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Venaxis Inc (NASDAQ:APPY)

Second Quarter 2013 Business Update Conference

July 16, 2013 8:30 am ET

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

Operator

Good morning, and welcome to the Venaxis second quarter 2013 business update conference call. [Operator Instructions] Please note this event is being recorded.

Now I'd now like turn the conference over to Joshua Drumm at Tiberend Strategic Advisors. Please go ahead.

Joshua Drumm

Thank you, Emily, and thank you all for joining us this morning. 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.

Yesterday morning, Venaxis issued a news release that provided an overview of its current activities and upcoming milestones. Additionally, Venaxis' prospectus filed May 24 is available on the company's website at www.venaxis.com. We encourage everyone to read yesterday's news release. 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 provide an update on recent milestones and give an update on the ongoing pivotal study of APPY1. Don will then provide an update on Venaxis' progress in preparing for full-scale commercialization of the APPY1 Test in Europe. Steve will provide some concluding remarks, and we'll open the call for 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 the 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 prospectus filed May 24, 2013.

This conference call also contains time-sensitive information that is accurate only as of the date of this live broadcast, Tuesday, July 16, 2013. Venaxis undertakes no obligation to revise or update any forward-looking statements 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. First and foremost, we will provide an update on our ongoing pivotal study for APPY1, then I'll hand it over to Don, who is joining us on the call today from Europe to provide an update on our market development activities in Europe.

I'll start with the clinical update. Yesterday, we announced that the ongoing U.S. pivotal study passed the first of 2 scheduled interim futility analyses under the protocol. The assessment was performed by an external Data and Safety Monitoring Board on the first 579 patients to complete the study, including the required patient follow-up period. The analysis involved an independent review of the validity, integrity and clinical and scientific relevance of the ongoing study, and, following this analysis, the external Data Safety and Monitoring Board recommended that the pivotal trial continue. While the test performance of the study remain blinded to Venaxis, this is an important milestone in the trial and allows us to continue to focus on enrolling the rest of the planned 2,000 evaluable patients as quickly and efficiently as possible.

At this point, we have approximately 830 patients who have either completed or currently enrolled in this study, awaiting the required 2-week follow-up, following the release from the hospital with initial diagnosis of negative for appendicitis. We're very pleased to say that the rate of patient enrollment continues to accelerate. The study is now enrolling patients from all of our participating hospital sites, and patient recruitment continues to improve on a month-by-month basis as we continuously work with the sites to further enhance the enrollment process.

Based on our experience enrolling the previous 500-patient study of APPY1, which was conducted in 2011, we had estimated the completion of the clinical study and submission to the FDA by the end of the year. Now having the benefit of increased visibility into actual enrollment rates and behaviors of our hospital sites, we believe we are still on track to complete enrollment and announce top line data by the end of this year, with FDA submission to follow as soon as possible thereafter in Q1 2014.

We've identified the primary reason for the initial slower-than-expected enrollment rate, the first of which is that while we nearly tripled the number of hospital trial sites, this required adjustments to the way we manage training and oversight at the individual hospital level. We are also fortunate to receive additional regulatory guidance from FDA for the study, which modified the trial design, specifically the way candidate patients are identified and recruited into the study, making it slightly more stringent to make sure we're evaluating the right patients. Managing these additional factors took a little extra time. We are now seeing enrollment trends improving. We feel confident in our updated estimate for the timing of trial completion by year end. Once enrollment is completed and the database is locked, we will finalize our FDA submission package as promptly as possible.

As the trial continues, we plan to provide another update on enrollment following the second external futility analysis, which is scheduled to occur after the study has enrolled approximately 1,200 patients. We anticipate making an announcement about the outcome of that data analysis following its completion.

As we focused on trial enrollment in the U.S., we are pleased to see our efforts to potentially reduce the number of unnecessary CT scans further validated by a large, retrospective study published in JAMA Pediatrics, which is the pediatric journal of the American Medical Association. The findings of this large observational study highlighted the importance of reducing unnecessary CT scans in children because of the significant cancer risk. The study measured the rate of use and radiation dose of CT scans performed over recent years on children under the age of 15 and found the risk of radiation-induced solid cancers was highest for patients undergoing CT scans of the abdomen or pelvis compared to other types of CT scans. Use of abdominal and pelvic CT scans also had the sharpest increase over the study period with possible appendicitis cited as a leading cause for performing an abdominal/pelvic CT. The JAMA Pediatrics study concluded by highlighting the urgent need for more research to determine when the use of CT scan leads to improved health outcomes and when other imaging and non-imaging diagnostic techniques might be as effective.

