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Executives

Joshua Drumm

Stephen T. Lundy - Chief Executive Officer, President and Director

Donald R. Hurd - Chief Commercial Officer and Senior Vice President

Analysts

Jeffrey Frelick - Canaccord Genuity, Research Division

Yi Chen - Aegis Capital Corporation, Research Division

Venaxis (APPY) Q4 2012 Earnings Call March 26, 2013 4:30 PM ET

Operator

Good afternoon, and welcome to the Venaxis Fourth Quarter 2012 Business Update Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joshua Drumm of Tiberend Strategic Advisors. Please go ahead.

Joshua Drumm

Thank you, Yosef, and thank you, all, for joining us this afternoon. With me on today's call are Steve Lundy, President and Chief Executive Officer; Jeff McGonegal, Chief Financial Officer; and Don Hurd, Senior Vice President and Chief Commercial Officer. This afternoon, Venaxis issued a news release that provided an overview of its current activities and upcoming milestones. Additionally, Venaxis' annual report on Form 10-K was filed this afternoon and is available on the company's website at www.venaxis.com. We encourage everyone to read today's news release, as well as the annual report. If you need a copy of the press release, please call Tiberend Strategic Advisors at (212) 375-2686 and we will email it to you.

Steve will give an update on recent milestones and the ongoing pivotal study of APPY1. Don will then provide an update on Venaxis' progress in preparing for full-scale commercialization of APPY1 in Europe. Steve will provide some concluding remarks and we will open the call for a question-and-answer session, where Steve, Jeff and Don will be available to take your questions.

Please note that certain of the information discussed on today's call is covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act. We caution listeners that during this call, Venaxis management will be making forward-looking statements. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with this company's business. These forward-looking statements are qualified by the cautionary statements contained in Venaxis' news releases and SEC filings, including its 10-K for the year ended December 31, 2012, filed today, March 26, 2013. This conference call also contains time-sensitive information that is accurate only as of the date of this live broadcast, Tuesday, March 26, 2013. Venaxis undertakes no obligation to revise or update any forward-looking statement to reflect events or circumstances after the date of this conference call.

Now I would like to turn the call to Steve Lundy, President and Chief Executive Officer of Venaxis.

Stephen T. Lundy

Thank you, Josh, and thanks to everyone for joining us on the call today. I want to start by highlighting some of our major accomplishments over the last few months, many of which have transformed the company and positioned us for success in the future. Most importantly, we made good on a number of important promises, the most significant of which is the initiation of our pivotal clinical study for APPY1 in the United States. But before I talk about the study, I want to quickly highlight that this is our first conference call as Venaxis Inc., having completed our corporate name change in the fourth quarter last year. We view this corporate rebranding as an important part of our future as a pure play, commercial stage in vitro diagnostic company. And we are very pleased to be addressing our shareholders for the first time under our new corporate identity.

Now on to the clinical trial update. We announced toward the end of the year that we'd been -- begun training hospital sites. And shortly thereafter, we announced that the first patients had been enrolled. As of now, enrollment into the APPY1 pivotal U.S. clinical study is expected to continue across the 28 participating hospital sites through much of 2013. Based on current projections, we anticipate completing the study and potentially filing with the FDA for clinical regulatory clearance of APPY1 by the end of the year.

As we've mentioned on previous calls, we plan to enroll a total of 2,000 net evaluable patients. It took a lot of hard work to get to this point, and we appreciate the commitment from our product development team, which made significant contributions to improving the performance of the test, also our manufacturing team and our regulatory affairs team. We also appreciate our meetings with FDA, who, just to remind you, provided valuable guidance and insight into the design of the pivotal study, both at our pre-IDE meeting and in subsequent follow-up.

Today, APPY1 utilizes a multi-marker -- multi-biomarker test configuration with improved performance that has been validated in more than 500 patients through successful pilot study. We did not want to go to FDA until we had the right product to meet the current needs of emergency physicians to treat abdominal pain, and we believe we have that product in APPY1. Now that we've advanced to our pivotal study, our primary focus is on completing efficiently and expeditiously, ensuring the highest quality data, which we intend to submit for FDA clearance of the test in late 2013.

