Precipio, Inc.
Q1 2013 Earnings Call Transcript

Published: 9 May 2013

[Operator:]

Good day. And welcome to the Transgenomic First Quarter 2013 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. (Operator Instructions) Also note today’s conference will be recorded and will be accessible both by phone and internet. Please refer to the press release on the conference -- 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 or any statement that 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 the forward-looking statements involve risks and uncertainties. Transgenomic actual result could differ materially for management’s current expectations. Please refer to the press release, the company’s Q-10 and Q-K, and other periodic SEC filings for the 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 the call is rebroadcasting, transmitting, or redistributed at a later date Transgenomic will not be reviewing or updating this material. I will now turn the conference over to Transgenomic CEO, Craig Tuttle. Please go ahead.

[Craig Tuttle:]

Thank you, [Joyce]. Good afternoon, everyone, and thank you for participating in today’s call. I’m joined today by Mark Colonnese, our Chief Financial Officer. I’d like to start off this call by providing a brief first quarter performance summary. Then I’ll provide an overview of our key business initiatives and commercial programs. I’ll then turn the call over to Mark who will review the first quarter financial results and following that we will have our typical question-and-answer session. But before we get going, I want to make a note that the change in our reporting structure that went into effect in the first quarter of 2013. We consolidated our laboratory -- our clinical laboratories and pharmacogenomics services business segments into a single segment, given their highly complementary nature and going forward it will be referred to as our laboratories services segment. In the first quarter we saw modest 2% growth at the topline. We continue to see topline growth in the Laboratory Services segment, which increased 11% year-over-year. This business segment is where we made our greatest investments in 2012 and we believe it will continue to be a major growth driver for the company. We continue to anticipated growth both in our Laboratory Services and Diagnostic Tools segments, and we commercialize new technologies and test we’ve acquired licensed or develop internally as we expanded other markets and regions worldwide with these products either by ourselves or with commercial partners. As you know in recent quarters, we’ve been focused on several key initiatives designed to advance our long-term growth. First, I’d like to mention the recent press release announcing our collaboration with Amgen in colon cancer. This is a very important step in our transition deeper into oncology genetic testing and we look forward to further announcements in this area. In addition we have made progress on our clinical validation of our ICE COLD-PCR technology, particular in lung cancer. We are also working aggressively to expand the awareness, clinical validation studies and marketing efforts for ScoliScore, the newest addition to our Laboratory Services units and an asset we expect will contribute to revenue growth throughout 2013 and certainly beyond. ScoliScore is the first clinically validated diagnostic tests that identify patients who are not progress to a severe curvature at the spine, thereby reducing this patient’s need for repeated doctor visits, physical exams and most importantly year of exposure to radiation for frequent X-rays. The elevated risk and incidence of cancer in these children as a result of this repeated X-rays is well documented. As we pointed out previously the market for ScoliScore is significant with nearly 1,000 children and adolescence usually between the ages of 18 and 15 entering the medical system annually with scoliosis and for home ScoliScore test and strongly impact their long-term care. And sense of few of these patients will actually progress to severe scoliosis, our ScoliScore test will translated into significant cost saving in terms of the health care system and to the patients and their families. We’ve undertaken a number of initiatives in support of ScoliScore. First, we extended our sales team to extend the reach and frequency of our calls on physicians. Second, we are collaborating with the key opinion leaders in the filed to expand awareness and also to analyze patient data in order to further demonstrate the clinical utility of the test leading to a number of new publications that will more fully describe and validate the clinical benefit of this test. Third, we are actively working with payors to expand coverage and improve reimbursement. And finally, we are initiating marketing campaign efforts to reach patients and their families to educate them about the benefit of ScoliScore and the risk from repeated X-rays. As I mentioned earlier, we expect increasing demand for this test throughout the year as our marketing efforts begin to take root and physician awareness increases. Further, we anticipate that the journal publications that we are working on will aid us in securing broad reimbursement for the assay. We also continue to provide sales support behind our proprietary C-GAAP test, which is a simple but comprehensive saliva test that more accurately predicts the patient's response to Plavix or Clopidogrel. Clopidogrel is mostly widely prescribed antiplatelet drug used to reduce the risks of death, stroke, and heart attack in heart disease patients. In addition to standard CYP2C19 testing which FDA issued a black box warning on in 2010. Transgenomic’s assay include the gene responsible for the transport of Clopidogrel through intestine and which has been shown and published clinical trials is also linked closely with patient outcomes from Plavix. As a reminder, fully 47% of patients in the U.S. have some genetic variation which can reduce the effectiveness of Clopidogrel for who could be candidates for different therapies and ABCB1 is market that is exclusively to Transgenomic. So the key growth driver that I would like to illustrate is our pharmacogenomics labs, which support clinical trials for pharmaceutical and diagnostic companies. A critical success from some of these trials completed or from ongoing trials in addition to developing deeper relationship with these pharmaceutical partners, so we are contracting increasingly larger clinical trials in the future based on the high-quality results that we provide is the opportunity for validating assays that can be transferred to our reference lab, as well as being developed into assay kit test that can be combined with our WAVE MCE platform or our WAVE systems for sales directly to other testing labs and hospitals worldwide. This will generate revenue in our tools business such as expected from our CRC RAScan test that we announced earlier this week. This is an important component to building our future presence in oncology diagnostics, our proprietary technology and the use of application. These expanding portfolio products will also include our Breakthrough ICE COLD-PCR technology that enables unmatched sensitivity and DNA mutation detection using standard sequencing equipment already installed in laboratories around the world, extremely high sensitivity ICE COLD-PCR enables detection of mutations from virtually any sample type, including tissue biopsies, blood, and circulating tumor cells. We continue to support ongoing clinical trials to validate this technology, as well as supporting several laboratories for evaluating the technology for clinical use. Final growth driver to mention that we expect to drive revenue growth is our WAVE MCE system and cancer gene mutation kits. The development of this oncology kits has been an important program in our R&D group and the commercialization then will be an important milestone. Finally, we also continue to experience sales of our HANABI Chromosome Harvesters and Spreaders products here in the U.S. and abroad. A final note, I’m proud to add that Transgenomic was recently awarded the 2013 Governor’s Bioscience Award. This prestigious award recognizes companies that have made significant contributions to the bioscience industry in Nebraska. We are honored to be recognized by the State of Nebraska and we sincerely thank Governor Dave Heineman and the Nebraska Bioscience Organization for this recognition. This award brings from the state and the larger lifescience community here. With that, I’ll turn the call over to Mark for deeper review of our first quarter results. Mark?

