Cancer Genetics, Inc. (NASDAQ:CGIX)
Q3 2013 Earnings Conference Call
November 13, 2013 04:30 p.m. ET
Panna Sharma – President & CEO
Elizabeth Czerepak – CFO
Jon Cunningham – IR
Brooks O'Neil – Dougherty & Company
Raghuram Selvaraju – Aegis Capital
Kevin Robl – Intraline Asset Management
Bill Hiler – Ridgecrest
Good day ladies and gentlemen. And welcome to the Cancer Genetics’ Third Quarter 2013 Earnings Conference Call. As a reminder this conference call is being recorded.
I would now like to introduce your host for today’s conference Mr. Jon Cunningham with the Cancer Genetics Investor Relations Team. Thank you, Mr. Cunningham, please go ahead.
Thank you for joining us for Cancer Genetics third quarter 2013 earnings conference call. On the call today are Panna Sharma, the company’s President and Chief Executive Officer and Elizabeth Czerepak, Chief Financial Officer. Cancer Genetics issued a new release after market today detailing its third quarter 2013 financial results and business progress. Following the Safe Harbor Statement Panna will provide an overview of the business progress and trends and Elizabeth will then provide a summary of the third quarter financial results. Next, Panna will discuss commercial and developmental update before we open up the call for Q&A.
Before we can hand it away I would like to ask everyone to take a note of the Safe Harbor paragraph that appears at the end of the news release issued today covering the company’s financial results. This progress states that in the forward-looking that we may make speak only as of the day it made and are subject to inherent risks and uncertainties including those described in the company’s most recently filed quarterly report on Form 10-Q and should not be unduly relied upon. Except those otherwise required by the Federal Securities Laws we disclaim any obligation or undertaking to publicly release, any updates or revisions to any forward-looking statement contain herein or elsewhere to reflect any change in our expectations with regard thereto to any changes in events, conditions or circumstances on which any such statement is based.
It is now my pleasure to introduce Cancer Genetics’ President and CEO Panna Sharma. Panna please go ahead.
Thank you Jon. Hello and good afternoon everyone, welcome all of you to our third quarter earnings call. It’s been six months since our last call and this is our first call company update since the number of events namely up listing to NASDAQ in August closing our follow-on offering on October 28, launching our joint venture in an existence sequencing with the Mayo Clinic called OncoSpire Genomics and receiving notices and allowances on several important patents that form the backbone of our unique [endomorphic] approach in creating gnomically guided personalized diagnostics for oncology. Our entire company over this past six months period since our last call has been focused on strengthening our platform, our portfolio and our brand for long term sustainable growth while continuing to build on increasing our market traction and driving commercial adoption.
I would like to take a quick moment to thank our team and thank those of you that worked very hard to understand and invest in our vision. For those who of you that are near to Cancer Genetics and our business I would like to provide a quick overview on our business model, some of the key growth drivers and our recent accomplishments. First and foremost would genomics-based diagnostics company focused on delivering unique comprehensive insights of our blood-borne and urogenital cancers that help in the personalization of cancer treatment. Our goals are sort of both the clinical care center such as hospitals, laboratories and cancer centers as well as the biotechnology and pharma community. We are improving the efficacy of their trials and where we help them with the development of fair [Gnostic] and compelling diagnostic programs. I would like to turn to some of the select highlights of our operational results.
I’m very pleased to report that revenue from commercial operations grew 67% for the third quarter 2013, 67% of the same period last year. Inclusive of government research grants revenue grew by 37% year-over-year. Testing volumes also increased significantly, with total test volume increasing 71% in the quarter year-over-year and we also continue to make improvements in gross margin with an increase to 29% for the quarter.
Although we have made few changes from quarter-to-quarter as we grow and scale the business. We are experiencing strong momentum in sales, test usage and product sales and Elizabeth, our CFO, will elaborate on additional operational financial highlights in a few minutes.
In the development of our portfolio we’ve also seen significant progress and the successful launch of two proprietary diagnostic tests for kidney and cervical cancer. Our proprietary portfolio now consists of five compelling genomic tests in our areas of which are hematologic and urogenital cancers. As a reminder we have developed these products and services, there are Novel and IP protected and collaboration with some of the premier cancer research institutions. For a kidney cancer array, we work closely with Memorial Sloan-Kettering and the Cleveland Clinic.
For a cervical cancer panel we work with the National Cancer Institute, Georgia Health Sciences University, Dana here in the U.S. and Kamineni Hospital & Healthcare System in India.
During the past quarter there was also the cervical cancer panel we published and the journal on gynecologic oncology in September and dispersed significant interest from both research institutions and cancer centers looking to improve the detection stage in the cervical cancer from using the existing Pap smear which allows no further samples to be taken from the woman and no additional healthcare time or visitor required to the Oncologist or OB/GYN. This is a significant shift in the ability to detect in three hours cervical cancer.
As we have indicated before we are on track for the launch of this breakthrough product here in the U.S. this quarter both through our lab as well as through several partner laboratories. We will be releasing additional details later this month on the approval and launch of FHACT as a [pre-LDT] as well as a unique database and a registered base product offering up tracking educate the missions, pathologists and community health providers on the genomic abnormalities associated with HPV-associated cervical cancer.
We believe that patents in genomics continue to be increasingly important specially in this environment and our new patent of words and notices of allowance for a renal diagnostic and mature B-cell neoplasm detection diagnosis continue to strengthen our intellectual property while further confirming our industry leading position in these difficult to diagnose cancers.
