Precipio Inc (PRPO) 2012 Q2 法說會逐字稿

Good day everyone, and welcome to Transgenomic, Inc. reports second-quarter 2012 results. At this time all participants are in a listen only mode. Later you will have the opportunity to ask questions during the Q&A session. Please note this call is being recorded, and I will be standing by should you need any assistance.

It is now my pleasure to turn the conference over to Chad Richards, Chief Commercial Officer. Please go ahead.

Thank you, Alysse, and thank you to everyone for joining us today as we discuss the second-quarter financial results for Transgenomic, Inc. 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, www.Transgenomic.com, for more details.

Our comments today will contain forward-looking statements. Forward-looking statements are any statements that are made that are not historical facts. These forward-looking statements are based on 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 only accurate at this time. If any portion of this information or presentation is rebroadcast, retransmitted or redistributed at a later date Transgenomic will not be reviewing nor updating this material.

Joining me today is Craig Tuttle, our President and Chief Executive Officer. During today's gold Craig will provide an overview of our key business initiatives and of the second-quarter results, then I will provide an update on our key commercial programs and sales initiatives. We will then open the call up for Q&A. Craig.

Thanks, Chad, and thanks everyone for participating on today's call. Now this was a record-breaking quarter for the Company and we realized record sales and achieved several key milestones that are critical for our future success. First I would like to provide a quick overview of the topline numbers for the quarter.

Net sales for the three months ended June 30, 2012, were $9.1 million, an increase of $1.4 million or 19% compared to the same period in 2011. Gross profit for the second quarter was $4.6 million or 50% of net sales compared with gross profit of $4.6 million or 59% of net sales for the same period in 2011.

Net sales for the six months ended June 30 were $16.3 million, an increase of $1.2 million or 8% compared to the $15.2 million for the same period in 2011. Gross profit for the six months ended June 30 was $7.7 million or 47% of net sales compared with a gross profit of $8.7 million or 58% of net sales for the same period in 2011.

Operating expenses were $5.9 million during the second quarter, a decrease of $247,000 compared to the $6.2 million for the second quarter of 2011. And the decrease in operating expenses is primarily due to lower stock option and bad debt expenses.

Operating expenses for the six months ended June 30 were $11.5 million, an increase of $359,000 compared to the $11.1 million for the same period in the prior year. The net loss for the second quarter of 2012 was $563,000 or $0.01 per share compared to a net loss of $6 million or $0.13 per share for the second quarter of 2011. The improvement in net loss is due to $4.2 million in preferred stock expense in 2011 and $1 million in gains on the common stock warrants.

The net loss for the six months ended June 30 was $3.3 million or $0.05 per share compared to a net loss of $9.3 million or $0.19 per share during the same period in 2011. The decrease in net loss was primarily due to the non-cash charges of $6.3 million for the preferred stock expenses in 2011 and the $1 million in non-cash gains for warrants in 2012.

Modified EBITDA, which is the non-GAAP measure that we view as a very appropriate and sound measure of the Company's results, was a loss of $632,000 for the second quarter of 2012 compared to a $369,000 loss for the same period in 2011.

Cash and cash equivalents were $6.3 million as of June 30 compared with $4.9 million. In addition, we had $9 million in short-term investments as of June 30. The increase in our cash and short-term investments is largely due to the $22 million private placement financing which we completed in the first quarter.

I would like to mention that our lab service business experienced a 41% increase in revenue this quarter over the second quarter of 2011. This increase was partially due to a net increase in Familion assay testing orders and the remainder was due to the sample testing backlog that was created from the LIMS failure in our New Haven lab at the end of the first quarter.

The software failure was successfully resolved in late April, and we resumed testing samples at a very increased capacity. We have also taken the time to review and approve our internal procedures to secure proper function of the software system over the long term. We are also in the process of adding an additional LIMS system that will be exclusively devoted to managing our C-GAAP assay panel to ensure that there are no system failures for this important new test for us.

Moving on to our milestones. We further expanded the reach of our cardiology platform through the continued growth of our Familion franchise. Transgenomic has become a leading global cardiac genetic testing company, with an expanding family of tests that are designed to detect genetic mutations that can cause serious cardiac disorders. The comprehensive nature of our Familion genetic test menu demonstrates our commitment to setting the standard for cardiac genetic testing today.

In line with that just a few weeks ago we announced the achievement of a key commercial milestone for our clopidogrel genetic absorption activation panel, which we refer to as C-GAAP. We were pleased to announce that C-GAAP is now covered by Medicare, and as a result 48 million Americans will now have easier access to this important genetic test.

