Precipio Inc (PRPO) 2014 Q1 法說會逐字稿

Good day and welcome to the Transgenomic first quarter 2014 financial results conference call. All sites are currently in a listen-only mode. But, please note there will be a question and answer session later on in the call.

Also note, today's conference call will be recorded and will be accessible both by phone and Internet. Please refer to the press release about this conference call on the Company's website, Transgenomic.com, for further detail.

The Company has asked that I read the following statement. Management will make comments today that 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 the management team and there could be no assurance that such expectations will come to fruition.

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

The information presented today is time-sensitive and is accurate only at this time. If any portion of this call is rebroadcast, retransmitted, or redistributed at a later date, Transgenomic will not be reviewing nor updating this material. I will now turn the call over to Transgenomic's President and Chief Executive Officer, Paul Kinnon. Please go ahead.

Good afternoon, everyone, and thank you for joining us for today's conference call. I am joined today by our Chief Financial Officer, Mark Colonnese. I will start by providing an overview of our ongoing progress, then Mark will walk us through the operating results for the first quarter 2014. We will then open the call for questions.

It is only a few months since our last call, but I am pleased to report that we continue to make good progress in implementing our key initiatives to leverage our products, our distinctive technologies, and our solid infrastructure and expertise. All with the goal of achieving commercial success and leadership in the rapidly growing field of personalized medicine by providing innovative genetic tests for cancer and other diseases that improve patient outcomes and reduce costs.

Our one encouraging signal is that we are on the right track, is the robust quarter over quarter growth in our core patient testing business, representing increased revenues from the advanced genomic diagnostic technologies that we see as a cornerstone of our future growth. This is being driven by a stronger focused on commercialization and operational efficiencies in this business. And we are optimistic that this focus, combined with new product introductions, will continue to propel this growth.

Mark will have more to say about these numbers in the upcoming remarks.

There were other positive developments in this quarter. Just yesterday, we achieved a major goal when we learned that we will begin trading on NASDAQ stock exchange at the start of trading day on Friday, under the ticker TBIO. Our uplisting to a major stock exchange is important symbolically, signaling our emergence as a Company on the move. And we also expect it to benefit Transgenomic shareholders through the Company's greater visibility, access to capital, and increased share liquidity.

Our core infrastructure was also strengthened during the first quarter when, we successfully completed a financing on favorable terms by raising $7 million via convertible preferred stock placement with Third Security], a well-known investment firm founded by RJ Kirk. This infusion of new money allowed us to pay down our revolving credit line, enabling the Company to access additional cash using this facility when needed.

During the quarter, we also implemented a reverse stock split, intended to rationalize our capital structure and facilitate our uplisting to the NASDAQ Capital Market. Additionally, we recruited an outstanding addition to the Board this quarter, Dr. Mike Luther, who has had a distinguished career as a researcher, manager, and a senior executive at leading life sciences organizations, including major pharmaceutical companies and top-tier research service firms. We see our success in recruiting new board members of this caliber as another promising indicator of our progress in reinforcing and expanding our reputation for excellence.

The first quarter includes a number of other developments illustrative of our new strategy. A key element is working with a variety of partners and collaborators to leverage our assets in their market reach and our partners to enhance our technologies and product offerings. This quarter was book-ended by complementary deals. We started with collaboration with Horizon Discovery, enabling us to fare the strength in our genetic testing kits to our foundation of our business through access to their state-of-the-art controls. Additionally, this collaboration is also expected to provide strategic opportunities that could significantly benefit Transgenomic's biomarker identification business.

Just after the quarter ended, we announced that Transgenomic would be providing clinical genetic testing services through Active Pharmaceuticals for novel agent to treat inherited mitochondrial disorders. This is another good example of our goal of becoming the go-to provider for biomarker discovery and genetic testing, designed to improve clinical diagnosis and outcomes.

We expect to build a broad portfolio of these types of commercial relationships and business deals with a variety of pharmaceutical and biotechnology companies. Going forward, we expect our ICE COLD-PCR technology to play a key role in our evolving [past] life medicine strategy. ICE COLD-PCR proprietary technology that enables detection of hundreds of both known and unknown mutants at very high sensitivity from a single sample using non-allele specific technology. Importantly, if key enabling technology for the practical implementation of targeted therapy impairs life medicine.

ICE COLD-PCR makes possible the accurate use of DNA analysis based on liquid biopsies, in the first instance using blood and plasma samples easily obtained from patients, rather than invasive, painful, and costly tumor tissue samples. There is considerable excitement in the biomedical community about the potential of these liquid biopsies, since we make it feasible for the first time to detect and then monitor patient response to therapy in an ongoing way. We believe the ICE COLD-PCR is superior to competing approaches due to its ultrahigh sensitivity, platform independence, and relative simplicity of use.