[Mark Colonnese:]

Thank you, Craig. I’ll recap the financials reported earlier today now. Net sales for the first quarter of 2013 increased by about $22,000 or 2% to $7.4 million compared to $7.2 million in the same period in 2012. The increase was principally driven by an 11% gain in our Laboratory Services segment largely reflecting revenue from our newer test including Nuclear Mitome, ScoliScore and the C-GAAP diagnostic tests, as well as a modest shift toward higher priced tests. In fact our CLIA laboratories group, which conduct patient testing showed a 15% increase over last year. This increase was partially offset however by lower sales of instruments in our Diagnostic Tools segment, although sales to consumables for that segment showed an 8% increase. Gross profit was $3.7 million or 50% of net sales, compared to gross profit of $3.1 million or 43% of net sales for the same period in 2012. The increase in gross profit was largely attributable to improved margins in Laboratory Services segment including our Nuclear Mitome test, which resulted from a change in vendors, and also to a favorable shift to higher margin instruments sold in Diagnostic Tools segment. Operating expenses were $7.5 million during the first quarter of 2013, compared with $5.5 million in the prior year. The increase was due to higher costs related to expansion of our field sales force to support the sales of C-GAAP and ScoliScore and other products and a higher bad debt provision. In summary, the net loss for the first quarter was $3.6 million or $0.04 a share, compared to a loss of $2.7 million or $0.05 a share for the first quarter of 2012. Modified EBITDA was $2.9 million loss for the first quarter of 2013, compared to a $1.6 million loss for the same period of 2012. Cash and cash equivalents were $7.7 million at March 31, 2013, compared to $4.5 million at the end of last year. And with that, I’ll now turn the call back to Craig.

