Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Richard J. Braun MBA, JD, CPA, – Chairman, Chief Executive Officer

Kevin J. Wiersma – Chief Financial Officer

James A. Schoonover MBA – Chief Operating Officer,

Analysts

Steven Crowley – Craig Hallum Capital

[Jeff Schmidt] – Fidelity and Company

Ruthanne Roussel – The Robins Group

MEDTOX Scientific, Inc. (MTOX) Q3 2008 Earnings Call October 16, 2008 10:30 AM ET

Operator

Welcome to the MEDTOX quarterly conference call. (Operator Instructions) At this time I'd like to turn the conference over to Kevin Wiersma, Chief Financial Officer, please go ahead, sir.

Kevin Wiersma

Good morning everyone. I am Kevin Wiersma, Chief Operating Officer of the MEDTOX Laboratory Services Division and also CFO of the company. Welcome to our 3rd Quarter Conference Call. Before Dick Braun, our CEO, begins our prepared presentation I'd like to cover one administrative item.

Forward looking statements in our conference call today are made under the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated.

Such factors are described from time to time in the companies annual report on Form 10-K and other reports filed with the Security and Exchange Commission. Our call today is in listen-only mode and we'd also like to welcome those listeners who have accessed this morning's call on the Internet.

Following our prepared remarks we'll have a question and answer session that is acceptable to our institutional investors and qualified financial analysts covering MEDTOX in our industry. We look forward to your questions. Also joining us for our call is Jim Schoonover, our Chief Marketing Officer, and at this time I am pleased to introduce Dick Braun, CEO of MEDTOX.

Richard Braun

Thank you, Kevin. It was a challenging quarter for MEDTOX but generally not inconsistent with our expectations. In our laboratory segment sample volume overall increased in the third quarter and our pricing structure remains stable. Our lab based drugs drugs-of-abuse business again showed strong growth in new sales. But that growth was negatively impacted by 11% lower revenues from existing clients due to economic conditions.

Clinical laboratory revenue increased 26%. This increase is attributed to our clinical laboratory expansion and diversification initiatives under taken in the last year. Within the clinical laboratory clinical trial services revenues in the quarter increased $2 million compared with $750,000 in the third quarter of 2007.

New signed protocols, in addition to other awarded business, now exceeds $10 million and there continues to be a growing number of proposals outstanding. Our contracts with the two existing pharma clients have designated MEDTOX as a preferred provider are contributing factors to the growing backlog.

In our last conference call we indicated that we were pursuing additional preferred relationships. In the quarter we added a third exclusive preferred provider relationship for central lab testing for clinical trials which should add to testing volumes in 2009.

As a result of our clinical laboratory expansion we have also been awarded additional new business totaling approximately $3 million on an annualized basis that has either started or will begin in the fourth quarter of 2008.

We incurred over $300,000 of incremental expenses in the quarter due to our clinical laboratory expansion. Transportation expense increased $250,000 in the quarter as a result of higher cost from our service providers. We have initiated fee increases that will take effect in the fourth quarter to mitigate these cost increases.

In the diagnostic segment revenues were flat year-over-year. The sales of devices sold into the hospitals and government markets increased 3.6 % and 31.1% respectively quarter-over-quarter. The revenue growth was negatively impacted by 9% lower sales to work place clients and reduced sales of OEM and contract manufacturing products that we are phasing out over the next two years.

In regards to our 510-K filing for the MEDTOX scan reader the FDA has requested additional data and studies which we are in the process of completing and expect to file shortly. We continue to expand and diversify our core competencies and are beginning to experience positive results from those efforts and investments.

While we are being negatively impacted in our DAU businesses because of economic conditions affecting hiring patterns new client growth in the DAU business is strong. We saw the same affect in the hiring downturn in 2003 when the tech bubble burst. But once hiring picked up we experienced double digit growth.

