone, for joining us today as we discuss the first quarter. As a reminder, this conference call will be archived and accessible by both phone and Internet. Please refer to the press release or our website, Transgenomic.com, for further details.

Our comments today will contain forward-looking statements. Forward-looking statements are anything, any statement that is made that is not a historical fact. These forward-looking statements are based on the current expectations of our management team and there could 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-Q, our 10-K and other periodic SEC filings for information about factors that could cause different outcomes.

The information we present 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 its material.

Joining me today are Craig Tuttle, our President and CEO, as well as Chad Richards, our Chief Commercial Officer. During today's call, Craig will provide an overview of our key business initiatives and then I will review our first quarter financial results. We'll then open the call up for Q&A.

Thanks, Brett and thanks, everyone for participating on today's call.

We had a solid start to 2012, centered on all the key elements of our core strategy, which includes, number one, investing in groundbreaking new technologies that will lead to important medical advancements and new product opportunities; two, launching new clinically relevant genetic testing products from this pipeline; and three, expanding our reach of our core instruments, products, and service businesses.

Our PGxPredict CLOPIDOGREL Panel launched late last year remains a key focus. This panel, we believe, is poised to be a major growth driver for us, particularly as Plavix goes generic in just a few days. Plavix, or CLOPIDOGREL, is the most widely prescribed antiplatelet drug used to reduce the risk of death, stroke, and heart attack in heart disease in stroke patients. Its effectiveness, however, is dependent on two genes that code for proteins that bring Plavix through the intestinal wall and then metabolize the drug in the liver to its biologically active form.

The gene for the liver enzyme that converts Plavix to an active drug is called CYP2C19. Patients with a dysfunctional genetic variation in the CYP2C19 gene who are treated with Plavix exhibit higher cardiovascular event rates than do patients with normal CYP2C19 function, because they do not have enough active drug in their bodies. The seriousness of this problem prompted the FDA to add a Black Box Warning to CLOPIDOGREL's label in 2010 to alert physicians and patients about this risk.

Our Plavix panel is unique, as it adds the second key gene called ABCB1 that codes or the production of the transport protein that moves Plavix through the intestinal wall. Reduced function of this protein results in too little absorption of Plavix into the body, again resulting in too little active drug in Plavix patients who then are at risk for drug failure, heart attacks, strokes and death.

Transgenomic is the only Company with both of these genes included in their Plavix response test for determining how well a patient will respond to Plavix. The ABCB1 gene is unique to Transgenomic's panel. It is covered by issued and pending patents owned Transgenomic.

In March we announced the publication of a new study by researchers at Vanderbilt University in the Journal of Clinical Pharmacology and Therapeutics. This study is the third independent study demonstrating the value of testing both CYP2C19 and ABCB1 to identify patients at increased risk for death, stroke and heart attack due to ineffective Plavix therapy.

With the growing body of clinical evidence on the value of testing for both genes, we think our panel will play a more prominent role as physicians weigh the benefit of soon-to-be generic Plavix versus the more recently approved Brilinta from AstraZeneca and Effient from Lilly - two drugs with potential efficacy for patients who are compromised for responding to Plavix.

A critical issue is that 47% of the U.S. population has variations in one or both of these genes and therefore should be offered an alternative to Plavix. This will be an integral message in our communications going forward.

A key element in building demand for the Plavix Panel is education. According to a study that we conducted at the American College of Cardiology meeting, 75% of cardiologists polled were aware of the genetic issue with Plavix and had heard about the Black Box warning and would select a different drug if they knew Plavix would not work.

But only 25% say genetic testing is important. Therefore, our communication campaign will be directed to educating these physicians and patients that better-performing drug options are available if they are at risk, based on their genetics, as determined by our PGx-Predict CLOPIDOGREL test.

We have begun and will further develop training and communication vehicles for reaching physicians to deliver this message that almost half of their patients using Plavix may not be getting the proper benefit and that generic testing is critical to determine who these patients are, so that they can be given the best drug option. There are over six million prescriptions written for antiplatelet therapy a year. The PGx CLOPIDOGREL Panel presents a huge opportunity for our clinical labs business, as a result.

Our Nuclear Mitome test is another panel that saw evidence-based support emerging during the quarter. This test employs the next generation sequencing technology to identify mutations in 448 genes and represents the most comprehensive genetic test available, to date, for mitochondrial disorders.

At the annual meeting of the American College of Medical Genetics this past March, Transgenomic's Dr. Jeana DaRe presented clinical findings from 70 patients tested for these disorders using our test. The finding included details of both the technical performance of the Nuclear Mitome test, as well as the wide variety of clinically revealing results discovered through its use.