[Craig Tuttle:]

Thanks Mark. So in summary, we continue to work diligently towards translating our strategic investments into value for Transgenomic’s many constituents including healthcare providers, patients and shareholders, and we look forward to updating you on progress through the balance of the year. And we are now happy to take any questions that you might have.

[Operator:]

Certainly. (Operator Instructions) And we’ll go first to the side of Matt Hewitt with Craig-Hallum Capital Group. Please go ahead.

[Matt Hewitt:]

Good afternoon, gentlemen. Thank you for taking my questions.

[Craig Tuttle:]

Hi, Matt.

[Matt Hewitt:]

First, could you maybe breakout little bit on ScoliScore test, some of the progress you’ve seen since you brought that under your umbrella, I think when you acquired it, it was around $2 million in revenues, you expected that you could get to $4 million with an increase sales present or actually sales present at all? And then also on the reimbursement side, where are we today on that timeframe?

[Craig Tuttle:]

So, Matt, we are, the response is, that, a little bit more complicated. Number one, we are working to get specific reimbursement improvements with many of the payors for the test that includes both contracting efforts with them, as well as these publications that we are working with, I think the most significant thing we’ve done is reengage with all of the key opinion leaders in this market to actually work with them to further the awareness of the test because many had not been contacted in some time about the assay. But also to work with them to gain publications and the publications are really the critical step toward helping in deeper support for reimbursement. And finally, we begin direct-to-consumer marketing activities that are just beginning to bear fruit in terms of patient’s learning and patient’s families learning about the assay and so those just have to take group. So at this time, we are not forecasting what we will see in the year for ScoliScore. But we definitely believe throughout the year, we will have these publications that will then justify deeper reimbursement and more contracts with key payers. And we think that’s the key in critical success. We’ve also expanded the sales team’s responsibility for selling this, so all of our reps are now covering ScoliScore. We believe it is such a significant opportunity but that's just a very recent development.

[Matt Hewitt:]

Okay. As far as publications are concerned, when should we be watching for those to hit? Is that something that could hit this summer or is it more in the second half of the year?

[Craig Tuttle:]

Certainly, in the second half of the year, although we are working very diligently with a variety of these key opinion leaders to develop the data that are submitted for publication. Unfortunately, we cannot control when journals accept the publications, but I know there are several studies being developed right now or finished for submission.

[Matt Hewitt:]

Okay. Thank you for that. Secondly, ICE-COLD PCR, I know that there is a couple hospitals that have been working on some studies regarding ICE-COLD PCR. I think the plan has always been that they would complete their studies and seek publication of the data. Where do we stand with that and how can this ICE-COLD PCR ramp, as we look at the back half of the year?

[Craig Tuttle:]

I will answer the first -- first, I will answer the last part of your question because I think it leads into the remainder. So this is an assay technology that we will have a variety of gene kits launched into the market as an RUO and for sales worldwide. And then from those sales, we expect to have deeper publications come out in combination with the studies that we are doing now. So that’s the first stab at the commercial effort. In terms of the hospital you asked about, we've actually had some customers that contacted us to buy ICE-COLD PCR kits to variety of labs and hospitals to look at the technology to see it, that something that they should include in their current clinical regimen and those are still ongoing. But equally important is the deep studies that we are doing with MD Anderson and Dana-Farber and still with UNMC here in pancreatic cancer, that should result in publications beginning as early as ASCO. So, we believe there will be some very exciting data in lung cancer at ASCO, both in circulating DNA assessment as well as circulating tumour cells. So you will see that quickly.

