Celera CEO Discusses Q3 2010 Results – Earnings Call Transcript

| About: Celera Corporation (CRA)

Celera Corporation (NASDAQ:CRA)

Q3 2010 Earnings Conference Call

November 3, 2010 4:30 PM ET

Executives

David Speechly – VP, Corporate Affairs

Kathy Ordoñez – CEO

Ugo DeBlasi – SVP and CFO

Tom White – SVP and Chief Scientific Officer

Analysts

Bill Bonello – RBC Capital Markets

Ashim Anand – Natixis Bleichroeder

Daniel Arias – UBS

Presentation

Operator

Good afternoon. My name is Castellan [ph] and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Celera’s Third Quarter 2010 Earnings Conference Call. (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 third 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 Ordoñez

Thanks, David. Good afternoon everyone and thank you for joining our call today. I’ll begin by providing an overview of the highlights of the third quarter and then I’d like to address the actions being taken as part of an effort to streamline the business and move it back toward profitability as well as the status of our partnering efforts.

The third quarter of 2010 was another challenging period for us as revenues declined by $8.5 million over the prior year quarter. Revenue in our Lab Services or Berkeley HeartLab segment was $3.8 million lower than the prior year, due to lower sample volume, which was partially offset by a higher average price per sample as new higher value genetic test were ordered by physicians.

During the third quarter, sample volumes declined approximately 22% over the prior year quarter and were adversely impacted by healthcare industry and competitive pressures including the loss of business from accounts serviced by former BHL sales representatives identified in the now settled litigation with the competitors. We saw reduce healthcare spending as patients appeared to be making fewer physician visits with a lower volume of laboratory testing as a result.

We continue to see encouraging signs of increase penetration of our genetic test into new physician accounts. Sequentially, third quarter total revenue at BHL increased by $0.8 million or 4.1% over the second quarter and while the corresponding sample volume over the same period declined by 5.1%, the growth in our genetic test had a substantial contribution to the increase average price per sample that offset the sequential decline in overall sample volume.

We saw sustained adoption of the KIF6 testing service with nearly 260,000 tests performed to date. We’re encouraged by the LPA testing volume with nearly 60,000 tests performed to date, and the 9p21 test performed well in the third quarter with nearly 40,000 tests performed to date. 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 we will exceed this goal.

We were encourage with the publication of a meta-analysis review article in the American Journal of Cardiology on the KIF6 gene variant as a predictor risk of coronary heart disease and reduction of CHD events from statin therapy. In contrast, the meta-analysis of case control studies that describe a lack of association between KIF6 and coronary artery disease was published in the journal of the American College of Cardiology. However, it did not investigate the association between KIF6 and statin benefit and the results are subject to fundamental biases that limit any comparison to the previous prospective studies that found in association between KIF6 and CHD.

We’re committed to investigating KIF6 in different clinical settings so that we can more fully understand how the KIF6 variant pertains to risk for CHD, and how it might contribute toward optimizing therapeutic interventions in both primary and secondary prevention populations for physicians and their patients.

In this context, preliminary KIF6 data from a genetic sub-study of the JUPITER trial showed that rosuvastatin or Crestor was equally effective at reducing cardiovascular clinical events among those with and without the KIF6 gene variant. In this trial of a low-risk primary prevention population, both carriers and non-carriers of the KIF6 gene variant receive the same benefit in the JUPITER trial suggesting that the effects of Crestor may be different than those previously observed with pravastatin and turbostatin in genetic studies of randomized clinical trials.

We do not think that these results detract from the role of KIF6 testing combined with expert medical opinion in managing risk for cardiovascular disease.

Revenues in our Products business were $9.1 million in the third quarter compared to $10 million in the prior year quarter, reflecting lower sales of Celera manufactured products distributed by Abbott and associated with the timing of orders in the quarter, partiality offset by increased royalties from sales of RealTime assays used on the m2000 system. Abbott had placed a total of 870 m2000 systems to date through the end of September.

The m2000 royalties continue to generate an important income stream for our Products business, and while the revenue in our Products business declined by $0.9 million in the third quarter, operating income in the quarter was $1.6 million compared to $0.4 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 entered into an agreement with Abbott to distribute the KIF6 test in Europe in the third quarter and we remain on track to submit a PMA for the KIF6 genotyping assay by the end of the year. Also in the third quarter, we receive patents from the U.S. Patent and Trademark Office for both methods of determining hard tack risk by detecting the KIF6 gene variant and reduction of such increase risk by statin therapy and methods of determining hard tack risk by detecting the genetic polymorphism in the protease like domain of LPA.

