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CombiMatrix (NASDAQ:CBMX)

Q4 2012 Earnings Call

February 27, 2013 11:00 am ET

Executives

Matthew Clawson - Partner of Investor Relations Group

R. Judd Jessup - Chief Executive Officer, President and Director

Mark McDonough - Chief Commercial Officer

Scott R. Burell - Chief Financial Officer, Principal Accounting Officer, Treasurer and Secretary

Analysts

Zarak Khurshid - Wedbush Securities Inc., Research Division

Bruce D. Jackson - Northland Capital Markets, Research Division

Alan Dubrow

Operator

Good day, and welcome to the CombiMatrix Corporation 2012 Fourth Quarter and Year-End Financial Results Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions] I would like to now turn the conference over to Mr. Matt Clawson. Please go ahead, sir.

Matthew Clawson

Thank you, Chris. Good morning, everyone. Welcome to the CombiMatrix Corporation 2012 Fourth Quarter Results Conference Call. With us today are CombiMatrix President and CEO, Judd Jessup; Chief Commercial Officer, Mark McDonough; and the company's Chief Financial Officer, Scott Burell.

Earlier this morning, CombiMatrix distributed a news release that summarized its financial results for the fourth quarter and year ended December 31, 2012.

Before we get started, I've been asked to remind you that today's presentation and answers to questions in the Q&A portion of the call will include forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could actually cause results or events to be materially different from those anticipated. For a list and description of those risks and uncertainties, please see the CombiMatrix's filings with the Securities and Exchange Commission. CombiMatrix does not assume any obligation to update or revise any financial projections or forward-looking statements made today.

Furthermore, this conference call contains some time-sensitive information and is accurate only as of this call today, February 27, 2013. Copies of the CombiMatrix SEC filings are available online from the SEC or by clicking on Investor Relations on the company website.

With that, it's now my pleasure to turn the call over to CombiMatrix's President and CEO, Judd Jessup. Good morning, Judd.

R. Judd Jessup

Good morning, Matt, and thank you. Welcome to CombiMatrix's Fourth Quarter and 2012 Year-End Conference Call, and thank you for your participation and interest in our company. I plan on making a few brief remarks about what we believe was a very important fourth quarter and full year 2012, and our thoughts on what to expect in the coming months. Then I'll turn the call over to Mark McDonough, who will be taking over as the CEO next month, as well as turn it over to Scott Burell, our CFO, for financial details.

I'd like to start today by saying we are a much different company than we were 1 year ago. We have a new core management team and a much stronger and more experienced sales organization that has performed very well under Mark's leadership. We streamlined our organization to cut costs and reduced our cash burn, and we've created a new focus and a new strategy that I'll let Mark discuss further.

As most of you know, I'm retiring and leaving CombiMatrix effective March 15. Mark McDonough, who was our Chief Commercial Officer and who has done an extraordinary job building our new sales and marketing organization, will be taking over the Chief Executive role.

I'd like to introduce Mark by saying that when we hired him last summer, he had shown on paper that he could build and lead a sales team. He had delivered great success in his stints at Ventana, US LABS and Pathwork Diagnostics. But it's one thing to talk about building the team, and it's another thing altogether to execute on the ground, translate that hiring into profitable salespeople, make it happen operationally and continue to deliver growing value to our existing and new customers. In only 7 months' time, Mark has executed exceptionally well, and it shows in the numbers we are generating in our core markets. Mark has been a key part of the entire cultural change we are seeing here at CombiMatrix and has helped generate a sense of enthusiasm that permeates our entire team.

I believe the company is headed in the right direction, and that I'm leaving the company in very capable hands.

With that, I'd like to thank you and turn the call over to Mark. Mark?

Mark McDonough

Thanks, Judd. I appreciate it. Good morning, everyone. Thank you for the very kind words. I can tell you the shift we are undertaking here has been a team effort. I'm excited to be taking the reins as the leader of CombiMatrix to continue forward with the new focus and strategy that's currently underway and clearly gaining steam. I'm also looking forward to meeting with shareholders and other interested parties in the coming months.