Clopidogrel, more commonly known as Plavix, is the most widely prescribed antiplatelet drug used to reduce the risks of deathstroke and heart attack in heart disease patients. The effectiveness, however, is dependent on the patient's ability to absorb the drug out of their intestines and then activate the drug by enzyme -- an enzyme in the liver.

Two genes are responsible for this function, ABCB1 and CYP2C19. Both encode proteins critical for the absorption and activation of Plavix to its active agent. Patients with dysfunctional CYP2C19 and ABCB1 genes treated with clopidogrel are twice as likely to experience major adverse cardiovascular events compared to patients with normal genes and protein function. Transgenomic's C-GAAP is a simple saliva test and is the only one on the market that test for mutations in both genes.

Medicare coverage is an important step towards the broad adoption of the C-GAAP test because it removes a significant economic barrier and allows for the more rapid adoption of the test by physicians.

Over 6 million prescriptions are currently written per year for antiplatelet therapy, and coinciding with the expiration of a key Plavix patent, the FDA recently approved multiple generic versions of clopidogrel. As a result, we expect the number of prescriptions to grow significantly and for our C-GAAP test to be ordered more routinely. We believe the C-GAAP test represents a potential multibillion-dollar market opportunity for our Clinical Laboratories division.

In addition to our cardiology franchise we have expanded the reach of our oncology platform as well. In June we successfully launched the first ICE COLD-PCR kit product at the 2012 American Society of Clinical Oncology meeting, the most important medical oncology conference in the health care industry.

We are branding our ICE COLD-PCR kit line under the REVEAL label to convey this technology's ability to deeply enrich or multiply mutations so that they can be tested successfully from a variety of tissues and body specimens, including blood or serum.

ICE COLD-PCR is a breakthrough technology that is capable of identifying mutation frequency as well as, or in some cases, lower than 0.01%, which surpasses the limits of currently available mutation detection technologies. This extremely high sensitivity enables detection of mutations from virtually any sample type, including tissue biopsies, blood and circulating tumor cells, or CTCs.

Mutation profiling from blood and CTCs is a potentially significant advancement for cancer patients because it is less invasive and carries less risk than obtaining tissue biopsies. It is also less expensive, and it can be performed with much greater frequency, thereby allowing almost continuous monitoring of a patient's disease from a blood specimen rather than attempting to take numerous repeat biopsies.

The significance of this test was highlighted by a recent study published in July in The Lancet Oncology, which demonstrated that the presence of the CTCs predicted early recurrence and decreased survival in chemo naive patients with non-metastatic breast cancer. And these results suggest that the detection of the CTCs could provide important predictive information for cancer patients and their physicians, and underscores the value of testing for CTCs and testing mutations in CTCs. Because they are at very low concentrations using ICE COLD-PCR is an ideal technology.

We continue to believe that ICE COLD-PCR has the potential to revolutionize cancer screening, diagnosis, monitoring and therapy selections. Ultimately our goal is to provide real-time monitoring of cancer progression, resistance mutations emergence, and responses to therapy all from a simple blood specimen. And we have begun the clinical validation of this approach with our recently announced study with the MD Anderson Medical Center, as well as working to further establish collaborations and clinical studies to support this approach.

Our REVEAL Kit powered by ICE COLD-PCR for the enrichment of KRAS mutations is now available worldwide to molecular diagnostics laboratories for use with standard DNA sequencing equipment. We are actively working to expand the ICE COLD-PCR testing platform to include other therapeutically relevant mutation kits, including those for BRAF, EGFR and PI3Kinase.

As a reminder, ICE COLD-PCR is performed on standard PCR equipment, which is already installed in laboratories around the world, and therefore we expect broad and sustained adoption of this technology as the technology gains clinical interest.

At this time I would like to mention that we continue to make progress with our innovative NuclearMitome Test as well. This test is designed to identify mutations in 448 genes that are considered important for mitochondrial function, and represents the most comprehensive genetic tests available today for mitochondrial disorders.

Just last month we announced a commercial collaboration agreement with the Medical College of Wisconsin Laboratories, a world-renowned institution with a robust presence in genomics and genetic testing, to offer next-generation genetic testing services. The Medical College of Wisconsin is one of the top clinical sequencing labs in the world and very accomplished with next-generation sequencing technologies and bioinformatics.

We are beginning our collaboration with MCW on our NuclearMitome assay, but good look forward to commercializing a variety of new tests with them in the near future. This allows Transgenomic to rapidly expand the clinical use of our NuclearMitome Test, in addition to building out our offerings, as we look to commercialize next-generation sequencing opportunities more broadly with the support and help of the MCW team.

We also continue to invest and enhance our new technologies. In May we acquired the biorepository assets of Gene Logic, Inc. This biorepository contains thousands of diverse high-quality human tissue samples and extracted DNA specimens that can be used to validate diagnostic assays that we develop, and it should provide a significant, long-term cost savings.

