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Executives

Alfred Merriweather – CFO

Bill Young – CEO

Christos Petropoulos Ph.D. – Chief Scientific Officer

Bill Welch – Chief Commercial Officer and Sr. VP

Analysts

Zarak Khurshid – Caris & Company

William Quirk – Piper Jaffray

Peter Lawson – Peter Weisel Partners

Keay Nakkae – Collins Stewart LLC

Jeffrey Frelick – Lizard Capital Markets

Matthew Scalo – Canaccord Adams

Mike Chu - Civic

Monogram Biosciences, Inc. (MGRM) Q4 2007 Earnings Call February 7, 2008 4:30 PM ET

Operator

Good day and welcome everyone to the Monogram Biosciences Fourth Quarter 2007 Financial Results Conference Call.

At this time I would like to turn the conference over to Mr. Alfred G. Merriweather, Senior Vice President and Chief Financial Officer. Please go ahead sir.

Alfred Merriweather

Thank you for joining us today.

The copy of the press release highlighting the information to be discussed in this call can be found on the Investor Relation section of our website. Before we begin, I would like to point out that some of our comments today will be forward-looking including those regard in the following: anticipated revenue, operation result, cash flow, and activities for 2008, prospects for Pfizer CCR5 antagonist Selzentry, potential use of our Trofile assay along with Selzentry, while our third party payers will establish reimbursement for Trofile and the amount of such reimbursement.

Implementation of the Pfizer collaboration with the FDA or any other agency will further regulate our current or future products, the timing and results of on going and planned clinical studies related to the effectiveness of our VeraTag assays, anticipated timing and success with the validation and commercial launch per mark and other potential products based on our VeraTag technology, and the protection afforded by intellectual property.

These forward-looking statements are subject to risks, uncertainties and other factors which may cause actual results to differ materially from anticipated results or expectations. For a discussion of these factors, please refer to today's press release and our SEC filings. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

I would now like to turn the call over to Bill Young Young, Chairman and CEO of Monogram.

Bill Young

Thanks, Alf, and good afternoon everyone. Our Quarter Four financial results reported today indicate that 2007 has as we have been predicting than it has been a pivotal year. Over the course of this call, we will review the operational highlights and progress for Trofile. Our land mark HIV Tropism Assay and for HERmark the first product based on our VeraTag technology platform.

First let me point out some key take home messages from our quarter four results. Our first full quarter of Trofile sales, a total revenue reach a record level for Monogram of $13.7 million. This represents 34% year-to-year growth and a sequential increase of 32% over the third quarter of 2007. As important as the increase in revenue is the leverage of our P&L and cash flow driven by that revenue growth.

Gross margin was 52% for the quarter dramatically improved from recent quarters. Operating loss was less than $5 million, almost 40% improved over the preceding quarter, this improvement in operating performance demonstrate the leverage provided by our existing lab infrastructure and sales force.

These high quality lab and sales capabilities are powerful assets that have enabled us in quarter of four to grow our revenues and simultaneously deliver various significant improvements and operating margins and cash flow.

Alf will go into details later in the call, but I hope you will take note of the leverage reflected in our performance in quarter four. Our team has worked hard to accomplish these results and I am extremely proud of their performance. I will turn now to our HIV activities and progress with Trofile. Alf will review reimbursements status and testing volumes along with financial information later in the call. I will focus here on the overall opportunity.

First let me review the market potential. Trofile is a very significant opportunities for Monogram. Based on sales entries current labeling for treatment experienced patients, we believe as many as 60,000 patients each year in the US maybe candidates for Selzentry, and the 20,000 to 40,000 is a realistic near term bracket for those patients in the US who could be candidates. Even at the low end of this range in patient numbers, this could represent a relatively near-term annual revenue opportunity in the US for Monogram of over $30 million.

Pfizer’s clinical evaluation of Selzentry in naïve patient’s design is on going. However, even if sales entries remain the drug indicated for this light stage patients, the opportunity for Trofile is still very significant to Monogram revenue prospects. We have already seen in our fourth quarter financials how this opportunity can transform our revenue and operating results, and we look forward to continuing this trend.

Next, I would like to remind you of our scientific strength which provide a strong foundation for our commercial success. We continue to maintain a high level of excellence and visibility in the scientific and clinical communities. All of our products are based on strong scientific and clinical data, and Trofile is no exception.

Just this week in Boston at the 15th Annual Conference on retrovirus and opportunistic infections or CROI. Monogram contributed to 16 presentations covering a number of leading edge advancements in HIV drug treatment. These presentations cover the spectrum of our work in HIV drug resistance for drug classes already on the market and also for drug classes that is still in development. What was most noteworthy was the day that reaffirms our leadership in Tropism testing. Last fall, we presented data, demonstrated a superiority of our approach over genotyping approaches, and we also presented initial data on advances that will allow us to enhance Trofile’s sensitivity to identify X4 or dual/mixed virus present in as little as 1% of the total viral population.

At CROI this week we reported on studies where we had examined patient samples from the phase two trial of Vicrivoroc, we compared co-receptor Tropism results, R5, X4, or dual/mixed HIV of the original Trofile test with those obtain using an enhanced version of the assay. These shows that the enhanced version of Trofile what if successfully screened out most of the study patients who experienced treatment failure due to the present of dual/mixed HIV, the Enhanced version of Trofile is nearing completion and its validation and we expect to roll it out commercially during Q2. Our enhanced Tropism assay sets an even higher standard of sensitivity for CCR5 positive patients and significantly raises the bar and strengthening the competitive power of our technology.