We believe this recommendation, which has been shared by other similar studies as well as by the FDA in its initiative to reduce unnecessary radiation exposure, aligns very well with the APPY1 Test Venaxis is advancing. The peer-reviewed study was featured in The Wall Street Journal and on the NBC Nightly News as well as key industry publications that reach potential users of APPY1, including the Newsletter of the American College of Emergency Physicians, which we believe further enhances the relevance of this landmark study.

Turning to our financial position, which was recently strengthened substantially with the $14.4 million in gross proceeds from our May 2000 public offering led by Piper Jaffray & Company. We currently estimate our cash balance to be approximately $20 million at the close of the second quarter 2013, which you will see reflected in our Form 10-Q when we file it in the coming weeks. Importantly, with the strength in financial position, we now believe we have funds to complete the FDA's clearance process and implement the commercial milestones necessary to bring the APPY1 Test into the hands of hospitals and clinicians in the United States and Europe.

Before Don provides an update on our market development activities in Europe, I want to highlight that we further strengthened our team with a new board member in this past quarter, Dr. Stephen A. Williams, who is Chief Medical Officer at SomaLogic, one of the leading protein biomarker discovery and clinical diagnostic companies. As you know, we also added Danaher executive, Sue Evans, to the board last quarter. These are 2 highly experienced diagnostic veterans who remain active and in the trenches of major companies in our field. We look forward to continuing to benefit from their deep experience, which will be invaluable to our future growth.

And with that, I'll turn the call to Don.

Donald R. Hurd

Thanks, Steve. European market development for our CE Marked APPY1 Test remains an active and an ongoing process for Venaxis. We continue to execute on our milestones and are on track for a full-scale European launch for APPY1 beginning in the fourth quarter of this year.

To remind everyone, our market development plan, which we initiated in late 2012 in anticipation of CE marking of APPY1, first involved hiring a highly qualified consultant to be our feet on the ground in Europe with the right commercial skill set and capabilities to connect us with the highest quality partners and leading hospitals. With Miguel Vernet in place, we began aligning ourselves with distributors in key territories that we determined to account for 75% of the in vitro diagnostic market in Europe. We then began establishing strategic market development agreements with these top distributors. In these agreements, we outlined clear milestones that included validating the size of the market opportunity in each territory, identifying and engaging the top 5 to 8 key opinion leader hospital sites as candidates for conducting clinical and economic outcome studies, as well as vetting and establishing relationships with additional hospitals as high-priority sales targets.

The goal is twofold. First and foremost, it is to fully understand the impact of the APPY1 Test on the clinical workflows and economic outcomes in each territory and to generate a robust and objective body of evidence that fully demonstrates the value of the APPY1 Test for all types of hospitals. These include university, community, children's or general-type hospitals.

Second, by engaging target hospitals in each territory, we expect to build customer demand for APPY1 ahead of the full launch, which will allow us to hit the ground running in terms of selling APPY1 through specialized distribution partners. These targeted hospitals identified by our partners have capacity for ordering a significant number of tests per month, and we are working together to establish relationships and make sales inroads with key hospital laboratory and emergency personnel.

So where do we stand today? We currently have 4 market development agreements in place with different distributors, and we are in the process of selecting our partners in additional key territories. In addition to the 3 agreements we announced previously, we have signed an additional market development agreement with Spring Medical, who will lead market development for the APPY1 Test at leading hospitals in Switzerland and Austria. All of these relationships continue to be productive and are progressing nicely in terms of the agreed upon milestones.

We have met with several potential partners in the U.K., Germany and France and are in the final process of selecting the best fit for our strategy in each of those regions. We expect to have market development agreements in place by the end of the third quarter. In the meantime, we continue to identify and are establishing relationships with the top hospitals in these territories, and we expect to begin market development studies very quickly once we select that partner. We look forward to providing updates as these strategic initiatives continue to unfold.

In terms of our existing partner agreements, the critical next step is to initiate market development studies at key hospital sites, which is where we are now in the process, and it is the reason I am currently dialing in from Europe. As I mentioned, the goal of the market development studies is to generate compelling and objective data. Positive data results can be leveraged with customers and the marketplace in the form of various scientific information, such as white papers, abstracts, case studies and peer-reviewed publications, that clearly validate the clinical utility of APPY1 as well as quantifying the potential cost savings associated with using our test at the various types of hospitals, accounting for differences in workflow and patient management.

We expect potential cost savings to come from 3 primary areas: first, a reduction in overall imaging, both in ultrasound and the number of CT scans performed on patients where the APPY1 Test result is negative; a reduction in the number of patients for whom a surgical consultation is ordered prior to imaging; as well as a reduction in the amount of time a patient spends in an emergency room either being prepped for imaging or for observational purposes. We believe information containing objective data that describes these potential cost savings and improvements to clinical workflow will add value to our commercialization efforts, particularly in Europe in the near term.