We are investing also in our commercial team to expand our focus on areas of our business that we anticipate growing in the future. We are continuing to buildout our sales and marketing teams to better reach physicians in our key market areas of cardiology and pediatrics or neurology.

In addition, we recently expanded our Business Development Group through the appointment of John McAuliffe as Vice President of Business Development for Neurology, and Matthew Beer as Vice President of Business Development for Oncology. John and Matt have strong background in business development for the life sciences and will be leading our expansion efforts in their respective areas.

I will now turn the call over to Chad Richards, who will provide a commercial update on or other key programs and our sales progress. Chad.

Thanks, Craig. First there are a couple of points I would like to make regarding our instruments and consumables business before I get into the overall sales update.

In May we achieved CE IVD registration in Europe for the diagnostic use of our proprietary WAVE MCE system and SURVEYOR Scan K-Ras kit. This CE IVD designation expands our market reach significantly by allowing us to market our WAVE MCE and SURVEYOR Scan kits for diagnostic use in approximately 30 European countries.

Our European distribution partner, A. Menarini Diagnostics, remain very enthusiastic about the potential of our products in the European market, and we continue to believe this partnership will generate significant revenue growth over the next several years.

For the three months ended June 30, 2012, net sales of the Diagnostic Tools business segment increased $500,000, or 17%, to $3.3 million as compared to the same period in 2011. Our tools business growth was driven by our partnership with Menarini Diagnostics, continued success with our HANABI Chromosome Harvesters, and a strong WAVE sales quarter in Asia.

For the six months period ending June 30, 2012, net sales for the same segment remained flat at $6.5 million as compared to the same period in 2011. Though we sold more instruments during the first half of 2012 compared to 2011, foreign exchange rates between the euro and the dollar were down by 8%, resulting in lower instrument average unit prices and a decline in consumable and service revenues for our European business.

Overall our Diagnostic Tools business remains a core foundation for the Company providing stable, long-term revenue and profit, giving us the resources to invest in our high-growth products going forward.

For the three months ended June 30, 2012, net sales for the Clinical Laboratories segment increased $1.6 million, or 41%, to $5.5 million compared to $3.9 million in net sales for the same period in 2011. This increase in revenue for the second quarter was partially due to the revenue realized from delayed orders from the prior quarter, but was also due to sales growth in both our neurology and Familion segments.

For the six months ended June 30, 2012, net sales for the segment increased $1.5 million, or 20%, to $8.8 million compared to $7.4 million in net sales for the same period in 2011. These sales increases were primarily due to growth in our Familion business and the success of our NuclearMitome Test.

It is important to mention that despite the backlog we are seeing an increase in demand for both our neurology and Familion tests, and we have increased our operational capacity and are bringing down the turnaround time for our testing as compared to prior quarters.

Finally, in our pharmacogenomic services business we continue to perform cancer pathway gene mutation analysis and other genomics testing services for a number of pharmaceutical companies, and source new project from a sophisticated group of high-profile pharmaceutical company customers.

For the three months ended June 30, 2012, the segment had net sales of $300,000, a decrease of $654,000, or 65%, compared to $1 million of test net sales for the same period in 2011. For the six months ended June 30, 2012, the segment had net sales of $1 million, a decrease of $294,000 or 23% compared to the $1.3 million in net sales for the same period in 2011. As a reminder, we had an $800,000 Phase III trial which we completed in its entirety in Q2 2011.

We tend to experience variability in quarter-to-quarter revenues in our pharmacogenomics business due to the nature of patient enrollment patterns and the timing of clinical trials, and therefore figures for this quarter are not indicative of future net sales.

Lastly, I would like to mention that we announced the issuance of a new patent during the quarter. In June the U.S. Patent and Trademark Office issued the 919 patent -- Method of Determining the Sensitivity of Cancer Cells to EGFR Inhibitors including Cetuximab, Panitumumab and Erlotinib.

The patent inventors demonstrated that key mutations in PIK3CA, also known as PI3Kinase, are powerful predictors for the efficacy of EGFR-targeted cancer therapies. Currently there are over 30 clinical trials in process looking at PIK3 as an indicator of therapeutic response. Our intellectual property is directly related to these kinds of clinical trials, and we believe it will give us a commercial advantage in discussions with these pharmaceutical partners going forward.

The addition of this patent allows us to effectively apply high-sensitivity mutation detection technologies, such as our proprietary SURVEYOR Scan, REVEAL ICE COLD-PCR, and BLOCker-Sequencing to PI3Kinase assays in order to be able to detect genetic variations in very low mutant load samples, and is a value addition to our genetic biomarker intellectual property portfolio.

I will now turn the call back over to Craig.