We will continue investing and further validations and further studies that demonstrates the unique value that these products have and these studies will drive adoption and also drive improved reimbursement as we continue to help in the care of cancer patients. This week at the 2013 AMP Annual meeting which is the Association for Molecular Pathology will be presenting two important posters, one jointly with Lumina and a second poster that demonstrates the diagnostic power and utility of our kidney cancer array. The expectance of these posters as well as a recent peer reviewed publication of our study results related to our MatBA-CLL which is chronic lymphocytic leukemia diagnostic which was accepted in leukemia and lymphoma during September provide additional validation of our technology and our approach to personalizing treatments based on patient risk profiles and outcome prediction.
The publication in leukemia and lymphoma was based on 228 treatment naïve patient samples across two large independent cohorts for multiple research institutions Dana-Farber, Hackensack University and Memorial Sloan-Kettering Cancer Institute and they support the value of risk stratification based on genomic imbalance, again this is an IP protected product that we’ve launched and continues to get market traction.
We will continue investing and fortifying our leadership position and hematologic malignancies through additional studies with institutions and also involvement in additional trials with leading biotech and pharma partners such as Gilead Sciences where technology and services we use extensively internationally and international trials for CLL.
In addition [Indiscernible] in December will also be presenting our poster on diffused large B-cell which is also now in market as an LDT for this very difficult to diagnose and difficult to manage this on neoplasm.
From the investment community our business model and approach has also been confirmed through strong interest, most recently our follow on offering of risk proceeds of over $46 million, cash from this offering position as to accelerate the build out of a national commercial footprint. This will drive long term revenue and margin improvements in our business and further strengthen our leadership position in gnomically based cancer diagnostics and the personalization of treatment.
I’ll show more better plans and our strategy moving forward in a few minutes. For now, I’ll turn the call over to Elizabeth, our CFO to share our Q3 results with you. Elizabeth?
Thank you, Panna. As Panna has already mentioned we continue to make significant progress during the third quarter. We experienced strong revenue growth year-over-year with revenue from commercial operations up 67% over the same quarter last year. Total third quarter revenue including government grants was up 37% growing from $1.2 million to $1.7 million.
On a year-to-date basis we also experienced substantial revenue growth. Revenue from commercial operations for nine months was up 69% over the same period in 2012. Total revenue for nine months ended September 30, including government grants was up 47% growing from $3.2 million to $4.8 million. Our trailing 12 months revenue comes in at $5.8 million.
We continued to see very strong growth in clinical test volumes in the third quarter with 2,920 tests compared to 1,704 for third quarter 2012 representing a growth 71% year-over-year. For the nine months ended September 30, our clinical tests volume grew to 8,035 tests compared to 4,937 for the same period 2012 representing a growth of 63% year-over-year.
Average revenue per test of $531 in third quarter was down slightly from average revenue per test at $551 in third quarter 2012. However, for the nine months ended September 30, the average revenue per test increased from $545 to $562 for the same period 2012. We expect to experience slight variance of this type from quarter-to-quarter as our revenue mix and our customer mix continues to evolve. Revenues from direct bill customers comprised of our select one and expand the x client increased $1.6 million or 142% to $2.8 million for the nine months ended September 30.
Gross profit improved to $494,000 in the third quarter up from $271,000 for the same period last year. Our gross margin improved significantly to 29% compared to 22% in third quarter of 2012. On the nine months basis, gross profit improved to $1.2 million with a gross margin of 25% compared to 11% in the first nine months of 2012.
We also continued to pursue initiatives to improve our gross profit trends through improved capacity utilization and process innovation. Our operating expenses were $2.2 million in third quarter compared to $2 million for the same period last year. R&D expenses decreased slightly to $434,000 compared to $501,000 in the third quarter of 2012. During third quarter we continued to increase our sales and marketing exposure which grew by 33% to $443,000 from $334,000 in the year ago period.
Our loss from operations in the third quarter was $1.7 million which is flat compared to the same period last year. Net loss for the quarter was $3.1 million or a net loss per share $0.61 compared to a net income of $300,000 or a net income per share of 23% in third quarter 2012. This net loss was primarily the result of a $4.4 million increase in the fair value of derivatives liability partially offset by $1 million increase in our interest expense.
At the time of our IPO in April, $9.6 million of debt was converted to equity and then in August 2013, we repaid $3.5 million of debt which will reduce our interest expense going forward. In August and September, we completed 1,605,000 share equity offering including 105,000 shares over allotment options for which we received gross proceeds of $16.1 million.
After deducting transaction fees and offering related expenses not previously paid, we netted approximately $14.2 million. In October, we completed a 3,286,700 share equity offering including the 428,700 over allotment option for which we received gross proceeds of $46 million after deducting transaction fees and offering related expenses not previously paid we netted approximately $42.2 million. On a pro forma basis reflecting the proceeds of the offerings, at September 30 we had $52.1 million in cash. Cash used in operations in third quarter was $2.8 million compared to $1.7 million used in third quarter 2012. The increase in cash usage was primarily from the pay down of order accounts payable.
I will now turn the call back over to Panna to review the major accomplishments of the period, discuss our business strategy and further detail and to cover some of the milestones that we are looking forward to achieve in the months ahead.