The enthusiastic response by hundreds of interested parties, not only strategic partners, but also MDs, clinical oncologists, and genomic scientists, to a webinar we hosted on ICE COLD-PCR this quarter, attests to a certain degree of interest in this technology. During the quarter, we were pleased to report the issuance of a new US patent that extends the scope and longevity of our ICE COLD-PCR and intellectual property portfolio, providing additional protections for this key asset.

Our partnerships with PerkinElmer, PDI, and Amgen are also progressing well. PDI has been laying solid ground work for its CardioPredict campaign and has hired an experienced diagnostic veteran who is now heading the effort. We remain optimistic about the opportunity and the product.

PerkinElmer has been making progress in Europe with our CRC RAScan products and we are seeing some positive signs there also. This market is moving toward greater testing for KRAS and NRAS, and this bodes well for us, and we are working well with PerkinElmer to ensure as we are well positioned to capitalize on this foundation in 2014 and onwards.

We are also continuing to work closely with Amgen on various projects and see it as a strong partnership in support of our CRC range of products and technologies.

To summarize, our strategic transition is still at an early stage, but we are seeing signs of positive change and early success. It undoubtedly will involve many challenges along the way, but we are cheered at our progress to date and enthusiastic, and excited about the many growth opportunities before us as we continue to build solid and broad foundation for the Company's future success. With that, I will hand the call over to Mark.

Thanks, Paul, good afternoon, everyone. We released our financial results about an hour ago, so I hope you have all had a chance to review the numbers. So let's get right to them.

Net sales in the first quarter of 2014 were $6.3 million compared with $7.4 million for the same period in 2013. More importantly, on a sequential quarter basis, that is compared with the fourth quarter that just ended this past December, our laboratory services net sales for the first quarter of 2014 increased by a solid 30%. We continue to see signs that our new commercial team is building momentum in this group.

The year-to-year decline that we saw, however, is mainly due to an event that I am sure you all will recall that happened last year, when we had a production disruption involving our NuclearMitome test. This disruption, which lasted many months, resulted in a large backlog of tests, which we resolved all in the first quarter of last year. This caused a temporary spike in our revenue last year, which distorted the comparison. Excluding NuclearMitomes, net sales in our core laboratory services business had a double-digit increase over last year's first quarter.

In the genetic assays and platform segment, the first quarter 2014 net sales declined by approximately $400,000 compared to the first quarter last year as we had fewer instrument sales in Europe. As all of you know, on a quarterly basis, this group sells low unit volumes of relatively high priced instruments. This can often cause large quarter-to-quarter swings in revenue levels.

Turning to gross profit, our gross profit for the quarter was $2.5 million or 40% of net sales, compared with the gross profit of $3.3 million or 44% of net sales in the same period of 2013. The 4 percentage point decrease in gross profit reflects the impact of last year's bolus of NuclearMitome tests on our fixed costs and the impact of -- this year of lower volumes in both our contract lab business and our instrument business, that impact on overhead.

Operating expenses were $6 million -- $6.0 million in the first quarter of 2014 compared with $7.1 million in the prior year. The decrease of approximately $1.1 million was primarily due to a lower bad debt provision in the first quarter of 2014 as compared to last year, and reductions in our lab services field sales force, as we reduced the size of our field force in the middle of 2013 and adopted a new channel strategy that uses partners rather than in-house salespeople for products that have different call point than our core offerings. This is one step that illustrates we are controlling our fixed expenses and are trending in the right direction.

In the other expense category, we recorded $50,000 of non-cash income related to warrant reevaluation in the first quarter of this year compared to $400,000 of income in 2013. The non-cash income items are a result of our current accounting rules that make us record income or expense when our stock price moves up or down.

Income tax expense increased approximately $400,000 in the first quarter of 2014 as compared to the first quarter of 2013. This year the Company recorded about $500,000 in income tax expense related to a deferred tax liability for tax amortization of goodwill. This is also a non-cash expense as required by the current accounting rules.

In summary, the net loss for the first quarter was $4.2 million or $0.60 per share compared with a net loss of $3.6 million or $0.54 per share in the first quarter of 2013.

Modified EBITDA, which excludes many of these non-cash items that I mentioned earlier, improved a bit to a loss of $2.7 million in the first quarter of 2014 versus $2.9 million for the same period in 2013. Cash and cash equivalents were $1.7 million at the end of this quarter compared with $1.6 million at the end of the year -- 12/31/2013.

As Paul mentioned earlier, during the quarter we raised $7 million in a convertible preferred stock placement with affiliates of Third Securities, which allowed us to completely pay off our $4 million revolver to minimize our interest cost, while keeping the revolver in place for use as we need it. Going forward, we believe we have sufficient cash resources to deliver on our plan this year, and we will access the revolver as cash needs arise.

At this point, I will turn the call back to Paul.