Thanks, Chad. I'm glad to be able to share our record-breaking second-quarter results with you and update you on all of the progress we have made. And though we are not issuing guidance for 2012, we are confident that we will continue to grow all business segments of the Company this year and in the future.

Transgenomic has become a leading global cardiac genetic testing company and we expect to continue growing that with deeper penetration from our current tests and growth of new assays that we will be launching in the near term, and finally of course, growth in our C-GAAP assay for predicting patients' genetic makeup for effective Plavix treatment.

Moving forward, we have new products and services that should contribute to growth in each division of the Company, and combined will generate increased growth in each division of the Company and should offer us compounded growth as we expand products from one group to the others.

What this means is that we will have expanding opportunities to leverage our new tests into the market in several ways. For example, from the perspective of an integrated biotechnology company technology that we develop in our Diagnostic Tools division, such as ICE COLD-PCR assays, can be deployed into our pharmacogenomics or clinical trials support division for early research for cancer treatments being developed by our pharmaceutical company customers to determine mutation status of cancer patients and their response to certain therapies. And once that link has been established we can then offer the test to our pharmaceutical company clients to validate their clinical trials.

Later that same test can be offered as a new assay through our CLIA-certified reference laboratory, and we can then also manufacture the essay as a kit product and it can be sold worldwide through our own sales efforts or with key partners.

In conclusion, I am happy to report a strong second-quarter, and we are proud of the progress we have made with all the programs mentioned here today. As we look forward to the remainder of 2012 we will continue to invest in innovative new products, while growing our fundamental core businesses.

As a leading global cardiac genetic testing company we will continue to launch new clinically relevant genetic testing products for cardiology as well as the other high-value areas of our business.

As a result of our many key growth initiatives we are expecting to announce more meaningful commercial milestones later in the year, including high-value collaborations for clinical validating studies for ICE COLD-PCR in cancer, increasing demand and testing volume for our C-GAAP assay panel, as well as the completion of beta testing and then the launch of additional REVEAL kits for use based on our ICE COLD-PCR technology. We remain focused on expanding the reach of our core instruments products and service businesses and investing in new products as well.

At this time we are happy to take any questions that you have.

(Operator Instructions). Matt Hewitt.

I've got a handful of questions here. I think the one that -- at least I think I am most excited about, the C-GAAP. Could you maybe layout where we were last quarter, where we are today, where you could see that business going over the back-half of this year?

Yes, I know -- we expected that question. It is a great question, and what we can tell you about the assay, in following the launch, as you know, at the end of Q4 last year we began selling efforts in Q1. And that resulted in a few tests, maybe 10, coming in in Q1, which is not uncommon for a genetic assay that requires three to five visits to a physician to educate them about the utility and the background of the test and how to manage patients based on the data, as well as share publications and get enough time in front of the cardiologists, in this case, to describe the clinical regimen.

The good news now is from those efforts and some expanded sales resources we have hired three new sales -- very, very accomplished sales professionals. And I think we brought in 160 tests in July already in second-quarter, and many of these are from cardiology practices that see at least 100 patients a month.

So we anticipate that we will continue growing the assay at a very rapid clip. And in that light, and based on the finances that we got in the recent capital raise, we are going to expand the sales force yet again.

So given -- what you just said here as far as you saw 160 tests in July. If I extrapolate that you go from 10 in Q1, dozens to 100 or so in Q2. Is it possible that we could as we enter 2013 where you could be doing thousands of tests or is that a bit aggressive?

No, that is our expectation.

Okay.

Now whether that is 1,000 month or 10,000 a month we would love to see the latter. As always, there is a pathway to educate the market that is just simply required in the development of a business opportunity like this within any key technical health care related space.

So the bottom line is there has to be publications. There has to have been clinical trials that demonstrate the clinical utility of whatever genetic testing is involved. There has got to be outcome data that shows that doing the testing will have an impact on patient care and patient outcomes.

And you have to have reimbursement. We have shown that with the Medicare release that we did just a week ago. And clearly you have got to have sales resources, billing, managed care contracts in place, etc. So the bulk of that work is done, and we are looking to finally share in the results and rewards of that effort.

So I think what I have been saying for a while here is that we expected tens of tests in Q2, hundreds in Q3, and we would like to see many hundreds to thousands in Q4 going into -- or Q4 and then going into Q1. Whether it will be a 500% growth per quarter, we will see.

Well, that is excellent news, and congratulations on the progress you have made there. Shifting a little bit, the Familion segment bounced back strong, obviously, with the benefit of the backlog. Do you have -- can you break out how much of that -- the growth in that segment was from the backlog versus how much of it was the core business just growing? And what are the dynamics that are behind some of that natural growth, if you will?