An important demonstration of the superiority of Trofile was reported in December, and Pfizer announced results of the study design to ensure the safety use of Selzentry. The study demonstrated superiority of Trofile over an alternate gene-based assay, which was demonstrated to have significantly overcome the presence of R5 virus and where there by have led to patients being inappropriately prescribed Selzentry. The key points in the Pfizer announcements were that safety and efficacy of Selzentry has been shown in treatment experienced patients who were infected by R5 tropic HIV as determined by the Trofile assay.

Trofile was the only Tropism assay used to screen adult HIV patients during the Selzentry Clinical Development Program. Results from one study in patients identified by the Trofile assay as having dual/mixed tropic HIV indicated there was no significant reduction in viral load when Selzentry was added to optimize background therapy.

The accurate determination of Tropism is essential to the appropriate use of Selzentry. If Selzentry is selected as an active drug for patients infected with dual/mixed or X4 tropic HIV, it may not contribute to virologic suppression, and could result in emergence of resistance to other drugs in the treatment regimen.

Lastly, Pfizer in their announcement told physicians who prescribed Selzentry based on the gene-based assay and had concerns about their patient who have contact Pfizer’s medical assistance number for additional information.

The key message from these comments is that Trofile is a critically important tool for insuring that Selzentry is administered safely, and the only assess tool currently available and those was reinforced just a few days ago when the Department of Health and Human Services issued its updated guidelines for HIV treatment in which had recommended that a Tropism test should be used prior to initiation of CCR5 treatment, and may also be considered as failure of therapy. The DHH’s guidelines also cited Trofile assay by Monogram is the assay used to screen patient who are participating in studies that form the basis of approval for Selzentry, the only CCR5 inhibitor currently available.

Of course Trofile’s value is not just limited to Selzentry, assuring Stage III trial of Vicrivoroc continues using Trofile for patient selection and has been since a GT for optimization of background therapy. And just this week we announced our involvement in Incyte’s Phase IIb trial of their CCR5 antagonist, a third CCR5 compound that is moving into clinical evaluation.

Finally, where revenue growth has being driven by adoption of Trofile in the US, we also initiated sales of Trofile outside the US in the fourth quarter. As you will recall, Pfizer is taking the commercial lead in sales and marketing and we are providing with funding from Pfizer, the logistics for handling samples. In these international markets, Pfizer purchases the assay from us and Pfizer is responsible for reimbursement matters as well as sales and marketing.

The first step in making Trofile available outside the US is the establishment of laboratory and courier partnerships to facilitate the collection and transportation of samples to our lab in South San Francisco. We currently have such partnerships established in 12 countries, 11 of this in Europe with Canada being the 12th to allow physicians considering for signing Selzentry access to our Trofile technology.

By the end of Q2, we expect to have access to Trofile and establish in countries that represent over 95% of the European market potential.

In Latin America, we expect our lab partner from Brazil to be in place by Q1. We expect to have Trofile available in almost 40 markets by the end of 2008 with the process continuing.

This has been a substantial effort on our part to create the infrastructure to make Trofile available in a very short space of time and in a large number of diverse markets. The fundamental rationale for our collaboration with Pfizer was to make sure that Trofile could be available to support Pfizer’s global launch of Selzentry. I am very delighted with the progress we have made so far.

So to summarize our position in HIV, we are pleased with the early results from Trofile. We have always believed this was a transforming opportunity for us and you have seen the beginnings of that in our fourth quarter financials. Beyond that, this is exciting time for HIV patients and their physician. They can now benefit not only from Selzentry in CCR5 class, but also from Essentris, Merck’s first in class integrase inhibitor. This means two new classes of drugs now available to help doctors maintain long term viral suppression for their patients.

Today, no drug or drug regimen has been able to do so indefinitely, so having two new options, this is a significant development for patients and doctors alike, and has been the pattern through out HIV therapy, these exciting new drugs will be used in combination not only with each other but with the existing drug classes.

This provides a great opportunity for both these new drugs, but also provides a great opportunity for our testing business as the additional complexity of therapy decisions that will require testing such as ours to maximize the benefit of therapy options.

Let me turn to the world of oncology, as you have no doubt heard from sources beyond just Monogram treating cancer is following a similar trajectory to HIV. Different therapeutic approaches are being tested in combination, and new drugs in the pipeline are becoming increasingly personalized to specific molecular pathways. As we have seen in HIV, the development and use of more targeted therapies require better diagnostics.

Monogram’s goal is to do so by providing diagnostics that set directly measure the targets of the drugs, proteins, activated-proteins such as protein dimers. In looking at our oncology portfolio, there are three important aspects of our approach to keep in mind. First, we base it on all our clients. Second, we focus our programs on providing valuable actionable information to clinicians. And third, we are following our established business model, surveying positions in pharma companies through a high quality radio reference file and layout the elements of our oncology program to reviewed both where we are today and how we plan to move forward to our commercial products.

I will first address where we are with HERmark, our first product which is focuse on breast cancer. Then I will put in the context of our VeraTag technology platform and describe the broader portfolio we are developing.

So first HERmark, to discuss HERmark, first I will review the unmet need in the market place and the clinical problem we are targeting with HERmark. Second, I will describe the market potential, the status of our clinical studies and finally the road forward.

Let me begin with the clinical program we are trying to solve. The opportunity we are addressing in breast cancer derives from the fact that current testing technologies, IHC and FISH while widely used are not very accurate, less than half of the metastatic breast cancer patients selected for treatment with Herceptin while IHC and FISH actually respond and it is a growing concern that the currently available IHC and FISH test may not be adequate and may miss patients who could benefit from Herceptin. There has been increasing attention on this in the clinical community.

A few months ago, The Journal of the National Cancer Institute addressed this topic in an editorial. We summarized interviews with a number of prominent cancer researchers and practicing oncologist, all agree the problem does not spring from any kind of misunderstanding over accepted mechanism of action, but instead lies fundamentally with the IHC and FISH tests themselves.