As we expected, corporate revenue declined by $3.8 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 one licensee. Due to the expiration of some patents in certain geographies in the second half of 2011, revenues in this segment are anticipated to be approximately half those expected in 2010.

Now, I’ll turn to the points I mentioned earlier. First, moving the business back toward profitability is a key priority for us, and we are implementing multiple cost saving measures towards this objective.

The restructuring program announced today will reduce headcount by approximately 50 fulltime physicians or approximately 9% of the workforce. We are realigning sources at BHL with current revenues and expect to move the business back to our profitability. We’re also making small adjustments to our Products business, which is already profitable. These actions and other cost saving measures are expected to save approximately $10 million in 2011.

We’re seeking ways to share capabilities and cost in our research program as well as manage SG&A expenses as a means to reduce the spend in our corporate segment. As we head into next year, we intend to monitor cost and work toward the goal of moving the business back towards profitability.

As part of our activities to improve sales productivity and customer focus at BHL, we recently appointed Michael Mercer to the position of Senior Vice President at Berkeley HeartLab, where he will be responsible for all commercial, clinical and laboratory operations functions at BHL. Prior to joining Celera, Michael was a consultant, including a 3-month assignment at BHL. Before he served as the Chief Commercial Officer for BHL from 2002 to 2007. We’re delighted to have Michael join us at this important time and he has already had an impact at BHL.

Second, we have then actively engage in partnering discussions for the past six months and we intend to continue to look at strategic alternatives for parts, for all of our business. We believe the actions we are taking to streamline the business toward profitability, improve our position as we seek to address the issues of scale and complexity in our business.

Finally, we are encouraged by new data on the cathepsin-K inhibitor compound or Odanacatib presented at the 32nd Annual Meeting of the American Society for Bone and Mineral Research. According to Merck with whom the compound is partnered, the data from clinical and preclinical studies continue to provide further background on the potential for the compound to increase bone density, cortical thickness and bone strength when treating osteoporosis.

Our current believe is that this asset could become increasingly valuable to our shareholders as the compound moves through development toward approval with approximately $316 million in cash and short-term investments and no debt, we view the strength of our balance sheet as a strategic asset as we assess our alternative.

Given his pending departure from Celera later this month, before I hand this over to Ugo DeBlasi to comment on our financial results for the quarter and the outlook for 2010, I would like to take this opportunity to thank him for his many contributions to Celera and wish him continued success. We have initiated a national search for his replacement. Ugo?

Ugo DeBlasi

Thanks, Kathy. Revenues for the third quarter of 2010 were $31.5 million, compared to $40 million for the third quarter of 2009. For the third quarter of 2010, Celera reported a net loss of $8.5 million or $0.10 per share, compared to a net loss of $7.4 million or $0.09 per share for the prior year quarter. The revenue decline in the third quarter impacted gross margin, which was 63%, compared to 68% in the prior year quarter. The decline in gross margin in the third quarter compared to the prior year quarter was primarily due to lower licensing revenues in our core per segment and lower sample volumes associated with BHL services.

There were a number of items in both the third quarters of 2010 and 2009 affecting the comparability of results that are listed in the reconciliation table in today’s release. For the third quarter of 2010, these items increased the net loss by $2.7 million, and included $1 million restructuring charge. For the third quarter of 2009, these items increased the net loss by $7.1 million, and included a $3.2 million restructuring charge.

Celera’s net loss on a non-GAAP basis excluding the items listed in the reconciliation table in today’s release was $5.8 million or $0.07 per share for the third quarter of 2010, compared to a net loss of $0.3 million or breakeven on a per share basis for the prior year quarter.

SG&A expenses for the third quarter of 2010 were $20.6 million compared to $22.6 million in the prior year quarter. The decrease in expenses in the third quarter was primarily due to the decrease in allowance for doubtful accounts to $1.4 million or 4.4% of revenues in the third quarter of 2010 from $2.6 million or 6.5% of revenues in the prior year quarter and reductions in our billing and collection cost at BHL, partially offset by cost associated with expansion of the sales infrastructure at BHL.

Excluding the allowance for doubtful accounts, SG&A expenses for the third quarter of 2010 were $19.2 million or 61% of revenues, compared to $20 million or 50% of revenues, in the prior year’s quarter. The increase as a percent of revenue is primarily the result of the lower revenues in the third quarter of 2010 compared to the prior year period, and the expansion of our sales infrastructure at BHL in 2010.

