Nanogen, Inc. Q3 2008 (Qtr End 9/30/08) Earnings Call Transcript

Nanogen, Inc. (NGEN)

Q3 2008 Earnings Call

November 17, 2008 at 4:30 pm ET

Executives

Nicholas J. Venuto – Chief Financial Officer & Vice President

Howard C. Birndorf – Chairman of the Board & Chief Executive Officer

David G. Ludvigson – President & Chief Operating Officer

Analysts

[R. Andrews – Laidlaw Incorporated]

Presentation

Operator

Welcome to the third quarter 2008 Nanogen Incorporated earnings conference call. My name is Eric and I will be your audio coordinator today. At this time all participants are on a listen only mode. We’ll be facilitating a question and answer session at the end of the presentation. (Operator Instructions) I would now like to turn your presentation over to your host Mr. Nick Venuto, Chief Financial Officer.

Nicholas J. Venuto

Welcome to Nanogen’s conference call to discuss our third quarter financial results. If you do not have access to the Q3 results press release you can find it on our website at www.Nanogen.com or you can call area code 858-410-4600 and ask for investor relations. Also on today’s call with me are Howard Birndorf, Chairman and CEO and David Ludvigson, President and COO.

On today’s call we will review the third quarter results and our outlook for the remainder of 2008. After the discussion we will poll the audience for questions. Before we move ahead, please note that during the course of this call we may make projections and other forward-looking statements regarding future events or financial performance that involve risks and uncertainties.

Our actual results may differ materially from projections described in such statements. Factors that may cause such a difference include but are not limited to those discussed in our annual report on Form 10K as filed with the SEC on March 31, 2008. A copy of our 10K is available upon request from investor relations at Nanogen and may be accessed via our website at www.Nanogen.com. Let me have Howard continue.

Howard C. Birndorf

The third quarter was an eventful one for Nanogen as we announced our planned merger with the Elitech Group and achieved another quarter of improved financial performance. Since signing and announcing our merger agreement with the Elitech Group in August, we have started to work more closely on the activities necessary to close the transaction and on planning to achieve a successful and smooth transition.

We remain very excited about the combination and the value it will bring to our shareholders, customers and employees. David will provide more information on the merger later in the call. Our third quarter financial results continued to demonstrate the excellent progress we are making to grow our business and move towards profitability. Our quarter revenue of $13.8 million represents an increase of approximately $1 million from the previous quarter and was more than 60% higher than the prior year.

Gross margin improvement together with a planned decline in operating expenses resulted in an improvement of more than $2 million in modified EBTIDA quarter-to-quarter as compared with the prior quarter. As a reminder, modified EBTIDA is management’s measurement of operating performance that we report each quarter.

A year ago we undertook a significant restructuring of our business and our financial performance since then has been very much in line with our plans. Compared with the third quarter last year, our total revenues increased by 64%, product revenues increased by 41% and the modified EBTIDA dramatically improved from a loss of $7.6 million to a loss of $600,000.

We continued to aggressively work to reach breakeven. Finally, we expect to end the year having met our objectives for revenue, expense management and consistent improvement of modified EBITDA. With our significantly improved financial results and the pending merger with the Elitech Group, we are looking forward to a strong 2009.

Nick will now review the financial results for the third quarter.

Nicholas J. Venuto

We are very pleased with our financial performance for the third quarter. Total revenues, as Howard stated were $13.8 million and were comprised of $7.8 million in product revenue, $1.5 million in licensing and royalty income and $4.4 million was from contracts and grants. As we expected, the third quarter product revenue was even with the second quarter as our European molecular diagnostic business experienced the expected reduction in product revenues due to the seasonal buying patterns in Europe.

Contracted revenue was higher than expected due to recognition of additional revenues in the quarter. The overall gross margin percentage for the third quarter was 68% compared to 58% in the second quarter. The improvement in gross margin percentage was due to the increase in contracts revenue and lower cost associated with the closure of our Toronto manufacturing facility.