We have also seen the spillover in the mainstream media with increased focus in the number of publications including Wall Street Journal. This is the very need HERmark has intended to address. HERmark provides quantitative and more precise measurements of HER2 expression and current test. It also provides the unique and quantitative measure of HER2’s activated form of HER2 homodimer. HERmark has the potential to enhance physician’s ability to accurately selections for Herceptin therapy and to subdivide them into groups with different clinical outcomes following treatment with the drug.

A product that simply provided this enhanced HER2 measurements could be a value in itself, however, we also have a separate parallel program directed at clinical validation of HERmark, establishing the clinical utility of the assay is a tool to identify the appropriate patients for Herceptin and metastatic and the adjuvant settings respectively.

Before reviewing these clinical paths, I will review the market potential, there are two market, those two patient with metastatic breast cancer and those early stage patients for whom Herceptin is used as the first line treatment what is known as the adjuvant setting. Patients with metastatic breast cancer are patients for whom cancer has spread beyond the breast and in many cases multiple treatments may have already been provided. The HERmark assay could serve almost 60,000 women annually, who are nearly diagnosed with stage four breast cancer or will progress from earlier stages of the disease.

Patients being treated in the adjuvant setting or generally newly diagnosed with breast cancer have had surgery and are now embarked in the first course of treatment to supplement the surgical procedure.

In the US, there are almost 200,000 new cases of breast cancer each year, and over 2 million women living with breast cancer. Nearly all these cases of breast cancer are candidates for adjuvant treatment, and are therefore candidates for the HERmark assay. The value of an assay to determine treatment choices were targeted HER2 therapy is very important in these early stage patients due to the likely length of drug treatment in this setting. Judging by patient numbers, these are significant markets. We believe the value delivered by an assay that can identify the appropriate patients for treatment will be readily recognized by clinicians.

Let me turn now to our clinical study. In metastatic breast cancer, we reported on three separate cohorts of patients, most recently at the San Antonio Breast Cancer Symposium in December. In these cohorts, which include both well controlled clinical study cohorts as well as real world clinical cohorts. HERmark was able to identify different sub populations of patients with different clinical outcomes on Herceptin. Growth also of these three cohorts provide a strong foundation for our ongoing work in metastatic breast cancer. In the adjuvant setting, we have now two studies in progress in which HERmark measurements are being correlated with clinical outcomes in large cohorts of patients treated with Herceptin, involving as many as 2600 patients.

The first of these studies and up to 1600 patient samples was initiated in late 2007 and is ongoing. The second study involving a large European study of up to 1000 patients has recently been initiated.

Starting from clinical studies to regulatory status, the HERmark assay is fully approved. In December 2007, we have received confirmation from the College of American Pathologists that the HERmark assay is certified for routine patient testing in our CLIA Certified Clinical Reference Laboratory.

We have already had our first inspection since we added HERmark to our list of CLIA validated assays and I am pleased to report that we passed the inspection with no exceptions.

So with regard to the road forward, in order to commercialize the clinical product for metastatic breast cancer, we plan to establish and validate HERmark assay cutoffs that will permit clear interpretation of the result for general clinical use. We plan to do so with in additional patient cohorts. For the adjuvant setting, we plan to complete the studies that I described and determine whether the relationships identified in the metastatic cohorts are also relevant to the adjuvant setting.

So to summarize the status of our programs to validate HERmark as a tool for selecting patients for Herceptin, first, the validation of HERmark and our CLIAL Lab has demonstrated the assay’s accuracy and reproducibility establishing HERmark as a superior tool for measuring and quantifying HER2.

In metastatic breast cancer, we have identified clear relationships between assay measurements and clinical outcomes and we are continuing our studies to confirm the results, and to identify clinical cutoffs to make the relationships generally applicable and adjuvant use of Herceptin with two large ongoing studies involve very large clinical trial cohorts, and our goal is to complete this as soon as possible.

We are pursuing a parallel pass to our first HERmark product in breast cancer, as well as completing the studies I described we are also conducting commercial planning to understand product positioning and pricing consideration in preparation for commercialization. I look forward to updating you on our commercial plans during the year.

I would like to step back for a moment and put HERmark in context. HERmark is a breast cancer assay and it is just the first product derived from VeraTag technology. HERmark utilizes measurements that have two analysis, the HER2 protein and its activated form HER2 homodimer.

The VeraTag platform goes well beyond us. We are continuing our programs to develop assays that measure HER1 and HER3 proteins as well as dimers involving HER1 and HER3, such as 1HER12 and HER23 heterodimes. These additional assays’ which are still under development are intended to broaden the applications for VeraTag technology to identification of resistance pathways for Herceptin in breast cancer as well as the identification of signaling pathways relevant to drug response and resistance for other breast cancer drugs.

Just as we have seen in HIV, we believe combination therapy will become the rule and not the exception in cancer therapy. Understanding the different pathways that are activated may guide not only decisions about individual drugs but may elucidate a path to effective combination therapy. It is also possible that even without the availability of this additional assays that a more precise measurements of HER2 alone may have implications for other HER2 targeted drugs such as Tykerb.

Expansion of the range of assays will also open up opportunities in other cancer types such as lung cancer and colorectal cancer. In the US alone, there are over 1 million solid tumors diagnosed each year. Our initial target population is breast cancer and it is just 20% of that long term potential.

While our operational commercial and clinical focuses on HERmark are critical research and development plans that are around the advancement of this new assays, these additional assays will when developed open up substantial new opportunities for us well beyond our first concept for predicting for Herceptin and Tykerb responses, because the HER family of receptors is a factor in many cancer types, development of this expanded range of VeraTag assays will simultaneously open up a number of separate markets such as different permutations of VeraTag assay measurements that may be relevant and lung cancer, head and neck cancer and many other cancers.