Day sales outstanding for the company in the third quarter of 2010 were 56, compared with 57 in the second quarter of 2010. DSO has continued to decline over the past six quarters.

R&D expenses for the third quarter of 2010 were similar to the prior year quarter. Cash and short-term investments at the end of the third quarter were approximately $316 million compared to $323 million at the end of the second quarter 2010 and we have no debt.

As a reminder, the June 26, 2010 balance includes $4.2 million for an unsettled short-term investment purchase, which was subsequently settled in the third quarter. Excluding this $4.2 million transaction, Celera’s cash and short-term investments of June 26, 2010 were approximately $319 million.

We expect to incur restructuring charges of approximately $2.2 million in the fourth quarter of 2010 in connection with the restructuring program announced today in addition to the $1 million recorded in the third quarter of 2010.

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 has made us more cautious in our outlook for the full year. We now expect full year revenues to be $129 million to $134 million, down from prior guidance of $135 million to $145 million and the loss per share on a non-GAAP basis to be between $0.30 and $0.34, compared to our prior guidance for a loss on a non-GAAP basis of $0.25 to $0.30.

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) And our first question comes from the line of Bill Bonello with RBC Capital Markets. Please, go ahead.

Bill Bonello – RBC Capital Markets

Hey, great. Thanks for taking my calls. Just a couple of follow-up questions, if I can. I guess the first thing just in terms of some of the trends you’re seeing; you say that kind of the macro environment. But is there anything clinically that you’re seeing just in terms of maybe less interest or demand in testing for particle size and concentrations that is contributing to this weakness?

Kathy Ordoñez

This is Kathy, Bill. And I’d make a couple of comments about the sample volume. First of all, the macro issues that we referenced earlier are real in that we and others are seeing that there are fewer physician visits and that testing that is of a discretionary nature such as the type of testing that we offer is under a considerable pressure.

But that being said, I would also point out that since we’ve owned Berkeley HeartLab over the period of 2008 and 2009, we did see a modest decline in sample volume between the second and third quarters and we attribute this to seasonality issues related to vacation, et cetera. So, it’s complicated. We have a combination of factors that are pressing on the industry as a whole and seasonality issues.

And one last point that I would make is that over the last year, we’ve had a concerted effort to introduce a number of new genetic test. We introduced the LPA in October of 2009 and as I said we’ve already performed 60,000 tests, 9p21 was introduced at the end of March going into April and we’ve performed 40,000 tests and our Plavix or 2c19 test was introduced in July and is taking off nicely.

So, this uptake in new testing has been a very positive thing. But what we have decided to do is to step back and focus probably over the next six months our sales force on building sample volume and then going back to expanding the menu.

Bill Bonello – RBC Capital Markets

Okay. So, that’s very helpful. I guess I still sort of have the fundamental question though about whether there is any change in clinical practice in terms of outside of people not going to the doctor in terms of physician interest in ordering testing when they have the patient in utilizing particles size and concentration testing.

Kathy Ordoñez

To my knowledge, we have not seen such an issue. This really comes down to patients going to the doctor in a less frequent situation and also, doctors being more mindful the economics of the testing.

One other factor that we haven’t mentioned that we’re also seeing is that patient insurance plans are emerging with higher deductibles and co-pay requirements and that also is impacting the volume of testing.

Bill Bonello – RBC Capital Markets

Okay. And then, I just – one other question and I’ll hop back into the queue. But just as we sort of think about assessing the run rate going forward, can you give us a sense of where you currently are in terms of the whole out of network business and where you see that heading. I mean it sounds like pricing was actually pretty positive, but sort of just so we can assess what the remaining risk there might be.

Kathy Ordoñez

So, we are under network right now with approximately $91 million covered lives. We are partnered with United Healthcare and AETNA and the third largest, the third of the three largest payers, Blue Cross, Blue Shield has been a target for us for some time. We are not under network with them and we continue to try to find a solution that is balance and the right business decision for us in that regard.

We do have contracts with a number of smaller payers as well and I don’t expect to see a major change in the overall dynamics in terms of what’s under contract except for the Blue Cross, Blue Shield business, which will move under contract if that makes good business sense for us.

Bill Bonello – RBC Capital Markets

Okay. And can you just give us sort of the, I know you have in the past, but just sort of remind us what the exposure so to speak is there, how much revenue maybe.

Kathy Ordoñez

You’re asking what percentage of the business is with Blue Cross, Blue Shield?

Bill Bonello – RBC Capital Markets

Yes.