Dr. DaRe highlighted two case studies where both patients achieved a definitive diagnosis for the identification of genetic mutations far outside the normal spectrum of genetic testing. The results concluded these patients' diagnostic odysseys, which had encompassed wide-ranging genetic and non-genetic tests, as well as consultations with various medical specialties, all of which had failed to pinpoint their underlying disease. These results are a typical occurrence in patients sent for Nuclear Mitome testing and demonstrate the diagnostics and resource-saving value of this test.

We also continue to invest in our cutting edge technologies. In February, we announced a collaboration with MD Anderson in a study evaluating the use of Transgenomic's high sensitivity ICE COLD-PCR mutation detection technology in the analysis of DNA isolated from circulating tumor cells, or CTCs, in blood samples from patients with advanced cancer.

The newest class of targeted therapy cancer drugs has radically changed cancer treatment regimens. They can effectively block specific mutated proteins in tumor cells, switching off tumor growth pathways. The key to their efficacy is selecting the correct pathway-blocking drugs, which requires knowing which mutations are driving the cancer at that time.

CTCs can be routinely isolated from a cancer patient's blood sample, and after increasing the key mutations that exist in these CTCs using our ICE COLD-PCR, these mutation biomarkers in these CTCs can be analyzed to determine if a patient will respond, or not, to a specific inhibitor drug. CTC analysis may also be feasible when there is no solid tumor to biopsy. Moreover, analysis and blood is much easier and safer than performing and testing a biopsy. It is certainly more cost effective as well.

The issue, to date, has been that CTCs are very rare in blood and difficult to analyze using traditional genomic methods. Our ICE COLD-PCR is a simple assay technology that has the ability to enrich very low levels of mutant DNA, allowing for the detection of tumor biomarkers using standard DNA sequencing techniques and equipment.

The collaboration with MD Anderson will examine the use of ICE COLD-PCR to determine the presence or absence of biomarkers before, during, and after therapy. This information could become a critical guide on the effectiveness of specific cancer treatments, during treatment, and at relapse when a new mutation is driving tumor growth.

The promise of using ICE COLD-PCR in this way will demonstrate - we anticipate - how physicians will select treatment for their cancer patients, track how well this treatment works, as well as allowing these physicians to be on the lookout very early for when a patient's cancer has come back through a new mutation with a new resistance pattern that requires a different drug.

In addition to performing ICE COLD-PCR analysis of tumor specimens for our pharmaceutical partners, our ICE COLD-PCR Assay Kits are nearing the market as well. We've completed beta site trials our K-RAS ICE COLD-PCR kit with EGFR and BRAF kits due to beta sites at the end of this quarter.

This type of research and investment in our technology demonstrates the value of Transgenomic's integrated strategy. We are employing technologies that we develop through our instrument and diagnostic DNA tools expertise, such as ICE COLD-PCR, that can be deployed into our clinical trials group for early research in cancer patients.

Once the link between our test and treatment selection and success has been determine during a drug clinical trial study, we can expand this testing for our pharma customers in larger validating clinical trials and then we can offer this test or test panel through our CLIA-certified reference labs. Finally, we can manufacture the assay or assay panel as a kit product that can be sold worldwide.

I'd now like to turn the call over to Brett for the financial review of the quarter. Brett?

Thanks, Craig. Let me review of the first quarter results.

Total revenue for the quarter was $7.2 million, a decrease of 4.0% compared with the $7.5 million for the same period last year. Revenues for the first quarter of 2012 included $3.3 million in sales related to the clinical labs business, $0.6 million in revenue related to the pharmacogenomic services unit, the clinical trials business, and $3.2 million in revenue related to the diagnostic tools.

Gross profit was $3.1 million, or 43% of net sales during the first quarter of 2012, compared with gross profit of $4.2 million, or 56% of net sales during the same period last year. The decline in gross margin for the first quarter is attributable primarily to reductions in margin for both our lab services and the diagnostic tools business.

Our Lab Information Systems, the LIMS installed in our Newhaven lab experienced a software failure that we reported on April 26th that resulted in reduced sample processing capacity, which impacted revenue and gross margin for the first quarter of 2011.

Margins in our diagnostic tools segment decreased due to the mix of the type of instruments sold. Our pharma lab, the margins, have improved due to the revenue increase quarter-over-quarter as, again, the costs in that segment are relatively stable.