Another major focus continues to be on market development, which we believe will be critical to the success of APPY1, both in the U.S. and overseas. In the U.S., we're continuing to cultivate relationships by growing network at hospital sites, many more than are participating in our pivotal study. Our goal is to amass significant market insight and other key intelligence in order to maximize potential uptake of APPY1 when we launch the test following regulatory clearance. I want to reiterate from our last call, it is our goal to enter the market having identified 35 to 50 potential hospital site buyers in the U.S. Thanks to our continued investment in commercial market development, we're moving ever closer to achieving that target.

Don Hurd and his team have been instrumental in making sure market development remains a top focus for us. In a few moments, Don will speak more about our significant progress as it relates to our market development activities in Europe.

On that subject, I'm very pleased to highlight our other major company milestone, which was our successful CE Marking of APPY1. This significant regulatory achievement allowed us to launch APPY1 selectively in Europe earlier this year. With the support of our EU-based company consultants and our regional partners, we have now launched the test and test system in 3 of our target EU territories. While this initial strategic phase of the European launch was designed for market development purposes, we take great pride in reaching this transformative landmark as it redefines Venaxis as a commercial stage company. I want to congratulate Don and the commercial team for this achievement and for successfully negotiating our current market development agreements. We look forward to continued execution on our EU market development plan and to potentially ramping up to full-scale European launch in 2014, around the same time we anticipate advancing on regulatory approval in the U.S.

Before I hand the call to Don, I'll comment briefly on our financial position. We were very pleased to strengthen our balance sheet with an additional $4.7 million in gross proceeds from our November public offering, which included full exercise of our underwriters over-allotment option. We ended 2012 with $12.1 million in cash, cash equivalents and short-term investments, which we believe is sufficient to complete the ongoing U.S. pivotal trial, as well as advance our market development efforts in Europe.

And with that, I'll turn the call to Don to provide further insight into the market dynamics and our specific market development activities. Don?

Donald R. Hurd

Thanks, Steve. As you mentioned, we have made significant progress in Europe since we obtained CE Marking for APPY1 in early January. We have significantly advanced validation of market potential for the specific regions we are targeting, which include the U.K., Germany, Italy, France, Turkey and the Benelux territories. We met with and we vetted a number of potential distributors in each of these regions, and we selected our top choices to support our market development efforts as part of the initial EU launch of APPY1.

As announced recently, we now have initial market development agreements in place with MOSS, which is based near Milan, to cover Italy, Istanbul-based SAVAS Medikal, to cover hospitals in Turkey, and Netherlands-based EMELCA Bioscience covering hospitals in the Benelux countries. Each have committed to working with us to qualify and establish relationships with the top hospitals in their respective territories and to helping us conduct small market studies designed to further quantify the economic value of APPY1 in those regions.

This is a very active and ongoing process for Venaxis and one we are happy to say is gaining significant traction as we continue to engage hospitals. Initial stocking purchase orders have been received and are being filled. In terms of next steps, we plan to train our development partners and look forward to initiating the hospital market development studies.

This initial phase of the EU launch is happening on a country-by-country basis, and our work continues to secure additional agreements in the remaining target territories. We continue to make frequent trips to Europe in order to cultivate these relationships, and we would expect to make one or more announcements regarding the status of additional market development agreements in the near term.

As we mentioned, the goal of this market development program is to familiarize the market with APPY1 and generate meaningful data that will appeal to the emergency physicians and hospital laboratories that would be responsible for utilizing our test.

As in the U.S., we are looking to establish a pool of potential EU customers before we initiate a full-scale European launch. As such, we will seek to publish and disseminate the data we are able to generate at selected key opinion leader hospitals in order to impact the broader hospital communities.