As you can see with our HIV and Oncology programs, we are enabling the development and use of better personalized benefits and we will continue to see much greater research and adoption of molecular medicine which will be driven in no small part by our efforts in molecular diagnostics.

The market place is warming up to the idea that treating complex diseases will not be adequately achieved with blockbuster drugs but instead require highly targeted and individualized approaches.

In the US, policy makers are also embracing the fact that the best way to steer healthcare from a patient, caregiver and cost perspective. Even congressional representatives are coming on board, for example, when Nancy Polosi installed the virtues of personalized patient care in a recent Democratic State of the Union, it became clear that this is top of mind and spreading among our legislators.

Now let me pass the call to Alf, who will comment to our Trofile revenue and fourth quarter financials and provides some thoughts on the outlook.

Alfred Merriweather

Fourth quarter revenue grew 34% over last year to $13.7 million. This substantial year-to-year growth was driven by the initiation of sales of Trofile. Trofile revenue is $2.6 million as we had full reimbursement in place for all the tasks performed, this revenue would have been about $4.5 to $5 million. Testing volumes have continued to progress nicely and are now over 200 per week in the US. We have now performed over 3800 test for patients in the US, of which about 2600 were in the fourth quarter.

Revenue of course reflects the portion of this from which we had reimbursement or which came through a client such as other reference labs and hospitals. We expect Trofile volumes to increase as coverage continues to broaden as new state Medicaid programs come on line. With regard to third party public and private payers, we continue to make strong advances to gain broad coverage and reimbursement for Trofile. Gaining our acceptable reimbursement levels with Federal State and private payers is key to our revenue growth.

Currently we had coverage and agreement on the level of reimbursement with the following payers. The Federal Medicare Program, Federal Department of Veterans and Indian affairs, and the Bureau of Prisons, and almost 30 state IDA 2400 programs.

With regard to the state Medicaid programs, 15 of these have established coverage although in many cases the establishment of reimbursement level will be determined separately and also we notified to receive a payment. New York and California have the largest HIV/AIDS populations. We have in-depth discussions with both these states and they understand and appreciate Trofile’s medical necessity, with variable indications and coverage and we are working with each as they perceive certain internal bureaucracies.

Private payers represent less than 20% of the coverage rates for HIV/AIDS, we have built over 200 private third party payers, many of them produce a very small number samples. Most of these are progressing to normal claims and adjudication processes with some level of payment are later received by Monogram.

We will continue our dialogue with these payers to establish long term coverage policies. Blue Cross has established a national coverage policy for Trofile. This policy excludes gene-based assays and defines them as investigational. With the coverage established with Blue Cross, the reimbursement level will still be determined.

In general, we are tracking to the goal we have laid out to the commercial launch for Trofile mainly to have coverage established with a substantial majority of payers by the end of the Second Quarter of 2008. We have made good progress to tests and remain focus on that as our goal.

One final open revenue relates to international. We began selling Trofile through Pfizer in markets outside of the US in Q4 and assay revenues were approximately $0.6 million for the quarter. These revenues are reflected in the third revenue on our balance sheet not on the P&L due to the accounting for our complex collaboration with Pfizer.

So as evidenced by Q4 results, even with Selzentry in the early stages of its commercialization and still with our complete reimbursement established, we have seen a meaning impact in our revenue. But where does it go from here? We are providing the following guidance. First, we expect that provided reimbursement that we have ultimately described and providing shares will continue on this path. We expect the revenue for the full year will exceed $60 million with an annual year-to-year growth of over 40%. Let me be clear, this does not mean that we are giving guidance in the amount of $60 million, we are indicating in excess of $60 million and we will provide updates over the course of the year.

The second point I would like to make is that we expect revenue for the first quarter of 2008 will be at or slightly higher than the fourth quarter of 2007. Q4 included a level of licensing revenue that we did not expect to be recurring and also reflecting a strong end of the year in our base business. In both our base business and the Trofile, we sold the same pattern that we see every year which is testing volume drops over the holiday period and due to the 14 day turn around time of our assays, this drop in testing is very typically reflected in the first quarter revenues.

We saw that same dip over the holiday period this year and as usual have seen volumes going up as we proceeded through January.

This revenue expectation for Q1 implies another quarter of substantial year-to-year growth in revenues. Let me now review other aspects of our financials. Gross margin improve dramatically in the quarters of 52% from less than 40% in the preceding quarter. We have been carrying some capacity since the Phase II Trial ended and with that capacity in place we were able to generate increased revenue with relatively incremental cost.

Included in cost of goods is the cost associated with test reforms, but which reimbursement has now been established. Gross margin would have been in the high 50’s, had revenue been recognized for all of these test. Bear in mind however, as you think about future gross margins that this favorable impact will be offset somewhat by the impacts on average prices of broadening coverage to an expanded range of public payers.

Overall, we are pleased with the trend in our gross margin and see further gross margin expansion of adoption and reimbursement of Trofile development. Total operating expenses in the aggregate were $12.3 million about the same level of Q3. R&D expenses of $5.1 million were higher than the $3.8 million recorded in Q3, R&D in Q3 as we noted over time lower than normal and in Q4, R&D expenses have returned to above the level of Q1 and Q2 of 2007.

Going forward, there will be likely some increase to the cost of acquiring and running samples in clinical studies, otherwise with no expected substantial change in the level of R&D activity. Sales and marketing expenses of $3.6 million were slightly lower than Q3. We may have some slight increase over 2008, but substantial increases will only occur as we approach March in relation to HERmark.

