Precipio Inc (PRPO) 2015 Q4 法說會逐字稿

Good day and welcome to the Transgenomic year-end 2015 financial and business review conference call. All sites are currently in a listen-only mode. Please note there will be a question-and-answer session later on in the call. Also note today's conference will be recorded and will be accessible both by phone and on the Internet. For more information, please refer to the conference call's press release on the Company's website, Transgenomic.com, for further details.

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 expectation. 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, sir.

Good afternoon, everybody, and thank you for joining us for today's year-end 2015 conference call. I am joined by our Chief Accounting Officer, Leon Richards. I will provide an overview and an update of our progress and Leon will then briefly review the quarter financials and the annual review.

Strategically, we have been focused this year on making Transgenomic the leading liquid biopsy company we believe it can be. The transformation has required the discipline to divest the legacy businesses that provide most of our revenues in the past, a task that is now largely complete. Recall that these businesses were inherently money-losing propositions for Transgenomic with limited growth potential and the required time and investment to make them viable going forward.

As a slimmed down high technology innovative enterprise, we are now able to turn our full attention to commercializing ICE COLD-PCR technology, which we believe has the potential to be a core enabling technology for the rapidly emerging liquid biopsy field which is fundamentally changing medical practice and driving the adoption of personalized and precision medicine. We believe more than ever that this focus is our best opportunity to achieve robust growth and ultimately return substantial value to our shareholders. And we also believe that we have made good progress in 2015 in building a strong foundation for the future success.

So, 2015 has been a year of major change for Transgenomic as the Company has followed its announced strategic plan to divest its low potential legacy businesses and to focus on commercialization of our ICE COLD-PCR technology. We have achieved many of our strategic goals for the year intended to create a premier liquid biopsy focused company, including the launch and commercialization of ICE COLD-PCR across multiple sectors.

Broader commercialization is expected to provide increasing revenues as well as a foundation for expansion of the licensing and partnering strategy we are pursuing in order to realize the full potential of this broadly enabling technology. As noted, implementing this strategy has involved a divestiture of businesses that compromise most of Transgenomic's existing revenues.

During the third quarter of 2015, we announced the Company had sold our column separation business and the remaining genetic and assays platform business. These transactions closed in the fourth quarter of 2015.

Last month, we reported that we had initiated a strategic review and evaluation of our patient testing business that resulted in the decision to suspend testing at our CLIA laboratory in New Haven, Connecticut as we assess our strategic options for that business. Please note that the patient testing business is focused primarily on testing in inherited disorders and diseases' susceptibility and does not include ICE COLD-PCR-based cancer tests that are run in our Omaha laboratory. These divestments have made major effects on the Company's financial results. The genetic assays and platforms business and patient testing business have been classified as discontinued operations. Information presented for current and prior-year periods in the financial statement have been modified to reflect this.

For 2015, we are reporting $23 million in discontinued operations, and Leon will give you more details on these numbers shortly. Our revenue in 2015 for continuing operations was $1.65 million for the core business related to ICE COLD-PCR, including pharma services, kit sales, CLIA testing, licensing fees, and royalties. Initially, these revenues are primarily being generated from pharma services, kit sales, and CLIA testing, but over the coming two years, we anticipate that licensing and royalty revenues will begin to surpass this initial revenues and that, in the future, we could potentially be generating high gross margin, licensing and royalty revenues reaching $100 million or more.

How do we achieve this future? Firstly by creating a solid foundation for expansion of our ICE COLD-PCR commercialization and licensing activities. In 2015, we delivered on a number of key strategic goals focused on the launch and commercialization of ICP across multiple sectors. Firstly, late in the first quarter, we launched ICE COLD-PCR as a pharmaceutical services offering to allow pharma companies and biotech industries to access this powerful technology for pilot studies, patient stratification, and clinical testing targeting using the liquid biopsy technology. I am pleased to report we signed up four global customers immediately. The initial projects we are conducting with these customers should start to develop into substantial revenue, generating clinical studies over the coming years and months.

Secondly, in late 2000 -- sorry, in late Q2, we launched our ICEme kits focused on enabling the large biomedical research market to buy our kits to facilitate oncology research designed to develop better drugs to treat cancer. We rapidly signed several overseas companies to distribute these products and expect to announce a large agreement in the next few months that will provide significantly more distribution firepower behind our ICEme kits.

Thirdly, we launched our ICE COLD-PCR CLIA testing business for cancer. This exciting offer offers ICE COLD-PCR-based cancer tests in panels aimed at specific unmet needs in patient testing and monitoring. We are very proud of the fact that, in just six months, we have successfully launched eight targeted panels for colon cancer, lung cancer, and melanoma.