In an effort to accelerate both market share gains in DAU, an expansion of our clinical lab business, we have continued the hiring of new entry level associate sales representatives and have added five in the third quarter. Based on a successful emphasis on expense control the growing number of signed protocols and awarded business in CPS and other new service offerings in our clinical laboratory we remain well positioned for the rest of 2008 and 2009.

Kevin?

Kevin Wiersma

Thank you, Dick. Here are some details regarding the quarter. We experienced top line growth of 8% for the quarter. In our lab business third quarter revenues were $17.4 million, up 11% from the third quarter of last year. Revenues from drugs-of-abuse testing increased 2.6% primarily as a result of increased business from government accounts related to prison, probation, and parole.

Overall new account revenue was strong but was offset by an 11% decline in revenues from our existing drugs-of-abuse clients. Revenues in our specialty laboratory services were up 26% mainly due to continued strong growth in testing for clinical trial services.

Specialty laboratory services revenue accounted for 40% of our laboratory revenue in the quarter compared to 35% last year. In our POCDI diagnostic business third quarter revenues were $5 million about even with the prior year. Modest gains in revenues from point to collection testing products were offset by a decline in contract manufacturing and other product revenues.

Point of collection testing products revenue was $4.6 million in the quarter, up 3.6% from last year, driven by strong sales of our Sure-Screen devices into the government market. As well as continued but slow growth of our PROFILE ER devices into the hospital market.

The gains with the government and hospital market were partially offset by a 9% decrease in revenues from device sales in the work place market. Contract manufacturing revenues were $.3 million in the quarter, down from $.4 million last year. Other product revenues were $.1 million in the quarter down from $.2 million last year.

Our overall gross margin was 42.1% in the third quarter compared to 45.8% last year. Our lab business operated at 37.4% margin in the third quarter down from 40.7% in the third quarter of last year. Lab gross margins were impacted by higher costs associated with our clinical laboratory expansion, increased transportation costs, and an increase in lower margin testing related to government accounts.

Margins in our POC diagnostic division were 58.5% in the quarter compared to 61.6% last year. POC diagnostic margins were impacted by product mix. Our selling, general, and administrative expenses were $6.1 million in the quarter, up 3% from $5.9 million last year.

SG&A expenses decreased to 27% of revenues compared to 28.2% revenues last year. Research and development expenses were $612,000 in the quarter compared to $599,000 in the third quarter of last year. Other expenses were $181,000 in the quarter compared to $178,000 in the prior year and consists primarily of interest expense and the net operating results of the new Brighton Business Center.

In terms of the balance sheet our trade receivables are up from the year-end levels due to an increase in August and September sales. Our days sales outstanding is at 50 days for the quarter compared to 66 days last year.

Our long term debt is at $471,000, down from $979,000 at year end. For the first nine months of the year capital expenditures were $6.2 million [inaudible]. Basin was $3.5 million. This concludes our review of the company's [inaudible] financial performance.

Richard Braun

Thank you, Kevin. We would now be glad to take any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Steven Crowley – Craig-Hallum Capital.

Steven Crowley – Craig Hallum Capital

A couple of questions for you, obviously the clinical trials related laboratory services business had a great quarter. I'm wondering how sustainable the level of revenues you obtained in Q2 might be? It sounds like you've bolstered the customer roster. But is that enough to keep you running at around $2 million a quarter?

Richard Braun

As we've explained I think a number of times, Steve, is that the revenue in that area can be lumpy. And I think we really have to look at it on sort of a year-over-year basis. But we're pretty confident that we're on a trajectory to have nice incremental increases year-over-year. But it may be somewhat variable from quarter to quarter.

Steven Crowley – Craig-Hallum Capital

Can you tell us where the clinical trial business was in last year's fourth quarter in terms of revenue run rates? You mentioned that in Q3 a year ago it was about $750,000 and you put up about $2 million in Q3 this year. I sense if you have a much – you have a stronger fourth quarter a year ago. But I am just wondering what kind of variability there might be there in that line?

Are we talking about it could be a passable quarter this quarter or it could be a million and half? Is that kind of the range we should think about?

