Exhibit 99.1
EPOCH BIOSCIENCES, LTD.
SECOND QUARTER RESULTS
AUGUST 3, 2004
OPERATOR: Good morning, and welcome to the Epoch Biosciences
Incorporated Second Quarter Earnings conference call. At this time, all
participants have been placed on a listen-only mode, and the floor will be open
for questions following the presentation. It is now my pleasure to turn the
floor over to your host, Dr. William Gerber, President and CEO. Sir, you may
begin.
DR. WILLIAM GERBER: Thank you Operator, and welcome to the Epoch Biosciences
conference call. This morning before the market opened, we released our
financial results for the second quarter of 2004. During this call, we'll
discuss our financial performance at Epoch during the quarter, review our
progress against strategic objectives and against the specific goals we
established for 2004, and update you on what the second half of the year looks
like.
You're reminded that today's discussion includes certain
forward-looking statements about the company's future financial performance and
other business prospects that are subject to risks and uncertainties. Important
factors that could cause actual results to differ materially are included in the
company's Form 10-K and other reports on file with the Securities and Exchange
Commission. We encourage you to review these documents carefully. Further, these
forward-looking statements speak only as of today's date, and Epoch undertakes
no responsibility to publicly release the results of any revision to these
forward-looking statements.
Epoch participates in three business sectors - the
research, diagnostic and industrial markets - where the rapid, accurate
performance of genetic analysis is contributing to scientific progress, human
health and environmental safety. These are growth markets where the application
of DNA technology is changing the way we work and the way we live. We've
positioned ourselves in each of these markets through a mix of licensing,
partnering and direct product sales.
Recently, as you know, we've been managing a strategic
shift toward direct selling and marketing of Epoch products by Epoch personnel
in the research and diagnostic markets. We raised capital to finance this effort
and have been investing in capabilities and infrastructure to achieve it and we
are producing results.
Effective this quarter, we can report on two businesses
in which we sell directly to customers. In early July, we launched our first
diagnostic products for the clinical laboratory with a portfolio of 21
analyte-specific reagents, or ASR's, which we call MGB Eclipse Detection
Reagents. We accomplished this launch while we continue to grow our research
business and to build our commercial infrastructures in both businesses.
Meanwhile, we strengthened our patent portfolio and increased licensing deal
flow across all 3 businesses, including expanding the scope of our first
licensing deal and diagnostics.
Our financial performance this quarter and in the first
half reflects our decision to divest unprofitable operations and to terminate
non-productive commercial relationships so we could focus on our MGB Eclipse
products, and invest in direct marketing and sales to drive our research and
diagnostic product businesses. The financial indicators in our core businesses
are positive, and we're pleased with the trends that are emerging.
Bert Hogue, our CFO will now go through our second
quarter financial results. After he reviews the numbers for you, I'll focus in
more detail on our efforts and progress in building our diagnostic and research
businesses.
BERT HOGUE: Thanks Bill, and good morning. The second quarter's
operating results that we released this morning were in line with the guidance
that we provided to you in early May.
Before I discuss our specific results, I'd like to
remind listeners that we continue to work our way out of revenue sources in
prior periods that make comparisons difficult and obscure healthy growth in
sales of our MGB Eclipse Probe System products.
As you know, we sold our San Diego operation in the
second quarter of 2003 and terminated the Amersham relationship in the third
quarter of 2003 so that we could focus on growing our core business. In
addition, our supply agreement with Incyte terminated, as expected, in the first
quarter of this year and Federal grants that provided contract research revenues
have expired. In my comments today, I will review various adjustments necessary
to make apples to apples comparisons of the current quarter's revenues to past
periods to give you a truer picture of the growth in our core business. The may
be somewhat confusing, but please bear with me as there is an important story
that needs to be told and that our reported numbers hides. The good news is that
we are working our way out of these legacy revenues and revenue comparisons in
the future periods should be simpler. Now to the specifics of our second quarter
results.
During the quarter, total revenue was 1.9 million
dollars. Excluding revenues from our San Diego operations, total revenues
decreased 15% from last year's second quarter. This decrease was due to
termination of our relationship with Amersham Biosciences from which we
recognized a significant license fees and contract research revenues during the
first half of 2003. As an indicator of our progress, if you exclude the San
Diego and Amersham revenues as well as contract research revenues from expired
grants from the prior year, total revenues in the second quarter actually
increased 20% compared to last year. Sequentially, total revenue was basically
unchanged from the first quarter of 2004, but there are clear signs of growth.