And, shortly, we will announce the imminent -- shortly, we will imminently launch the first liquid biopsy test for metastatic breast cancer. This is a major development and we will be offering a 10-day turnaround compared to currently a 30-day turnaround for metastatic breast cancer patients by using blood samples and identifying some of the most important low-level mutations in this devastating disease. We also expect to be launching additional cancer tests on an ongoing basis with the intention of becoming a real player in the rapidly growing sector.

Fourthly, we signed our first commercial license, commercially, for ICE COLD-PCR with Melbourne University, an important cancer center in Australia, allowing them to offer CLIA-style tests for EGFR cancer in Australia.

Finally, and fifthly, we established a strong commercial cancer advisory board that includes the thought leaders and CLIA clinical advisors to provide us oncology guidance we need to make the ICE COLD-PCR technology enabling and to enable the precision medicine market. All of these activities have helped position us and establish a foundation for TBIO to become a leader in the liquid biopsies and precision medicine field through our own sales and especially via our strategic and broad-based licensing and partnering strategy.

While we have not yet achieved our goal of signing our first major partnership, we anticipate doing so in the next several months. Now that our divestments are almost complete, we believe that BIO will be a more focused and aligned organization that is better able to deliver on the premise of ICP for the precision medicine market.

As we have stated previously, it is important to provide access to the technology as broadly as possible and, in order to achieve this, we will continue to strategically partner with sequencing platform companies, life science companies, molecular testing labs, academic and commercial, and also service providers. This strategy is being well received in the market by potential clients and partners as has the performance of our ICE COLD products. All of this gives us confidence in our strategy and that it's the right one.

Overall, we are pleased with the increasing momentum we are achieving and believe we are on track to realizing the key elements of our plans for ICE COLD and TBIO. And, with our new streamlined structure, we are now able to focus our full resources and energies on commercializing this technology, whose versatility and ease of use, we believe, are perfectly aligned to the needs of the market and the emerging high-growth sector for liquid biopsies.

With that, I will now hand over the call to Leon. Leon?

Thank you, Paul. As Paul noted, 2015 was a transitional year for the Company and, from a financial reporting perspective, the divestiture of the GAP business in two separate transactions and the suspension of patient testing -- of testing in patient testing business, have had a major effect on the manner in which the Company presents its operations and financial results. The revenues and expenses associated with the GAP business and the patient testing business are no longer included in the Company's results and information presented for both the current year and the prior periods in the financial statements has been modified to reflect these as discontinued operations. My comments will be in regards to the continuing operations only.

Net sales for the year ended December 31, 2015 from continuing operations were $1.7 million, a 33% increase compared to the $1.2 million in the same period in 2014. The $500,000 increase reflects the higher sales from the contract laboratory services lab in Omaha.

Gross profit was -- actually reflected a loss of $300,000 compared with a loss of $900,000 for the same period in 2014. The loss at the gross profit line improved due to the higher revenues and lower costs for some operating supplies in 2015 as compared to the prior year.

Operating expenses for the year were $8.9 million compared with $9.6 million in the prior period. The $7 million -- $700,000 decrease in operating expenses reflects lower stock compensation costs and some lower research and development costs in the current year versus the prior year.

In summary, the net loss from continuing operations for the year ended 2015 was $10.1 million, or approximately $0.93 per share, compared with.net loss of $10.8 million, or $1.59 per share, in 2014. We have supplied and modified EBITDA calculation, which is a non-GAAP measure which the Company views as an appropriate and sound measure of the Company's results, and the loss was $8.1 million for 2015 compared with a loss of $9.1 million for the same period in 2014. And reconciliation of that net loss to modified EBITDA has been presented in our earnings release.

Cash and cash equivalents were $400,000 at December 31, 2015, compared with $1.6 million at December 31, 2014. And, as previously announced, during the first quarter of 2015, the Company completed a financing that raised approximately $2.2 million.

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

Thank you, Leon. In recap, Transgenomic has made major and significant progress towards becoming the focused precision medicine company we have been targeting for the past 12 months. We significantly advanced our ICE COLD-PCR commercialization strategy with the launch of multiple CLIA tests for cancer. We signed our first commercial license for ICE COLD CLIA testing overseas and we continue to work with our pharma partners towards developing a scalable ICE COLD-based services business. The Company (technical difficulty) this while delivering on our promise to divest and monetize our nonstrategic assets and generate nondilutive funding to help fund our growth strategy.

At this point, we're ready to open the call for questions.

(Operator Instructions). Bill Bonello, Craig-Hallum.