In terms of overall commercial effort, we anticipate being in position to expand the launch in Europe to full scale roughly in parallel with our FDA submission in the United States. We also plan to hire and train our initial U.S. sales force while the submission is under FDA review in order to be ready to launch in the United States upon potential clearance.

In short, we are focused on laying a solid foundation with the expectation that 2014 may be our breakout year in terms of commercial activities. We look forward to continuing to share our progress with regular future updates.

With that, I'll hand the call back to Steve for closing comments and to begin the Q&A.

Stephen T. Lundy

Thanks, Don. I'll conclude by reiterating our commitment to gaining U.S. regulatory clearance and developing the market for APPY1, which we believe has the potential to improve the way emergency physicians manage their patients who present with abdominal pain. We accomplished much over the recent months and we plan to maintain our track record of execution in the months and years to come.

Our primary focus is on advancing APPY1 and expanding its potential market opportunity. We believe that we are also well positioned to develop next-generation diagnostic products due to our demonstrated capability to develop high-quality assays and proprietary algorithms and our unmatched pool of well-characterized patient samples collected during our past clinical studies, which we expect to leverage for future biomarker discovery.

While considering potential diagnostics for other abdominal issues, our vision is to develop a follow-on appendicitis test, an APPY2, if you will, that can hopefully deliver both the high sensitivity and the high specificity required for use as a true positive-negative predictor of acute appendicitis. We're also thinking critically and strategically about our future and the life cycle of our products.

Adding to our biomarker discovery and test development expertise, I also want to mention that as announced in December, we added a new board member this past quarter, Dr. Sue Evans, who is a former President of the American Association of Clinical Chemistry, and a 30-year veteran of the in vitro diagnostics industry. She will be instrumental in providing guidance as we expand our portfolio of diagnostic tests.

Over the past months, we've made significant commitment to be more visible in the financial community. We have been and intend to continue presenting at select investment banking and industry conferences. With our corporate rebranding well advanced and our strategic focus solely on diagnostics, we believe Venaxis is a compelling story for investors.

With that said, we look forward to taking your questions. And with that, you may go ahead, Yosef. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jeff Frelick with Canaccord.

Jeffrey Frelick - Canaccord Genuity, Research Division

Steve, can you give us a sense of -- maybe it's better for Don, but with the 3 new distributors in Europe that you've signed up, when do you expect training to be completed with the reps there?

Stephen T. Lundy

Don, why don't you go ahead and address that one?

Donald R. Hurd

Sure. The 3 distributors that we're working with are all in kind of a different phase right now, Jeff, with the agreement we signed with them. The initial phase of the agreement with the milestones that I've set up with the distributors, before we ship a product and before we train everybody, to answer your question, was to make sure that we both were comfortable and validated the market opportunity in each of the countries. And we also then identify the top, let's say, 30 to 40 accounts that we wanted to work with. And on the market development studies and from there, we would identify probably 5 to 8 hospitals that we'd actually get out and do the studies on. That process is ongoing in different phases right now with those 3 distributors. So once that's finished, which I would expect over the next 45 to 60 days, then we would ship the product to them and we would start the training of their sales agents as they call them there, Jeff.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And how many sales reps collectively do the 3 distributors have?

Donald R. Hurd

That's -- I'd probably be -- that wouldn't be totally accurate because it varies country by country. But in Italy, you're probably looking at 10 to 12. In Benelux, you're looking at 3 to 4. And in Turkey, you're probably looking in the neighborhood like Italy, 10 to 12.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And then can you give us a sense what their hospital coverage is by each distributor? How many collectively -- how many hospitals total in each region they actually call on?

Donald R. Hurd

Sure. Italy and Turkey, well, Turkey has well over 1,000 hospitals, Italy has well over 1,000 hospitals, and the Benelux territories are just short of that. And all 3 distributors cover their entire territories.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And then maybe Steve, you guys kind of went pretty thorough through the EU strategy. Can you just maybe outline the next 2 or 3 milestones that we should be thinking about for the U.S. strategy?

