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Response Genetics, Inc. (NASDAQ:RGDX)

Q1 2014 Earnings Conference Call

May 8, 2014 8:30 AM ET

Executives

Thomas Bologna – Chairman and CEO

Kevin Harris – CFO

Operator

Good day everyone and welcome to the Response Genetics First Quarter 2014 Earnings Results Conference Call. This call is being recorded. With us today from the company are the Chairman and Chief Executive Officer, Mr. Thomas Bologna and Chief Financial Officer, Mr. Kevin Harris. At this time I would like to turn the call over to Mr. Bologna. Please go ahead.

Thomas Bologna

Welcome to our 2014 conference call. Before highlighting our financial and operational results, Kevin Harris our CFO will read our forward looking statement. I will then review our first quarter 2014 financials, summarize where we are, discuss our 2014 expectations and then open the call to questions for Kevin and I.

Kevin Harris

Thanks Tom. In addition to the historical information, our first quarter 2014 conference call today contains or may contain among other things, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements concerning our expectations, strategy, future operations, future recruitment, future financial position, future revenues, projected costs, prospects and plans and objectives of management.

When used in this call the words expect, anticipate, intend, estimate, plan, may, will, believe and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expected.

These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to update any forward-looking statements in this conference call to reflect any change with regard thereto, or any change in events, conditions or circumstances on which any such statement is based. Tom?

Thomas Bologna

Thanks Kevin. Let me start by saying, we believe our first quarter DX financial and non-financial results are reflective of where we are in the transformation of our company. Both DX revenue and volumes increased over the fourth quarter of last year and it was accomplished primarily with new differentiated content. While it took longer to materialize than we would have liked mainly by about a couple of quarters.

We believe our tenacity is beginning to be realized and I suggest that’s for a very simple reason. If one simply measures our success by this last quarter or any other quarter for that matter by top-line revenue comparisons, I believe we are missing the [under tones] of why we expect 2014 to be a transformable year for our company which has been in the making for approximately the last two years. That said, I believe the numbers do not tell you the complete story and I would like to also provide you with insight into what we believe the reported numbers do and do not try to do.

First our Pharma business was down and the numbers show that. That was largely a result of our completion of much of the immediate GSK business and we appreciate that our Pharma business is relatively lumpy. And comparing the fourth quarter 2013 to our first quarter 2014 Pharma sales if we back out the $500,000 fourth quarter 2013 GSK milestone payment our Pharma revenue decrease by approximately $500,000.

The key question is what do we expect going forward both in the short and long-term timeframes with our Pharma business. As in our DX business we’re not sitting back. I am pleased to say that all indications are that we have won a large multiyear multi-million dollar NCI related award and we expect to begin realizing revenues from it in the third quarter or approximately even later in this quarter – that is second quarter of this year.

Also with our introduction of next-gen sequencing capability along with our other testing capabilities we expect to begin securing additional Pharma work based on our efforts to-date. If you recall, we added Director of Biopharma Sales late last year and we’re also realizing revenue from another large Pharma client.

Let’s now talk about our DX business. First quarter DX revenue was $3.3 million which is approximately 4% higher than both the fourth and first quarters of last year, we have been moving in the right direction. More importantly total accessions for the number of samples that we processed increased by approximately 5% over the fourth quarter of last year. Additionally our enabled DX accessions are approximately 8% higher than that of March again it is moving in the right direction.

We are very pleased with our DX revenue and more importantly with our volume growth for a number of reasons, the first of which is the increase in accessions or the number of samples that we processed over the prior quarter is not something that we have always experienced. The fact that our accessions increased relative to the fourth quarter of last year is exactly what we push for and expected based on the actions that we have taken.

I should also note that the increase was largely a result of our growing TC/PC business as well as the introduction of our new Tissue of Origin Test in February. More specifically our TC/PC business average daily unit volume has increased since the launch at an average growth rate of approximately 24% per month, appreciating that revenue recognized on TC/PC volume is less than that of our global DX accounts since we are (inaudible) component while the pathologist (inaudible) for the special component.

We expect to see accessions continuing to increase as we scale our TC/PC business. Our DX Tissue of Origin sales are off to a good start and we expect those sales to continue increasing as well. We acquired that business in August of last year and moved and set it up on our LA facility what we believe was an extremely short period of time mainly only six months. We firmly started selling the Tissue of Origin test in February while it is too early to tell with a 100% Tissue of Origin activity is building nicely and we expect this test to be a significant contributor to both our top-line and bottom line results.

Our net Tissue of Origin Test accessions have grown month over months since its introduction and I’m pleased to note that this trend continued in April with net Tissue of Origin accessions increasing by approximately 76% over that of March. It is also important to note that this proprietary technology has opened new door for both clients and payers. We are receiving order from new accounts which is also presenting new opportunities to grow our overall DX business. No question we believe this turning out to be a great deal by any form of measurements.

What I am suggesting is this – the programs that we initiated such as our TC/PC pathology partnering program and the result of our deal such as the Pathwork Diagnostics asset acquisition by adding up – by adding to our top line nicely while we are also optimizing our core business which we believe could be quite lucrative based on opportunities and considerations that we’re pursuing.

With that said we also believe the marketplace is changing dramatically and that too (inaudible) opportunity. This is the way we see it, the market is undergoing a rapid transformation on both pricing dynamics and technological change. We all know that reimbursement has been a challenge for everyone in our space and I would (inaudible) that we are dealing with as well.