Good afternoon, guys. A few questions here. First of all, I am wondering if you could walk us through the timing expectations related to the various ICE COLD-PCR commercial activities, when we might start to see some uptick in revenue or revenue from those activities, and maybe even just some kind of ballpark of how you're thinking about the size of the opportunity in the near term.

Sure. I appreciate it, Bill. Obviously, we have got four or five clients in the ICE COLD testing side of it with our pharma services business. We have been running partner studies with them. We see those projects generating revenue this year additionally to what we already get for our pharma services. Initially, they will be small projects, $250,000 to $500,000. And then as they increase, they will get up to maybe $1 million, $1.5 million, like the Amgen project we did on Vectibix. So that will be a fairly good growth. And we are actually getting interest from other pharma companies and biotechs that we haven't worked with in the past because this area is becoming a very hot area, as you know, whereby people want to use liquid biopsies to stratify the population and to eliminate or add in patients. So that will be the sort of read and booked so to speak of the first business revenue.

The kit business is starting to pick up and actually we are generating significant activity there with a lot of the US and some of the international molecular academic centers, and that is starting to pick up. But, really, we are looking for a big distribution deal. We have got one that we think we will be able to finalize and get announced this quarter, which will give us a very good standing in the market and maybe another few coming quite quickly after that. That will get the kit business up and running and get the kits being used in the academic market for people to start testing their drugs in development in academics.

Secondly, the CLIA business, as I say, we launched eight tests in the first six months, which is above what we planned, and we have got a new one coming out which will accelerate the adoption of blood biopsies for breast cancer, which is a really bad disease and the treatment and diagnosis is very difficult in metastatic breast cancer and it takes too long to get a tissue, analyze it, and then get the results. So being able to do that quickly and rapidly.

But also, we are looking at that as opportunity to accelerate our licensing opportunities by talking to the large CLIA laboratories and also the academics who do the molecular testing in-house. And it is actually generating a lot of interest. So we are working in that region. They will probably be similar revenues to the academic market for kits, but they will generate more revenue longer-term because, obviously, they will be doing more testing in-house. And that is where the royalties and licensing becomes a benefit to us because there is no real work for us. It is just they are doing the testing, they are running tests, and we just get the royalties, which is a high margin.

And then, finally, the big licensing deals, we are hoping to get one of them done this year, probably in the next three or four months as well, whereby we get it onto a platform or into a company's hands who is then going to generate business for us in the same way it will generate royalties. So overall, next 18 months, two years, it will be the kits and services and the CLIA business with oncologists. And then, after that, the royalties and licensing revenue will pick up.

We don't give guidance, but in reality we do think that the revenues we have so far will be small compared to what we will get in the next two years. And then in three to four years' time, those revenues will start growing significantly as we get royalties and licenses from the expansion of the technology and its adoption in the market very rapidly.

Okay. That's very helpful. And then can you just tell me what your latest thinking is in terms of either a regulatory pathway or trials, publications, etc.? What, at this point in, do you think you need to do from either a regulatory or publication standpoint to drive adoption, particularly of the CLIA tests or the kits themselves, maybe less so on licensing front?

We sort of park the bus, as they say, with the FDA and we will continue to keep that there. We don't believe the FDA's approval is required for the strategy we have for the licensing and commercialization we are going through. The interest and the adoption we are seeing and the activity we are seeing from molecular labs and partners leads me to believe that is the right strategy. So that is there.

In terms of papers and publications, we are presenting next week at the AACR. We've got a very good paper on T790M and another mutation that are inherently critical to lung cancer.

Additionally, as I said, we have got the new breast cancer panel coming out. We have got some other papers coming out as well on concordance and such like that that are actually very compelling and show great results.

So we will continue to do papers and publications. We are actually trying to step up a little bit more of our academic collaborations to get those accelerated.

And the study at Melbourne for the 0.02% clinical relevance has started. We had trouble getting some of the samples in there, so that is study is underway now. So that will be working in the background. So really, I think it is the partnerships, the strategies, the customers taking licenses that our products will start generating papers and publications and information, but the adoption of the technology is actually going to come from people realizing it does work, starting to use it in their own hands. And the feedback we have got from end-users, once they get the test and they start using it, they realize how simple it is, how empowering it is, and then you start adopting it. I think that will start generating the sort of adoption accelerator, so to speak, and that will put us in a good position. So I don't see us spending millions of dollars paying for external collaborators to write papers or to run samples for us in the short term, but I do see us collaborating more with some of the bigger institutes to generate work that would be copublished that has our name on, their name on, and is using their materials in-house.