Just over 10% of our revenues in the first quarter came from product sales to
Incyte and from chemical intermediate shipments to ABI. As I mentioned, the
Incyte supply agreement terminated in March and we had no intermediate sales to
ABI in the second quarter.
We replaced those revenues with increased sales of MGB Eclipse Probe Systems and
higher royalties.
Product sales were 489 thousand dollars this quarter,
down from 688 thousand in the second quarter of 2003. However, when excluding
San Diego and Incyte revenues from the prior year's second quarter, product
sales were actually up 34% year-over-year due to higher MGB Eclipse revenues.
Sequentially, reported product sales were down a bit from the first quarter in
2004 but were up 10% if you exclude the impact of the Incyte termination due to
a 33% increase in direct sales of MGB Eclipse products.
We're excited about the sequential growth in MGB Eclipse
direct sales over the last few quarters and we expect it to continue. While our
direct MGB Eclipse revenues in the research field are still concentrated in a
few large accounts, our customer base is increasing and our pipeline of target
customers is broadening. The sales and marketing initiatives that we started
late in the first quarter are in full swing and beginning to show positive
leading indications of future growth in MGB Eclipse product sales. Bill will
speak to these initiatives later in the call.
During the second quarter, license fees and royalties
increased to 1.45 million from 1.37 million dollars realized both a year ago and
in the first quarter of 2004. Absent of non-recurring Amersham revenues
recognized in the second quarter of 2003, license fees and royalties increased
29% from a year ago due to higher royalties from Applied Biosystems and modest
contributions from newer collaborators such as BioControl and Celera
Diagnostics. Sequentially, the 6% increase over the first quarter was due
primarily to higher royalties from ABI and Third Wave Technologies.
In early 2003, we recognized contract research revenues
from an NIH grant and a collaborative research program with Amersham. The NIH
grant has expired, and the Amersham relationship was terminated by us in late
2003. Accordingly, there were no contract research revenues in either of the
first two quarters of 2004. On the bright side, we expect modest contract
research revenues from a new commercial collaborator in the third quarter and
have several grant applications in process, including one that we expect to
begin generating revenues in the fourth quarter.
Total operating expenses for the second quarter were 2.7
million dollars, a sequential increase of about 7% from the first quarter of
2004. The increase was due primarily to increased sales and marketing costs and
higher professional fees related to corporate governance and business
development.
As you know, during the first quarter of 2004 we closed
a private placement of common stock in warrants. As we discussed with you last
quarter, generally accepted accounting principles require us to adjust the fair
value of common stock warrants every quarter. The 178 thousand dollar valuation
adjustment recognized
in the second quarter relates to the change in fair value of the common stock
warrants during the quarter. While the recognition of this change in value
impacts net income or loss, reported in accordance with GAAP, it has no impact
on the company's operations, working capital, or liquidity.
At the end of June, we had 9.2 million dollars of
unrestricted cash and cash equivalents, down slightly from 9.7 million at March
31st.
With that, I'll turn the call back to Bill.
DR. WILLIAM GERBER: Thanks, Bert. You can see from our numbers that we
continue our transition to a product company. In our research business, we added
key personnel, made significant gains in lead generation, engaged in trade show
and co-promotion activities, increased the number of companies actively
evaluating our products, and expanded our business with existing accounts.
We've retained a telemarketing firm to execute a lead
generation program for the U.S. research market. They placed over 2 thousand
calls to real-time PCR users, conducted approximately 360 interviews, and
actually produced several orders. This effort is generating quality leads for
use by our sales organization.
During the quarter we hired 2 field sales reps on the
east coast and the new product manager. The sales professionals started in early
June so their impact will be felt in subsequent quarters. We're currently in a
process of hiring a west coast representative and candidates have been
identified for this position.
Our reps follow up with the qualified leads produced by
the telemarketing firm by visiting the accounts in order to set up product
evaluation. Testing is underway at several large pharmaceutical companies and a
large biotech company in the east.
We also initiated outreach activities in Europe by
retaining a marketing consulting group and plan to hire an Epoch European sales
rep later this quarter. Technical presentations have been made to 4 European
accounts and product testing has been initiated at 3 of the companies.
We participated in trade shows and expect to be present
at relevant industry and scientific events throughout the coming year. We're
also engaging in co-promotion activities with Sigma Aldrich, a large St. Louis
based company that develops and distributes reagents and kits for pharmaceutical
and biotechnology companies, universities and government laboratories. Sigma has
developed real-time PCR reagents that work beautifully with our MGB Eclipse
Probe products and they're including our literature and mailings to their 20
thousand customer database. Our team is also developing direct mail campaigns
and a journal ad program that will launch in mid-September.