Richard Braun

We can't predict because these trials can be moved. We sometimes get you know on very short notice we get some business. So, it's difficult to predict, Steven.

Steven Crowley – Craig-Hallum Capital

What kind of pipeline do you have for Q4? Since we're in it I mean you must have some visibility from customers.

Richard Braun

The only information that we give out on that is the aggregate pipeline which we've said is in excess of $10 million. And we're not going to disclose what the pipeline may be for the fourth quarter.

Steven Crowley – Craig-Hallum Capital

How does that pipeline compare versus how you went into Q3?

Richard Braun

It's higher.

Steven Crowley – Craig-Hallum Capital

OK. In terms of the regional clinical laboratory what can you tell us about your efforts there and you've been cranking up the marketing efforts. Are we at the cusp of seeing some benefit, some ramp in that business?

Jim Schoonover

Steve, yes, this is Jim Schoonover. We are seeing that we—we've been building the infrastructure from an operational point of view and ramping up the sales and marketing efforts throughout the year. We saw good account acquisition in Q3. We expect that to continue in Q4.

Some clients that we have won in a competitive bidding are going to be starting in Q4. So, we're happy with the trajectory. We would obviously like it continue in a strong fashion but so far so good.

Steven Crowley – Craig-Hallum Capital

In the drop-off you experienced in your existing account base in workplace drugs-of-abuse I mean it's been a slide in that metric from modest-positive to flattish, to modest negative to pretty significantly negative.

I guess I'm wondering where you think we are in that curve? Is this about as bad as it gets from existing customers or can the pool be a lot deeper than this?

Richard Braun

Steve, we obviously we don’t have any idea where the future economic headwinds are going to come from or how strong they'll be. One thing that we do control is the ongoing acquisition of new client revenue. That has continued to be strong throughout the year. We expect that to be strong going forward and really that's what we can control. And I think our people are doing a very good job at winning new accounts.

Steven Crowley – Craig-Hallum Capital

One final question and I'll hop back in the queue. You mentioned you added five additional entry level sales reps given the success you're having in garnering new accounts. How big is that group in total now?

Unidentified Corporate Participant

Right now it's 11 and we anticipate having two additional this quarter. So year-end we're anticipating 13 associate sales reps.

Steven Crowley – Craig-Hallum Capital

And your overall sales and marketing group is how big?

Unidentified Corporate Participant

Right now it's about 32 people.

Operator

For our next question we'll go to [Jeff Schmidt] – Fidelity and Company.

[Jeff Schmidt] – Fidelity and Company

Just two quick questions, just can you kind of give us some clarity on the costs going forward related to the expansion and kind of where they taper off?

Kevin Wiersma

The cost, this is Kevin, Jeff. The cost going forward should be fairly consistent. They've been pretty consistent on a quarterly basis as we've implemented that new—the new clinical laboratory expansion. Obviously there is some variable cost that increases as the volume comes in. But from an infrastructure standpoint the costs are all in.

[Jeff Schmidt] – Fidelity and Company

OK, and then this is my last question. Just can you give some insight to your clinical trial/customer mix? And maybe and just any concerns you might have on the funding environment for some of the trials they have in place?

Richard Braun

This is Dick. There is some diversity among the clients. Generally we believe they're well funded. And we do, do some due diligence in terms of who they are and if they have money and are they going to be able to pay?

And well obviously in tough economic times there can be some surprises we're pretty comfortable with the people we're dealing with and they're ability to pay and their sort of ongoing activity level. And a number of these companies are public and so there is a good deal of visibility into their finances.

Operator

Your next question comes from Ruthanne Roussel – Robins Group.

Ruthanne Roussel – The Robins Group

Hi, good morning, it's Ruthanne Roussel speaking. I wanted to ask a little bit about the strategy for the government market. Last quarter we had eight to ten fairly sizable government customers. Can you give us any insight into whether new customers have been added or whether those existing customers have grown? Or whether we've penetrated into new states?