In the near term, I'll be keenly focused on commercial execution, and we're working to make sure that the sales and operations at the lab do not miss a beat during this transition. That said, I'll also be able to get out and introduce myself and the CombiMatrix story more actively in the investor community, starting later this spring. And I look forward to sharing the progress we are making with all of you as things progress.

I think CombiMatrix last year made what promises to be the most important strategic decision in our history. We made the decision to go from being a laboratory that was trying to do a variety of tests in several diverse markets to a laboratory focused on what we do best and where the opportunity is greatest. Today, we are focused on where the market is growing and leveraging what distinguishes CombiMatrix in the marketplace, prenatal and pediatric testing, particularly, chromosomal microarray analysis, which we call CMA. We are the only publicly-traded company in the world today that specializes in CMA. After months of discussion and candidly stagnant growth, the decision was made about mid-year last year, and so far, the marketplace has responded very well. There's still a long way to go, but we're gaining traction and market share. And we're all very excited about the sales ramp that we've generated in the prenatal testing market.

As we preannounced in January, annual growth rates for prenatal tests in the fourth quarter and the full year, respectively, for 2012 were 172% and 171%. That's countered, of course, by a dropoff in our deemphasized oncology testing business, which we had discussed on prior earnings calls.

The fastest growth is coming from the specific area of miscarriage management, where the CMA test can help parents and their physicians determine if there are genetic reasons for failed pregnancies. Of course, we are also leveraging the recent clinical findings that favorably compares CMA to older methods of prenatal genetic testing. CMA is proving its worth every day. It gives parents, physicians and educators better tools for anticipatory care by proactively addressing the impacts of many chromosomal disorders.

At the same time, the clinical value of CMA is changing the technology landscape for the prenatal molecular diagnostic market. A pair of studies published in December in the New England Journal of Medicine compared CMA to the traditional karyotyping for genetic prenatal diagnosis and also for stillbirths. Both of these head-to-head studies concluded that CMA identifies additional clinically significant genetic abnormalities compared to karyotyping, in both the prenatal setting, as well as the evaluation of stillbirths.

Given this high-profile clinical shift, which is set to change the standard of care for prenatal testing, we believe that microarray analysis could represent as much as 10% of the overall invasive testing market this year. And we have some key opinion leaders who believe CMA will completely replace karyotyping with just a few years. We expect our current market estimates of the $600 million annual market for the prenatal space to expand rapidly, particularly as more and more women and their physicians realize the clinical value of prenatal tests.

And most of you are aware that new noninvasive tests have also begun to impact the overall market for prenatal testing. But it's important to keep in mind that those tests screen for certain genetic conditions, such as Down syndrome, and that the vast majority of these tests come back negative. Many of the parents facing this uncertainty will want the broader information provided by microarray testing. The fact is, there is more than enough opportunities for growth and expansion for both noninvasive testing and microarray testing, especially when you take into account our current revenue base and market share.

With that, I'd like to turn the call over to Scott for more details on our financials. Scott?

Scott R. Burell

Thanks, Mark, and good morning, everyone. I'd like to begin my comments today with an overview of our operating statement, followed by a discussion of our balance sheet and cash flows before turning the call back over to the operator for questions.

Starting with our operating results, total revenues for the 3 months ended December 31, 2012 were $1.48 million, comprised of $1.42 million in diagnostic service revenues and $54,000 of royalty revenues. This compares to $1.25 million in total revenues for the fourth quarter of 2011, comprised of $1.22 million in diagnostic service revenues and $25,000 of royalty revenues, representing an overall increase in total revenues of 18% quarter-over-quarter.

We ran a total of 1,590 billable diagnostic tests in the fourth quarter, compared to 1,318 tests in the fourth quarter of 2011, representing 21% increase in diagnostic test volumes. We billed 108 different customers in the fourth quarter of 2012 for the tests performed, compared to 103 customers in the fourth quarter of 2011.