Natural growth was roughly 10% in the quarter. And a ballpark for you on the backlog was in Familion $600,000.

Okay.

So where I am rewarded and I want to thank the entire team in the New Haven facility, as well as the entire sales team, that they came in behind and helped with that whole process in terms of educating the physicians and the impact and coordinating so that we reduced that impact on patients who were awaiting their testing results.

But we were able to increase the capacity of the lab significantly in Q2. It came with some expense, because we did run a lot of over time. But we have further improved the LIMS system that has expanded our capacity even further, and as such, we can handle this volume now going forward. I have had to add a weekend shift now, which is a good thing, and we are gearing up for more C-GAAP testing.

Well, again, good work on the progress there. Maybe a couple more for me and then I will hop back in the queue. The pharmacogenomics, obviously that segment is going to be a little bit lumpy. I believe early you have talked about there were some larger Phase III type trials that were in the hopper, but you were at times dependent upon the partner to give the go-ahead. I'm just curious where those sit today.

I think I have been mentioning along that we expected those in the Q3 timeframe. So the good news is on one of the trials we have finished all of the central background work and a lot of the validation that was necessary and now it is in front of the customer to sign us up for the Phase III. There is another Phase III that we are in final discussion with with, again, a little bit of background work and then to move into that trial.

The most important, I think -- the most forward result was the trial we did last year that we finished, that data was just finally crunched and thoroughly analyzed. And so now that data, as we have been told, is soon going to the European bodies and the FDA. And so the subsequent outcome from that we still hope will be a companion test with us. And so we have been dependent on the key partner to do that work, and as you know, getting a large bioinformatics effort completed is a time-consuming process. So that is great news.

Absolutely, and then that is -- I think we all recognize that business is going to be a little bit lumpy, but there are some real bright prospects coming through there, so it is good to hear the update here.

A last one from me and that I will hop back in the queue. Just, I guess, more on the financial side, can you break out what the FX headwind was to revenues and -- from a cost perspective?

If you go back and look historically at foreign exchange rates from 2011, in the second quarter of 2011 the euro was anywhere between $1.4 and $1.48 versus the dollar. In Q2 2012 that had dropped down to between $1.23 and $1.32. So it is about a 14% decrease in the value of the -- between the euro and the dollar between Q2 of 2011 and Q2 of 2012.

You expand that out and look at the first-half of 2011 versus the first-half of 2012, there was about an 8% impact on revenues. If you look at our European business, we still enjoy about $3 million a quarter in sales from that segment. So you take a look at that overall impact without seeing any decline in units, and in fact we actually saw an increase in unit sales in Europe and in US in our instrument division. But trying to climb up over that 8% to 10% impact on FX depending on what month it is booked, takes a lot more sales revenue than sales volume to get over that hump.

So just running the simple math here, it was around $400,000 of topline revenue impact. And then if you pull that through that is maybe $0.01?

Gross margins, that affects everything, absolutely.

Okay, all right. That is great. I will jump back in the queue.

(Operator Instructions). Mark Merrill.

I am wondering -- my first question, I am wondering if you can talk a little bit more specifically about the C-GAAP sales and marketing strategy and distribution channels, especially with the recent Medicare announcement, sort of things such as the types of physicians you might be targeting and specific geographies?

And, also, I am wondering if you could talk a little bit about your gross margin experience with the C-GAAP test, sort of historically as you have started to build some momentum in that business? And then if you have any thoughts on gross margin expectations once the business starts to pick up some steam?

I think I have got those in priority. I will probably answer in reverse order. So, first of all, we are making a good gross on this test, but the volumes are so low we are just -- I don't even have the data for July crunched here to tell you that. But we are expecting 50% to 60% margins and low volumes, and we certainly want to see that move up to 70% to 80% margins.

As you would anticipate, as the volumes get higher, we will start adding more levels of automation and liquid handling. It is not a key issue on the bioinformatics or data analysis side, but there is the attendant staffing that is essential to make sure we can perform the test with a very rapid turnaround time. So to date we are hitting about a two-day turnaround on the tests, and we are guaranteeing three days in the market, just to make sure we can get that to physicians right away.

One of the other questions you asked is who are we calling on and what are our marketing plans? We have been calling through our Familion brand, and well before we acquired that business but certainly since we have acquired it in the last 18 months. This is a group that calls on cardiology laboratories across the country, focusing on those that are really well-versed in the electrical functions of the heart and in the genetic impacts on that, so mostly the electro-physiologists.

So what we are doing now is being already well-versed in those offices, we are going across the hall and talking to interventionists, the physicians that are going to do stents or are managing difficult cardiac patients.

Another thing that we found out in the market is that there is a large number, maybe as many as 1 million, stroke patients who are being managed with Plavix. And we have already received samples from our neurology sales team that are, we think, going to certainly contribute to the growth of the test as well.