Admin expenses of $3.5 million were also a little lower than Q3. The level of spending should be continued at around the level we have incurred over 2007. On a pro forma basis, excluding fair value adjustments for the convertible debt and CVRs, our pro forma net loss for the quarter was $4.6 million, reflecting a substantial improvement over the level of $7.6 million reported in Q3.

We ended Q4 with $34.6 million in cash and cash investments. An increase of $1.1 million, this increase in cash reflects pre-payment and up from payments from pharma customers for not only Pfizer of $5.5 million and proceeds from more exercises of $0.6 million, without these benefits, cash use and operations would have been about $4 million and a total reduction of cash would have been about $5 million for the quarter.

The use of cash in operations are approximately $4 million has improved from an average level of about $7 million quarterly in the first three quarters of 2007. We expect for this Trofile revenue continues to build. We will be able to firmly reduce our cash use.

Bill Young

We would now be very happy to take questions. Operator, please poll for any questions.

Question-and-Answer Session

Operator

(Operator Instructions)

We will now take our first question from Zarak Khurshid with Caris & Company.

Zarak Khurshid – Caris & Company

Congratulations on the Trofile ramp and really nice up tick in sales. So it looks like the average rate of reimbursement for Trofile has improved to closer to 60% or so. That is a nice jump from 30% or around there back in November. What has really been the driver there and what is the reimbursement level that you are assuming in your revenue guidance?

Alfred Merriweather

First of all regarding of what is happening right now, in the quarter, we have two different sources revenue for us, one is, clients which are referenced, other lives in hospitals and then the other primarily is Medicare. You know the Medicare reimbursement level of 1960? The client tends to be in that range, so right now, the coverage is skewed if you like to the relatively high end of what would be our pricing range over time, as public payers come on board, that would come down because the state Medicaid and public payers tend to be a little lower, so we are seeing the benefit right now of a higher than normalize pricing structures.

I want to comment specifically the assumptions on the line, the guidance is obviously with too many factors going in to it, but I think we are pretty pleased with the way the reimbursement process is going. We think we are doing pretty well in terms of the goal that we set, which is to get substantially complete coverage by end of Q2.

I think the discussions we have had with the state Medicaid had been positive and the two biggies of New York and California, as we said, we have had very positive conversations with those medical necessities, it does not seem to be an issue. I think they are just running the course of their internal bureaucracy and then hopefully we will see some progress soon, but they are hard to predict.

Zarak Khurshid – Caris & Company

Nice announcement this morning! Can you quantify the phase to opportunities with Incyte? What is the timing of those and is that built in the guidance as well?

Alfred Merriweather

Incyte, they are moving into Phase II, so it is not a large scale Phase III so that will be relatively small in its revenue impact, but obviously to the extent that there is now a third CCR5 component moving through the clinical trial process. I think that is a very, very positive development for the CCR5 class and you also saw this morning, and as with Pfizer where they have a second generation CCR5 compound in their earlier stages of the process, so I think with those two announcements, the Incyte is moving forward with theirs and Pfizer having a second generation, one coming through I think the indication there is the CCR5 class is alive and well.

Bill Young

And obviously assuring continuing with their Phase III.

Alfred Merriweather

Yes.

Zarak Khurshid – Caris & Company

And then just lastly, I will jump back in the queue. On the gross margin side, what sort of capacity do you have there and if we see a doubling or tripling of Trofile testing throughout the year and what sort of leverage do you have in that expense.

Alfred Merriweather

Clearly, we saw a pretty substantial leverage in Q4 as we had the capacity for the Pfizer trial and obviously we have the capacity for more revenue in the form of the un-reimbursed products, so from a revenue perspective there is more that is there in Q4 than we are able to put in the P&L in terms of volumes, we do not see capacity being an issue in terms what can be reasonably be expected for the next year or so. We have plenty of space here and the lab is operating sufficiently, not at full capacity, so I think we are not too overly concerned about what our capacities are.

I think as far as the gross margin impact, as we go forward, we will see a couple of things. One, we will see as we get more reimbursement for more of our cash that will help us obviously, but again as the public payers begin to come that will bring down the overall EPP sums. So there will be a couple of conflicting things there but net, I think we see gross margin expanding from here, but I think the leverage from Q4 was sort of the initial burst of picking the capacity that we have for the Pfizer trial.

I would not necessarily expect quite that same free ride and if you like in sort of the lack of lack of incremental cost going moving forward but certainly, the leverage I think would be there.

Bill Young

Another reason why the capacity is not going to be an issue for the next year is that we have been working hard on automation of a lot of the more labor intensive steps in the assays and have made a lot of progress on that as well, so we have plenty of additional capacity in our current facility.

Operator

I will take our next question from Bill Quirk with Piper Jaffray.

David Clair – Piper Jaffray

Just a quick question on the enhanced assay that you announced this morning, can you guys give some sensitivity specificity data around that?

Bill Young

So you are talking about the assay that was presented at CROI?

David Clair – Piper Jaffray

Yes. The enhanced Trofile.

Bill Young

It has sensitivity for 4X or dual/mixed virus is 1% or better, so it is a very well validated now in clinical samples to be able to achieve those results.

David Clair – Piper Jaffray

I am sorry you said it was for?

Bill Young

The sensitivity for X4 or dual/mixed virus is 1% or better.

David Clair – Piper Jaffray

1% or better

Alfred Merriweather

You can detect it down to 1% in the viral population.

David Clair – Piper Jaffray

Yes, right. I guess I am looking for, so are you saying it is sensitivity of 99%?

Chris Petropoulos

So what we are saying is if there is a minor variant in the population that 1%, we can detect that. What we have done is based on clinical data, we have refined the sensitivity of the assay to detect minor populations that are likely to prompt failure upon selective pressure with Vicrivoroc, yet we have done that by preserving the specificity for our five calls, so we have been able to screen. We are now able to screen out those that are likely to have emergency XC4 populations, but not at the expense of overcalling dual/mixed viruses, so we still do very well at identifying the patients that will have very good response to the drug.