Thank you, Elizabeth. On our last earnings calls, I shared the five main pillars of our growth strategy. Today I am going to talk about what we are doing in each element and what can be expected on a near term basis in each of the main elements. First, increase in geographic coverage. We have seen already that there is significant need to partner with community hospitals and cancer centers and to better inform oncologists and pathologists of our unique state of the art offering for testing and diagnosing complex blood-borne in urogenital cancers.
When I came into the company in 2010, community hospitals and centers accounted for about 14% of our volume that number is about 40% today and we expect it to continue increasing. This is a critical element in our growth and in reaching more patients. There are over 4,000 community hospitals and 1000s of local oncologists that need a partner for genomic assessment and improved disease management for their patient. Here we have developed a uniquely branded program called Expand DX where we help and expand their value proposition to the community and expand their capabilities in personalized cancer diagnosis.
During our last call, I mentioned that we had recently started hiring outside the Northeast and into the Texas and Midwest region. Today those areas are now responsible for the staffs discovering geographic segment in our business and also some of the best new accounts. With a greatly improved cash position as a result of our recent capital raise, we are now developing a national sales footprint to build our market share and the Expand DX market and really serve this underserved customer segment.
Our second main strategy element is our select one program where we partner with the biopharma community meaning both the biotechs as well as the pharma companies. Select one which we formally launched in Q1 of 2012, continues to grow quarter-over-quarter driven by our partnerships with companies such as Gilead Sciences which we announced back in March. We continue to grow that business and the biopharma community is aggressively moving toward biomacro based therapeutics not only as part of their launch but also as part of their trials. We are in an ideal position to partner, to help drive the changes that are needed by the biopharma community in their clinical trial programs and help them development of the potential companion markers and in developing their fair [Gnostic] programs.
When we launched this offering in 2012 with a couple hundred thousand dollars in initial contract, today our agreements in this category are worth over $7.5 million and growing each quarter and we expect that work to last over the next two to two and half years and perhaps further.
Select one has made us a valued partner to biopharma companies where we can accelerate their development in our – in very targeted diseases program and help them manage the key issue of genetic base patient stratification and response monitoring. As an example of this value in the case of our Gilead customer, our partnership recently aided in the CLL trails and made for more targeted and more efficacious trials. You will continue to see additional announcements over the coming quarters on our progress in the strategic area for both Gilead as well as other biopharma clients that we will be announcing.
The third element propeller of our strategy is a strong focus on payers and on reimbursement essential to our long term value, we want to insure that healthcare providers in organizations see the added value in our testing and proprietary services. We start making investments in generating the dialogue and exposure which the payers, the cost management organizations and with insurance providers that demonstrate the effectiveness of our tests and our approach and in our capability in the genomic assessment of complex cancers that ultimately reduces the cost of care.
We are currently launching several health economic studies that demonstrate the financial impact of our specific taste in leukemia, lymphoma, renal and cervical cancer. Our complete focus on specific oncology categories has significant appeal for payers and providers since they look at these cost centers on a very disease specific focus and so we can ensure that we get a comprehensive complete diagnosis while maintaining and in many cases actually decreasing cost or moving the need for invasive surgical biopsies such as the case in our renal and cervical cancer products.
Reducing cost, reducing procedures essential to the management of cost and improving care of these cancers. Our focus on payers and reimbursement led to initial view of Multiplan back in May and we have several other partners now that we’re in conversations with. We’ll continue our active dialogue and investment in this and we expect that additional payers to sign up with CGI over the coming quarters and will routinely update our investors on this front.
The fourth element of our strategy is our joint ventured with Mayo Clinic. We launched this joint venture as you know in next generation sequencing which we feel and the community feels is an important approach that will change the future of healthcare and patient management. As a technology matures, as prices decrease and the standards are merged. CGI and our shareholders will be uniquely positioned for longer partner Mayo to capture value in this area. Mayo had formed joint venture with us and next week in New York we will be hosting as venture median investors on Friday November 27, our outline our 50% ownership split in this cutting edge company will benefit our shareholders near term and long term and also impact the oncology ecosystem in a very targeted disease specific manner.
We believe ultimately that our targeted approach to NGS that has been developed in a bottoms up manner guided and lead by the clinical need from some of the leading top leaders and clinicians will have a real pragmatic and lasting impact on the healthcare system in oncology.
The fifth element and this is very important is continue to investment in our existing portfolio as we discussed earlier we built this company on a foundation of tremendous genetic knowledge and now has been rapidly translated into meeting clinical questions that are both actionable and relevant to disease management and hematologic and urogenital cancers. We’ve launched now commercially five very compelling proprietary tests that we expect will significantly change care treatment and these tests are not only approved CLIA in New York but it’s also a process of getting the tests approved that we become very good at.
I more importantly work and I continue investing our existing products through studies, trials or find the algorithms, improve their performance and sensitivity and ultimately driving improved value and usage of the services that we’ve launched. In early 2014 we will hosting a portfolio update where we will be sharing the development details of our existing portfolio giving insights into adoption patterns and sharing case studies where it has impacted patients and care decisions.
Executing on these five pillars of the central to driving growth in our company and in keeping some of the leading edge of genomic based care and oncology. As all of you know, the healthcare industry right now is going through a significant paradigm shift moving away from traditional approaches toward more comprehensive genomic assessments of cancers and integrating that into the more informed guide and decision around patient care.