R&D and SG&A operating costs in the third quarter totaled $12.8 million, a reduction of $300,000 from the prior quarter. Part of this reduction was due to the cost associated with the Toronto closure and the rest is related to lower headcount. Consolidating point of care operations in to our facility in San Diego is expected to save approximately $4 million in annual operating costs with the majority of these savings beginning in the fourth quarter of this year.

As a result, we expect operating costs to continue to decline from current levels. Our operating loss for the third quarter was $4.2 million, a decrease of $2.1 million or 34% from the prior quarter. Our internal measure of performance modified EBTIDA improved to a loss of $600,000 in Q3. This represents an improvement of more than $2 million or 77% as compared to last quarter’s loss of $2.7 million.

Compared to the same quarter in 2007, our EBITDA loss decreased by $7 million or 92%. The improvement from the prior quarter and the prior year demonstrates the benefits realized by our decision to restructure our business and is consistent with the guidance we had provided. Moving to the balance sheet, third quarter cash ended at $1.7 million. While our cash run rate has declined significantly from prior year levels, we continue to be cashed constrained in operating our business.

The $8 million bridge from the financing arrangement that we entered in to in August with our note holders and the Elitech Group demonstrates their strong support for the merger. It is important to point out that only $5 million of the bridge financing was funded prior to September 30^th. During the fourth quarter we have begun receiving additional $1 million monthly advances from Elitech in accordance with the bridge finance agreement.

Compared to a year ago, our cash used in operating activities decreased by 80%. For the nine months ended September 30, 2008, we used $6 million in operations for an average burn rate of $2 million per quarter. By comparison we used $30.5 million during the same period in the prior year representing an average burn rate of over $10 million a quarter.

We remain focused on cash management and expense control and are making good progress on our goal of reaching cash flow breakeven. David will now review operations and merger status.

David G. Ludvigson

I’d like to take a few minutes to discuss the third quarter business operations and the related developments and summarize our guidance for the rest of the year. I will also provide a brief update on the Elitech merger. Operationally, our product revenue continues to be led by molecular diagnostic products with approximately 85% of third quarter product revenues coming from that product line and 15% coming from our rapid test cardiac products and the final shipments of array related consumables.

Approximately 40% of product revenue came from North America and 60% from Europe and other export geographies. The North American molecular diagnostics business increased in the third quarter as customers accelerated purchases of analyte specific reagent products, ahead of implementation of the new FDA guidelines for these ASRs. The majority of our products have been reconfigured to meet the FDA guidelines and reconfiguration of the remaining products will be completed in the fourth quarter.

Shipments in North America during the fourth quarter will decline from the third quarter as customers work off this inventory. As Nick indicated, third quarter shipments in Europe were seasonally lower as we had expected. We do expect to see an increase in shipments during the fourth quarter although much of the increase in volume will be offset by lower exchange rates.

Molecular diagnostic products continue to be a strong growth opportunity. Our efforts to expand outside of Italy while still in the early stages, are making good progress. Export sales outside of Italy accounted for 7% of product revenue in the third quarter and on a year-to-year basis are approximately double the prior year’s level.

During the quarter we signed an OEM arrangement with Menarini, a major European pharmaceutical and diagnostics player to market our molecular products through their sales network in Europe. We expect initial revenue from this relationship to begin in 2009 and the contract includes increasing minimum sales requirements over a six-year period.

Qualitative rapid test for cardiac conditions accounted for the majority of third quarter revenue in the point of care business. We’re very pleased to report that we’ve completed CE marking of the MT Pro-BNP while blood product for use in the diagnosis of congestive heart failure referred to as CHF. With the CE marking effort behind us we are initiating product launch activities in Europe during the fourth quarter.

The clinical trial to support our 510(k) filing in the US is wrapping up and we expect to submit to the FDA by the end of the year. Product launch planning has started in the US with our key distributor. The current CHF market exceeds $400 million and is growing at an annual rate of more than 20%. There are few participants in the MT Pro-BNP rapid test market and we expect strong growth of this product in 2009 and beyond.

Contact and grants revenue includes a number of multiyear projects, the most significant of which are our two CDC contracts. In the rapid influenza test project, we have completed and submitted a revised prototype to the CDC for their evaluation. Continued CDC funding is tied to acceptance of this prototype. The performance of the product is excellent and together with our commercial partner HX Diagnostics, we are preparing to enter clinical trials during the upcoming flu season.