Jim Schoonover

Ruthanne, this is Jim Schoonover. I think to some degree the answer to all three of those is yes. The new customer acquisition, I believe, most if not all of those have been acquired in previous quarters in 2008 have started. There are certainly some of those where the degree of business we will get from them has not been reached yet meaning that we've still got more room to grow.

And then we continue to largely both through sales efforts and through referral or referral activity we continue to have new opportunities presented to us that we respond to. So, the government area has been very strong for us this year. We're obviously watching state funding for 2009. That is an area that we want to keep close tabs on.

But we've been very happy with the acceptance by the market of our SURE-SCREEN device and or [DARS] program and activities of that nature.

Ruthanne Roussel – The Robins Group

OK, and a second question. I have a note here which is from the last conference call saying that in the second quarter clinical trial services began 2008 with $5.5 million in signed protocols and now has nearly doubled that backlog.

What – can you help me reconcile that with the idea that the backlog has grown from second quarter to third quarter and is not at $10 million.

Unidentified Corporate Participant

Well, the number back then as we add the two together was approximately 10 and I think what we've said is it's now exceeded 10 million. And in fact it's closer to about 13 million. So, we absorbed about $2 million of the backlog in the quarter. But we are – we've added to the backlog and now it's growing by some 25 to 30%.

Operator

Steven Crowley – Craig-Hallum Capital, please go ahead.

Steven Crowley – Craig-Hallum Capital

Dick, thanks for the color on the clinical trials backlog. That's helpful and it certainly jives with the success you had in the period. In terms of your preferred provider deals is the business that you anticipate from the two, now the three preferred providers in that total of signed protocols? Or are those signed protocols outside the blanket preferred provider deals?

Richard Braun

In the number that we gave you we don’t put anything in there that's anticipated. Those are either actual signed protocols or contracts or we've been verbally awarded the business and we're in the process of tidying up the paperwork.

And so there is no anticipation in there. And there are protocols within that number for the first two preferred providers. The third preferred provider has only been recently signed up and I don’t believe, Jim, we've actually gotten any trials from them yet.

Jim Schoonover

No, we've not received any – well we're just starting. They've just finished their audit and we should be starting up activity with them both in the third quarter but primarily in 2009. Sorry, the fourth quarter.

Steven Crowley – Craig-Hallum Capital

Great, and in terms of the regional clinical laboratory initiative it sounds like you had a good quarter of customer acquisition, maybe some of the larger customers that might represent how many [inaudible] is too strong but sizable tenant in your business are really just going to be beginning in the fourth quarter. Is that the proper characterization?

Richard Braun

Yes, that would be appropriate.

Steven Crowley – Craig-Hallum Capital

And the response to your marketing efforts for the regional clinical trial as a local supplier here in the upper mid-west is that message resonating or is there a different part of your value proposition that seems to be ringing louder with perspective customers?

Richard Braun

I think the local aspect is important. I think the fact that we have a very broad menu of competencies and very broad test menu is important. We have our own courier transportation function here in the upper mid-west.

So I think it's a combined platform that we talk with customers about. Again many of these clients have been with their current provider for many years. So it’s not a short term acquisition process. It takes a number of visits. A number of explanations what MEDTOX is all about in terms of service and quality and things of that nature.

But we feel comfortable both with the backlog that we have going forward and also with the response we’ve received from clients, definitely a benefit being local versus putting specimens on planes and flying them.

Steven Crowly – Craig Hallum Capital

Great. Now my last area of questioning is around the second generation reader. Which is turned into quite a process for you as many other companies have experienced with the FDA this is probably a more arduous process and path than we might have expected. What can you tell us about where you are now versus where you thought you were three months ago. In terms of really answering all the agency’s questions and being able to give them a completed set of responses that might actually lead to short term approval of the product.

Richard Braun

All of what you said is true that it’s become a bit more difficult in dealing with them in the sense that they seem to be putting a bigger focus on these types of instruments in these testing area. But having said that it’s my expectation that we will be getting the information back to them that they’ve requested even perhaps by tomorrow. Or definitely by early next week.