Today Cancer Genetics is ideally positioned at the right time with the right type of very unique portfolio and the right team and now I’m formed with the right capital to execute over the next several quarters and years. We built a very strong base that’s already bearing fruit has positioned us for a continued growth and performance this year and beyond and this is what’s driving groups such as Mayo Clinic, Memorial Sloan-Kettering, the Cleveland Clinic and other premier institutions as well as biopharma customers such Roch and Gilead to partner and develop programs with us.
This is because of our technology and our pragmatic comprehensive approach works well, delivers the necessary information of personalized treatment. With the industry in the midst of the significant paradigm shift we believe that integrating genomic based cancer diagnosis into a more comprehensive and complete snapshot of the patient is becoming widely adopted among clinician and pathologist not only in the U.S. but around the world and this is why we’re driving to develop this national sales footprint.
We believe that the use of our tools and services are going to be central to ultimately helping physicians drive better, improve patient stratification, better understand and predict outcome and drive more effective cost informed treatment decisions for their patients and drive them to the right therapeutic programs.
Thank you for taking time to listen and I would like to open up the line today for questions.
Thank you. (Operator Instructions) Our first question is from Brooks O'Neil of Dougherty & Company, please go ahead.
Brooks O'Neil – Dougherty & Company
Good afternoon and congratulations on your progress. I’ve a couple of questions, can you hear me okay.
Yes, Brooks we can hear you fine.
Brooks O'Neil – Dougherty & Company
Okay, fine. Perhaps you could just discuss the steps that you would take to commercialize a product or say for kidney test which was recently to keep the pad and how you take to the market to drive revenue and earnings from that test?
Brooks that’s a great question. Central the driving adoption as you know is not only having unique IP and protection which was granted to us but also having it as a clear available test. We’ve now launched that as a clear available test through large validation studies of both Sloan-Kettering and Cleveland Clinic. Driving adoption as you know is really toward, we’ve a three part strategy one is developing additional sales people that will be calling on the urologists and the pathologists in the key renal centers, we’re now putting that in place.
Second is a drive adoption with leaders in the major research institutions and that is being done by showing them the value of array in being able to give a specific diagnostic answer to fine needle aspects that are today have to go for nephrectomy or surgical biopsy. So we have been able to do that in hundreds of samples and now we’re actively getting into the major thought centers to showcase this to pathologists and oncologist.
And then, third where the real explosive opportunity is, is to then bring this test with the data, with the IP and with thought leader adoption into the community setting where there is literally 80% renal cancers initially diagnosed and to be able to offer this tests to pathologist so they can reduce the number of surgical biopsies, get to an earlier decision faster. There are about 60,000 cases of renal cancer new to Novel every year in the United States and its increasing by about a 4% a year, 3.5% to 4.
And roughly 15,000 to 18,000 of those new cases go to surgical biopsy and we feel given our algorithm that can subtype the renal cancers into the four major subtypes as well as give information on benign versus malignant which is a central question.
We believe our first foray is to cap those 15,000 to 18,000 cases every year and try to avoid the thousands of dollars spent on the surgical biopsy or nephrectomy. So we have a – what we feel as a very kind of clear and simple plan to drive thought leader adoption, institute additional trials, bring this data into our growing sales footprint and then enter into community hospitals where we can have a killer value proposition of being able to remove cost, get the patient to a treatment plan earlier and faster, so that’s kind of our strategy again we going to first hit the 15,000 to 18,000 and then use that data then to drive the next wave which is to move primarily genomic we guide a diagnosis for the remainder as well.
Brooks O'Neil – Dougherty & Company
That’s very, very helpful. Second question is I was just curious, let’s just talk a little bit about reimbursement in our brands you to buy that and the steps you are taking to develop a relationships with the payers, but you give us sort of sense for what outlook is for reimbursement trends over the next 12 to 18 months?
Very straight question, I think essential to what we’re doing in this category and for everyone. I am going to give you a perspective that is guided by not only our reimbursement here at CGI, but looking kind of based on our more forward-looking conversations that we had with payers, I don’t have a crystal balls, so want to obviously presses over that, but as Elizabeth pointed out we’re seeing some uplift in some of our average revenue per test and we are sourcing in certain categories at down checks that’s why I think we need to categorize it. What we are continuing to see is consistent with what everyone else may see in the category is that government payers such as Medicare and others do have downward pressure both on how long they are taking to pay as well as what they are paying. We don't expect this to abate anytime soon, we think this will continue for the next two to three quarters as molecular codes, concerns about the types of reimbursement that are being made, they are going to take a while to settle. I think that category of payers today represents year-to-date through September 1, about 13% Elizabeth through September?
13% from Medicare.
Yes, 13% from Medicare.
With an increase in revenue per test.
With an increase in revenue per test in Medicare, so we are getting better at collections. But we’re seeing continued pressure, so I think that’s one category. The second category where we’re seeing, I would say more informed dialogue and more interest is really the third-party payers such as the [Indiscernible], United’s, Blue Crosses, Signos and Oxford’s and they are all very interested in how incorporating disease-specific tests into their accountable care methodology will change how much they have to spend. So we’re now very actively having dialogue in a disease-specific way for example in kidney, in multiple myeloma in disease like B-cell because this payers know if they get x number of cases they spend x number of dollars prior to first treatment.