Stephen T. Lundy

Yes, Jeff, I think, the main thing in the U.S. is going to be advancing on just giving you more update in terms of where we are in the pivotal trial. As you may recall, we have 2 points in the study where we will conduct what's referred to as a futility analysis. That is where an external statistician will review the data to date, and this is blinded to the company, to let us know if we are still on track to have a possibility of being successful with the trial. So I think the first one would be 600 patients and that would probably provide us some flavor as to where we are there later on in the summer. And then 1,200 would be sometime probably in the early fall. So I think those are 2 significant sort of milestones along the way of the trial. And certainly, as we -- if we have any significant announcements on development of other products, we'll certainly bring those to investors' attention. But as we've tried to indicate, our real focus right now is APPY1, the trial, as well as the market development.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And then are all 28 hospitals in the U.S. pivotal up and running?

Stephen T. Lundy

All of them are signed up, not all of them have submitted samples yet. I would estimate that about 80% have submitted samples, and the others are very close behind. So I think, very shortly, we'll have 100% participation.

Operator

[Operator Instructions] Our next question comes from Yi Chen with Aegis Capital.

Yi Chen - Aegis Capital Corporation, Research Division

Could you remind me the patients that would be enrolled for the pivotal test and how many patients have been enrolled so far?

Stephen T. Lundy

So, Yi, we anticipate enrolling 2,000 patients. And right now, we're probably somewhere between 150 and 200.

Yi Chen - Aegis Capital Corporation, Research Division

150 to 200. Okay. And you anticipate to finish the enrollment about, I would say, the third quarter, is that correct?

Stephen T. Lundy

Yes, I think we've guided and we continue to believe that we'll complete enrollment somewhere near the second half or the latter part of the third quarter.

Yi Chen - Aegis Capital Corporation, Research Division

Okay. And once the test gets approved by FDA, what size of a sales team you would probably give for yourself?

Stephen T. Lundy

So as Don mentioned, in the EU, we will continue to go with our specific distribution partners and their sales agents. In the U.S., we intend to take a direct approach. We believe that about -- somewhere between 10 and 15 sales reps in large markets would be sufficient to cover those, the large hospitals that we intend to focus on, that is the 2,000, 2,500 hospitals that really comprise about 80% of the potential tests out there. So as we get going, if we believe we can accelerate sales by adding more, we will, but I think that 10 to 15 would be a good number for the first year anyway.

Yi Chen - Aegis Capital Corporation, Research Division

Okay. And for EU market, do you have any sales projection at all at this point?

Stephen T. Lundy

No, we have not delivered sales projections. I think the approach we're taking here, Yi, is as Don mentioned, let's lay the foundation of market development and make sure we build the data we need to -- and the evidence we need on the test. And then as we get into the later parts of 2013, I think we'll be in a position to provide good guidance in terms of how we see things going forward in 2014, which we see as the real pivotal year in terms of commercialization and uptake of the product.

Operator

Our next question comes from Jeff Frelick with Canaccord.

Jeffrey Frelick - Canaccord Genuity, Research Division

Don, maybe another follow-up question on the EU. The next sort of distributors, I think, you had mentioned you're targeting, U.K., France, Germany and those countries. Time-wise, are you close? When do you think you'll start securing additional distributors in those 3 regions?

Donald R. Hurd

Jeff, it would be hard for me to pin down a time because we're negotiating terms basically with all 3. And all 3 of them are -- they also have a different life other than Venaxis, believe it or not. So I would say, time-wise, before -- well, we're sitting here in March, I'd say before the end of May, I would expect to be completely done or have all 3 on board. Probably sooner. I'd feel more comfortable telling you by the end of May.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. That's fair. And you're thinking likely 3 distributors, not 1 pan-European distributor, each country would have a distributor tied to that, correct?

Donald R. Hurd

Each distributor would be tied to their specific territory, I mean, if that's what you're saying, yes.