This clinical trial should form the basis for a seasonal flu product 510(k) submission in 2009. The laboratory influenza project based on our proprietary real time PCR technology is in the initial development phase and is on schedule for the first development checkpoint early in 2009. The unbilled contract amounts for these two projects are approximately $14 million.

The amount and timing of funding and revenue recognition depends on progress against the CDC approved phases of the specific contracts. In the rapid test contract HX Diagnostics is also responsible for funding certain elements of the project. In addition to revenue growth, we continue our programs to reduce expenses. During the third quarter we completed the final phase of personal reductions associated with the array business closure.

We finished our final production runs in Toronto and completed the production transfer to San Diego and we reorganized our sales organization to lower cost and better serve our customers. Our path to profitability includes both revenue growth and continued expense optimization.

Our financial guidance for 2008 remains unchanged. We continue to expect total 2008 revenues to approach the $50 million mark. We also continue to expect quarterly improvements in modified EBITDA. Our goal of reaching breakeven in Q4 as measured by modified EBTIDA, will depend on the amount of contract revenue that we are able to recognize in the quarter. Financial guidance for 2009 will be provided in the future as we move further along with the merger.

At the time we announced the merger with Elitech in August, we said that the businesses were highly complementary with little overlap. The Elitech clinical chemistry and microbiology businesses provide a strong stable and profitable revenue base. Nanogen solutions which are directed at the newer emerging delivery segments of molecular diagnostics and point of care testing markets provide a strong vehicle for growth.

As we’ve continued to work with Elitech and initiated detailed transition planning, we continue to find few, if any, overlaps in product offerings but a high degree of overlap in our targeted customers. As a result, our transition and integration activities will focus on the effective combination of our sales and marketing organizations to make sure we capture the available sales opportunities for each company’s products.

We’ll retain the focus on small and midsize customers and we’ll emphasize increasing sales resources in the US and Europe with a strong complimentary distribution network. In addition to transition planning, our other major activities are centered on the Elitech audit and the related SEC filings that will lead to the proxy statement and the shareholder vote.

A lot of time, expense and effort are going in to this effort. Elitech has committed a significant amount of resource to accomplish the audit and Nanogen is equally invested in the SEC filing process. Overall, the process is taking longer than expected but we still aim to close by the end of the first quarter. We continue to believe that this is a very good transaction for our shareholders.

As you know Nanogen’s business has been in transition over the last year. Our third quarter results continue to the strong improvement trend that we’ve shown since our restructuring a year ago and clearly show that we are achieving a significant financial improvements we expected. Joining forces with Elitech will build on this moment and gain market recognition for our efforts.

The combination of Nanogen and Elitech will put us in the unique position of having a broad product offering that will generate more than $150 million of revenues and 10% positive EBTIDA in the first year of operations. Thank you for your time and attention. That concludes the formal remarks. We’ll now turn the call over to our listeners for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of [R. Andrews – Laidlaw Incorporated].

[R. Andrews – Laidlaw Incorporated]

Would you bring us up to date on your plans and timing for a reverse split that you had mentioned several months ago?

Nicholas J. Venuto

The reverse split that we had to receive approval for from the stockholders back in February was for up to one per 15 reverse and that we have been waiting on to see what develops with our stock price. In the meantime, the SEC and NASDAQ have actually extended out the timeframe in which we are required to regain compliance with the minimum bid rule.

We have until the middle of February, 2009 to obtain compliance so our expectation at this point is to wait and continue to monitor the situation and also look at how a reverse split would tie in to the combination with Elitech as we will be issuing stock to consummate the merger. So, at that point in time we would assess the number of shares and make a decision on what we would do in terms of a reversal.

Operator

It appears we have no more audio questions in queue.

Howard C. Birndorf

On behalf of the entire executive team at Nanogen, we thank you for participating in our conference call. We’d also like to thank our shareholders for their continued support and of course the employees of Nanogen who continue to show their commitment and drive to deliver quality products to our customers.

Operator

Thank you for your participation in today’s conference. This concludes our presentation. You may now disconnect.

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