And there what we are seeing is less reliance by those payers on just following Medicare and CMS guidelines and they want to get their own data and so I think given the value that our tests have with these specific disease states and the fact that we really proven in large studies the value that it has getting to earlier and more comprehensive diagnosis. We are very hopeful here that overtime these trials and these discussions will result in significantly improved uptick on a average revenue protest that will take several quarters.
The first category that we are seeing is the biotech and pharma community, we’ve seen tremendous growth, correct me if I’m wrong but I think about 140% year-to-year and what we call it overall our direct bill customers, so very large growth and also a pretty large increase in average, their number of testing ordered in the trials. And that I think will continue because there is a real race to figure out not only what’s therapeutic but what combination of new therapeutic and existing protocols will work and this is all being driven by stratifying into more precise patient groups and pools during adaptive clinical trials and so we’re seeing that growth what we are calling our kind of a select one business that’s about 40% almost year-to-date and we continue being between 30% and 40%. And then we see average revenue per test they are increasing.
So that’s again I started to give you complex but because the categories are different and the dynamics are different they have all various push and pulls into the revenue base. I think for our shareholders it’s good, it diversifies our revenue base, which is very important I think in this environment and more importantly gives us much more decisions to help guide ultimate patient value by understanding what’s going on in trials by understanding what’s going on in the payers.
Brooks O'Neil – Dougherty & Company
That’s really helpful, thanks a lot.
Thank you, Brooks.
Thank you, the next question comes Ram Selvaraju of Aegis Capital, please go ahead.
Raghuram Selvaraju – Aegis Capital
Thanks very much for taking my -- I just wanted to ask a little bit about the financial side if you could talk a bit about the use of proceeds from the most recent financing and give us an idea about the timing which we should expect to see you extend to sort of, for example, sample processing capability on the clear front potentially by acquiring a clear facility on the West Coast, you sort of given an update on that. And then secondly, if you could give us an update on how we should be thinking about potential benefits to Cancer Genetics on the revenue side from when for example that your reactors -- that you were involved with at the phase III level might be approved, so one sales of bad drug start to approve how that’s going to benefit Cancer Genetics on the revenue side and how that is going to work?
Okay a lot of questions, I have tried to get some good notes Ram, thank you for your questions very good and timely. First one I’ll tackle the use of proceeds with some of Elizabeth’s help that primary you know and this continues to primary point of this raise was really to drive this increased commercial traction with year mark the majority of the proceeds 15 million or more expanding our geographic reach outside of Northeast and Midwest to much more national footprint. We also have year marked $5 million for Mayo joint venture, about $5.5 million to $6 million for our own internal R&D and clinical affairs and efforts. And we expect that largely to be over the next two year period.
Our goal for the remainder of this year is to get our sales force to -- sales and marketing team to about 12 to 14 people and increase that to 30 plus by next year. So we really see very aggressive rollout in the first half of next year on a commercial infrastructure. The Mayo payments as we’ve indicated it’s really based on meeting milestones and progress. We made the first million payment from our last user proceeds we will be making another million based by early in Q1 of 2014 and in RS program we basically program about a million every six months or so into the Mayo joint venture.
Again for a set research and development on our own we’ve year marked between $2.5 and $2.75 or so million per year both for the next two years. A lot of the heavy R&D has been done as you know Dr. Chaganti and his team from Sloan-Kettering and other institutions and they founded the company back in 1999-2000, they have been doing tremendous amount of work on identifying and developing these algorithms. So we’re really resting on good decade of great genomic insight.
In terms of the Clear and West Coast I think that is a great question, it goes right to the heart of getting a national footprint and becoming a leader in this category. We have a great clear facility here in New Jersey, we can continue to increase our capacity here between 3x and 4x, but we do think to meet the national need that we will need a facility on the West Coast. Although there is nothing near-term and that we had, I would say any substantial discussions with – we remain open and I think from our shareholder perspective, you know our shareholders expect growth and so if there is something that make sense or it fits the need or it gets us to market faster and much more effective manner and if it’s a good use of capital we’ll remain open to that, but nothing near-term that we see.
The last question or the last new question is really on what drove us to really accelerate the need for capital is that with the [Indiscernible] one-on-one Gilead approval pending from FDA. The results from obviously they have a compound and 94% efficacy in the trial I think they brilliantly used patients stratification and response monitoring. We did a lot of that work here in our lab, we’re able to manage nationally and internationally the field testing obviously it’s an area of excellent, we’re centre of excellence for that and we think we will see significant uplift in our CLL volume as a result of that drug getting into market. But also as a result of several other CLL drugs that are coming into market that have been improving including Roche as well as Jansons Partner pharmaceuticals. As you know and I think we had some of the conversations to blood-borne category is really going through a tremendous renaissance of very, very targeted powerful agents to go after non-responder groups, to go after intermediate prognosis groups and all of this testing we expect to capture significant portion of that because the traditional CLL testing its done today is going to need be augmented and we think we are going to be central to that.
As you know there are up over 23,000 to 25,000 new cases just here in the U.S., this probably 5x to 6x at number tested for potential and we think, we are going to capture as a result of our involvement in that trial and as a result of our CLL work. We expect to capture major share of that somewhere our model tend to 25% of that over the next several years.
Raghuram Selvaraju – Aegis Capital
Can you just elaborate on one point with respect to that? If in future you happen to have more collaboration like the one that you had with Gilead and particular drug in question like for example, it allows us, gets approved and gets onto the market in the United States? What are some of the steps that you can use to ensure that Cancer Genetics’ molecular diagnostic test or tests associated with that drug in clinical development wind up being the diagnostic instrument of choice, have a companion to that drug, when it actually gets on to the market? Let’s for example as of right now correct me if I am wrong, there is no direct obligation for physician administering it allows it to use the Cancer Genetics products, correct?