The technological change I’m referring to is next-gen sequencing, it is very positive in the marketplace and I will go so far as to say it’s maturing at a rapid pace which could be both good and bad depending on one’s perspective. We have taken a very deliberate approach on how to capitalizing that opportunity and we sincerely believe the deal that we announced just a few weeks ago is both optimal and prudent for a number of reasons.

Namely, first it provides us with unique and we believe best in class NGS lung test, along with our core strength in solid tumor testing. Secondly we believe NGS is powerful and may very well replace some of the existing tests but not all tests especially in short to intermediate timeframe because like any new technology it too has limitations.

For example, NGN does not limit itself to TC/PC opportunities and we know in today’s healthcare environment the TC/PC model is preferred [by some accounts]. Third, the (inaudible) deal leverages our national sales force very well and fits right into our core competency in our approach to the market. That is we view ourselves as a content driven solid tumor molecular diagnostics company with differentiated content that makes a difference in the lives of oncology patients.

The offering we are giving our account executives more to sell to both our existing customers as well as new potential accounts and it fits perfectly into our largest product segment mainly testing associated with lung cancer which is a very large market opportunity. I would even go so far as to say that we believe we are viewed as the very best in lung testing and would further suggest that this new offering further reinforces that position.

This next-gen sequencing lung cancer test represents what we believe is the best in class and will further strengthen what was formerly our lung academic profile. With this addition we are replacing our lung academic profile with our new comprehensive lung profile that we believe incorporates the best of our formal lung academic profile with this best in class NGS lung test.

The two together make for differentiated product offering that includes gene mutation, amplification and translocation data as well as RNA expression based information. We strongly believe that the use of multiple technology platforms enables us to provide truly comprehensive actionable information for cancer therapy selection. Moreover our approach offers physicians a choice of option so they can optimize turnaround time, cost and other considerations on a patient by patient basis rather than accepting a single methodology or a one sized [physical] approach.

To take me few steps back we further believe the addition of next-gen sequencing to our portfolio further illustrates our patient centric commitment to therapy selections based on the unique molecular characteristics of each patients tumor and is totally consistent with Response Genetics being a differentiated content driven company that provides great products to our customers.

While we’re accomplishing key strategic objectives we assume the financial results were filed a shortly thereafter and to-date they are taking longer to materialize than we would like.

With that let’s turn again to the numbers. The primary reason for the shortfall on our bottom line is volume. Our first quarter DX revenue clearly indicates that our DX revenue and volume is heading in the right direction that is increase in both revenue and volume relative to the fourth quarter of last year. We expect that to increase further as a result of the many initiatives that we have in place.

From a strictly financial point of view the bigger question is the Pharma business since it has got lumpy and it did not have a favorable impact on our first quarter numbers. As previously noted we expect to see that business grow as we begin testing under the expected NCI related multi-year, multi-million dollar award which we believe could begin to add revenue in the third quarter and possibly as early as in the second quarter or this current quarter.

Our volume increases – as with our volume increases we expect our margins to grow as well. We believe our below the line expenses mainly in sales and marketing, G&A and R&D are being managed well. And our investment in infrastructure including strengthening our sales force and back office operations was and is prudent and that is further evidenced by looking at our bottom line numbers.

With the slightly more than $1 million decrease in first quarter of 2014 Pharma revenue relative to fourth quarter of last year, our first quarter 2014 operating loss increased and only approximately $330,000 in other words our below the line investments are paying off.

Before making some concluding remarks and opening the call for questions, I’d like to make a few other comments regarding 2014 going forward. First, as I noted in our last conference call we expect to introduce a next-gen sequencing service shortly and I am very pleased that we delivered on that expectation. Equally important we believe the approach that we took is very logical and we further believe that it’s consistently integrating technological opportunities with good business judgment.

We believe that because our next-gen sequencing test specific actionable generic observations, it provides a better option for doctors and patients and diagnostics that (inaudible) that gave to us a regime where mutations and other abnormal changes are more likely to occur. I believe our VP of R&D Stephanie Astrow said in the past when she told the report that it was also very important in fact with approach and strengthens our goal was to select the next-gen approach that was curated and carefully thought out rather than taking the shortcut approach and just offering a large number of genes.

In other words what Stephanie was suggesting was we wanted something where the test truly made sense and added real value, we have no doubt that was accomplished with the deal we struck with (inaudible) mainly we’ve brought good signs and did this together.

In addition to our offerings for lung cancer we currently market genetic tests for our colon, melanoma, gastric, thyroid and breast cancer and we expect to introduce additional tests in 2014 as-well-as test related to another bodies type. In other words we also to grow our business by adding important and reimbursed tests to our core business and I’m pleased to say those programs are also on track.

While I cannot go into the specifics and I am not prepared to say more at this time. We’re actively pursuing opportunities that we believe could leverage and re-monetize our existing assets capabilities and expertise nicely. And lastly one of our goals to pass our key goal is to make 2014 a truly transformative year for Response Genetics and I could tell you we’re pursuing that goal aggressively.

I believe our increasing DX business in both revenue and volume over the fourth quarter of last year is indicative of our capacity to growth this business and in doing so push hard to increase shareholder value. And with that operator please open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

Thomas Bologna

Well, I’d like to thank everyone for attending this conference call specially this early in the morning, especially here out of the West Coast. And thank you very, very much for all your support for the company. Thank you.

Kevin Harris

Thanks.

Operator

Well ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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