Operating expenses were $5.5 million during the first quarter of 2012, compared with $4.9 million during the same period last year. Operating expenses increased, primarily due to the non-cash charges for bad debts and stock option expense for the options that were granted last year.

Net loss for the first quarter was $2.7 million or $0.05 a share, compared with a net loss of $2.8 million or $0.06 a share for the first quarter last year.

Modified EBITDA, which is our non-GAAP measure that we view as appropriate and a sound measure of the our results, was a loss of $1.6 million for the first quarter of this year, compared to a loss of $16,000 for the same quarter last year. The lower margins and the increased operating expenses drove that change.

The Company is very well-capitalized with a strong cash balance. At March 31st, we had $19.3 million in cash and cash equivalents. Our position was substantially due to the $22 million private placement in February.

And with that, I'll turn it back to Craig.

Thanks, Brett.

A couple of other points I'd like to make about the quarter, first about our instruments and consumables business. This business remains a core foundation for the Company, providing stable, longer-term revenue while giving us the resources to move our high growth products forward. While our instrument business is a more gradual trajectory business, we see meaningful growth potential here going forward.

We hit an important milestone in this regard during the first quarter, in that we began delivering instruments to A. Menarini Diagnostics, our European distribution partner. A. Menarini remains very enthusiastic about the potential of our Surveyor Scan and WAVE MCE Mutation Detection Systems in the European market. We continue to believe this partnership could be worth significant revenue over the next several years.

For the quarter, due to our first instrument sales to A. Menarini, we experienced an increase in the number of units sold, although the mix of instruments sold resulted in lower average sales prices. As a reminder, our instrument sales translate into incremental revenue from consumables and service contract sales and bioconsumables providing compounded and repeating revenue growth.

In our Pharmacogenomics business, we continue to perform cancer pathway gene mutation analysis and other associated genomic service testing for a number of pharmaceutical companies and source new projects from a sophisticated group of high profile pharmaceutical company customers. Although we may and will continue to experience variability in quarter-to-quarter revenues, based on the timing of projects or when specimens may arrive, we continue to experience growth in this area of the business.

Lastly, our lab services business. As Brett mentioned, we saw a decrease in revenue for the quarter due to a software bug in our LIMS system at the Connecticut lab. This resulted in a decrease in volume and revenue for the quarter. Fortunately, this testing revenue has been delayed rather than lost and all of these delayed specimens will be completed, we believe, before the end of the quarter. We also continue to test samples that are coming in currently.

In spite of that software glitch, I believe that we're off to a good start for 2012. Each of our business divisions is showing increased demand, driven by greater reach and cutting edge technologies and products.

Based on our many key growth initiatives, we also successfully completed a $22 million private placement financing in the first quarter, which brought a number of top institutional investors into the stock.

We look forward to the many great opportunities for growth that are now in front of us and we are excited to continue to share that growth with you. At this time we are happy to take any questions that you have.

(Operator Instructions) Matt Hewitt, Craig-Hallum Capital Group, LLC

Good afternoon, gentlemen. Thanks for taking our questions. A first one, maybe could you talk a little bit about the silver lining of the FAMILION lab issues and how that maybe makes your business better, going forward?

Well, funny you should ask that, Matt. The good news, I guess, if you can endure a software bug like this and the impact its caused, is that the fixes that we worked out with our vendor actually have increased capacity by about 50% now and ultimately, significantly higher than that. So the good news was or is that we will be able to process more samples on a routine basis with the same resource load that we have.

But, in spite of all that, I want to also commend our team in Newhaven, because they are working nights and weekends, seven days a week to get all the samples done that were involved in this slowdown. And we do that because these are patients' specimens and these are patients that are waiting for the answer and the critical information that we provide. So there's a strong commitment out there to make sure that we maintain that relationship with the patient and the ordering physicians.

So, ultimately, as I said, the benefit will be an improved system, and unfortunately, as we found out after dissecting the issues, this was a software bug that was resident in the LIMS system that was going to be triggered once we hit a specific volume. At our increased volume levels now, that's what happened.

Alright. As far as -- can you quantify what the impact was in the quarter? I mean, maybe not a specific, but can you ball park what that revenue impact was and maybe what the gross margin impact was?

It's clear there was a gross margin impact. We aren't really reporting down to the dollar level of sales that were delayed, mostly for competitive reasons. However, as you pointed out, a reasonable target was $7.8 million for the quarter and at $7.2 million, we thought that the impact was small and actually we probably would have exceeded your forecast for the quarter.