The number of customers that are evaluating our products
has increased significantly. Several of these companies represent large
potential revenue streams to Epoch. The total number of individual customer
orders has grown appreciably quarter-over-quarter. Perhaps the most significant
event to note is that our major MGB Eclipse by Design accounts, Millennium and
the NCI, expanded their business with us during the quarter. What this means to
us is that once our products are in-house, the R&D organization recognizes their
utility first hand and begins to apply the technology more broadly within the
company or institution. It takes significant effort and time to land a large
corporate account, but once we're over that hurdle we can take advantage of
organic growth within the account.
Now let's turn to our new business, molecular
diagnostics. As planned, we launched an initial portfolio of 21 MGB Eclipse
Detection Reagents, analyte-specific reagents for the clinical laboratory
business. MGB Eclipse Detection Reagents are the next generation in DNA probe
and primer technology for real-time PCR, bringing to clinical laboratories the
high performance of Epoch's genetic analysis technologies that are widely
available in the research community. Our first battery of proprietary Epoch
reagents includes assays to detect 13 infectious diseases, 5 inherited diseases,
and 3 cancer related targets. We intend to expand the portfolio to at least 30
reagents by year-end and we're on track to do so. Our first diagnostic product
sales occurred during July.
The advantages of MGB Eclipse Detection Reagents to
customers include a broad menu, high performance, internal controls, a common
operating protocol, and compatibility with the lab's installed instrument
system. The early feedback from the market has been very positive, with target
customers responding particularly well to our product's high performance and
quality. The labs are very receptive to the bottom line effect our products can
produce in their businesses. Several of the top 10 commercial and university
labs are now actively testing our products.
As announced in May, we initiated the collaborative
agreement with ARUP Laboratories, a Salt Lake City based national clinical
reference laboratory for the development and supply of MGB Eclipse Detection
Reagents. We're collaborating with ARUP on the development and validation of
infectious disease assays. We've had very positive feedback from the infectious
disease lab and utilization of our products has expanded to additional groups
within their organization. ARUP has successfully validated 3 assays, and 3 more
are in progress. They now have 3 Epoch products on-line for patient testing and
they've initiated publications on the use and advantages of our products.
We added key personnel here to support our diagnostic
initiative, including a Product Manager and a Director of Manufacturing with
significant experience in the diagnostic business. Paul Hulker brings us over 25
years of manufacturing and general management experience specifically in
diagnostics. He was most recently General Manager of Alidex, a supplier of
diagnostic products and
subsidiary of Polymedco. Previously, he was VP Operations for the Diagnostic
Sciences Division of C.R. Bard, and held senior manufacturing positions at Murex
Corporation and Baxter Healthcare. Paul will continue to build the capabilities
and reliability of our cGMP manufacturing function while focusing on
consistently high quality and low turnaround time.
We're developing an ad campaign targeting diagnostic
journals to build awareness, a trade show program, and a direct-mail program
based on trade show lists. We've already participated in our first trade show at
the Clearwater Virology Meeting. This meeting is sponsored annually by the
Pan-American Society for Clinical Virology. We've conducted 70 customer
interviews at the meeting and scheduled follow-up visits with many of these
targets.
Our value proposition in the ASR market is the broadest
line that's easy to use, high performance, cost-effective reagents in one
catalogue. We know customers have a strong desire to have alternatives and
believe our solution will have significant appeal to customers of all sizes.
Diagnostic product sales have begun and although we continue to believe they'll
be modest in 2004, this business represents a key growth engine for our future.
Apart from our direct selling initiative and
diagnostics, we've expanded our license agreement with Celera Diagnostics 4
months after entering into the initial worldwide non-exclusive deal. The
licenses cover incorporation of Epoch's MGB and Eclipse Dark Quencher technology
into TaqMan probes for selective infectious diseases and allow Celera
Diagnostics to manufacture, sell and distribute diagnostic assays that utilize
Epoch's Minor Groove Binder and Dark Quencher in selected products. We receive
license fees and royalties on sales of the licensed products to end-users.
In conclusion, we're pleased with our progress in
building our product businesses. We believe we're doing the right things to
establish product acceptance and to create momentum in the quarters ahead.
Now a few comments on what the rest of the year looks
like from a financial perspective. Bert?