David Clair – Piper Jaffray

I am sorry, just to be clear the sensitivity then is 99%? Is that what you are saying?

Chris Petropoulos

We do not report out the actual sensitivity and specificity. We are now in a larger data set with clinical data. I think we can begin to do that.

David Clair – Piper Jaffray

Can you give us a ball park?

Chris Petropoulos

It is certainly in the 90’s for sure.

David Clair – Piper Jaffray

It is in the 90’s both sensitivity and specificity?

Chris Petropoulos

Yes.

David Clair – Piper Jaffray

Okay, fair enough. And then the question for you Alf, thanks a lot for the guidance into 2008, just so I could get maybe directional with gross margin, I mean, do you expect to maintain the gross margin that we saw this quarter or can we expect a little bit of expansion there? I think you mentioned, if you were reimbursed for everything that would have been in the upper 50’s?

Alfred Merriweather

That would be based on Q4’s mix. However, once state Medicaid’s come on board, they will tend reimburse with a lower level. So in Q4, we were seeing the benefit of the payer still sort of paid more towards the high end of our range, right about the Medicare level. Once the state Medicaid comes on board then, we will have a negative impact from the average price coming down.

On the other hand, as in Q4, we took the cost of those assays for which we did not have reimbursement, did not take the revenue, so they will be a couple of things offsetting each other as go forward there, but overall I think, we see our gross margin going up over the course of the year.

Operator

We will take our next question from Peter Lawson with Peter Weisel Partners.

Peter Lawson – Peter Weisel Partners

I wonder if you could just go through the current capacity utilizations.

Alfred Merriweather

I cannot really give you a specific data on that, Peter, but I think as we said, we certainly have plenty of room to grow. We have taken on some additional space starting in a few months, not because the life itself is running out, but it is space available should we need that. Additional space really is for the support functions, both around R&D of the lab and other functions so that we have been really squeezed in space and there are support activities around the lab itself. The lab itself, I think is in pretty good shape in terms of ultimate capacity.

Bill Young

We have done studies on this figure and with the additional of the appropriate labor and extra shifts which are the main constraint right now which we can hire if we choose probably triple the current capacity. So we are not worried about it at this point. At some point in the future, we may have to provide some additional facility but as Alf, said at least with another building around here, we would be able to do that. So it is not a worry for next two or three years.

Operator

And we will take our next question from Keay Nakkae with Collins Stewart LLC.

Keay Nakkae – Collins Stewart LLC

With respect to your comment about Q1 likely being higher revenue than Q4, you also talked about some one time revenue in Q4. Could you be more specific about that?

Alfred Merriweather

We have some licensing revenues that actually was more significant in Q3 of over a million dollars. This is from the former Aclara, marketing its technologies, so there is a real, more of up front licensing fees, we licensed the caliper, and so we would be getting on a very lumpy basis, we may get some revenue in the future. We have had a good amount of revenue at 2007. There was a couple of hundred thousand in Q4 and a little bit more on Q3 and that particular aspect, we do not expect that to be at that level in 2008 and anything that does happen will be somewhat unpredictable and lumpy, so I think we are trying to say about Q1 is that we have had a great Q4 and we are not necessarily looking for extrapolation of that growth out of the Q1. I think we have seen a strong end in our base business which is not atypical, but very often because of the timing of the holidays and what that does for patients getting testing, we typically see a little bit of softness at the beginning of Q1 that is just reflecting that holiday period thing.

So, I think we are trying to suggest that Q1 will probably be running about where Q4 came in, but obviously it is still very substantially year-to-year growth.

Keay Nakkae – Collins Stewart LLC

Okay! With respect to reimbursement, if and when New York and California Medicaid come on board doing some quick math here, it is look like maybe half of your test again reimbursed. What would that percentage of reimbursed test move up to if you included those two states?

Alfred Merriweather

We are not sort of giving that level of granularity, but it would certainly move up. They are the two biggest states and New York is certainly the biggest payer for AIDS/HIV, so it does make a noticeable impact.

Bill Young

It would probably would affect volume as well because we believe that some physicians are holding back in the submission of assays for their Medicaid patients because they know there is not coverage yet, and even though we would take the samples, they are not getting through so the volume would go up as well.

Alfred Merriweather

We started to see that the volume of our overall Trofile testing right now that we are getting from those states is below what we would have expect just based on our historic resistance testing business.

Keay Nakkae – Collins Stewart LLC

Okay! And with respect to resistance testing, what type of tick up are you seeing there in perhaps being done in conjunction with the profiling for and considering somebody for Selzentry.

Alfred Merriweather

We are still seeing, as we have said in previous calls, somewhere in the order in high teens, 20% of Trofile samples coming in with a resistance test along with them. It is always hard to know if that is our resistance test that we would have had any weight, so some of it may be testing that we would have seen truly incremental pull through from Trofile. Some of that, quantifying that at the start, having said, we certainly saw a strong end to the year with our resistance testing and I think we are feeling pretty good about that as far as the business is going in to 2008.

Bill Young

I think it is also a natural message for our sales force as they talk about Trofile to also remind the physicians some important topics, a nice background and we have a great tool for that, in fact the tool is you get to use the most clinical studies to do that same thing, so the messaging is definitely around both products as we go visit physicians.

Keay Nakkae – Collins Stewart LLC

With respect to the new more sensitive Trofile assay, what makes it easy for you to have that ready to go, is it completing the CLIA validation?