So expanding the market, and it is just one -- so happens we have a good basis and long-term participation with neurologists. So that is just a great contribution that comes together in this case.

Thank you. And as a second question, I am wondering if you can talk a little bit more specifically about how to think about the ICE COLD-PCR REVEAL Kit now that they are starting to launch over the next few quarters in terms of, I guess, a couple of things, starting with new tests. I know that you mentioned KRAS, but also in the pipeline BRAF and a couple of other tests. And, likewise, with those tests sort of your anticipated distribution channels, sales and marketing strategy and thoughts on sales.

Well, clearly the KRAS test is critical, because it is a noted companion and right now can only be tested in the tissue. So we still believe it is critical to have that testing done in blood. We are starting a clinical trial with a collaborating company that has excellent access to a large number of colon cancer specimens that are from a variety of -- all different stages of colon cancer, and we are looking at blood and tissue.

So what is required -- and just like Matt's question earlier, what is required to validate a technology like this is to do the deep clinical studies that show that you can find these mutations similar to or, in our case, hopefully better and the blood rather than in the tumor because of the heterogeneity that persists across solid tumors, for example.

And then we have to publish that data. And that is just for KRAS, although in the study we are going to look at other important genes that are well known to confer resistance to cetuximab in -- oh, yes, panitumumab, Vectibix.

But we, for example, we know in a colon cancer patient typically presenting metastatic cancer 40% roughly of those patients will present with a positive KRAS mutation that confers resistance to those two agents. But there is about 10% that are NRAS positive. 8%, I believe, are BRAF positive, 5% roughly that are PIK3CA positive, etc.

So, of course, we want to expand the menu to include all of those and then just continue as each new gene is discovered. And quite frankly we are agnostic to how those discoveries occur. We are implementing next gen sequencing technology inside the Company and applying it to all sides of our business. But where it has a great screening indication is in cancer.

And so we think what the clinical regimen there is that on the research side the key academic centers will be looking at solid tumors with next gen sequencing and finding all the potential disease confer -- resistance conferring variants that are then further looked at in a shorter or briefer panel, hopefully, with ICE COLD-PCR in blood. That is certainly our goal.

So in that light we know we have got to do critical clinical trials and validate that. So that is why we were lucky to get a very effective study started at MD Anderson, and we have conversations with six other key collaborators across colon, pancreatic, lung and melanoma. And I wish I could announce them, they are all in discussion and until they are signed we are under confidentiality to broach them.

So, again, the goal is to bring each of these kits out. We already have an understanding developing with our partner in Europe. They are very excited about ICE COLD-PCR and chomping at the bit, so to speak, to begin selling that kit and the next kits. We already have BRAF and PIK3CA in beta testing in Europe. And we do have a sales team entrenched in Europe that can begin selling this to academic centers rather than the target market where Menarini is so well-versed.

And in the US we know that it is going to take more effort and, in fact, we are hosting the ICE COLD-PCR clinical symposium later this month or next month, depending on when we can get all the panelists aligned, to talk about the clinical trials that are further needed for ICE COLD-PCR, as well as potentially getting some trials started with those participants. They are all key leading oncologists or academic researchers directly associated with these three cancer types.

Okay, great, thanks. And as a final question, I know that the ICE COLD-PCR technology is based on and is compatible with standard PCR, but taking a really long view is the technology or components of the technology also compatible with next generation PCR and DNA technologies?

We believe so. It is a more complex question than that, because for example if you are looking at a technology that is single cell enrichment, or whole genome sequencing out of a single cell, the problem there is which cell are you going to do all that work on. So that is where the conundrum is around next generation sequencing, particularly in oncology.

In our view the ability to enrich for a -- and multiplex so that you can do several genes at one time and do an appropriate panel. But to do this type panel testing in blood to sequentially or serially monitor a patient we think is going to be the best economic impact and clinical utility of the technology.

But at the same time, depending on how you structure the panels if you can in the next generation, whether it is on a chip for the Ion Torrent or in a lane on the Illumina analyzers, you can do ICE COLD-PCR up front. But they are focused right now on looking in the tumor, and as long as they don't have sensitivity problems, I think that is an excellent vehicle to use to find these panels that we could then employ -- or deploy ICE COLD-PCR against.

Okay, great, thanks. Those are my questions.

(Operator Instructions). Matt Hewitt.

A couple on the modeling side. Is it safe to assume that with the LIMS system issues resolved that we should see a decline in the SG&A component and we should also see the gross margin improve starting with Q3?