BERT HOGUE: In our late February conference call, we outlined our
plan to make aggressive investments in building our sales and marketing
infrastructure during 2004 to address the opportunities we see for our products
and technologies in both the research and molecular diagnostic field. We raised
money to fund these investments and we began executing on that plan late in the
first quarter. We also indicated that revenue growth during 2004 would be back
end loaded as we realized returns from both our sales and marketing efforts in
the research field and the launch of our molecular diagnostic products. We said
that year-over-year revenue comparisons during the first half would be difficult
due to the Amersham and San Diego revenues realized last year. We also said that
sequential quarterly revenue growth in the first half of the year would
be nominal due to rotations within our revenue sources, in particular the
declines in chemical intermediate shipments to ABI and termination of revenue
generating contracts such as our supply agreement with Incyte and NIH grants.
To date, that guidance has been spot-on. While we're
experiencing steady growth in our direct sales of MGB Eclipse products, such
growth has been offset by the loss of non-recurring revenues realized in prior
periods and our progress therefore is not obvious as we work through these
rotations in our revenue sources and product mix. We indicated in February that
we expected full year revenues could reach 10 million dollars. Although we've
executed on our plan to build infrastructure and add personnel in support of our
direct sales strategy, these efforts have taken more time that we'd planned.
We currently expect full year 2004 revenues to be closer
to 9 million dollars. The decrease from our prior guidance is primarily the
result of two factors that had an approximately equal effect. One, a significant
decrease in chemical intermediate purchases forecasted by ABI for much of 2004;
and two, a later than anticipated increase in research product sales through
direct sales channels. The markets are there. Our products are being well
received by customers and prospects and our expanded sales and marketing
activities are reaching far more customers now than just 2 quarters ago.
However, revenue growth in the second half won't accelerate at the same rate as
we once thought. That said, revenue comparisons in the second half of the year
will be positive, both year-over-year and on a sequential quarterly basis.
Sequential revenue growth during the second half of the year will be driven by
increases in MGB Eclipse product sales, both in the research and diagnostic
markets and in royalties and contract research revenue.
The growth of our core business makes us very
optimistic. Consider this: if we subtract revenues for non-recurring sources -
San Diego, Amersham, Incyte, and expired grants - from reported 2003 revenues,
our adjusted 2003 revenues were approximately 6.4 million dollars. Our current
2004 revenue forecast of around 9 million dollars represents pro-forma
year-over-year revenue growth of over 40%. All in all, we're quite pleased with
that performance and, more importantly, that we worked ourselves through the
loss of these legacy revenues, launched a new product line in the larger and
faster growing molecular diagnostics market, and will enter 2005 with a mix of
revenues that's not only sustainable but poised for growth.
As for the third quarter, we expect growth in sequential
revenues to resume and total revenues to be between 2.2 and 2.4 million dollars.
Product sales are expected to be up sharply with continued increases in direct
sales of MGB Eclipse products in the research field and initial, albeit modest,
revenues from MBG Eclipse Detection Reagents. Product royalties are expected to
be up about 7% this quarter on a sequential basis and we anticipate contract
research revenues from a new commercial collaboration. Net loss for the quarter,
prior to any impact from changes in the valuation of common stock warrants, is
expected to be between 500
thousand and 700 thousand as we continue to implement our direct sales and
marketing and business development programs.
I'll now turn the call back to Bill for some closing
remarks.
DR. WILLIAM GERBER: I believe that over the next 6 months, we'll be in a
better position to independently assess the progress of our product businesses
as the visibility of our effort grows and intensifies. Our advertising and trade
show activities for our ASR products will begin in the fall. For example, we'll
be at the American Society of Human Genetics Meeting in Toronto in October and
the Association of Molecular Pathology Congress in Los Angeles in November. For
much of Epoch's history, we've been the molecular version of Intel Inside for
TaqMan and Invader products. Now our products are out front and our people are
very gratified to see our new sales and marketing organization put creativity
and muscle into promoting MGB Eclipse directly to customers.
In addition to a higher profile on both the diagnostic
and the research markets, there are more tangible events you can look for in the
second half. Significant new MGB Eclipse by Design accounts in the U.S.;
emergence of Epoch's European research products business; new MGB Eclipse
Detection Reagent accounts, both large and small; new MGB Eclipse Detection
Reagent products, bringing the tally to at least 30; additional collaborations
producing contract and royalty revenues; and importantly, growth on all revenue
lines.
Cheryl, we'd now like to open the call up to questions.