Jeffrey Frelick - Canaccord Genuity, Research Division

Yes. Okay. And then with respect to the KOL strategy in each of the European regions that you're now securing, can you just give maybe a little bit more color on that? How long does that take to secure those, do you think, once the distributor partners have lined up key customers, how long do you think it takes to then drill down with key opinion leaders?

Donald R. Hurd

That is a very, very good question, Jeff, because it's the heart and soul of the market development that I'm doing. And first off, as I mentioned, the distributor or the partner has to be on the same page as I am. And we'll use Benelux as an example since they were the first one we signed up. It was very important with Patrick, who is the owner of that company, that he goes out and using our profile model, if you will, with looking at the number of emergency room visits, percent of abdominal pain and the resources to get that information, and we did it once for Benelux, but I wanted Patrick to go out and do it on his own so that we could agree on the actual potential in that country. And we have done that with Patrick at this point. And then from there, Patrick took a look at the study and the clinical outcome study that I wanted to do and how we wanted to do it and how long it would take and the number of patients that we needed to do, it's a short study. And that in itself required that we had some very, very key opinion leader hospital sites to initiate and do this study. So it was very important that we identify the top 35, 40, 45 hospitals in that territory, as we'll do with every distributor. And from those hospital lists, I have been actively involved in reviewing those names along with our consulting partner, Miguel Vernet, and along with all of our distributors. And from that list, we then get it down to about 5 to 8 that we've initiated relationships with, then we started visiting these accounts to present the study and present the product to and to get their buy-in. And not only that they would like to do a study like this, a clinical outcome study, where we can generate white papers, case study information and peer review publications, all this to help us with a full-blown launch, let's say, towards the end of Q3, early Q4 of this year. So again, as far as timing on that, I look to start the studies with those key opinion leader sites at the end of April, early May at the earliest, with both Benelux, Italy and Turkey. And as I sign on the other distributors, I would hope that I can start the same type of studies in those countries probably sometime in May. I don't expect that those studies will take longer than 45 or 60 days to complete because we're not talking a full-blown FDA clinical trial like we're doing in the U.S. We're enrolling a small number of patients but it will still take a couple of months to generate the data we need to statistically power any information that we generate in the way of papers for white papers, case studies and peer review publications. Hopefully, that answered your question.

Jeffrey Frelick - Canaccord Genuity, Research Division

Yes, that was great. And then a follow-up to that is -- I mean -- so I guess, glad to hear that you're really involved in reviewing the key opinion leaders, so it won't be just the distributor identifying them and getting them involved, you will be able to critique and visit and have a discussion with these thought leaders before they get under way on their study, correct?

Donald R. Hurd

Well, yes, it's very correct. I think, Jeff, you and I talked a number of times. And you know I get major involved in the details of doing this thing. So, yes, as I have told Steve before, when it comes to agreements with these distributors or any of these KOLs, whatever, I personally will make the trip because I need to see, touch and feel these people before I move forward with them.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And will there be a significant cost in running the small studies?

Donald R. Hurd

There is. Another great question. As people -- anytime you do a study in a hospital, you have to get either IRB approval or ethical sign-off -- ethical review committee sign-off. And something this small is pretty much in Europe done with the ethical review committee and there's probably a couple thousand dollars involved in that. And then everybody's -- people's time and efforts and then we use our statistical person and we'll provide somebody for data gathering, whatever. So I have a very good handle on that cost and we budget accordingly to handle it.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And just last question, Don. As you complete these studies and get them published, is that the last thing you need to really then scale up the full launch in Europe as you enter 2014?

Donald R. Hurd

I believe so, yes.

Operator

Showing no further questions. This concludes our question-and-answer session. I would now like to turn the conference back over to Stephen Lundy for any closing remarks. Please go ahead.

Stephen T. Lundy

Well, thanks, everybody, for joining us today. We really look forward to speaking with you again on our next update as we continue to give you updates on our progress. Thanks, again, for attending the call today.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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