The answer is a little more complex, but the impact from all the overtime that we had to bring in from the team in New Haven to meet that backlog, definitely that goes away. But at the same time -- so there will be a margin improvement. And not only that, we are expanding testing. That is, I think, a good -- that is good news. And so that will get contrasted with the current expense load. So I think it improves in that regard.

If somebody could fix the European economy that would probably help out the exchange rate. I don't know how that is going to go in the short term -- probably not favorably for us.

But I don't think anyone is calling for that. So as I look at our models we should see, at least marginally, improving gross margin. And granted you have been doing some hiring, so maybe the SG&A improves a little bit but that will be more at the margin, just given some of the new hiring?

Correct. And there is no doubt that we are looking at the level of staffing that we see in some of the specialty cardiology companies or some of the other genetic testing companies, and whether we have the resources or not to duplicate that as a model or not. And one of the key important considerations for us is what do we need in clinical trials and how can we do these medical trials at a very cost effective level. We know we could use them further on the cardiology side for the C-GAAP test.

And we need to continue to develop our scientific advisory and key opinion leader team there, and we are trying to do that. And also leverage in some more sales resources, no doubt. So, yes, that should impact the SG&A line.

Okay.

One other thing that you didn't ask, that I will answer for you, or at least lead you to is that on the PI3Kinase patent one would ask why is that of any utility. And quite frankly, at least as we know colon cancer and in some -- and in lung cancer there is certainly a percentage of patients that this gene confers resistance and, as such, has to be used or should be used in the clinical regimen for determining what the most appropriate therapy would be for these patients.

But having that as an exclusive for treatment selection means that all the clinical -- and I don't think we said that in the prepared remarks -- but all of those clinical trials are ongoing that involve agents targeted or based on PI3Kinase mutations those are all companies that we are now contacting to alert them to that. And that if they do see the need for a companion diagnostic based on the patent structure, we are the key partner there. So that is where we expect future improvement in the clinical trials business as a result of that patent.

You know, that is a great point. I appreciate you bringing it up. And it actually leads me to another question. Because there are a number of your peers that if you look at the genes that they're targeting there are a number, including some of the largest in the world, that flat out list that gene as one of the targets that they are either using now or going after. How are you going to address that? And what is the difference between your patent and maybe the application that they are using it for?

There is one other -- the complication is that there is one patent from Johns Hopkins that has recently issued for the use of that -- those gene mutations to diagnose cancer. We don't see much value in that patent because here you are sampling through biopsy a tumor, so you already know it is cancer. So, quite frankly, we are not concerned about that patent, at least in comparison to what is important to the clinicians now, which is to determine therapy for that cancer when it has those mutations. So we think that is critical, and clearly we have got to talk to those companies.

And it becomes more critical, when we have an actual drug that says in order to put a patient on this therapy you need to test for PI3Kinase. A lot of people that are running these tests today are using it for prognostic indication, not for therapeutic selection. But when you -- so when they offer the tests they can say that the test is for a prognostic indication or diagnostic indication, not for therapy selection. But when you get to a drug that requires PI3Kinase in order to select a patient that is when the language of our patent becomes significant.

Okay, all right. So basically everyone is going to eventually going to need to come through you in one way or another, whether it is licensing, licensing through you or ultimately just sending the samples to you to run.

Or buying our kits, exactly.

All right, okay.

And that is where we think we are kind of universal there, so we can either do the test internally -- certainly for a clinical trial we will do that. And then we can sell it in our CLIA laboratory or just sell the kit. And quite frankly longer-term that is also something that can be licensed or partnered with a large partner.

Okay. I guess last question for me. You have previously talked about a pipeline of possible acquisition candidates. I am just curious if you have had any success or you have got additional candidates in that pipeline today?

I guess the good news is there is always an active pipeline, but beyond that I am not at liberty to give you an update.

well, maybe a better way of asking it, what types -- are you looking for additional labs to roll into the mix or is the more you're looking for various technologies that you could use to enhance your current capabilities?

Well, we are doing both. On the latter part of that question, for example, if we can save cost by doing a next genome or next gen sequencing rather than Sanger sequencing for some of our assays -- we are looking at that right now and we have the equipment in-house to do that.

But on -- the other question is broader. So, yes, we look at tuck-in acquistions as an opportunity. I think the model that we've discussed for a while, our laboratories that found an appropriate clinically relevant assay that just couldn't commercialize it successfully. And we continue to see those, and we continue to look at those that have significant market opportunity, but that meet with our call points, meet with our technology capabilities, and could be easily rolled into both our sales team, our patient services team, our billing and managed care contracts and, of course, our laboratory processes. So more on that later.

Okay. Well, again, congratulations on the progress on some of your key initiatives, and good work on the financial performance here in Q2.

Brian Marckx.

Congratulations on all the progress you have made. Just a couple of quick ones. Relative to Menarini and EMC was there an initial stocking order in Q2?