Bill Young

Primarily yes. We are in the middle of validating and we want to be sure that that is completed and we are satisfied with it in the lab performance, we think we will be mainly routine, but we need to do that and get that of validation package so clean up and submit it and then we would be ready to go. So we are talking about doing it sometime in Q2.

Keay Nakkae – Collins Stewart LLC

And do you also need confirmation from CAP before you start with that?

Bill Young

In that case it is a confirmation, but it is notification. We have to send the validation package in or a summary of it and then get their okay, it is usually fairly routine.

Alfred Merriweather

When we submitted the data on the HERmark assay before the holidays, we submitted to CAP and I think it was about a two week period for us to get confirmation and it is not really a review and approval, it is just more of an acknowledgment and as we had mentioned in the call, we had our first inspection and that would have been CAP’s opportunity to take a hard look at what we were doing there and the inspection went well, so the actual to be able to launch the product, there is a notification, a very short term confirmation that that is in place and then we go forward and go for it.

Bill Young

I want to emphasize here to that that the current version of Trofile that we have been running since 2004 is a great assay. It is the best one by far available anywhere. It was used in all of the clinical studies on which approval for Pfizer’s strong results were based.

So what we are doing here within this assay is just moving the bar a bit to make it even better, but let us at least say the occurring assay is very, very good.

Keay Nakkae – Collins Stewart LLC

And just curious coming out of quarter, obviously, it seems like there is a high degree of interest in being able to tease out that higher sensitivity for the X4. What would be the implications of using this assay and the Phase III studies that are going? Would they not want to do that at this point or what are your thoughts there?

Bill Young

In terms of the advanced sensitivity assay? No, I think they are all very interested in it, the minute we have it, because they want to make sure that patients who are screened into the study and put on their drug, the drug is going to work so yes, we have gotten great interest from all of the pharma companies working on CCR5 drugs.

Keay Nakkae – Collins Stewart LLC

Okay, then finally, with respect to the HERmark assay, at this point specifically with the adjuvant study with the NSABP, what is your best guess of when you will complete the remaining 6300 samples and then you will actually have something as far as the result that you could talk about.

Bill Young

We are in the middle now of data analysis and that is actually primarily occurring at our collaborator and all of the data from us is in their hands, I honestly cannot predict precisely when we are going to be able to sit down and look at those analysis, that data analysis is ongoing.

Keay Nakkae – Collins Stewart LLC

Are you still sort of interim point before you complete the 1600 or are you being green-lighted to complete?

Bill Young

We are still at the interim point. And what I have said early on the call is that we have also started testing another thousand patient cohorts from Europe, also Herceptin adjuvant patients that is a completely separate study they were doing with another group. So that work is already started in the laboratories here.

Keay Nakkae – Collins Stewart LLC

Would you expect that study to complete before the NSABP?

Bill Young

Not necessarily, I think they are both going to go along in parallel.

Operator

(Operator Instructions)

We will take our next question from Jeffrey Frelick with Lizard Capital Markets

Jeffrey Frelick – Lizard Capital Markets

Maybe just a follow up to an earlier question on the enhanced Trofile assay, Bill. If we think of the current assay, the current Trofile assay, with about 10% mixture right of X4 dome X, is it a 100% sensitivity? So with one 1% mixture, what would the sensitivity be?

Chris Petropoulos

If we keep going back to the specificity, it is very difficult to address that question because there are multiple factors that go into whether or not a patient may respond to a regimen. A lot of those being not related to Vicrivoroc potency or susceptibility to Vicrivoroc, there are adherence factors. The activity of the optimized background treatments and so it is difficult to make those absolute calculations.

What we can tell you is that when you screen with the standard assay and enroll patients, those patients have a remarkable response to the drug, and when you screen out patients with those assays and then you test those for response for Vicrivoroc those patients do not respond.

What we are doing with the enhanced assay is simply picking up a little bit of sensitivity incrementally and preserving the specificity, so I know everyone is looking for a 99% sensitivity, specificity, but again, it is very difficult to make those calculations because it is not just the assay that determines whether or not a patient is going to respond or not going to respond to the drug, and or the drug regimen I should say. Does that help at all?

Jeffrey Frelick – Lizard Capital Markets

Okay, I will circle back with you guys on that one. I guess a little bit. Thank you for the color on the reimbursement with the various organizations, with respect to the private payers, you said, you guys are on approximately 200 or so. What percent now are covering and I guess how does that play into your thoughts on the outlook for 2008?

Alfred Merriweather

Well, most of those are very small volumes. It is relatively small numbers that the really big ones are the Blue Cross, those kind of people. So the matter of private payer revenues that we got in Q4 was very small, but since it was all on a cash basis and we are still really on that basis until we get reimbursement a little established, for example Blue Cross, they said, informally that they are covering the assay and we are still working through, the submittal fields process to work the reimbursement levels and the appropriate levels. It will probably take the first half of this year. We need to work that through with the major payers.

Jeffrey Frelick – Lizard Capital Markets

Are the major payers kinds of in that assumptions for the outlook of 2008 or that would be incremental, how do you think of that?

Alfred Merriweather

I think some of them certainly are yes. The guidance we gave was in access of 60 million so we have rapid success with all those payers that will have an impact on how much beyond that 60 million level and we can go, so that we will be able to, once we get through to the first half of the year, we may be able to give a little bit of color on that, so that we will know exactly where we are with New York and California Medicaid with the private payers, and so we will be able to give you a better sense of where we are going.

Jeffrey Frelick – Lizard Capital Markets

You mentioned a bit ago, with respect to some of the suggestions holding back because of lack of coverage right now. Are you guys doing anything to kind of proactively, I guess get the box to submit samples and like you said, kind of test them anyway and you maybe can speak about that as far as marketing program or communication.