[Matt Hewitt:]

Okay. So there will be imposers or papers at ASCO on ICE-COLD PCR, if I’m hearing you correctly?

[Craig Tuttle:]

Yeah. That’s Correct.

[Matt Hewitt:]

Okay.

[Craig Tuttle:]

Not just from us.

[Matt Hewitt:]

That’s fantastic. As far as kind of hitting the bunch of different topics here and I apologize for bouncing around. Amgen, first of all, congratulations on your first announcement on the pharma partnership, that’s great news. Could you maybe provide or is that still going to come, as far as some details that you could provide as far as the opportunities concerned either domestically or internationally? Obviously with the European approval, I would say that that’s going to be your first revenues will come from that market. But how big of an opportunity is that?

[Craig Tuttle:]

First of all, thanks, Matt. It was a great relationship that began sometime ago and it is nice to see it mature to this level. We really are duty bound by our partner to limit the amount of information we release on that collaboration in those products until their timeline. And they make -- they are supporting announcements but you should expect things shortly from us. But what I can tell you in terms of biologically treated metastatic colon cancer patient, it’s roughly 50,000 in the U.S. and a similar number in Europe. And we think then rest of world is a similar number and we certainly know that there is demand in the Middle East and in South America and obviously in Asia for these products. So, I will told I guess I could add to that up and say maybe 200,000 potential patients. Although the biologics treatment levels I don’t believe are quite at that higher level in South America and the Middle East yet. So that’s kind of an indication of the total population of biologically treated metastatic patients. So that’s certainly a market and we will be selling laboratory services as well as kits and instrument systems to support that.

[Matt Hewitt:]

Okay. Again that’s great news. As far as the Menarini partnership is concerned, how was that progressing, when should we anticipate the full blown launch of the WAVE MCE Systems, how soon can that start getting some traction?

[Craig Tuttle:]

Again, another good question and the CRC RAScan product line will be involved in that. We are still in the final stages of beta site testing with some key European partners in collaboration with Menarini at the completion of the beta site trials. They anticipate they are through an aggressive launch. So it still remains a high priority product in their mind and our mind and it’s a strong collaboration. And we are in constant communication with them about it.

[Matt Hewitt:]

Okay. You mentioned that you’re going to be rolling the pharmacogenomics business into the lab services business. Maybe -- I would assume that’s going to make it a little more difficult for us unless you plan on breaking out of the conference calls, the revenues or the business that you generated from the pharmacogenomics in any given quarter. How should we be thinking about that business going forward and there was a couple of phase 3 trials that I know that you had been waiting for the pharma customer partner to give the green light on. Where does those sit today?

[Craig Tuttle:]

Well, on one hand we are told we cannot announce the projects that we have in queue, simply because they remain confidential and are subject to those pharma partner’s submissions. So at one point, we thought we would be able to announce but we have been informed otherwise. So you won’t hear that from us other than in terms of dollar volume tick ups in that business, which we anticipate shortly.

[Mark Colonnese:]

Other than, Amgen, of course…

[Matt Hewitt:]

Yeah.

[Mark Colonnese:]

…Which was a really nice opportunity for us to announce that.

[Matt Hewitt:]

Yeah. Okay.

[Mark Colonnese:]

But going back to your first question, Matt, that business is about 90% of that is our patient testing business in our CLIA labs. So that will be the driver of how that business progresses and how it grows. It’s such a large piece of it that pharmaceutical’s number is just not going to materialize at least in the near term.

[Matt Hewitt:]

But if I recall correctly, I mean, a couple of CRC trials depending upon how quickly they phase in, those could be significant. I mean, if I think about $1 million Phase III trial that phases in over a couple of quarters. Now, is that 10% of that business anymore. It’s much greater than that. So how should we be thinking about modeling? For example, when I realized at the end of the day, it’s up to the customer to again give the green light but -- and I realized that you can state who the customer is but from a timing perspective, are we going to have any visibility on that or is it just wait-and-see what happens in the quarter?