OPERATOR: Thank you. The floor is now open for questions. If you
have a question, please press `star, one' on your touchtone phone at this time.
If at any point, your question is answered, you may remove yourself from the
queue by pressing the pound key. Questions will be taken in the order they are
received. We do ask that while you pose your question, you pick up your handset
to provide optimum sound quality. Please hold while we poll for questions.
Our first question is coming from Adam Chazan of Pacific
Growth Equity.
ADAM CHAZAN: Hey guys, a couple of quick questions on the diagnostics
front. I was hoping you could kind of give us a feel for what the direct selling
effort might look like, in particular what kind of sales and marketing group are
you planning on assembling, you know, and what the timeline is there. Secondly,
in terms of the menu expansion, you're talking about adding somewhere around 9
products before the end of the year, do you expect the focus to continue to be
on infectious disease, or do you expect, you know, kind of a balancing of the
portfolio or will you push into any other areas.
DR. WILLIAM GERBER: Thanks Adam. Good questions. The sales and marketing
organization currently, the dedicated folks, we have a Senior Product Manager
who's assisted by a full-time Product Manager here at the office that are
focusing on this. We've hired Steve Owings, who was head of sales for Visible
Genetics and knows the market extremely well. He's based in Atlanta, and is in
the process of hiring 2 additional people - one on the east coast and one on the
west coast - to be onboard by the end of the year. And really since our target
market is, at most, 400 labs in the US but obviously we're using the 80/20 rule,
we think that ultimately 5 or 6 people is going to be as many as we probably
want to have in the US and that having 3 by the end of the year'll help us ramp
up at the rate that we think is appropriate.
As far as the assays in the menu, the clinics continue
to have an infectious disease focus and the reason for that is as you know we're
collaborating with a large number of labs - all commercial but some university
based and some free standing commercial labs including the largest in the
country - and their interest seems to be primarily in the area of infectious
disease assays for using real-time PCR. The genetic disease market as you know
is dominated by Cystic Fibrosis, and we're not going there. Then you drop way
down to Factor II, Factor V, and hemochromatosis and a few other tests; so that
market segment we won't focus on heavily. Cancer's an interesting area,
obviously more and more genes and mutations are being identified in cancer cells
that are important potentially in predicting outcome in response to therapy. As
you know we've done this work with the NCI where they've identified SNPs and
cancer cells and we've designed assays for them. Several hundred of those assays
are available on our website. We're expanding that menu with NCI and will
continue to make them available and we're hopeful that through research, some of
them will become significant commercial tests that will be routinely run on
tumors to predict the outcome of the disease. But that's going to happen over
time, although ultimately I think it's going to be a very large market.
OPERATOR: Sir, does that complete your questions?
ADAM CHAZAN: You know, I'll follow-up with one more question.
Molecular diagnostics was a focus, or I should say one of several key topics at
AACC this year. Just curious what your read on the conference might have been
and where you think things are going to go over the next year to year and a half
in terms of ASR and ASR related products.
DR. WILLIAM GERBER: I think that you know the ASR regs from the FDA have
really opened up, opened up the opportunity and accelerated the opportunity
significantly in that companies like Third Wave and ourselves have been able to
enter the market where in the old days it would have been very, very difficult
given the regulatory requirements. I think that what we're trying to do and
obviously I think we're going to be successful at, is to focus on a segment of
the molecular diagnostics market that the big guys have tended to shy away from.
They're fighting it out over HCV and HIV and Cystic Fibrosis and they're not
really paying a lot of attention to the dynamic nature of this market. The
advantage of our technology is we can
develop an assay with a collaborator very, very rapidly and introduce it. We can
work with some of the more innovative people in the industry on developing these
assays and making them have the type of sensitivity that they need and the type
of performance they need. So we're going to continue to kind of fly under the
radar of the big guys and build what we know to be the largest menu in the
industry and continue to work with our target market very, very closely to have
success. I think the interesting thing is that I think the big guys are going to
stay kind of at the backend of this, and that is as assays grow, be they say a
quantitative CMV assay or as these novel assays are developed and are
commercialized, I think they're going to wait at the backend of the 510K process
and basically adapt these things to their high throughput instruments. So I
think the ASR market is going to continue to be a rapidly growing, rapidly
evolving market and I think it's going to continue. Probably we're going to see
companies like Third Wave and ourselves have a lot of success in it by virtue of
our focusing very narrowly on the opportunity and applying our technology to it.
ADAM CHAZAN: Great. Thanks.