So our anticipation is that those samples that we didn't get done certainly will be done in Q2 and so we will realize that, plus, to whatever degree we have samples coming routinely now, we will accomplish those as well.

And as we look at Q2, the push out from Q1 to Q2 or the sales, but I would also imagine that we would see a significant bump in the gross margin in the second quarter, just given the utilization of the facility.

That's certainly true, although it always remains to be seen what the volume is. Clearly, in Newhaven they're working nights and weekends, so we're doing two shifts a day and Saturdays and Sundays. So there'll be some impact from that side, so it's more important for us to get those samples completed to keep the turnaround time and the reporting to the physicians and patients as quick as possible.

Okay.

The other component will continue to be instruments that we sell to A. Menarini. Now remember that those instruments -- and this is, I guess, pivotal, and if you were going to ask that question next, I apologize, but this is really pivotal for us because Menarini can't sell a single thing and particularly our mutation kits, where our biggest margins are, until they have instrument systems.

So the benefit is to have sold them instruments. However, we source that instrument. We don't make it ourselves, so the margins are lower on that instrument. But this is the pump that we prime the system with and when we have instruments installed and they are beginning selling efforts. So truly this is the beginning of this key business component for us and that's why I mentioned in the prepared remarks that we look forward to seeing improvements in the revenue side for our DNA tools business.

No, that's exactly where I was going and so thank you for leading in. I guess the follow-on to that would be how much of a contribution was that initial stocking order in the first quarter for Menarini?

I think it was 6 or 7 instruments and they're roughly $32,000 each.

That's very helpful. Shifting gears a little bit here on the ICE COLD-PCR, the screen cell opportunities. Could you provide a little bit of color about maybe number of trials that you're currently working on or some bigger trials? Anything to help us kind of gauge the progress there would be helpful.

Sure, I understand that and so I think, too, the most important point to bring up, I think, in terms of commercializing both the new technology and associated assays with that technology -- and I just presented this at a diagnostic marketing conference just last week. You need roughly six things and you need them done for every assay that you launch and every technology you launch, no matter how big or small the opportunity.

You need publications and the more validating publications and the more prestigious the journal, the better. You need key opinion leaders. You need reimbursement. You have to have a customer service group to make sure that the patients understand the test and how the test will be paid. You need a sales team that's calling on the physicians and all the issues and support resources that go around a test like that.

And so it's critical for ICE COLD-PCR to be adopted that we have these clinical trials and more important for me is to make sure they're trials with the right and most prestigious organizations or academic centers and also that we work with academics that will work with us at what we think are very cost-effective pricing levels.

So, now, coming back to the opportunity, first of all MD Anderson is at least one of the most prestigious, if not the most prestigious cancer centers in the world, so we're excited by the first study with them. And that study will look at a variety of cancers and it will look, as I mentioned, at both when patients come in, during treatment and after treatment.

So we'll begin to monitor how these patients respond to the drugs and see what the profile of mutations in their blood and also on the mutation profile of their circulating tumor cells. And this is a very pivotal study suggesting, once we get data, that ICE COLD-PCR is a technology of choice for both diagnosing or directing patients to which treatment they should be given. But also monitoring them during treatment, which is at least as large an opportunity as diagnosis, or probably much larger because you'll look at multiple time points during treatment. And then, of course, looking for recurrence, which will be additional tests that would be done, so expanding that panel.

So we think that's pivotal for the validation of this technology. We do have a trial going on with Dana Farber and we are in discussions with three or four prominent institutions right now, coming close to contracts with them, to look at lunch and colon cancer and pancreatic cancer as well.

That's helpful. You think --.

I realize, Matt, I mean, those are great questions and we aren't announcing them until that we can do so with a signed contract, but, as we did with MD Anderson, there's no objection to us announcing these studies with these academic partners once they're completed -- or rather once the contract is completed. So you'll hear more about each one of these as we sign them up.

Okay, very helpful and then, lastly, for me and I'll jump back in. With Plavix going generic, you mentioned here in a couple days, should we be watching for anything in particular? Is there any news flow that we can expect to see that might point to at least increased awareness or possibly that you're even that you're starting to run some samples for that panel?

Yes. We have begun to run samples. What we are finding in the market, as you would expect and what we predicted from the beginning, the easy part of this test was to perform the technical validation and launch it in the laboratory.

The more daunting and arduous task is to go out and slug it out in the sales cycle and with the communication cycle of reaching physicians and educating them about this test and the value of it against their patient population. Clearly, none of them that we've spoken to really knew that 47% of their patients shouldn't be on Plavix, or would at least respond poorly or poorer to Plavix than they would to some alternative medications. So that's a key learning point and we've got to get that message across.