As reported in today's release, we had a strong quarter on the prenatal side of the business, which during the fourth quarter, prenatal revenues grew by 161% as compared to the fourth quarter in 2011 and for the 12 months ended 2012, has grown 101% versus the prior year. And sequentially, prenatal revenues grew by 76% from the third quarter of 2012 to the fourth quarter.

Strong volume growth, coupled with improved reimbursement on prenatal microarray testing has contributed to the overall revenue growth in this market, whereas declining volumes and reimbursement from oncology sales, as well as some lower volumes in certain pediatric markets, resulted in an overall diagnostic revenue growth rate of 17% quarter-over-quarter. The declines in oncology revenues were expected as we have deemphasized our direct oncology sales efforts in recent periods, and in turn, have focused our sales and business development efforts primarily in the prenatal diagnostic market. We anticipate that as the organization is more aligned towards the growing prenatal developmental markets and as clinical catalysts emerge, overall revenue growth in the prenatal market will continue, whereas the oncology and pediatric revenues should stabilize in the future.

Year-to-date, we performed 5,782 billable diagnostic tests, generating revenues of $4.96 million, compared to 4,634 billable tests generating $4.56 million of revenues in 2011, representing an annual increase of 25% in testing volumes and 9% in diagnostic revenues, respectively.

Due to the change in product mix, which in 2012 includes higher volumes from lower-priced traditional genetic testing such as chromosomal analysis, CVS and FISH testing, the overall net increase in revenues are not directly correlated to the increase in testing volumes. However, our test menu expansion to include non-array tests has been strategically important in driving our prenatal market growth and we believe will be important to driving higher microarray volume in the future as the prenatal market evolves from traditional testing to CMAs. As the market trend continues, we expect that our test mix will be more highly concentrated in CMAs, particularly in the prenatal markets, resulting in higher average revenue per test performed and improved operating margins in future periods.

Operating expenses for the 3 months ended December 31 were $2.7 million versus $3.2 million in the comparable 2011 period, representing a decrease of 15%. The decrease was driven primarily by cost reductions executed in May and June of 2012, where we reduced headcount across all functional areas of the company, as well as related operational costs and expenses. Year-to-date, operating expenses of $12.3 million were lower than the comparable 2011 period by $214,000 or approximately 2%, primarily due again to lower headcount and expenses for the past 6 months of 2012 compared to the full year in 2011.

Net loss from continuing operations increased to $3.8 million and $9.5 million for the 3 and 12 months ended December 31, 2012, respectively, versus $2 million and $7.9 million in the comparable periods. The increases were due primarily to the noncash charges incurred as a result of mark-to-market derivative accounting for the warrants issued in our fourth quarter Series A Preferred Stock financing. Under Generally Accepted Accounting Principles, the warrants issued to the investors of this financing are required to be recorded as derivative liabilities at fair value, with changes in fair value reported as nonoperating charges or credits in our income statements each reporting period. It is likely that we could recognize substantial noncash charges or credits in future periods, depending on changes in fair value, whether any dilution adjustments occur or whether the warrants are ultimately exercised for common stock. Also related to the Series A Preferred Stock financing were noncash deemed and accrued dividends totaling $740,000 in the fourth quarter, resulting in an overall net loss to common stockholders of $4.5 million and $10.3 million for the 3 and 12 months ended December 31, 2012, respectively, versus $2 million and $7.6 million in the comparable 2011 periods.

Turning now to our balance sheet and cash flows. We ended December 31, 2012 with $2.4 million in cash compared to $6.4 million as of the prior year end. Our net loss -- or excuse me, our net cash flows used in operations were $1.37 million and $5.94 million for the 3 and 12 months ended December 31, 2012, respectively, compared to $1.4 million and $6.5 million in the comparable 2011 periods. Included in our prior year's cash flows were $578,000 of cash received from discontinued operations related to our former Custom Array business. Excluding these receipts, our year-to-date operating cash flows from continuing operations improved primarily $1.2 million due in part to higher test volumes, improved reimbursement and collection activities and lower expenses from cost reduction efforts that were executed early in 2012.