Okay. And then, if I can, just a couple of quick housekeeping numbers. I may be able to back into this one, but I don't want to screw it up. You gave full-year results, but not quarterly results and because you did grade out a lot of the business into discontinued ops, can you just tell us what the revenue for continuing operations for Q4 was?

Yes, it was about a third, Bill. It was about a third.

One-third of the annual?

Yes.

Okay.

And the majority of that was not ICE COLD-PCR.

Okay. Okay. So what is that, then, just out of curiosity?

It is the core pharma services. You know, last year was a transformational year for the business. Additionally, it was a transformational year for the pharma services business in Omaha. So we continued presenting and talking to academic -- sorry, to pharmas about the technology. They have been evaluating it, talking with us, running samples. So now we are going to benefit from the fruits of that work where we will do studies and projects on the ICE COLD technology this year and start generating revenues from that where we would be using ICE COLD in our CLIA testing for pharmas. So in the past, it was more historical projects like the ones we did with Amgen and the likes of Lily in the past. So really it was just our core genomic testing using our sequencers and our next gen sequencing platforms in Omaha. So things like Vectibix and tissue samples, not quite the blood biopsies where we are going to be this year.

Okay. That's helpful. Then just the last housekeeping thing, it's on the balance sheet. Is there any chance you can tell us where cash stands today and what cash burn is looking like right now?

Yes. I mean, cash, I don't think we have put a number out there, but our go-forward cash burn has probably gone down significantly now and we're looking at $450,000 to $500,000 a month. So we have reduced that by multiples to get the Company focused and really clearly aligned to ICE COLD-PCR. The operation is all on generating revenue, as you say, from the services, the kits, the CLIA assays, and then the licensing and partnering.

Thank you very much. I appreciate it.

(Operator Instructions). Marco Petroni, MG Capital.

Following up on the question from Craig-Hallum with the cash situation, if you do the numbers, you had -- what you had at the end of the quarter, you raised $2 million. You don't have a lot of cash on hand. What are you guys going to do to bridge the gap between when revenue comes on the ICE COLD and now?

Obviously, last year, we did our nondilutive capital in terms of the GAP business and, obviously, we announced our strategic review of the patient testing business, which resulted in us doing the suspension of testing. And, obviously, the goal there is to generate nondilutive funding from the strategic review of that business. And I think that is probably all I can actually say on that, Leon, isn't it?

That's it. Yes.

So basically we are expecting some money from these assets. It still hasn't come in yet. And that will bridge the gap between now and when ICE COLD will be supporting the Company.

That is a good assumption, Marco.

Okay. And then second question. I know you don't give guidance, but you say that this is a $100 million business and potentially more. But what is the distribution of that in the first -- I mean, are we talking about two years of $5 million, $10 million, and then it goes to $50 million? I mean, how does this goal cycle work? Is it a hockey stick or is it more gradual? Just like distribution on that. Where -- if we started June 1 of this year, that was five years, how are the years going to look in terms of, let's say, percentage of that $100 million?

I appreciate the question and we have spoken, obviously, on a regular basis. It is not a hockey stick. We have got a plan that we have built up from the bottom down in terms of how many licensing deals, how many kits would someone buy, comparing it to the other players in the market, comparing it to the adoption whether it is our kit sales for our CLIA testing and then also our pharma services. And then, that grows and, as I say, there is a pivotal point, probably in year three, when the licensing and the royalty revenues will outstrip the cash generated from those other tests. So for instance, if a customer, say, I don't know, pick a name of a large cancer facility, whether it is, I don't know, Cancer Centers of America, for want, say they take this and they adopt the technology and we do a licensing deal with them. They would buy the kits off us at a discounted price and they would pay us a royalty on the tests they provide. So, we would be getting a discounted price of the kit sales and a royalty. In (technical difficulty) those royalties will start to add up to be more than the revenue that we are getting from direct CLIA testing ourselves.

However, in the short term, that will be a bigger number, though it won't be a hockey stick and it won't be a perfect straight line. But over a sort of 2 1/2 year period, it will probably (technical difficulty) royalties number will become bigger than the actual direct sales. But we will still be getting revenue from the kit sales at a discounted price and a lower margin.

Then, over longer-term, maybe in year four or five, some of the larger companies or suppliers or customers may decide to build the kits themselves. Therefore, we don't get the kit revenue. We will just get a royalty on their manufacturing rights. So really, the drive is to get to the stage that we get the highest margin revenue in the three -- years three or four or five onwards, but that, then, allows us to we invest. But, really, it is not quite a straight line. Does that help, Marco?