No that is actually correct. There is no obligation at all and there are a lot of different ways to look at people who are non responders or people who are in intermediate. So again, we are not a companioning diagnostics there is no co-branding right now. But what we can do to ensure that we get our fair share that is really develop at national footprint as you know our involvement as a you see our center of excellence you know a lot has to have co-branded kits that went out to all these site. Our name has been involved with some of the major publications in leukemia and lymphoma in the international workshop of CLL, so what we can do as we can take active steps to get the national footprint, develop more aggressive marketing awareness programs. And ensure that we continue to service those accounts at the highest level as possible. We are working with some of the major thought leaders such as folks at Dr. Rice’s lab at Hackensack, [Indiscernible] so almost all the centers we are working with them, so that will allow us to I think try the adoption but you’re also right. There is nothing that dictates now. That’s really driving the commercial, drive that’s why it’s very important that we get the commercial sale and marketing infrastructure in place.
Now going forward as we grow as a company because we have developed these test and capabilities and IP protected and we will take them on to other technologies beyond a race such as NGS etcetera. We can have a much more proactive approach. As you know this is what I think will be the first any of the a lot of these biomarker based drugs go after very specific patient populations and the paradigm of care is going to be combination protocols more and more narrow casting of the precise patient groups and I think will be central to that and a number of other B-cell malignancies namely defused large B-cell, mental cell and follicular all of which we have product store.
Raghuram Selvaraju – Aegis Capital
Got it, just two very quick questions, can you tell me what the level of stock based compensation was in the most recently reported quarter and how we should be thinking about that going forward and secondly can you give me the quarter ending share account number?
Sure. Stock base compensation, I’m just adding some numbers here was about $400,000 for the nine months ended September 30, and the way to look at that is as we make new hires of course we will continue with our plans here that every employee has stock options that is appropriate for his level of contribution and growing the company.
Raghuram Selvaraju – Aegis Capital
So in another words we should affect to see that going up over the course of the coming quarters, right?
Yes. As we hire I would say that at this point we, for example, in the lab itself probably the hiring will be more at the mid to lower levels as we adjust up for its – in order to handle more volume. And fewer higher level people will be needed proportionately to supervise those so of course the stock option grants for higher-level people is usually higher. As far as your question about the number of shares that we have at the end of September 30. We had a basic weighted average shares outstanding of about 5 million. We also have another 2 million, I’m just looking for the fully diluted number, we have 1.9 million in warrants that are outstanding and then we also have about 500,000 of our option plan that still to be awarded.
Raghuram Selvaraju – Aegis Capital
Okay. What I was asking was the quarter ending number not the weighted average number that’s not fully diluted do you have that number or no?
Yes, hold one second. We had 5,965,000 shares.
Raghuram Selvaraju – Aegis Capital
Okay, okay thank you so much.
So I want to add to that Ram, just to support because of the rate the follow on was done after the quarter end there is obviously additionally 3.2 million shares that were introduced in to the float as a result of that sale.
Right, so as of November 1, for example, we estimate 9,265,000 shares.
So that’s part of the more appropriate share count to look out today in the 9.265?
Thank you. The next question is from Bean Hennery of [Indiscernible], please go ahead.
Good afternoon Panna and good afternoon Elizabeth.
Ben, how are you?
Doing well. Just a few here for you on the health economics that you mentioned what do you think the casing towns might look like for those and how long do you think it will be before some of those might be completed and able to go payers with?
Some will be closed which mean that some payers will want them specifically just for them for example we are in discussion with a payer now that wants to do 50% to 100% study specifically in renal cancer we’re in discussion with another payer that wants to do B-cell malignancy those will be specifically only for those payers, I about will be able to share results openly.
There are - in our own sanction ones that we are currently doing. We expect to have those in the first half of next year both in CLL as well as in renal cancer. We’ve already launched one in cervical cancer, based on the lot of data that we have from the NCI grant as well as data from a number of other sites we expect that in the first half. That's the major focus point for us to start, taking the existing data, monitoring that into studies, and then having multiple sites but at the same time we are also doing what we call closed sessions which are for specific payers or specific institution. And those will be more challenging to share openly. But I think those will result in typically contracts or agreements or further adoption of our tests and obviously we will signal those as it happen.
Okay. That's very helpful. And then you mentioned, we should be expecting some additional announcements on potential biopharma partners, any chance you could characterize, who you are in thoughts with is, if it brings like, Gilead were there, you know, multi tens of billions in market cap, are they smaller, maybe emerging biotech, but that don't have something on the market yet, you know, do they run the gamut. How do those kind of shakeout?
Ben, good question. I think first I want to take time and say you know, all of our relationship in biotechs and pharmas you know, confidential is very important. I can definitely characterize, we have ongoing dialogue with Roche and Gilead, you know, some of our partners today to continue servicing them and increasing the role that we play in many of their trials and their work, so I do expect additional contracts there. We are already in that process. But we do have several new ones, as part of our corporate development kind of strategy, we tend to focus a lot more of our time on the big biotechs and pharmas versus emerging companies. We are and again we only focus on the disease categories where we have unique insight knowledge. So I can't really say what, I don’t want to characterize too much in size but more or less, we are focused on larger players.