So, yes, we plan some information spots and radio coverage of this once Plavix goes generic on the 17th and we'll have further programs, international news levels as the story emerges. And we're also, through the good efforts of Argo Partners, our IR and MR firm, we are reaching out to editors and journalists to make them aware of the issue and have them prepped to be able to contact us when they come up against this issue and want much more information about our test.

Great. Thank you for the updates.

Sure, our pleasure. Thank you.

Brian Marckx, Zacks Investment Research, Inc.

Hi Craig, how are you?

Good, Brian, how are you?

Good. Just one quick one. Everything else was answered. Did you add any headcount to the sales team during the quarter?

We have and we're adding a few more positions to go out and deal with the Plavix opportunity. So, as we talked about during the private placement, our key goals for the raise, the funds from the raise, were to add headcount to drive those key programs, that and ICE COLD-PCR, so that is in process.

We also are bringing in some business development management to help us in both the neurology and the oncology area. Chad, Brett and I have been very busy, but we can't do it all anymore. The level of activity has gotten to that size and then, clearly, there's a spate of folks that are contributing to that, that you don't see, but on the technical side. So we've got some help, but we're bringing in more people to bring in some added expertise, particularly in biz-def.

Okay, thanks a lot, appreciate it, Craig.

Sure, again, our pleasure. Thanks.

(Operator Instructions) Paul Knight, Transwestern Financial Advisors, Inc.

Hi. Craig, as it regards ICE COLD-PCR, do you find that users are looking out to sequencing techniques like the Oxford Nanopore or Ion Proton and saying maybe this is a more viable long-term alternative? Or do you think that ICE COLD is it for blood borne DNA?

Paul, that's a great question and I'll tell you our opinion and we've got some background on this that I think adds some validity to it. What we believe in the current treatment and diagnostic regimen for cancer and other disease discovery processes, but mostly for somatic disease where there are small levels of changes that are only related to the cells that are in cancer growing in an unregulated fashion, there's not many of them. And as such, you have to go to the tumor if you're going to use any of these large screening technologies.

So just the inherent sensitivity of these techniques are not very effective when you're trying to look for a screening indication or just purely in blood. There's just not a lot of circulating DNA. There's not a lot of circulating tumor cells. So, in the tumor, we don't think that there's a significant advantage. However, I will still point out that there are mutations that exist across tumors.

So again -- but we follow closely our recent publications that are starting to look at tumor heterogeneity and so, depending on where you take a biopsy in a tumor, the mutation profile is sometimes different. So, if you're looking at a second generation or third generation, whatever, next gen sequencing of that biopsy, if you haven't taken a biopsy a centimeter away, you might not see the entire profile of mutations in that tumor.

So we still think that ultimately blood is going to be, or circulating tumor cells or some other body fluid will be a more effective technique and process, certainly less invasive, easier to do for the patient, more cost effective, etc.

And in that regard, we just don't see second gen or next gen being able to just perform at an equivalent level to ICE COLD. I mean, we're talking about a thousand-plus-fold increase in sensitivity over Sanger sequencing and when you look at next gen, depending on the coverage levels, and I won't get deep into that, the nuances there, but you're talking about tenfold, maybe a hundredfold at most.

After they use ICE COLD, are they having to do follow-up with Sanger?

We confirm with Sanger. Yes. However, the reason that we can do that is that we have enriched a mutation to the point where it can be readily seen in Sanger. Whereas if you tried to do it with straight Sanger sequencing or, in effect, with nex-gen sequencing, you really would miss that mutation.

Okay. And then lastly on the diagnostic side of the business with the software delay. Can you do a catch-up? Or does this just kind of fall on what it normally would now in Q2?

No. Again, I mentioned it earlier. Two things happen. One, our vendor helped us fix the software and they worked nights and weekends too and we went through all of the escalations of the different response, with lots of stress to everyone.

But then, once the software was fixed, but also that fix allowed it to run faster in some of its operational procedure and then the team in Newhaven just doubled up. So folks were running two shifts a day, Monday through Saturday and then a shift on Sunday. So, in that regard, all the testing that was slowed down and didn't get reported in Q1, plus the first part of Q2, we will finish all of that, we believe, before the end of the quarter and we're still processing new samples that come in.

Yes. Okay. Thanks.

Yes.

(Operator Instructions) It looks like we have no further questions from phones.

Great. Well, we appreciate everyone participating on the call and look forward to speaking to you next quarter.