No, it does. It does. I mean, I guess, when will you -- or are you guys going to feel comfortable to give some guidance to lay out some (multiple speakers).

I mean, if, hand on heart, if we outperform my plan, which is conservative for this year, I would be happy to give you guidance this time next year, because if we can outperform the foundation year, the next two or three years are easy because this year is the growth year. This is the year when we get one or two things done and things start to tick over. If we can outperform the plan in-house, I think we would feel a lot more comfortable then because we will have partners using the product. We will be enabling the marketplace. If we can sign up the number of people I think we can this year, it is easy for us, then, to predict because they will be running the samples. They will be running patient samples. They will be getting billed for them and paid for them. We will just be collecting money on them and also we will have our large distributors in place for the kits. So I would say, probably this time next year, we will feel very comfortable doing it because I'm fairly confident that we have got a big enough pipeline this year.

All right. Thank you Paul.

(Operator Instructions). Joel Marcus, Network 1 Financial.

I think the one question about where some of the funding is going to come from, which is I guess the sale of the facility where you just expended the patient testing and everything. If I understood correctly, you don't seem to want to give guidance on what those assets might be sold for. If I was wrong, obviously guidance would be appreciated. And unfortunately, all of this happened so quickly I really haven't had time to read the K line for line for line. But on the balance sheet, it does jump out that you have $7 million in debt maturing this year and you don't seem to have any palpable way to pay that down unless it is renegotiated. So, what are your plans for dealing with that debt that is maturing this year to get us to the very bright future that you have outlined for us with ICE COLD?

Third Security remain very, very supportive of the Company. They always have been. They still are. The company, the organization, is fully behind what we are doing. We work with them on a very regular basis.

Personally, I don't see us -- we obviously want to pay that debt back as quickly as possible, as effectively as possible. We understand that it is a hurdle that is out there, but we haven't got any plans to make that paydown today, tomorrow. But we obviously work with Third Security on a regular basis to see how we do that and what we need to do. I don't know if you would like to add anything, Leon, about that, from a financial standpoint.

No, I think, at this point, that is about as much as we can say in regards to that, Paul.

Okay. And is there any guidance you are willing to give on what the assets behind the patient testing facilities where you just suspended operations? As I say, I thought I understood you to say that you couldn't, but I will just ask it again in case I misheard you, because all this is happening so quickly, as I said, I didn't really have time to review a lot to prepare myself for this. But can you give any guidance as to what those facilities and what that ongoing business might be able to be sold for?

I appreciate the clarification. We can't give you specific guidance of how much. I can say that we are actively working on a number of transactions that relate to the patient testing business that should bring in funds. As any or if any of that becomes material, we will obviously disclose it. We are confident that it will bring in funds and that it will allow us to keep on moving forward with ICE COLD. And that is what we have been working on. It has been a long restructuring process. I think the Company has done a good job of building it.

In the press release, we do list out the achievements that we have got on ICE COLD. And I would say it is probably when we did it in hindsight and looked back this year and said what have we done, we actually did perform a lot and get a lot of things done. And that is a credit to the rest of the business and the focus.

But, really, we just need to move forward now and make Transgenomic TBIO sort of the right business for the liquid biopsy company. The tests we are coming out with are the right tests, the good tests. The technology is being accepted. And, really, we have just got to really keep going with that and get these deals closed and do what we need to do. But we can't really give you any more clarity other than that. But I appreciate the question, Joel.

Okay. And I guess my final observation is you've accomplished an awful lot. I mean, you have got a very healthy intellectual property portfolio. You have got these things out there. And your share count for a company that has achieved all this is still remarkably low. So if you have to tap into equity to raise more money to get from here to there, I mean, it is not the end of the world because you've kept the share count remarkably low for a company that has developed like you have developed over the course of the years.

Yes. Actually, that brings up one point that I completely forgot to mention in the discussion, actually. We actually extended the IP against the patent trial in the US and, basically, we got both patents issued and confirmed and actually got six new claims granted as well, which is actually unheard of. So the validity of the patents and the strength of the patents was a concern during the year because we actually did defend the patents in the US PTO as well.

Great. That's the end of my questions. Thank you Paul.

(Operator Instructions). It does appear that we have no further questions at this time. I will now hand it back over to Paul Kinnon for any additional or closing remarks.

Now I'll say thank you very much. We've communicated our enthusiasm about the progress we are making in revitalizing TBIO and advancing the commercialization of ICE COLD-PCR with its potential to transform the Company and the precision medicine market. And we look forward to keeping you apprised of our progress.

And that does conclude today's program. We would like to thank you for your participation. Have a wonderful day and you may disconnect at any time.