Kathy Ordoñez

Let me get back to you on that because I want to give you the latest number.

Bill Bonello – RBC Capital Markets

Okay. Thank you very much. I’ll hop back.

Ugo DeBlasi

Bill, sorry I would just add in that we have not typically disclose that previously. That is not something that we typically give, but we can look at that. Thanks.

Bill Bonello – RBC Capital Markets

Okay. Thank you.

Operator

Our next question comes from the line of Ashim Anand with Natixis. Please, go ahead.

Ashim Anand – Natixis Bleichroeder

Yes. Thanks for taking the question, guys. Kathy, I was wondering if you can give us the KIF6 test, total test number, which you have historically given up to date?

Kathy Ordoñez

Yes. Through October of 2010, we had performed 260,000 tests.

Ashim Anand – Natixis Bleichroeder

Okay. Now, you had mentioned about the editorial and review article and the meta-analysis study which review some of the KIF6 plane. In terms of the debacle, are you guys thinking of publishing a rebuttal in the peer review journal or how are you planning to handle that in terms of the negative fallout of that study and the editorial.

Kathy Ordoñez

Tom White our Chief Scientific Officer will comment on that.

Tom White

Yes. We expect to submit a letter to the editor of JAC in rebuttal to the case control paper as well as the editorial pointing out flaws in the study design and some inaccurate or misleading statements in the editorial.

Ashim Anand – Natixis Bleichroeder

Okay. Finally, in terms of the sales force that you lost in Southeast, I know you guys have been working to get that replace. How is that going if you can comment on that and when do you think it’ll be back as it was before those guys left?

Kathy Ordoñez

Well, as we have previously commented, we have backfilled positions in the Southeast. Some of the territory lines were moved around, but we’re fully setup to compete in that area of the country in terms of personnel. We have had issues with a number of small laboratories with whom we compete who are not as consistent in requiring patient co-pays or deductibles, which has made it difficult for us to compete in some of those cases.

Ashim Anand – Natixis Bleichroeder

Thank you very much, guys.

Ugo DeBlasi

Yes. So, if we can just – Bill, if you’re still on the line, we can give you some insight into that question that you had.

Kathy Ordoñez

Yes, Bill. Sorry, I didn’t have this information at my fingertips. I wanted to make sure I had the most current information. So, the representation of Blue Cross that is non-contracted now is on the order of 15 to 20% of the total number of samples.

Operator

And our next question comes from the line of Derik De Bruin with UBS. Please proceed.

Daniel Arias – UBS

Hi, this is actually Dan in for Derik. Thanks for taking the questions. I was just curious if you could tell me a little bit about the pricing of your test relative to your competitor and whether or not there’s a large difference there. And then what’s the steps, I guess its following on the last question, what’s the steps could be to regain some of that business. What is if there’s a price sensitivity there that could be address.

Kathy Ordoñez

It’s sometimes difficult to compare pricing from one laboratory to the next because of the menu of test and also because of the technology that’s used and how that is reimbursed. So, I would say in a general sense in terms of what is actually the reimbursed for our test, there generally parallel, if you take into account the technology that’s used.

One difference in terms of what we have offered is that focus that we have on genetic testing where in general, the pricing has been higher. We’re currently seeing pricing on the order of $90 for our KIF6 and LPA test, whereas $90.21 has been on average carrying a higher price around $165 and Plavix, the most recently introduced test is really too early to put a specific number around that. But that has been even significantly higher.

These are, of course, not the prices for the test, but the reimbursement, the average reimbursement that we are getting. Often, the pricing is considerably higher, but the number that we focus on is the reimbursement number.

Daniel Arias – UBS

Sure, okay. And then just going back to the question on the JAC article, have your conversations with physicians led you to believe that they understand that the statin benefit conferred [ph] enough of a use to warn it going forward, the way that they have in the past. And it’s just a matter of them needing to have it explained to them or they immediately understand the benefit?

Kathy Ordoñez

I would say that’s its early on in our work around the relevant papers. But in the aggregate, it would seem that we have been successful to date in explaining the differences in the studies and why we think that this meta-analysis is not relevant to the primary usage for the test.

Another comment that I would make and again, I would underscore that’s its early on is that we have not seen a material change in KIF6 testing patterns at Berkeley HeartLab at this time.

Daniel Arias – UBS

Okay, thanks.

Operator

Dr. Speechly, there are no further questions.

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 website and the audio replay will be available later today using the phone numbers in today’s press release. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation. You may now disconnect and have a great day.

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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.

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