Bill Young

Our message has been reimbursement for diagnostics takes time to put in place, send your samples in and we will test them. I think what Alf was saying was that despite that message the amount of New York and California Medicaid patients that we see is way below our normal percentage for resistance testing, so that implies that even though we are giving that message, not everyone is sending them through and so there is clearly volume out there that if we can get coverage in place.

Alfred Merriweather

Our priority is not as much to get more of those samples brought in, but the work that the Medicaid to get the reimbursement established. The key priority is to get to the point where we can get some sample of coverage processing and then in volume increased beyond that.

Jeffrey Frelick – Lizard Capital Markets

Okay, maybe a quick oncology question. Any update on the next cohort for metastatic?

Bill Young

Yes, we actually have two cohorts in-house. One of which with a completed testing and the other, we are preparing the test and then we have several more in the wings on their way in. So we are actually making progress on that front.

Jeffrey Frelick – Lizard Capital Markets

Do you think will be sufficient enough to get your cutoff levels established?

Bill Young

We will have to see what the data says, but hopefully that would be the case. And we will only be dependent on the data.

Jeffrey Frelick – Lizard Capital Markets

Timing on that, Bill? What do you think of that?

Bill Young

You know, I just hate to speculate on timing and we are working as fast as we can on it.

Operator

We will take our next question from Matthew Scalo with Canaccord Adams

Matthew Scalo – Canaccord Adams

I wanted to ask about on how do I think about the launch of the enhanced Trofile? Is it like a light switch where in Q2, a majority or large percentage of current testing volume goes to that or is it fairly gradual throughout 2008?

Bill Welch

What we are going to do with the enhanced Trofile is once we validate that; we will roll that out in the market place. We are not going to offer both Trofile and the enhanced sensitivity Trofile. We would just start offering in the enhance sensitivity Trofile, so when that becomes available we will launch that.

I would say that there are two things there, there is not necessarily heads up in there, but there is a store appreciation with the finance in the HIV studies. Me and Chris and Bill are talking about Trofile is a very good assay, so I am just obviously holding back, but they are all looking forward to the improvement as it comes forward.

Matthew Scalo – Canaccord Adams

So in Q1 you might see maybe a little bit of impact maybe from that, are you really excited about the advantages?

Bill Young

We did not talk about the launching in Q1.

Bill Welch

It will be sometime in Q2.

Matthew Scalo – Canaccord Adams

But before hand as people get a little bit excited about the launch, I guess, they would like to hold back?

Bill Welch

I am not sure that there is much impact day to day in terms of people holding back. The assay is running pretty good, so I think this is certainly an incremental improvement in the assay, but the current is assay is not to be ashamed of and it is clinically validated and people are pretty happy with it, so I think as they say, these are not two product that we will offer simultaneously, it will just be an improvement in the sensitivity of the assay as we start doing it with a new method.

Matthew Scalo – Canaccord Adams

I wanted to ask your thoughts on also the change or the potential change in carriers from the Medicare side, does that have any potential impact reimbursement? I understand full well that Medicaid is a very small percentage of the testing volume, but the ability to impact the reimbursement level.

Bill Young

I guess we cannot predict what the future will bring, but we would think not. The Trofile, has been established both as a medical necessity primarily and then also the coverage we have. The transfer appears to be a much more of a process, it is broader than essentially what we are doing, and we just look forward to that. I think it is supposed to be sometime in barely second quarter or so.

Matthew Scalo – Canaccord Adams

And last question is just on the HERmark as far as how should I be looking at when eventually this becomes commercialized. Is it going after the fish market first or do you see this kind of potentially being a primary screen instead of immuno-histochemistry?

Bill Welch

I think it definitely has the potential of replacing both the current assays, that being said what strategy will actually take us, we want to know how we will position it and how we will price it, and we are still working that out. Based on what we see, it definitely has that potential to replace the current assays.

Operator

We will take our next question from Mike Chu with Civic.

Mike Chu - Civic

Just on the 2008 revenue guidance of $60 million and above, can you give us anymore color on what assumptions are based in to that and specifically, are there any oncology revenues in that and is that the right way to characterize the rest of the revenue as kind of flattish non-Trofile revenue and the delta year-over-year is all Trofile or is it a different event?

Alfred Merriweather

Well, I think the key driver of growth is obviously is Trofile, that is the major factor. Our base does some sufficient testing as we said early on, we had a good end of the year and we are feeling pretty good about that part of the business. Maybe a little bit pull through coming true with Trofile, but that any growth will not be substantial.

The pharma portion of business as we said, the share we are taking with our Phase II trials. Incyte is not really big deal in terms of revenue, but it is one small piece of business that we get and I think were likely to get some improvement from the pharma as well, but the contribution for that is relatively small in relation to the Trofile opportunity. With regard to oncology, irrespective of the timing, whether what we will make of those studies and when we are able to announce and then implement the commercial launch.

It is unlikely that we would see any significant revenues this year from that, simply because whenever the launch happens, as we have seen with Trofile, and probably later, because there will not be a labeling linkage with our first HERmark product, the reimbursement will take a little longer to unfold than Trofile has, so from a given launch date, whenever that maybe, the revenue ramp will be a little delayed in relation to Trofile as a comparator, so I would not look for any oncology revenue this year. I think Trofile will be the key driver.

Operator

That does conclude our question and answer question. At this time, I would like to turn everything back over to you Mr. Young for any additional or closing remarks

Bill Young

Thanks very much everyone for joining us today. We look forward to updating you in our future progress and certainly discussing with you the results of Q1 in a couple of months. Thank you very much.

Operator

That does conclude today’s conference. Thank you for your participation. You may disconnect at this time.

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Source: Monogram Biosciences, Inc. Q4 2007 Earnings Call Transcript
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