In terms of timing, we expect the first of these studies to be completed by the end of the third quarter of this year. The studies and data are being managed by Venaxis using the same high standards and practices that are currently in use for our pivotal U.S. study. We expect the first materials leveraging data from these studies to be available in the fourth quarter, which, combined with the strength of longer-term distribution agreements with our partners, will signal the start of our full-scale launch.

Shifting now to our preparations for U.S. commercialization, our plan is to commence hiring and training our initial U.S. sales force upon receipt of positive topline data in order to be ready to launch in the United States upon potential clearance. Both Steve and I have years of experience working with highly qualified sales reps in this space and have already had initial conversations with certain of the people we expect to be managing this launch from a sales perspective. That said, we plan to wait until we are satisfied with the topline data from the clinical trial before engaging a sales force while the APPY1 Test is under review by the FDA.

In summary, we remain focused on laying a solid foundation with the expectation that 2014 may be a potentially significant value inflection year as we plan to continue on to full-scale commercialization of APPY1 in Europe and advance to commercialization in the United States. 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 Q&A.

Stephen T. Lundy

Thanks, Don. I'll conclude by reiterating our commitment to gaining U.S. regulatory clearance and developing a market for APPY1, which we believe has potential to improve the way emergency physicians manage their patients who present with abdominal pain. Despite the time needed initially to bring our hospital sites up to speed, our pivotal study is going very well and is enrolling patients at an accelerating rate. We are also continuing to meet our commercial milestones in Europe, as Don mentioned, and the positive feedback and enthusiasm we're seeing from our partners and potential customers has been very encouraging and continues to amplify as we're able to further develop the market.

In closing, I'll reiterate that we have the capital to achieve major regulatory and commercial milestones we have set for ourselves. Through a prudent use of this cash, we believe we have the financial resources to execute on our plan.

With that said, we look forward to taking your questions. You may go ahead, operator. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Jeff Frelick of Canaccord.

Jeffrey Frelick - Canaccord Genuity, Research Division

Steve, maybe first question on enrollment. Can you give us a sense how many patients you're enrolling currently per month? And you had mentioned some acceleration. Do you -- can -- expect that acceleration to kind of continue as we get through the summer and into the fall?

Stephen T. Lundy

Yes, I think we do, Jeff. I mean, right now, the rate that we've seen over the last month has been about -- has been 200 patients or so per month, give or take. And what we've done is we've -- as you, I think, know, we enrolled initially 28 hospitals in the study, and we did an evaluation after the first few months. So several of these hospitals were not enrolling at the rates we had hoped, and we are actively replacing them with other hospitals that we think will accelerate -- that have a huge potential to accelerate enrollments. So that's -- I think that's one factor. The other factor is just getting the hospitals up to speed, as I mentioned. There were several things that we identified early in terms of getting these hospitals to enroll at the max level. For example, a lot of these hospitals are university hospitals, and one of the enrollment criteria is that there be no imaging performed or actually received -- the results received before a patient is enrolled. And many of these hospitals being academic hospitals, they're starting with an ultrasound, and one of the things we had to do was counsel them on how to enroll the patients prior to the physicians getting the ultrasound results. And that's just an example of something that really did kind of hold back enrollment as we started. So that's just one example. So between those 2, additional hospitals being recruited into the study and just really helping the hospitals with the enrollment criteria, we think we'll accelerate quite significantly beyond where that 200 or so a month is today.

Jeffrey Frelick - Canaccord Genuity, Research Division

So if it's sub-28, can you share how many hospitals are contributing to the study right now?

Stephen T. Lundy

Well, all of the hospitals are contributing, Jeff. It's just that some of them were contributing at levels below our expectations. For us to really -- for it to be a feasible hospital -- I mean, remember that we have contract research associates that are going out to these hospitals on a regular basis and collecting their data, auditing their databases and so forth. They need to be contributing 3 to 4 patients a week, and some of these were contributing let's say 1 to 2 a week. And that's just wasn't acceptable, so we elected to, in some cases, close down a couple of hospitals and enroll new ones.

Jeffrey Frelick - Canaccord Genuity, Research Division

And can you just maybe elaborate a little further on the changes to the enrollment criteria that you cited in your opening comments from FDA?