Okay. And then lastly and this is maybe a little bit more big picture. Can you talk about how the recently allowed patents validate your patent strategy and perhaps a little bit hard and how your strategy might differ from others in the industry?
Yes. That's a very good question. We have recently been given notice of allowance on number of patents in our B-cell franchise for the detection and differential diagnosis of B-cell, near has some exposure, patents, seminal patents as well as a continuation part and then also a patent in renal. These patents are all based on our ability to grew out of signature on the algorithm, that kind of decision tree. What we have seen in the patent or recently in genomics, recent decision that you are probably eluding to, you know, [secronom and the ariead]. They have been very focused on specific biomarkers and the ability to naturally observe those biomarkers.
What we are doing is, markedly different, what we are doing is looking at the data, and then developing algorithms based on the clinical ability to stratify and predict response or predict outcome. That's very different than just looking at a biomarkers saying you have A or B. I think I have always stood on the side of, whether biomarkers ultimately are able to be patentable or not. We do have some patents, there as well, that we file but our focus and what's central to us is the algorithm. We do think that cancer being a very complex disease, and not just one or two markers, and whether there are present or not present or up-regulated or down but really developing these unique signatures and that's where oncology is going as toward these large complex panels that require the development of bio informatics and algorithms to understand and stratify patients. And that's really what our methodologies focused in around and we can do that in our ways, we can do it next gen sequencing, we can do it in, you know, whatever other technologies emerge.
Perfect. That's exactly what I was looking for. That's really all I have for the moment now. Thank you.
Thank you. The next question is from [Thomas Wister of Richard Companies]. Please go ahead.
Hey guys, congratulations again on the continued progress in the business. I just have a few questions here. First, considering the fact that Cancer Genetics has test across multiple different types of cancer, does that change how you are going to approach your sales and marketing strategy at all?
Really good question. Yes, sales and marketing is central to our growth. What we are doing today is, we are focused largely on building out our hematological focus and we are now beginning to aggressively look at people who have had call points or understanding in the urogenital side. We do foresee some overlap, but we will have sales force, it's mostly hematologic going into next year. I think this time next year, we probably have two very distinct pools. One focused on the hematologic malignancies and then one focused on, the urogenitel, as we continue to develop and support these test.
But one very interesting thing you should know, and also as we are looking at this will absolutely accelerate adoption is a unique team focused on the hospital market. What we are seeing today is tremendous pressure and cancer centers, community hospitals, community labs that drive cost down, get more out of each sample, reduce the number of test being performed but yet give more guided and more accurate information and so they are looking for partners and so I think today that kind of sells little bit different. We are going to also have a specialized group that focuses specifically on these community labs and hospitals.
Good question. We do see a complex, not more complex but I will say more stratified groups and that's again the bulk of our growth in terms of headcount and in terms of cost, it's going to be the maturing and the further refinement of our national commercial organization.
Great. Thank you for the color there. And then for my next question. I know that you said earlier that you can't give too many specifics maybe on your select one cancer backlog. But could you may be give us some color on maybe what type of – what stage or trials you are seeing some of these biotechs and biopharmas come in now and use some of your services, are we seeing like stage three trials or may be earlier like stage one or stage two?
It's a good question. I will give you some color around how we look at it and what we are seeing. And again I just want to caution that courses can change quarter-to-quarter. So, you know, what we are mostly during our later stage trials today. Stage two to be in three. That's why we are seeing fairly larger contracts come in and opportunities. It's not to say, we are not doing phase one or earlier work you know, we do have some stuff at stage one, we do have some stuff at preclinical that people ask us to look at. But again, as I mentioned in our earlier question, we tend to focus the majority of our time with larger names and they tend to really have larger trials phase two or later, if either on their own post-acquisition or of assets that they have done. So, that's what we are indexed and I think that will continue in near term on the later stage larger trials to be in later.
Okay, great. Thanks for that. And then just one last question from here. Just looking at your -- it's just great to see the gross margin going up here, but going forward how do you see the ramping up as both your test volumes expand and maybe as we see some of the revenue protest that kind of go up here over the coming quarters?
Let Elizabeth, our CFO, kind of give you the perspective on where the gross margins are going and the ramp.
Right. So, what we are starting to realize is from the benefits of having larger volumes. Of course we expect to see the efficiencies in the lab continue to develop and to allow us to have appreciate increasing gross margins. On the other side of it we are also working very hard to look for efficiencies and to put in various instrumentation and equipment, and also to move certain productions, for example, last year we move to production and probes to India. So, we are looking at every corner to find ways to improve but we think that overtime, we will reach our goal of getting into the 65% to 70% growth - gross profit margin range, by our goal of 2015 or so depending on how fast our ramp is on the volume side, we will achieve that sooner rather than later. Also we are working on process improvements and as I mentioned before the hiring that we are doing to accommodate these volume is more at the lower level because we have most of the senior management already in place on the cost of good side.
Okay, great. Thanks for the color there. And that's all the questions I have for today. So, congratulation again on the good quarter and I look forward to seeing or catch you in the next progress going forward.
Thank you. The next question is from Kevin Robl of Intraline Asset Management, please go ahead.
Kevin Robl – Intraline Asset Management
Hey guys, how are you?
Good, Kevin, how are you?
Kevin Robl – Intraline Asset Management
Fine, thanks. This question on the typical advancement product that you are wanting to do. Trying to bring the U.S. in the fourth quarter. What do you see as the goal is for the market for that product?
Kevin, its great question. Just to repeat things were muffled. The cervical cancer product we launched outside the U.S. fact, we got great data on it for multiple sites we’ve started the U.S. launch this quarter. We think we will be making announcement shortly and as I mentioned in my prepared remarks that we also expect to have a available database track set. The addressable market, the way we look at it, is we look at number of abnormal Pap smears at least for the U.S. and more mature markets where there is a significant existing OB/GYN infrastructure.
In developing countries and emerging countries where they don't have an infrastructure, it's a very large-scale opportunity, cervical cancers number one and number two killer of women. But speaking more specifically in the U.S. where we expect the launch in Q4. They are about 3.5 million abnormal Pap smears every year, about 2 million of those are referred for colposcopy, what is a surgical biopsy. To understand whether or not there is a real cervical cancer there or what stage the dysplasia is at. What we do in our cast is we obviate the need for that colposcopy, we save a lot of time and energy and effort, so our near-term addressable marketing we think is at 2 million, of those 2 million, about 500,000 or about 25% of those are high-grade lesions that have a very high chance of forming into cervical cancer that are typically today excised.
And so, the way we look at the addressable market is that there is 2 million colposcopies that are referred which we think we can do a major portion of that either through our own lab as a laboratory developed test cancer and to our partners who would be launching the product but also and very importantly near-term we are going to after that 500,000, and again, our average revenue per test that we expect to come from to $400 to $550 per test range as a laboratory developed test and then as a product, $100 to $150 range we sell it as a potential offering to other partners. So it's a very large market, gets into the hundreds of millions pretty quickly but we have a very pragmatic approach, we think this, the health economics studies are very compelling and we think this is going to be a real potential blockbuster for us in the coming years.
Kevin Robl – Intraline Asset Management
Thanks. Yes, I think you answered my next question was going to be more – what the revenue was going to be on the test, once we find the market but you answered it though. Thanks a lot.
Thank you, our last question comes from line of Bill Hiler of Ridgecrest. Please go ahead.
Bill Hiler – Ridgecrest
Yes. Hi, thank you. You touched on this with the national footprint strategy, but you know, test volumes have reached 2,920 for the quarter, as the New Jersey facility, that's about 35 to 40 tests per day, I guess. Is there a practical capacity in the lab in New Jersey on a -- where you are level, where you will kind of approach the capacity of lab and what steps can you take to expand that capacity?
Bill, thank you, very good question. We are always very cognizant of capacity. We think today in our new Rutherford facility, we can expand between 3x and 5x where we are at today. So, we are very comfortable that we will be okay near-term. We obviously can increase the number of shifts, their number of process automation and process improvement steps that we are taking, and so again, we think here in Rutherford 2x to 5x where we are at today and obviously, we have options to expand in the existing facility as well, if we need to. But I think as one of the analyst pointed out earlier Ram, longer term to really develop at national footprint, we will explore, you know, other geographic options as well.
Bill Hiler – Ridgecrest
But I guess until you add additional capacity outside of New Jersey, I mean can the facility handle 5,000 tests or the number that kind of handle 5,000 tests a quarter or what do you–at what point you can get a little bit constrained?
Again, you know, I think this are really 2,920 this past quarter, and you know, again, we think very easily – Yes, by the number of tests now. I am going to just give a caveat to it, you know, because different test at different levels of complexity, apply different labor, it all depends on the mix ultimately. But we are very maniacally focused on streamlining the test automation fact. One, even before prior preparing for this call, a major chunk of my time was spent with one of groups focused on, how do we improve the turnaround time, and what kind of investment do we need to make to start improving the automation of some of the more manual aspects. So it's something that our teams is very focused in on and we want to make as much use of the existing facilities as possible before expanding out into other facilities.
Bill Hiler – Ridgecrest
Just one follow-up on the financials. Can you break down the commercial sales versus total sales?
Elizabeth, will take that.
Right. So the difference between commercial sales and total sales that we have been talking about today is basically just subtracting out the government grants. Right and so for example in the first quarter, I mean, sorry, in third quarter, we had a hundred thousand dollars in grants. That's what we had year-to-date as well.
Bill Hiler – Ridgecrest
Also all the grants were in the third quarter. So to get the track of hundred thousand from the total that will give us the commercial sales?
Right. And we compared to third quarter 2012 where we had a bit more grant. So, in third quarter 2012 we had 280,000 in grants and this year we had about 475,000. So, we like to look out in our operational basis, so that we don't have any distraction from the amount of the grant revenue.
Bill Hiler – Ridgecrest
Great. Okay, thank you very much.
There is no further questions, you would like to give us some final remarks before we go?
Yes. Thanks Jon. As I mentioned earlier, we believe we have a very unique business, it has patent protected products in number of cancer categories that I met, we continue to build a very strong base of a commercial footprint. We can see to get good adoption and we are investing in the future with our next gen sequencing company OncoSpire genomics. We think we have got growth across all segments for our business and we foresee very good strong momentum going into the next several quarters. So with that I think we’ve got great standing and we are building quite quickly to be one of the leaders in the space.
Thank you very much Panna that will conclude the call.
Ladies and gentlemen, this does concludes today's teleconference, you may disconnect your lines at this time and thank you for your participation.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!