DR. WILLIAM GERBER: Sure.
OPERATOR: Thank you, our next question is coming from John
Sullivan of Leerink Swan. Please pose your question.
JOHN SULLIVAN: Hey guys, good morning.
DR. WILLIAM GERBER: Good morning John.
JOHN SULLIVAN: I had a couple of questions as well regarding the
diagnostic opportunity, but let me just start regarding the traditional research
opportunity for one moment if you don't mind. You had talked about in describing
the research opportunity; you talked about a survey and a telemarketing firm
that you hired, where you're contacting a large numbers of researchers,
real-time PCR researchers. I'm just wondering if you can, if you're getting back
any information about general trends in use of real-time PCR among, I assume
you're talking mostly to academic researchers. Just trying to get some sense of
whether academic researcher work is still in the real-time PCR area or if it's
moving forward from genes into proteins and cell based research, that sort of
thing.
DR. WILLIAM GERBER: Well John, there's still, we think, a good 20, 25%
growth in real-time PCR generally and ABI keeps coming out talking about 20-30%
growth in their SDS market. So there's no question it's continuing to grow and
people are continuing to apply the technology. I think, you know, first we're
just seeing more and more people jump on board and recognizing the advantages of
real-time PCR over more traditional methods. And second, I think in terms of
innovation, people want to look more at things like splice variance and
multiplexing and other applications of real-time PCR that they'd find more
useful in their work, even applications like CPG methylation. So it's
continuing to grow, it's continuing to evolve, and new applications are
continuing to be developed.
JOHN SULLIVAN: Okay, that's very helpful. Well let me shift now to the
detection reagent business. Can you just speak for a moment? You talked about
the marketing, could you just talk about you had mentioned some of the early
access customer's remarking on the bottom line benefits to the lab of your
products. Can you just flush that out a little bit more, what sort of benefits
are they perceiving?
DR. WILLIAM GERBER: Well I think one major benefit, and you cannot
underestimate this, is lot-to-lot consistency. These labs when they buy a new
lot of a product, have to do a very brief re-validation of the assay and if you
can come up with highly consistent reagents such that when they buy a product
from you it works the same way as the last product they bought from you. This is
very, very important to them and we've been very pleased that one of our
customers, a household name, has said that the product that we're shipping them
is the highest quality product they've ever received from anybody. So that's
very, very important. The second is common protocol. If you run one of our
assays, you can run all of our assays because the protocols are identical.
This is very important in terms of labor because it
means that you can take on another one of our assays without retraining your
tech. It's basically run the same way and if you've got a 96 well plate, you can
break it up and run 3 or 4 of our assays on it because they all run at the same
temperature and use the same settings. The third is an area that's very
interesting and I won't go into it now, but we will as the time approaches more
and that is that the expiration of PCR patents next year, the basic PCR patents.
Given the fact that our probes are not degraded they don't infringe the TaqMan
patent, and given the fact that native Taq is now outside of patent in the
United States, it appears people have freedom to operate outside of Roche's
patents using native Taq, and our assays work beautifully with native Taq. It's
our view currently that these labs can start using our product early in 2005
without paying royalties to Roche. Now this is a very big deal for them because
you're talking about royalty rates anywhere between 10 and 18%. So that's
another consideration that's not a minor one for many of these labs.
JOHN SULLIVAN: Terrific. Thanks very much. And just to be clear. ARUP
is going to be, is ARUP helping you design assays or is just helping you produce
assays once you've designed them?
DR. WILLIAM GERBER: Both. And we're, again, we can design these assays very,
very rapidly so that with ARUP and others, you know, we will develop a prototype
assay and bring it to them, they'll run it on human samples and if they find
that we miss a few or that the sensitivity isn't quite right or something, we'll
redesign it with them until it meets their specs. Then by virtue of them
validating it, running a full validation and putting it online in their lab, it
makes it much easier to approach the next lab and say, "Look this is up and
running at ARUP so your risk in validating it is very, very low." So
there's a good deal of value in having this kind of relationship with ARUP and
we're developing the same type of relationship in other areas with other labs.
JOHN SULLIVAN: Understood. And my last question regarding your vision
for this business. Do you expect a significant portion of this business to be
custom requests from your customers regarding assays that they want to see?