Finally, we ended the fourth quarter of 2012 with $5.1 million in total assets and $1.7 million of current and long-term liabilities, excluding the warrant derivative liability of $4.2 million.

With that, I will now turn the call back to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Zarak Khurshid of Wedbush Securities.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Zarak here at Wedbush. So just curious, what is the list price these days on the prenatal array test? And what is the average percent of the list price that you're achieving from the payers?

Scott R. Burell

Yes, this is Scott Burell. The list price of a microarray on prenatal or pediatric, for that matter, is $3,250. And on the prenatal side, we're receiving average reimbursement of close to $1,700 per array.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Great. That's very helpful. And then I think I may have missed it in the intro comments, but what is the potential impact from the uptake of NIPT tests? And can you possibly discuss the -- just the total number of amnios and CVS that you think are taking place, say -- that took place in 2012 and where you think that's going in 2013?

R. Judd Jessup

Yes, this is Judd. We -- obviously, the numbers are moving around here. We don't have specific numbers on noninvasive prenatal tests. I think the important thing is, there's -- we estimate there's 4 million pregnancies in the U.S. per year, and the number of positives on NIPT is probably about 5% of that or 200,000. And then we think there's another 175,000 that would want to seek invasive testing due to an abnormal ultrasound, and another 200,000 with advanced maternal age who would go on to invasive testing. So all in, that gets us close to 600,000 potential invasive procedures per year for a market size of around $690 million, assuming -- that's assuming $1,200 per array, which is conservative. So we think the market is plenty large enough for everybody. And the real reason is, is -- and this really hasn't been focused on, is the karyotyping market, which has been doing most of this invasive testing, is basically going to go away. So that market is up for grabs, and we're optimistic that, that will cause a significant increase in the number of microarrays.

Operator

And we'll take our next question from Bruce Jackson, Northland Capital Markets.

Bruce D. Jackson - Northland Capital Markets, Research Division

Looking at -- Mark, looking at the test volumes, they've been going up kind of in the 20%, 21% range for the past 3 quarters. Do you think that's a sustainable growth rate going forward?

R. Judd Jessup

You mean the 21% year-over-year or what are you talking about, Bruce?

Bruce D. Jackson - Northland Capital Markets, Research Division

The 21% year-over-year growth in the results, yes.

R. Judd Jessup

Yes. Okay. Yes, well, we don't really comment on the future, but I would say that, that 21% increase that you saw year-over-year includes very large increases in the prenatal segment that we've been talking about, as well as declines in oncology testing and some declines in pediatrics. So what we're excited about, Bruce, is that we think the declines in oncology are basically done. I mean, our number of tests we run a month has flattened out and actually starting to increase a little bit. And the pediatric testing, that stabilized in recent months. So you take those 2 facts, combine it with the continued increase in prenatal, then I would say we're optimistic going forward about double-digit increases.

Bruce D. Jackson - Northland Capital Markets, Research Division

Okay. And then looking at the average revenue per result, we had a quarterly uptick this quarter. I'm assuming that the prenatal testing carries a higher price point, and we might actually see some abatement in the price erosion?

Scott R. Burell

Yes, this is Scott. As I stated in my prepared remarks, as the company's mix of tests moves away from the mix of non-array tests towards more -- a higher concentration of CMAs, they definitely carry a higher price point to have a higher average reimbursement. And so as I stated, we do expect that average reimbursement and overall improvement in operating margins to continue.

Bruce D. Jackson - Northland Capital Markets, Research Division

Okay. And then 1 last question for Scott. Do you have a breakeven sales number that you're working with?

Scott R. Burell

Yes. We're not providing forward-looking estimates at this time other than just what we've talked about before, which is this strategy of focusing on the prenatal markets and on the CMAs, those are the highest reimbursed tests that we perform. They carry the best gross margin of any of our tests, and that's where all of the growth is coming right now. So we're excited about maximizing that opportunity and I think in the relative short term, turning around that breakeven point relatively quickly. But that's probably about as much as we can comment at this time.