Initial stocking orders came in Q1. There were some additional orders of that type in Q2, but we also started to see some reagents in Q2 as they are starting to go out in the field and do demos.

Okay.

And we do have one of them for Q3.

We do have orders in for Q3, and everybody is about to head out on holiday starting tomorrow in Europe. Things will slow down slightly, but we have expectations that we will see an increase in Q3 versus Q2 from Menarini.

Okay. Would you characterize it as stocking or sales on the other end?

What they are doing right now is buying instruments and putting them out into the field for their demonstration purposes, so there is some stocking going on. They are just now launching the CE IVD Mark product to their sales teams, so that was the gating event for them to be able to go out and start selling the product to end-users.

Okay.

And a little color on that, we met our projected timelines and milestones with them, but to do a full CE IVD Mark requires, what, 16 or 30 languages, I can't remember.

It depends on how many countries you want to market in, but the translations are taking quite a bit longer than originally estimated.

Okay. And one on the pharmacogenomics business. You talked about a Phase III trial that you expected to come online in Q3, I believe. Is that -- is the background work that you talked about, is that a revenue generating work or is that gearing up for revenue-generating in maybe the next quarter?

We have had two clinical trials in the lab for the last six months that were gating events for the Phase III trials that were already contracted. We completed the work necessary for both of those companies in the second quarter. We have presented them with the data. They are evaluating new data now. And in one case they have got to get some guidance from the FDA in order to move forward with the next phase of the trial.

On the other large clinical trials that we have in the lab they were waiting on this first set of data. We actually already have over 200 samples in the lab waiting for them to evaluate this first round of information in order to tell us what exactly they want us to do with those samples. But we do have samples in-house, so as soon as they give us the word here, hopefully in Q3, we will be ready to start testing in that trial.

Okay.

And we continue to recruit. So that is --.

And enrollment is ongoing, absolutely.

Yes, okay. Okay, great. Thanks a lot guys and congratulations again.

(Operator Instructions). [Ernesto Patacki].

I want to congratulate you for the quarter and all the strategies you have made so far, and looking forward for the next step. And I have a question for you. Have you prepared or looking forward to have any strategic partner in the pharma business?

Well, it does -- that is a -- on one hand, on the clinical trials business we are always doing studies, whether they are Phase II or III or discovery projects that will link to a companion, and that effort continues. And as I said earlier, we are going to accelerate that with our PI3Kinase patent.

And the other side of it, and I'm just anticipating that you're referring to the C-GAAP side, we continue to discuss -- particularly one of the partners is interested to work more closely, and we are under confidentiality so that is all I can say this time.

We know how important that is, but we think it is equally important for the partner, because in this case we are the referee. And the benefit of the C-GAAP test is that before you put a patient on drug and before you treat them or insert a stent or whatever procedures upcoming, you know the appropriate drug to put them on. And the most important phase after their treatment is that next two weeks. So you really need to know their genetic makeup. And therefore I think that partner understands it and we think we will make some progress there still this year.

Thank you very much.

[Michael Zimba].

The pricing on the C-GAAP test, I apologize if I missed it, is there like a retail price and then the Medicare allows a certain amount? How does that work?

Yes, the list price on that assay is $750. And then the Medicare price is based on a stack up that comes from the American Medical Association with the pricing associated with each of those individual steps and processes. Although for competitive reasons we are going to decline to comment on how much we are getting paid, but it ranges below the list price, but that is consistent with all laboratory businesses.

Is it a substantial amount of the list price can you say or that you -- goes through a revenue line?

It is a substantial amount.

Okay, cash, at $15.3 million -- each of the first two quarters I have you burning about $4 million. Is that going to decrease as we go forward with revenues increasing? And otherwise by the end of the first quarter at that rate it would be down around $3 million again. And I know with the work you're doing and the growth you're going to burn through some. What is the situation with that?

We certainly plan to utilize capital to drive the C-GAAP test and at a lower priority the ICE COLD-PCR technology, simply because that takes longer. At the same time, we are still looking for our replacement note. We did make a $1.3 million payment to Forest, because we didn't get an alternative note that was negotiated in time from a bank. And so we were in the process of trying to secure a note to take out the remainder of the Forest note with better terms, longer terms, so to our point on cash management.

Okay, well thank you. We have been around -- some of us have followed the Company for quite a while, and this is by far I think the most exciting conference call we have heard. So keep up the good work. Thank you.

Our pleasure, thank you.

It appears we have no further questions at this time. I will turn it back to our speakers for any closing remarks.

Well, we certainly appreciate hearing the kind comments. And it is great news to come out with a strong quarter. We hope to have the same conversation with you at the end of Q3. Thanks so much.