DR. WILLIAM GERBER: In the research area, that continues to be an important
part of our focus. ABI is a product company, they don't do so well when it comes
to service or providing custom products, so in the research area that's
absolutely something we do. In the diagnostic area, it's not so much a custom
assay, but if somebody says that they work in a particular area and they're very
interested in us developing an assay, provided we believe that this is a
potentially expanding opportunity and we confirm that with some other
collaborators, we're happy to develop and assay very, very rapidly. But again,
that's based on customer demand and our belief that that assay will be a
significant seller.
JOHN SULLIVAN: So it's more customer feedback just to inform your
development of new products that will be broadly distributed in molecular
diagnostics?
DR. WILLIAM GERBER: Absolutely. You know, there are already a couple
products on our list that weren't there at the beginning of the year.
JOHN SULLIVAN: True. Thank you very much.
DR. WILLIAM GERBER: You bet.
OPERATOR: Thank you, our next question is coming from Jonathan
Feldman of SBZ Select Investment. Please pose your question.
JONATHAN FELDMAN: Good morning. I was wondering if you could give me a
little color on how the company's relationships with its partners are
proceeding?
DR. WILLIAM GERBER: Sure. Our research partners?
JONATHAN FELDMAN: Yup.
DR. WILLIAM GERBER: Absolutely. Bert can cast some light on this because a
lot of this is financial, but our relationship with ABI continues to be very
strong. As I mentioned earlier, in their recent earnings call I believe they
pointed out the SDS business, our business with them, is growing at 25% plus
growth rates year-on-year. So they're doing very well. Third Wave, we've been
pleasantly surprised at their performance in terms of growth and royalties from
Third Wave. I think if any of you follow them, they're projecting over 50
million in sales this year; 15 million in the diagnostic area. And again, our
technology's inside that Invader platform. QIAGEN is our major research partner
and I would say that QIAGEN's portrayal of themselves has
been dead-on; they're slow to start but once they start to gain speed, they tend
to start coming on strong. We've been disappointed, frankly, with QIAGEN's
performance in the first year of the relationship but there now appears to be
signs of real life including in Japan from research customers. Bert do you have
any other comments on how things are going?
BERT HOGUE: Only that we focus a lot on our diagnostic initiatives
but it's important to keep in mind that those companies and others, place a
value on our technologies and the revenues from those customers continue to
grow. So it's an important part of our business and will continue to be.
DR. WILLIAM GERBER: Yes.
OPERATOR: Thank you, our next question is coming from Beth Levin
of Cision Ventures. Please pose your question.
BETH: Hi. Good morning.
DR. WILLIAM GERBER: Good morning.
BETH: I just had a question about where the increase in core
revenue growth is coming from?
BERT HOGUE: Sure. I'll take that. I'm guessing you're meaning the
increase I characterized as 6.4 million in adjusted 2003 revenues to 9 million
in 2004 revenues. Is that the question?
BETH: Yes.
BERT HOGUE: Great. If you look at our 3 revenue line items on our
P&L, product sales increase is about 40% of that, and license and royalties and
contract research is about 60% of that. Within product sales are a couple things
that I'll break apart for you. MGB Eclipse products, direct and otherwise, and
the chemical intermediates business we have with ABI, which is, frankly, a
negative from 2003 to 2004. And I carved that out because that's kind of our
wholesale business, our products that we ship with our technology in them to ABI
pursuant to our license supply agreement that they turn around and sell as MGB
TaqMan products. We have very little control over that revenue flow and really
it shouldn't be viewed as an underlying indicator of the strength or weakness in
our business. It just ebbs and flows as ABI forecasts. They purchased a lot of
that material in 2002 and 2003, and even as their SDS business continues to grow
25% year-over-year, they're just using up that inventory now, which leads to a
decrease in the business to us. So if you carve that element out, product sales
are about half of the increase from 6.4 to 9 million, and royalties and the rest
are the other half. It's consistent with our business model.
BETH: Okay. Thanks.
OPERATOR: Once again, the floor is open for questions. If you have
a question, please press `star, one' on your touchtone phone at this time. Once
again, for further questions, please press `star, one'.
Thank you, our next question is coming from Howard
Feldman of ACN Securities. Please pose your question.
HOWARD FELDMAN: Good morning Bill.
DR. WILLIAM GERBER: Good morning, Howard.
HOWARD FELDMAN: I've noticed 4 years ago or so, soon after you joined
the company, that we'd have quarterly calls like this with very little
participation. We're now seeing a great deal more participation. Are you finding
that the Wall Street community is starting to put the company on the radar
screen and maybe some of the bigger guys, as you say, you're operating under the
radar of these bigger guys, but aren't these bigger guys also showing some
interest in the company? That is, are you starting to see, or can you even
comment on interest you're starting to see from Wall Street?