Operator

And we have a follow-up question now from Zarak Khurshid of Wedbush Securities.

Zarak Khurshid - Wedbush Securities Inc., Research Division

So just wanted to kind of circle back to my prior question. So you laid out through the theoretical market side, and I think that's fairly well understood, but if you read through the literature, there's been a fairly large disconnect between the number of CVS and amnios every year versus that theoretical market size. And if you could just kind of talk about how many CVS and amnios you think were performed in total in 2011 and '12, I think that would be very interesting. And do you think that number is going up or down significantly this year? And if it goes down, how might that impact the growth rate in your prenatal business?

R. Judd Jessup

I can't comment on the number that you're seeking. All I can do is comment on the fact that the number of CVSs and amnios probably will go down somewhat due to NIPT. But the real important thing as a takeaway is that most of those CVSs and amnios that will ultimately decrease as a result of noninvasive testing are not going to be done with a karyotype, they're going to be done with a microarray, which will cause an increase in our business.

Operator

And we'll take our next question from Alan Dubrow of Wells Fargo.

Alan Dubrow

I was wondering if you would be kind enough to address how things are working on the marketing side. I know we've got several relationships with distributors, and we do some direct sales. What's the mix? And how do we see that going moving forward?

R. Judd Jessup

Yes, could you repeat the question, please?

Alan Dubrow

Yes, I'm sorry. Regarding the sales effort, I know we've got some relationships with distributors, and we're doing some direct sales. Can you talk about where our strong points are, weak points and how we see that going forward? Are the -- basically, are the distributors, is it working out, is my question.

R. Judd Jessup

Sure. Mark McDonough is here, and he is probably closest to that. So I'll turn that one over to him.

Mark McDonough

Great. So we have a direct sales team that's purely focused on the MFM and OB/GYN market for the prenatal segment, and they are having a lot of success. And there's also a lot of good news there in that over half of them are new hires that are just really learning and starting to hit their stride. And then on the partnership front, we've partnered with local laboratories. I think we made an announcement about Path, Inc. back in December. But that really is starting to take off now, and that's a local laboratory in Southern California. So we are looking to expand our partnerships with other laboratories, as well as keep a lean sales and marketing organization here.

Alan Dubrow

Okay. Speaking of the lean sales and marketing organization, which brings me to my next and last question, is if you take the cash on hand and you do the burn rate, just some quick math in my head says we could be running out of cash by late summer. What are your thoughts on that?

R. Judd Jessup

Yes, that's a good question. We're doing a number of things. As you might have seen yesterday, we modified the warrants under our Series A financing so that they can be exercised now. And these warrants are currently in the money and could generate as much as $1.7 million in near-term capital, assuming they were all exercised. In addition, we're considering other financial opportunities in terms of capital raising, and we're fairly far down the road with those. So I guess, in short, I would say that I'm optimistic that we will be able to raise additional money in both of these ways and don't see a problem there.

Operator

[Operator Instructions] And we have no further questions at this time. I'd like to turn the conference back over to Mr. McDonough for additional or closing remarks.

Mark McDonough

Okay. Thank you. To underscore what I said earlier, we believe our strategic shift from being an integrated developmental oncology company to being the focused developmental genetics company that we are today, specializing in prenatal genetics and reporting, was a seminal event for CombiMatrix. As we look to the overall diagnostic marketplace today, we are very confident that our focus on prenatal, it is not only the right move for us, but it's the correct move, given the changing marketplace we work in. Our recent ramp in the prenatal marketplace has not only compensated for the dropoff in oncology business, as we stated earlier, but it's generated healthy overall top line growth which should continue to accelerate in the coming year as oncology stabilizes and prenatal continues to ramp.

Today, the market is moving towards us, not away from us, and we believe that we have put together the right team to begin to capitalize on this opportunity. It's all about execution. And if we can continue to execute as we have in recent months, we will continue to gain market share, and most importantly, grow value for our shareholders.

Thank you very much.

Operator

And this concludes today's presentation. Thank you for joining, and have a nice day.

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