[Craig Tuttle:]

I think what we’ve said in the past and what’s true is that these projects that are big million dollar projects will take four, six, eight quarters to expand. So I think they will be incremental to our business but I don’t think it’s one that you’re going to see tripling of the business in any given quarter. But that said, I can tell you that the interest in our pharmacogenomic services business has expanded pretty quickly from the Amgen release. And we’ve gotten a lot of good feedback from potential customers already as a result of that announced collaboration. And what’s most rewarding to me on that one and I can go on and do it any deeper than that. But from an excellent collaboration with the partner like that, we have follow-on product that we can sell on our CLIA lab and that we can manufacture and sell into our kit -- or as a kit onto our systems worldwide. So that’s the exact model we were trying to pursue and it’s incredible for us to have it finally realized but we hope to continue duplicating that.

[Matt Hewitt:]

Okay. Maybe one more from me then I’ll jump back in the queue. Sorry, I’m monopolizing your time here. The new sales hire, obviously, it’s been a significant jump from Q1 of last year. I think you’re right, close to 30 at the end of Q4. Where does that team sit today and where do you see it shaking up maybe as we exit this year?

[Craig Tuttle:]

Well, we didn’t finish that staff up until the end of 2012. So we are -- we continue to monitor and manage those new folks and help them to learn their territories and our products. Most of them came with deep experience in the cardiac space but we did bring in some additional really strong sales professionals on the neurology side to help with ScoliScore and then ourselves decided that it’s such a big opportunity. All of our team are selling that product line. So we manage that closely and track progress. And that said I can tell you that we are looking at other vehicles to add to that and other marketing efforts to drive Scoli and C-GAAP much more deeply into the market then maybe we can hit with just those resources. So it remains a key focus and then one, I think that we will certainly get an answer for fairly soon.

[Matt Hewitt:]

So are you still -- are you saying that you’re still around 30 with no immediate plans to add to that team or from a headcount’s perspective?

[Craig Tuttle:]

That’s correct.

[Matt Hewitt:]

Okay. Great. Thanks. I’ll jump back in the queue.

[Craig Tuttle:]

All right. Thanks Matt.

[Operator:]

We’ll go next to the site of Alex Silverman with Special Situations. Please go ahead.

[Alex Silverman:]

Can you break down roughly the $1.5 million incremental on OpEx between the sales force growth and what the bad debt provision was?

[Mark Colonnese:]

The bad debt provision was a large piece of it than the sales force increase.

[Alex Silverman:]

What was the bad debt provision in the quarter?

[Mark Colonnese:]

It was about a $1.5 million in the quarter, $1.5 million.

[Alex Silverman:]

And was that a single receivable or what was that?

[Mark Colonnese:]

No, that was -- and if you look at last year’s -- I think for the year last year we did about somewhere between a $0.5 million and $0.75 million every quarter. So this was higher than normal. This was related to some Medicaid receivables we had in our lab business that was the bulk of the write-offs and the low Medicaid reimbursement that we’ve been seeing are one of the top things that we’re planning to address very shortly.

[Alex Silverman:]

Okay. Thank you.

[Operator:]

(Operator Instructions) And we will go to Brian Marckx with Zacks Investment -- I'm sorry -- with Zacks Investment Research. Please go ahead.

[Brian Marckx:]

Hey guys, most of my questions have been answered and the remaining has to do with the Amgen collaboration. I know you may be limited on what you can talk about, but I’ll give it a shot anyway. Can you talk about how the revenue model works with the collaboration?

[Craig Tuttle:]

Well, the collaboration itself is a fee for service. So they are paying to -- for us to complete the development and get the CE-IVD designation for these kits. So that’s part one that’s a fee for service. And then of course then we will begin selling the kits and that could be a revenue item in our -- like other consumables in our tool business.