Stephen T. Lundy

Yes, the main one, Jeff, was we wanted to exclude the very high-risk patients. And so those were the patients that, if you remember our CP-11 [ph] study, that would have gone directly to a surgical consult anyway. We -- the FDA felt that there -- and we agree that those patients probably aren't the best candidates for the test. So as we've seen from the prevalence data from the study, the prevalence has gone from a 29% rate of appendicitis in CP-11 [ph] to about a 23% in the study. So that was something we had to get our arms around as well. That actually was -- we are quite happy with that. 23% is, we think, right on target, and that's something we really wanted to monitor very closely to make sure we're on track. So that was the biggest difference.

Jeffrey Frelick - Canaccord Genuity, Research Division

And that's fairly close to real world, right,Steve?

Stephen T. Lundy

Yes, yes. We -- when we did our statistical analysis plan, Jeff, we anticipated somewhere between 20% and 25% prevalence, and we're right in the target. So that's really good news actually.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And then just 2 quick questions for Don on Europe. So how many -- Don, can you maybe share how many hospitals you currently have signed up for the short clinical studies?

Donald R. Hurd

Presently, we have 5 hospitals identified, and all 5 are in different processes, steps of signing on the dotted line, Jeff. And let me clarify that. It's -- I mean, I'm here just to make sure that we do finish that and we start the study imminently [ph] in a majority of them. So none have signed on the dotted line yet, but I expect imminently that they will move very quickly in that direction. It's a process.

Jeffrey Frelick - Canaccord Genuity, Research Division

Okay. And then you talked about 3Q starting to see publications come out of these studies. So is this -- will this be kind of a rolling publications, maybe one appears in late September and then subsequent months we'll see some additional studies come out?

Donald R. Hurd

I would think that would be a logical approach to it because there -- obviously these hospitals, I mean, they have different -- just to give you a flavor, and I think you know this as well, I mean, Ethical Committee have to meet and approve the study, right? And emergency people, lab people are ready to sign off, but they need to have the Ethical Committee review. So not all hospitals have that review at the same time. So that means that some will start different times and finish different times, so your explanation is pretty accurate.

Jeffrey Frelick - Canaccord Genuity, Research Division

So when do you expect -- now that you have 4 distribution partners covering multiple countries throughout Europe, when do you expect to have a study basically arming each distributor partner? When will that occur? Early '14?

Donald R. Hurd

No, I would hope in the fourth quarter. I have a study going in each of those territories.

Operator

Our next question comes from Yi Chen of Aegis Capital.

Yi Chen - Aegis Capital Corporation, Research Division

My first question is based on the current enrollment speed. Is it likely that we will see the result from the second futility testing early fourth quarter this year?

Stephen T. Lundy

Well, if you look at -- just to give you a -- Just to go back, we got, as I mentioned, about 830 patients that are enrolled now. So we've got approximately 400 to go. And at a rate of -- accelerate above the 200 a month we're doing today and look at a follow-up of, say, 3 weeks after that to get all the database closed, so that's probably -- we're looking at 2 months from now or so.

Yi Chen - Aegis Capital Corporation, Research Division

Second question is, could you give us some color on the pricing for testing the EU area?

Stephen T. Lundy

We haven't established pricing yet in the EU. I think we've guided in general that we're probably targeting somewhere in the $75 to $80 range. Now the pricing in EU will be probably about 25% to 30% less of that because we'll be transferring the -- the distributor will be buying the product at a discount and selling it after that. So you see, we've modeled ASPs in Europe somewhere in the $40 to $50 range. We have not finalized a pricing yet either in the U.S. or in Europe. I think that's one of the reasons why these studies that Don refers to are very important. And we are going to be conducting a study -- similar study in the U.S. as well. So -- but we -- I think those prices probably will fall into that range.

Yi Chen - Aegis Capital Corporation, Research Division

Okay. My final question is what's your current estimate for cash runway?

Stephen T. Lundy

Well, we've got, as mentioned at the end of the second quarter, about -- some $20 million in cash, and I think you can estimate approximate burn going forward about $1 million a month. So that kind of gives you our runway, which is approximately 1.5 years or so. That assumes -- that's without any revenue. So to the extent that we can mitigate that burn through rising revenue, which we do believe will be -- starting to take place in the fourth quarter and accelerating in 2014, obviously that burn would be mitigated to some degree.

Yi Chen - Aegis Capital Corporation, Research Division

Okay. When you plan to file the 10-Q?

Stephen T. Lundy

It will be approximately August 8 or 9.

Operator

[Operator Instructions] And this concludes our question-and-answer session. I'd like to turn the conference back over to Steve Lundy for any closing remarks.

Stephen T. Lundy

Thanks for everybody -- to everybody for joining the call today. We certainly look forward to updating you next quarter and when we have our next futility analysis. So thanks again. Have a great day.

Operator

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

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