Thank you, Mark. At this point, operator, we are ready to open the call for any questions there may be.

(Operator Instructions) Matt Hewitt, Craig Hallum Capital.

Just a couple for me, actually. Would it be possible to get a little bit more color on the development and progress that you are seeing with PerkinElmer and PDI, or whether it is specifically more quantitative details? Did you see growth since the start? What are you seeing so far in Q2? Any kind of volume increases? Any additional details would be greatly helpful on both of those fronts.

We are still working on that, in reality. We don't break out that number as a defined number at the moment. We are seeing an opportunity in the market. I know, as I said, there is a trend in Europe for that business to grow and there is the demand there with the CRC RAScan in terms of the market adopting KRAS and NRAS. We don't currently pull those numbers out and separate them out, really, but we do see a trend there and we think it is opportunistic for us to grow the business.

And is it safe to assume that it has grown since the launch of those two relationships?

In terms of PerkinElmer and (multiple speakers)

And PDI.

Yes. I would say that both -- we are seeing an uptick in the business on both of them.

Okay. And is it accelerating? Is it at a sales pace at the moment, but you anticipate an inflection as we get closer to the end of the year? I'm just trying to get a sense for the magnitude of that business.

I mean, it is not -- neither of them are material to the business at the moment is the answer, probably, Matt. I think that we are keen on the opportunities. We are focused on the opportunities. We are working with them aggressively.

I had a call today with the VP from PerkinElmer there. So we see it as a very good opportunity in both cases. We are focusing on them. And -- but, neither of them are really material to the business at this moment in time.

Okay. And then, another one, a separate area for me -- liquid biopsies -- and you mentioned that there is a growing interest in them. In fact, over the past quarter, there has been a number of articles, studies, all sorts of news flow on liquid biopsies and some of your competitors are starting to make some noise. And I am curious, where do we stand as far as ICE COLD-PCR and its ability to start moving the needle from a financial perspective for Transgenomic?

So we have said over the last two or three earnings calls since I have been on the board of the Company that we see this year, the revenue coming from our biomarker identification business unit, where we will be working with the Pharma and biotech companies and maybe life science partners to actually get some revenue from that side of the business. It probably won't be material this year, but we are actually working on a strategy to commercialize it rapidly. And that is why you are starting to see that news flow coming out of us, and we will keep on doing that. We think we have got an aggressive plan on how we can commercialize it and that is where the focusing a lot of our energy and resources.

Is the increased noise that you are hearing in the market today -- do you view that as a benefit? I mean, does that help to increase awareness and, therefore, anyone actually looking into liquid biopsies is ultimately going to find you and ICE COLD-PCR? Or is there a risk that somebody jumps into the market ahead of you that makes it a little bit more difficult for you?

Well, I think as I said in the comments, we believe our technology has a superior -- is a superior technology to a lot of the ones on the marketplace. Without going into the technology in too much detail, we are able to identify hundreds of mutations, unknown and known, in any single sample with very, very high sensitivity and also from any liquid biopsy. We will be capitalizing on that.

We are non-allele specific, which is a bit technology driven. But it gives us a massive opportunity, we think, to capitalize on this technology.

I am not worried so much about competitors. I am more worried about what our strategy is, how we make sure that we capitalize on this rapidly and efficiently, and commercialize the technology.

Okay.

Does that help?

Yes. That does. And, as far as the two segments are concerned, obviously the equipment business is lumpy. We recognize that. But can we anticipate additional growth in the lab services side sequentially as this year progresses? And even on the diagnostic tools side, if you back out maybe some of the contribution from the equipment, but more looking at the assays themselves, is that business going to grow as well?

Maybe Mark can answer some of that, and then I can answer some more on the GAAP business as well.

Yes, I would say, we feel like the lab business has turned around. We saw a nice -- very strong quarter for us in the first quarter. We do think, with the launch of the new products that we came out with in neurology and CardioPredict, and even our in-line products are performing, we do expect to see quarter to quarter growth in that business.

And I would say we expect the GAAP business, the tools business to grow as well although it is going to be lumpy, Matt. We had -- we actually had a great fourth quarter, as you remember, and this quarter was just a little light. But we do think, overall, that is a growing business as well.

Yes. And, to add to that comment is really that we provided the focus and the leadership we need on all of the three business units from a commercialization. We continue to focus on them. And we will bring on new technologies and new products from other vendors to come into that organization, because we know we have got a very strong commercial team there. We have just got to support them with the right technologies and products for them to commercialize for us to bring us in revenue.

Okay. All right. I think that covers it. All right. Thanks, gentlemen.

(Operator Instructions) It looks like we have no further questions at this time. I will turn the call back to the speakers.

Okay. Well, I would like to say thank you very much for everyone attending and participation in our call, and the interest in Transgenomic. We look forward to speaking to you again in the near future on the progress we are making on the Company.