DR. WILLIAM GERBER: Well, you know, I think we're in the same position as a
lot of companies in our sector right now, Howard, and that is that there's
simply no interest on the part of the large houses because there's no banking
business to be done with a company of our size and they're simply not going to
be bothered. But there are a number of firms that are moving into the kind of a
vacuum that was created by the consolidation that are starting to focus on this
sector and work with companies like us and, yeah, I think that there's no
question that our move into diagnostics has potential for some significant
revenue growth, really starting next year, and has started to catch the
attention of some of these firms. And really I think in terms of investor
interest, that continues to be significant in terms of funds and the like.
HOWARD FELDMAN: And the 9 million dollars that you have, would that even
be considered for acquisition?
DR. WILLIAM GERBER: Yeah. I think we've talked about this before. We're
certainly focused on organic growth here because we've got a very colorful
technology and we want to leverage it. At the same time, you know, we recognized
that organic growth, even at 40% a year, doesn't qualify for significant revenue
story in terms of top line revenues. So we are always open to the notion of
acquiring companies or products using either cash or equity, provided it makes
sense strategically, so that we can tell a story to you and other investors that
makes sense and that you like, and provided that it's accretive.
HOWARD FELDMAN: Thank you.
DR. WILLIAM GERBER: You bet.
OPERATOR: Our next question is coming from Adam Chazan of Pacific
Group Equity.
ADAM CHAZAN: Hey guys. Another quick question on the existing
portfolio. You mentioned that 3 of the assays that ARUP is running - are running
I should say - were validated and essentially designed by those folks. Can you
comment at all as to, you know, the balance of the portfolio, how are those
designed, who were you working with, if anybody, and you know, what were some of
the considerations behind designing and developing those products, and may this
change going forward as you talk to more and more potential customers?
DR. WILLIAM GERBER: Sure. Actually Adam, I was probably a little bit
misleading. We design the assays initially. We can go out and do a blast and
look at their sequences and come up with what we think is an assay that will
work well, and then we'll actually validate that assay against synthetic
templates with synthetic targets. So then we take it to ARUP or other
collaborators and say, "Alright, we think this is pretty good assay, why don't
you run it on your human samples that you have banked here and tell us how it
performs." Now, not unusually, it performs just fine and they're happy to adopt
it as designed.
But in one example, we've designed an Enteroviral assay,
and as you know there are dozens of Enteroviral sub-species and it turned out
that on a group of a hundred assays that they were quite certain were positive
for Enterovirus, we missed I think 3. Well, they went back and sequenced those 3
and found that they were as yet unknown variants, not yet described in the
literature, that we couldn't have predicted. So we used some of our modified
bases to basically change, I believe in this case it was the primer sequence,
the primers, and it worked beautifully and then got those 3 and now they're very
happy with the assay. So it's not so much that they design them for us, it's
that they validate them for us and if we need to tweak the assay because of
something like that, we'll do it. Is that helpful?
ADAM CHAZAN: Yeah, that's helpful. So of the portfolio now, I mean,
is this generation 1, generation 2, and when you describe something as a product
that's in the portfolio, you know, how many turns has it gone through or how
many potential turns to you envision any potential candidate going through?
DR. WILLIAM GERBER: Well, all of the cancer assays we validated on samples,
so they're done. The genetic assays you can get samples on. So those we know
work fine. It's really in the infectious disease area and I would guess of the
13 infectious disease assays that we have out, something like 7 or 8 have been
validated by partners as working or we're in the process of doing that, and the
others we're just about to enter into validations for at other sites. And again,
I think the Enterovirus is really an exception; most of them work just fine
right out of the box. But if there is tweaking to make them a high performance
assay, we're more than happy to do it and the turnaround time on that is usually
weeks from the time that we're told, "You know, we'd
like this to be a little more sensitive" "till the time that we get it back in
their hands and they validate it.
ADAM CHAZAN: Thank you.
DR. WILLIAM GERBER: Sure.
OPERATOR: Once again the floor is open for questions. If you do
have any final questions, please press `star, one' at this time. Gentlemen, at
this time there appear to be no further questions.
DR. WILLIAM GERBER: Well, thank you very much, operator and thanks everybody
for participating in the call today. We appreciate your interest in our company
and our business.
OPERATOR: Thank you. This does conclude today's teleconference.
Please disconnect your lines at this time, and have a wonderful day.