And this time we with our outside consultants spent a considerable amount of time and conference calls with them to try to ensure that we clearly understood what they wanted. And that there wasn’t going to be any additional questions after we competed this. There is no guarantee of that. But we think that we got it this time. And so we’ll be filing shortly.

Steven Crowley – Craig Hallum Capital

Our hope would be that you’ve satisfied or addressed every question that they asked. Or some that they might have asked. Anticipated them. And are now in a position to give it a go or no go. Obviously a go decision is desirable.

Richard Braun

That’s our hope.

Steven Crowley – Craig Hallum Capital

In terms of the customer base and the volume from those customers while you’ve been disadvantaged by not having the second gen reader. It sounds like you’ve been relatively successful maintaining those customers. Is that a correct characterization?

Richard Braun

Yeah. That definitely is. I think with the help of Cardinal Health. Whose our partner in that market I think that we’ve done a very good job at maintaining our relationship with clients. I think that people at hospital laboratory environment understand that the FDA process can be time consuming.

They’ve been patient with us. They are using our existing products which are performing well for them. So I think all in all we’ve done a good job at the maintenance piece and slight growth. But I think obviously once we get the approval or the hope for approval. The growth within that market will resume some of its previous height shall we say.

Steve Crowley – Craig Hallum Capital

Have you been able to build the pipeline of, you know, very qualified prospective customers once your back in the ball game so to speak?

Richard Braun

We definitely have target group that we’ve discussed the situation with that are very interested in talking with us once this process is completed. But because of the uncertain timing we’ve not been overly aggressive at going out and starting up new conversations. We’d rather just wait and do that once we get the clearance.

Richard Braun

And Steve there is some good news out of the delay from our perspective. In responding to some of the inquires from the FDA. We made some decisions in making modifications to the product. Mostly in the software. And so the product is going to be a better product than we had out before.

Operator

(Operator Instructions). Please go ahead sir.

Steven Crowley – Craig Hallum Capital

It’s me again guys. One final area of questions if there are no more questions. It seems that looking at your website and some of your marketing material. You seem to be going down the path maybe somewhat aggressively on offering to pain clinics. There is a program called Chalks, you know the name of the program. I don’t have your website up. But how fledging of an effort is that and when might we see some benefit of your initiative there?

Richard Braun

It was an initiative that started at the beginning—Let me back up. We’ve been doing toxicology based testing for pain clinics for many years. But we didn’t really make it it’s own product line until the beginning of 2008. So it started really at a standstill in 2 1. We have had I think exceptional response from the market between that time and today. I would suggest that 4th quarter will continue to be sort of the priming of the back log.

But we should see meaningful contribution from pain throughout 2009. It’s an exciting market we do extremely well. We have a really good sales group focused on it. And we’re excited by the market.

Steven Crowley – Craig Hallum Capital

Maybe you could just paint a little picture for us through the value of our position and exactly where you sit in the equation and then I’ll stop asking questions.

Richard Braun

I think sort of the bottom line is MEDTOX was founded 24 years ago as a toxicology laboratory. And so we have many years of experience in both interpretation capability, testing capability and our scientific group does an excellent job working with the physician helping them better understand the result that they receive from us.

In terms of their patient results and also we are very good at helping them identify drugs that are above and beyond sort of “street drugs”. That might have an impact on what is going on with a pain patient. And if they—from a physician point of view it can be a bit of a difficult market because each patient is different.

And so I think the ToxSURE program is all about a cooperative effort with the physician to give them the information that they need to monitor their patient more effectively.

Operator

Thank you ladies and gentleman. At this time I would like to turn the conference over to Mr. Dick Brown. Please go ahead sir.

Richard Braun

I would like to thank you for joining us. And we look forward to speaking with you again when we announce year end results.

Operator

This concludes today’s conference for MedTox Scientific Inc. Thank you for joining us and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: MEDTOX Scientific, Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts