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Executives

David Speechly – VP, Corporate Affairs

Kathy Ordoñez – CEO

Ugo DeBlasi – SVP and CFO

Tom White – SVP and Chief Scientific Officer

Mike Zoccoli – SVP, Products Group

Analysts

Bruce Cranna – Jefferies & Co.

Ashim Anand – Natixis Bleichroeder

Derik De Bruin – UBS

Charles Duncan – JMP Securities

Celera Corporation (CRA) Q2 2010 Earnings Call Transcript August 3, 2010 4:30 PM ET

Operator

Good afternoon. My name is Shamicka and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Celera’s second quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. During the speakers’ presentation there will be multiple question-and-answer session periods.

(Operator instructions)

I would now like to introduce Dr. David Speechly, Vice President of Corporate Affairs at Celera. Dr. Speechly, you may begin your conference.

David Speechly

Thank you, operator. Good afternoon everyone, and thank you for joining Celera management to discuss the second quarter 2010 financial results that we issued earlier this afternoon. Present today are Kathy Ordoñez, our Chief Executive Officer; and Ugo DeBlasi, our Chief Financial Officer, as well as other executives from Celera and Berkeley HeartLab.

During this call, we will be making forward-looking statements about Celera’s business. Forward-looking guidance, financial or otherwise, is only provided on conference calls or in our press releases. Any statements in this conference call about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words and phrases such as believe, will, expect, anticipate, estimate, think, intend, plan, foresee, could, should and would.

For example, statements concerning 2010 financial guidance, financial condition, product launches, regulatory approvals and timelines, possible or assumed future results of operations, growth opportunities and business strategies, industry rankings, litigation outcomes, plans and objectives of management and future economic conditions are all forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied.

Factors that might cause such differences include, but are not limited to, those discussed in our SEC Filings. Copies are available on our website, as well as the SEC’s website at www.sec.gov, and on request from our Investor Relations department.

We also will be discussing historical and forward-looking non-GAAP financial measures. These non-GAAP financial measures are not in accordance with, or an alternative for, GAAP and may be different from non-GAAP financial measures used by other companies. A reconciliation of historical GAAP and non-GAAP financials can be found in today’s press release and on the Financial Reports page of the Investor Relations section of our website at www.celera.com.

Please note that after this call, the text of these prepared remarks will be posted on the Investor Relations section of the Celera web site. Kathy Ordoñez and Ugo DeBlasi will now comment on the performance of Celera during the quarter, and then we’ll open the call up to questions.

Kathy.

Kathy Ordoñez

Thanks, David. Good afternoon everyone and thank you for joining our call today. The second quarter of 2010 was a challenging period for us as revenues declined by $8.8 million over the prior year quarter with revenue in our Lab Services, or Berkeley HeartLab, segment $5.6 million lower than the prior year, due to lower sample volume, which declined approximately 23% year-over-year. Sample volumes were adversely impacted by the loss of business from accounts serviced by former BHL sales representatives identified in the now settled litigation with Health Diagnostics Laboratory, as well as changes to BHL’s business that were implemented in the second half of 2009. We also believe that sample volume at BHL was impacted by reduced discretionary healthcare spending as patients are making fewer physician visits with lower volume of laboratory testing as a result.

We’re seeing increased competitive pressures, particularly among smaller laboratories in the cardiovascular testing space, with varying sales approaches to attract physicians and patients, including by limiting or eliminating patient financial responsibility for testing services. Though we have won many new accounts and we saw encouraging signs of growth in many regions, these were offset by lost accounts in our more traditional disease management segment as a result, especially in the Southeast. We’re urgently assessing how best to respond to these competitive pressures and regain market share in these markets.

In contrast to this, in the differentiated cardiovascular genetics segment of our lab services business, we have seen encouraging signs of increased penetration of our genetic tests into new physician accounts. With the expansion of our high margin proprietary cardiovascular genetics test as an integral part of plans for BHL’s growth, we’re pleased with the launch at the end of the first quarter of a laboratory testing service for 9p21 to identify people at risk for early MI, and in the last few weeks with the launch of a laboratory developed test for CYP2C19 that identifies carriers of genetic variants that may impact the effectiveness of the anti-platelet drug, Plavix or clopidogrel. The FDA recently placed a warning on the Plavix label to inform clinicians that they should consider an alternative treatment depending on a person’s 2C19 genotype. BHL's new test identifies 8 variants known to be associated with Plavix metabolism.

We continue to see sustained adoption of the KIF6 testing service with more than 230,000 tests performed to date. We’re encouraged that the LPA testing service that was launched in the fourth quarter of 2009 is gaining market acceptance, with approximately 39,000 tests performed to date, and the 9p21 test performed well in the second quarter. At the start of the year, we set a goal to double the revenue from our cardiovascular genetic tests in 2010 to more than $20 million. We believe that our sales and marketing efforts position us for the achievement of this goal.

Typically, we would only comment on the year-over-year change in revenue and sample volume changes, but in this quarter it is important to understand how these have performed sequentially. Revenue at BHL increased $2.1 million, or 12.0%, over the first quarter with a 7.8% corresponding increase in sample volume over the same period, as we saw encouraging signs of growth in certain regions, partially offsetting the declines described above.

A bright spot in a challenging quarter was in our Products business, where revenue in the second quarter was $10.9 million compared to $9.7 million in the prior year quarter, reflecting increases in both the sale of Celera manufactured products distributed by Abbott and royalties from sales of RealTime assays used on the m2000 system. Abbott has placed a total of 820 systems to date through the end of June. The m2000 royalties continue to generate an important income stream for our Products business, and while the revenue in our Products business increased by $1.2 million in the second quarter, operating income in the quarter was $2.7 million compared to $0.8 million in the same period in 2009. This is the result of both improved operating efficiencies and the contribution from the m2000 system royalty arrangement.

We achieved registration of the KIF6 test in Europe in the second quarter, and we remain on track to submit a PMA for the test later in the year. We expect to mirror this regulatory path for other proprietary genetic discoveries, such as LPA.

As we expected, corporate revenue declined by $4.4 million over the prior year quarter, primarily due to lower licensing revenue from the completion of payments from three licensees, which was partially offset by higher royalty revenue received from a licensee.

We continue to seek strategic partners to better leverage our scale and expand our commercial reach with the aim of addressing the sizeable market potential associated with our genetic tests. We’re also focusing on value enhancing transactions on other assets, including our capital structure and our use of cash. This work continues to progress in parallel with our partnering discussions, and each remains a top priority to complete in the coming months.

Now, Ugo DeBlasi will make a few comments regarding the financial results for the quarter and the outlook for 2010.

Ugo DeBlasi

Thanks, Kathy. Revenues for the second quarter of 2010 were $32.6 million, compared to $41.4 million for the second quarter of 2009. For the second quarter of 2010, Celera reported a net loss of $6.1 million, or $0.07 per share, compared to a net loss of $31.7 million, or $0.39 per share, for the prior year quarter. The revenue decline in the second quarter impacted gross margin, which was 63%, compared to 68% in the prior year quarter, and as expected, was higher than the 62% reported in the first quarter 2010. The decline in gross margin in the second quarter compared to the prior year quarter was primarily due to lower licensing revenues and lower sample volumes associated with BHL services.

There were a number of items in both the second quarters of 2010 and 2009 affecting the comparability of results that are listed in the reconciliation table in today’s release. For the second quarter of 2010, these items decreased the net loss by $0.6 million, and included a pre-tax cash benefit of $2.8 million for legal and insurance settlements. For the second quarter of 2009, these items increased the net loss by $12.6 million, and included a pre-tax charge of $15.7 million for non-cash intangible asset impairment.

SG&A expenses for the second quarter of 2010 were $21.9 million compared to $41.1 million in the prior year quarter. The decrease in expenses in the second quarter was primarily due to the decrease in allowance for doubtful accounts to $1.4 million, or 4.3% of revenues, in the second quarter of 2010 from $20.1 million, or 48.6% of revenues, in the prior year quarter and savings from our 2009 restructuring, partially offset by costs associated with the expansion of the sales infrastructure at BHL.

Excluding the allowance for doubtful accounts, SG&A expenses for the second quarter of 2010 were $20.5 million, or 62.9% of revenues, compared to $21.0 million, or 50.7% of revenues, in the prior year’s quarter. The increase as a percent of revenue was primarily the result of the lower revenues in the second quarter of 2010 compared to the prior year period, and the expansion of our sales infrastructure at BHL in the first half of 2010.

Days sales outstanding for the company in the second quarter of 2010 were 57, compared with 60 the first quarter of 2010. DSO at BHL has continued to decline over the past five sequential quarters.

R&D expenses for the second quarter of 2010 declined by $1.0 million compared to the prior year quarter, primarily as a result of the completion of certain discovery research and development projects and associated lower employee-related costs in the corporate segment.

Our outlook for 2010 and the risks and uncertainties that may affect Celera's financial performance are stated in today's release. Sample volume softness experienced in our BHL business in the first half of the year has made us more cautious in our outlook for the full year. We now expect full year revenues to be $135 million to $145 million, down from our prior guidance of $145 million to $155 million and the loss per share on a non-GAAP basis to be between $0.25 and $0.30, compared to our prior guidance for a loss on a non-GAAP basis of $0.15 to $0.21.

We added new sales representatives in the first half of this year and while we expect this contribution to accelerate growth, this will take time. We will continue to closely monitor our operating costs, and depending on the outcome of our partnering discussions, we will take appropriate actions to streamline the business toward profitability.

We believe this outlook could be affected by a number of factors and other risks and uncertainties outlined in today's press release and in our filings with the SEC.

These comments reflect management's current outlook. Celera does not have any current intention to update this outlook and plans to revisit the outlook for its business only once each quarter, when financial results are announced.

With that, we'll now open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Bruce Cranna of Jefferies. Please proceed.

Bruce Cranna – Jefferies & Co.

Hi, good afternoon everyone.

David Speechly

Hi, Bruce.

Kathy Ordoñez

Hi, Bruce.

Ugo DeBlasi

Hi, Bruce.

Bruce Cranna – Jefferies & Co.

Kathy, let me start with BHL in the quarter, the lower volume and the down 23% year-over-year, can you by chance quantify that for us in terms of at least your sense how much of that is the sales force defection you have experienced and how much of that reduction is actual just kind of the broader economy?

Kathy Ordoñez

Well, it is very difficult for us to really quantify that because when the volume goes down, it is not always possible to understand why, but that being said, we have seen fairly substantial decline as we indicated in the Southeast in those territories that were impacted when the sales reps left during the first quarter. So I would say, it is an important, maybe even substantial contribution to what we see, but overall there is pressure on the business due to the healthcare situation as I described.

Bruce Cranna – Jefferies & Co.

So, maybe the majority of that is the sales force situation, would that be fair?

Kathy Ordoñez

The majority of the decline that we’ve observed is in certain territories in the Southeast for the most part. We have had a couple of other weak territories, but I would say that the weaknesses concentrated there, and it is not really possible for us to always parse apart the rationale for it.

Ugo DeBlasi

Bruce, this is Ugo, I mean, if you kind of look at it there is like three things going on. It is the HCL [ph] that Kathy articulated, it is what we articulated around the softness in patients visiting the offices, and you have to remember back in the second quarter of last year, we made a number of changes to the business that also affected the second half volume last year. So, your comps are a little skewed year-over-year because of that as well.

Bruce Cranna – Jefferies & Co.

Okay. And then just one question on the guidance if I could, the guide down, is it your sense Kathy that is really specific to BHL because it looks like the product line is actually holding up better than I would have expected, so I’m sort of trying to figure out if your guide downs really related to specifically BHL or is there anything you are seeing on the product side that may change?

Kathy Ordoñez

Well, we don’t provide segment specific guidance.

Bruce Cranna – Jefferies & Co.

Yes.

Kathy Ordoñez

The results in the Products business year-to-date speak for themselves. But as we have cautioned in the past, there is also now a lot of quarter-to-quarter variability in our revenues in the products area due to purchasing patterns of large customers and inventory transfer to Abbott. So, in general, we are pleased as we spoke about with the progress that was made in the second quarter in the Products business.

And then another aspect of the P&L that is also important is the royalties. There is always a certain amount of uncertainty around those because we don’t actually control the focus of our licensees and how much effort they have put on selling our products.

Bruce Cranna – Jefferies & Co.

Okay. I will take one more stab at this, I guess what I’m trying to get at is based on the first-half and the midpoint of your forward guidance, it looks like your thinking is something like $10 million, $14 million increase in revenues half-over-half. I’m just trying to figure out if that is a realistic number or you know, there is something we’re missing on either the product or the BHL side for the second half of the year?

Kathy Ordoñez

One dynamic to take into account is the increase in revenues we saw between the first quarter and the second quarter at BHL. And the fact that we have introduced two new tests at BHL over the last several months, the 9p21 test, which is experiencing very strong uptake and also in the last few weeks, we introduced the Plavix test. So having additional testing available and having it penetrate samples successfully is an important aspect of that. And the other factor that we are hoping will drive sales relates to the expansion of the sales force that we went through in the first-half of the year, and those people are trained, experienced and up to speed now, and we’re expecting them to begin to contribute to the growth in revenues in a significant way.

Is there anything you would add to that Ugo?

Ugo DeBlasi

No, I think you highlighted the key points Kathy.

Bruce Cranna – Jefferies & Co.

Okay. Thank you.

Operator

Your next question comes from the line of Ashim Anand of Natixis Bleichroeder. Please proceed.

Ashim Anand – Natixis Bleichroeder

Good afternoon guys.

David Speechly

Hi, Ashim.

Ashim Anand – Natixis Bleichroeder

I was wondering about announced but doubtful accounts, you said I think it was 1.4, which is down from 11 million probably from last quarter, so if you can kind of elaborate on that, you know, and obviously you’ll said that DSOs have improved, so if you can kind of elaborate on that, how you are seeing things on that front?

Ugo DeBlasi

I think you got your numbers wrong. Last quarter, I believe that debt expense was around 1.7 million, 1.8 million. So, it continues to improve and DSO continues to improve, and as I have said on previous calls, there are much better processes in place than we did a year ago, and renewed focus on it. And things are working out well there.

Ashim Anand – Natixis Bleichroeder

Okay. Now coming to the guidance on SG&A, which obviously would be affected by the loans, I was looking at the revenue revision, the top line revision and SG&A expense revision, and if I held it to my estimate the SG&A as a percentage of sales, I would have expected around a little over 6 million reduction. However, the way it is right now if I take the midpoint of the SG&A expense in terms of guidance, it is a $5 million reduction.

So, in that regard, if you can kind of tell me the components of it, maybe you are thinking of spending more on sales force or that is to do with the loans?

Ugo DeBlasi

No, as – we tend to be conservative in how we project the allowance, but as I said in my script we’re going to monitor costs, and you have to remember that we have a sales organization, a new sales organization that we have increased 23 reps that we have to monitor their productivity closely, monitor where sales volume goes, and then if we need to make more adjustments, we will make more adjustments in the second half.

Kathy Ordoñez

And I think the difference that you are focusing on of $6 million, versus $5 million is the additional level of granularity beyond the way we would typically think about it. We recognized that our SG&A to revenue ratio is too high, and that is part of the reason that we have talked and focused heavily on establishing a commercial partnership to help us with our scale issues, and if necessary and if we are not successful in the work that has been done to expand the sales force and drive sales, then we would have to address that as well.

David Speechly

I think as Kathy mentioned, you are at a very low level of granularity. We do not have any expectation that bad debt expense is going to get any worse. That is clearly not our goal here. So that is not baked into our thinking. But there are a number of moving pieces that we can get into, but it is a level of granularity that is not needed to go into at this point.

Ashim Anand – Natixis Bleichroeder

Okay. In terms of gross margins obviously there is improvement, but still I was at least expecting a little bit higher and obviously you have actually pressed on some of the subject in terms of volume and all that obviously makes sense. But if you can comment on was there any contribution in terms of the reimbursement you are getting on your legacy tests that declined last quarter, so, have you seen that trend again – did that contribute also to gross margins.

Ugo DeBlasi

The way I think you need to look at the declines, or if you want to say they were not declines, but what we saw was stability in our price per sample. So, we had seen declines in our price per sample over a number of the prior quarters that has stabilized. A lot of that has to do with cross selling factors on the decline. So you have new tests coming in. You have got more moderate declines that most labs will experience with reimbursement, but as we add more tests to our menu, our revenue per sample or per rack is now starting to stabilize. So the impact on gross margin that you are seeing is clearly a result of the sample volumes, as well as the lower licensing revenues, which dropped right to the bottom line.

Kathy Ordoñez

And also the genetic tests that we introduced are high-volume; I mean higher revenue tests, high margin tests.

Ashim Anand – Natixis Bleichroeder

Okay, that is wonderful. I was wondering if you have provided as volumes for KIF6, can you just confirm, I think you said 233,000 right?

Ugo DeBlasi

No, it was approximately 230,000 I think.

Ashim Anand – Natixis Bleichroeder

230, okay, thank you. And I was wondering if you would maybe – I know it is small, but if you can give us some volume numbers for 9p21?

David Speechly

We have not provided that yet, it is too early in the launch and it is not something that we have provided thus far.

Kathy Ordoñez

But the uptake has been strong. We have been actually pleasantly surprised by the uptake of the test. And as you may have noted, there was a publication last week in JAK [ph] about it again.

Ashim Anand – Natixis Bleichroeder

Okay. And finally, progress on the KIF6 CE mark, I was wondering if you can talk a little bit about it. It is ID PCR assessed. Is it made it to a platform, or just if you can talk a little bit about that?

Kathy Ordoñez

So, we have developed the test on the m2000 platform, but for its distribution in Europe, we are also planning to provide applications on at least two other systems. Here in the United States, because the regulatory requirements are different, we will focus at least initially solely on the m2000 system.

Ashim Anand – Natixis Bleichroeder

Okay. Thank you very much guys.

David Speechly

Thanks.

Operator

And you have a question from the line of Derik De Bruin of UBS. Please proceed.

Derik De Bruin – UBS

Hi, good afternoon.

David Speechly

Hi, Derik.

Ugo DeBlasi

Hi, Derik.

Derik De Bruin – UBS

Hi, you know, on the Plavix test, I know Medco has launched a study looking at CYP2C19 and puts forth potential for prescribing – given that you already have a relationship with Medco for the KIF6 – and, first of all, could you update us on where that study stands on statin compliance, and can you give – are you collaborating with Medco? Are they using your test for Plavix?

Kathy Ordoñez

Let me first update you on the KIF6 and statin compliance study, and if there is any information different from mine, please try Tom and Stacey [ph]. But to my knowledge we are halfway through in terms of accessioning the samples that we were expected in that study and the accessioning of those samples appears to reaching a steady state. They are coming in in a regular basis, and the lab is turning them around quite quickly. So we would expect that certainly by the end of the year, or later this year all of the samples would be in the study.

And then we got to follow what happens with compliance, probably taking a temperature after three months, and then really looking at it carefully after 6 months, and then perhaps going beyond that depending on how Medco and Celera feel about the data. Relative to Plavix, there is really nothing that we can talk about relative to what Medco’s intentions are there.

Derik De Bruin – UBS

Okay. I guess what – and forgive me for my ignorance on this – but what other company, what other competitors are out there selling tests in this market for Plavix?

Kathy Ordoñez

We have seen some Plavix offerings from our cardiovascular small laboratory competitors, and we have also seen Plavix offerings from large laboratories. We’re very pleased with our test because it addresses eight SNPs, which is somewhat unique in terms of the value that it provides in covering virtually all of the relevant SNPs.

Derik De Bruin – UBS

And I guess is it because it has a higher number of markers, and is it a higher price point than the other tests?

Kathy Ordoñez

Well, it is too early to actually understand how we are going to be reimbursed for Plavix, because we only just launched it a couple of weeks ago and probably have not collected very much revenue. But we would expect that our pricing would be competitive, but provide more genetic information than some of our competitors.

Derik De Bruin – UBS

Great. Any update on your strategic partnership plans, and just I guess in terms of how you are doing, looking at expanding the sales force or expanding your distribution network?

Kathy Ordoñez

Well, as we have said for a couple of quarters now that we believe that we have – actually in some ways a positive situation, because we have this very exciting pipeline of genetic assets, and somewhat limited ability to tap into all of the market potential here in the United States for those tests. And so one approach that we have taken has been to expand the sales force and we are seeing an increase in genetic tests as a result of that.

On the other hand, we believe that the opportunity from these proprietary genetic assets exceeds the scale for a company like us, and we would ideally like to put in place a relationship with a commercial partner that would allow us to leverage our proprietary testing. We have talked about this now for two quarters, and it is a major focus for me and the management team, and frankly we are either going to be successful in the coming months or to take a different approach in addressing the sizeable market potential associated for our cardiovascular assets.

Derik De Bruin – UBS

Okay. And I guess can – you know, we have the big meeting down in Maryland for the laboratory developed tests, the FDA kind of taking a look at that. I mean Celera has always kind of approached this market as launching LDT, and you are showing with KIF6 you're planning on filing a PMA to go along with this. I guess, having kind of seen some of the stuff that came out of that meeting, can you give us kind of what your feeling is in terms of the regulatory environment for LDTs?

Kathy Ordoñez

Yes, and there seems to be a somewhat shift in focus away from just the IVDMIAs to include virtually all laboratory developed tests. It would appear that the FDA is continuing with its risk-based approach to assessing which test to regulate first, and has taken a stand relative to direct to consumer genetic testing, and it has always been Celera’s position that a physician should be involved in the prescription of these tests, and the discussion of the results with patients.

And so that reinforcement is consistent with what we have said, and also we are investing a sizeable amount of money, and we believe strongly that these tests should be registered with regulatory bodies around the world. And so, the FDA’s position is consistent with the direction we are going, and we actually think it is the best way to bring these types of tests into routine clinical care.

Derik De Bruin – UBS

Great and one final question. So could you just refresh my memory on your research collaborating with Ipsen? And just I guess what the approach on using next gen sequencing technologies to go after biomarkers; I guess could you just frame for what is the goal of that relationship, and what type of products will eventually come out of it?

Kathy Ordoñez

Well, as you have probably noted Derik, we have been collaborating with the French pharmaceutical company Ipsen for some time, and we did some work with them that actually led to their desire to expand the study, and to look for human variation in a way that required and supported that, we begin to incorporate next-generation sequencing technology into the experimentation. And so we have brought that platform into the company and are going forward with it.

And a nice thing about this collaboration is that now we have the skill set and the informatics et cetera to do that, and the platform and what we have learnt can be applied to other problems.

Derik De Bruin – UBS

And I guess expanding into next generation sequencing, before were you doing more of just a targeted SNP-based genotyping approach on the 7900 platformers, for example?

Kathy Ordoñez

Right, as you have seen how we conducted our discovery work, and then had really a high-volume approach to being able to replicate it RealTime PCR on the 7900, and also I have a unique conversion of Luminex that we have used to validate and further replicate testing of SNPs that show initial association. And so bringing in this next generation sequencing capability actually augments our ability to look at different types of problems. I don’t know Tom is there anything you want to add to that.

Tom White

Only that the previous approach was based on other markers that have been discovered to be associated with type variation in the human population from (inaudible) association study. Sequencing was also involved here with regard to looking at those 30 or 40 candidate genes. Now, with some additional work coming out of the other studies, it is in line to expand that into a much broader look, as a larger number of those samples that can be done really mainly by massively parallel sequencing and larger numbers of people with a larger number of genes.

Kathy Ordoñez

And if this project is successful Derik, it could lead to a companion diagnostic that Celera may provide.

Derik De Bruin – UBS

Okay. And I guess I'm just curious on this, just the fact is, so if you're looking at SNP calling and analysis of this, so the accuracy of the next gen platform, the bioinformatics are strong enough to basically replicate what you have been seeing with the RealTime PCR platforms. I'm just curious as to what – you are kind of going down that pathway, what enhancements have been done to the technology, and what has gotten you to the point where you're comfortable enough with the technology and the call rates that were there to kind of go to move to there? That was complicated. My apologies, but so –

Tom White

Yes, as we look at using the next generation sequencing to discover other variants that might be useful. But it is the RealTime technology that is being used to validate them today as a very high accuracy rate.

Derik De Bruin – UBS

Got you. Okay. Thanks. That makes perfect sense then. Thanks.

David Speechly

Thanks, Derik.

Ugo DeBlasi

Thanks, Derik.

Operator

Your next question comes from the line of Charles Duncan of JMP Securities. Please proceed.

Charles Duncan – JMP Securities

Hi, guys, thanks for taking my questions. I had a question on the KIF6 PMA strategy that you had talked about later on this year. Have you had an opportunity to meet with the FDA in a pre-filing meeting yet?

Kathy Ordoñez

We have had multiple meetings with the FDA, and I believe we have another one on the calendar. Mike, do you want to comment on that.

Mike Zoccoli

Yes, we are preparing the packet to submit to the FDA for the pre-filing meeting, so the pre-filing meeting gets a preview of what we intend to submit to the PMA, and then we have a couple of months to either make some changes and finish it up for the filing at the end of the year. So that is being – actually we contacted the FDA and we are getting some tentative dates from the FDA for when that meeting can be held.

Charles Duncan – JMP Securities

And then can you provide some additional color on really what the commercial strategy is behind that filing? If you make that filing and it is successfully approved, what do you think that can do for you in terms of being able to market specific claims, or perhaps you could address whether or not that has been a point of pushback with regard to the adoption of the KIF6 test? Do you think that really your commercial success can be even greater than with an improved PMA than what it has been so far?

Kathy Ordoñez

Sure. We actually view the registration of the product as a very important step, and ultimately getting the testing for KIF6 and our other cardiovascular marker into the guidelines, and to become part of routine care. So, I don’t think it would overnight have an impact, but we believe that it will have an impact in its acceptance among the cardiovascular community.

And we believe that actually the limiting factor in our being able to drive the uptake of KIF6 and our other new genetic tests is really being able to reach the physician, being able to cost effectively get to the hundreds of thousands of physicians, who could possibly be prescribing these tests.

Charles Duncan – JMP Securities

And so this will raise visibility on the test, but also provide, call it, some external validation of it?

Kathy Ordoñez

I think that is important and Charles, you made an important point in your original question in that we can make more definitive claims about the performance of the product once it has been registered in the United States.

Charles Duncan – JMP Securities

Okay. And then if I could turn to one of the comments you made in your prepared remarks regarding cash use, I think you mentioned corporate partnering and other capital structure considerations here. Taking a look at it, could you help us understand if you favor, call it, an M&A-based strategy, or are you looking at share buybacks, and when do you think that you will be able to speak or provide more color on what you want to do with your cash?

Kathy Ordoñez

Well, as we indicated in the prepared remarks, we are actually assessing all alternatives. We have pointed to and are heavily focused on our partnering strategy, and we would think that as we are processing that it just doesn’t provide sufficient bandwidth, nor would it be the best strategy to have a concurrent focus on M&A activities.

Charles Duncan – JMP Securities

Okay. But you might consider a share buyback or something like that? I mean, what were you referring to in terms of your capital structure?

Ugo DeBlasi

Yes, as we go through this analysis and look at the commercial opportunities that are out there, I think previously we have held the view that a buyback or a dividend may not be the best use of cash, but the management and the Board are monitoring this, and we are committed to maximizing shareholder value. And if that involves a buyback or a dividend should the circumstances warrant it, we will consider it.

Charles Duncan – JMP Securities

Okay, good. Thanks for the added color.

David Speechly

Thanks Charles.

Kathy Ordoñez

Thanks Charles.

Operator

This concludes today’s Q&A portion of the call. I would like to turn the call back over to Mr. David Speechly. Please proceed.

David Speechly

Thank you, operator, and thank you all for participating in the call today. As a reminder, management's remarks will be posted within the hour on our web site, and the audio replay will be available later today using the phone numbers listed in today's press release. Thank you and good bye.

Operator

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

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