[Brian Marckx:]

And so does Amgen get a portion of the revenue?

[Craig Tuttle:]

Can’t go into any of those financials associated with that.

[Brian Marckx:]

Okay.

[Craig Tuttle:]

Yeah.

[Brian Marckx:]

Okay. So it’s RUO in U.S. right now and for clinical use in Europe, correct? So is it…

[Craig Tuttle:]

And LTD.

[Brian Marckx:]

I am sorry?

[Craig Tuttle:]

An LTD SA.

[Brian Marckx:]

Okay.

[Craig Tuttle:]

I am sorry, LDT. It’s a lab developed test in our CLIA lab to make all the acronyms come out.

[Brian Marckx:]

Okay. Now I forgot my question. Relative to Menarini and how this potentially accelerates instrument placements?

[Craig Tuttle:]

The interesting news here, Brian, is that the new exons and the mutations that are contained there. We have the only kit products on the market for them. And that’s because of our collaboration with Amgen. So that gives us a significant leg up. We believe to move into the marketplace immediately and hopefully begin securing revenue for that and to support patients. Anything beyond that, we just can’t say at the moment but there will be news relatively soon on all of that.

[Brian Marckx:]

Can you say estimated timeline of when the test rolls out in Europe?

[Craig Tuttle:]

We’re going to put out a press release on that when we launch and that will be done very shortly.

[Brian Marckx:]

Okay. That’s it. Thanks a lot.

[Craig Tuttle:]

Okay.

[Mark Colonnese:]

Thanks Brian.

[Operator:]

We’ll go back to the side of Matt Hewitt with Craig-Hallum Capital Group. Please go ahead.

[Matt Hewitt:]

Just a couple of follow-ups for me. First of all, as I look at the instrument business here in the first quarter versus a year ago period, were there any push outs or was there anything or onetime in nature that occurred here in the first quarter versus a year ago period or versus other normal quarter?

[Craig Tuttle:]

This year is no. I think the big thing was last year we had a number of instruments sold to our distributor at distributor margins, and I think we’ve talked about this on past quarterly calls. So it’s more of fact that last year was a pretty good year for our instrument sales.

[Matt Hewitt:]

Okay.

[Craig Tuttle:]

Yeah.

[Matt Hewitt:]

Cash flow and in CapEx in the first quarter just from a model.

[Craig Tuttle:]

CapEx was very light. Cash flow, I don’t have that number in front of me, Matt. I can get it for you. But I can tell you it’s about $3.5 million spend. But I’d rather give you more accurate number. That’s a good ballpark for you.

[Matt Hewitt:]

Okay. Thank you for that. And then lastly, obviously you issued a press release here recently as far as Chad is moving on, what are your plans to replace that position and what kind of timeframe should we be thinking about?

[Craig Tuttle:]

Well, we wish Chad well in his next position and we’ve already engaged a consultant to help us in commercialization of the Amgen product line as well as ICE COLD-PCR and that individual was previously the VP of Biz Development and General Manager of one of the leading divisions at Life Technologies. So he’s already been making really positive inroads in driving the commercial planning and activities around those two key programs both for the European launches as well as the U.S. So that’s the first side of it. And then the other is in the short-term, we’re picking up that responsibility and deeply engaged with our sales manager and team worldwide, but we will still look to replace that position.

[Matt Hewitt:]

Okay. Well, that’s great. Thank you very much for the update. We appreciate it and look forward to the coming press releases.

[Craig Tuttle:]

Thanks, Matt.

[Operator:]

I’m showing no further questions in queue at this time.

[Craig Tuttle:]

Great. Thank you. Thanks for your questions and continued interest in the company and I look forward to further announcements of our key successes and business developments as they occur. Thank you.

[Operator:]

This concludes today’s conference. You may disconnect at this time and enjoy the rest of your day.