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Response Genetics, Inc.(NASDAQ:RGDX)

Update Call

March 26, 2008 5:00 pm ET

Executives

Kathleen Danenberg- President and CEO

Thomas Stenkovich- Vice President, Chief Financial Officer and Secretary

Analysts

Zarak Khurshid-Caris & Company

Jared Cohen-Cohen & Company

Gregory Leshenko-Maxim Group

Operator

Greetings ladies and gentlemen and welcome to the Response Genetics Inc. Year End and Strategic Update Conference Call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Tom Stenkovich, Chief Financial Officer for Response Genetics. Thank you Mr. Stenkovich, you may begin.

Thomas Stenkovich

Thank you very much operator. Welcome and good day to everyone. I would like to start out by reading our Safe Harbor statement. During the course of this conference call we may make forward-looking statements or predictions regarding future events or the future financial performance of the company. We wish to caution you that such statements are just predictions and actual events or results may differ materially. Investors should read the risk factors set forth in Response Genetics Securities Exchange Commission filings and periodic reports filed with the SEC. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

I would now like to turn the call over to Kathleen Danenberg our President and CEO.

Kathleen Danenberg

Good afternoon and thank you for joining us. In today’s call I would first like to review some of our major accomplishments since our IPO on June 5, 2007, including the initial launch of Response DX: Lung and Response DX: Colon. Tom will review the financial results for the year and I will return towards the end of the discussion to talk about our plans for 2008 and lastly I’ll take your questions.

In June 2007, we completed our IPO and set two goals for the company moving forward: first to develop gene based diagnostic tests to predict cancer recurrence and chemotherapy response for lung, esophageal, pancreatic and colorectal cancers; and second to expand our genomic clinical trial analysis business within the pharmaceutical industry. Today I am able to tell you that we are on schedule to meet these objectives within our development timeline and I’m happy to report that not only did we launch our ERCC1 test in March 2008, according to our timeline announced last November, but we also expanded our test offerings in the form of ResponseDX: Lung and ResponseDX: Colon. These products also test for KRAS mutation status, RRM1 gene expression, EGFR amplification, and TS gene expression in addition to ERCC1. Additional information about Response DX can be found on our newly launched website. The catalyst for these tests coming to the forefront was a Journal of Clinical Oncology article published last July. In this paper we reported the results of our prospectively designed clinical trial in late stage lung cancer using ERCC1 gene expression to direct chemotherapy. This positive clinical trial demonstrated that choosing platinum chemotherapy only for patients with low ERCC1 expression significantly increases the response rate over treating all patients with platinum based chemotherapy. Moreover, selection of non platinum therapy benefited patients with high ERCC1.

As we now approach the end of the first quarter I can say that we’ve started our initial launch at selected institutions. The goal of the initial launch, as we stated in November, was to learn about ERCC1s utility in clinical practice and the best way to make it available to physicians. We have now executed on making the tests available, begun processing lung and colon cancer patient samples and expanded the offering to include the additional tests. These tests were requested by the physicians from key institutions so that they would be able to properly treat their patients. Therefore, under the newly branded Response DX: Lung offering, physicians can order a test for our proprietary ERCC1 gene, but also RRM1, EGFR amplification and KRAS mutation analysis using our patented RNA and DNA extraction processes.

Platinum based therapies are standard care in colorectal as well as lung cancer. It was always our intention to pursue the colorectal cancer market and therefore due to the demand from physicians with whom Response Genetics have strong relationships, we have decided to make Response DX: Colon also available.

With response to genetic patent position on ERCC1 and TS for PCR based tests and the knowledge that both are applicable, the guiding standard of care treatment in colorectal cancer, the logical step was to make these tests available as Response DX: Colon.

The addition of KRAS testing to our offering was strongly suggested by the oncology community to predict benefit from EGFR directed therapy.

I will briefly summarize now how a physician would use the results of each test. Physicians ordering the four Response DX: Lung test would begin with interpretation of the RCC1 results. The first choice a physician will make in treating a newly diagnosed lung cancer patient is whether to use platinum or non platinum based therapy. Testing the patient sample for ERCC1 would guide the physician in this important choice. A low expression of ERCC1 indicates that the patient would benefit from platinum based therapy; with a high expression of ERCC1 suggests that the patient would benefit more from a non platinum based therapy.

Current guidelines for lung cancer treatment indicate using a combination of two drugs, so the next step would be to choose a drug partner in the platinum or non platinum doublet therapy. Expression of RRM1 would predict the efficacy of the commonly used gemcitabine therapy as a second drug in the combination. In the event that first-line therapy is unsuccessful and relapse occurs, physicians would need to think ahead to second-line therapy in which EGFR directed drugs are currently used. This is where the test for EGFR amplification and KRAS mutation status are pertinent. Using the four tests that constitute Response DX: Lung, physicians can more accurately direct therapy to the particular targets in each patient’s tumor. For example, currently 95% of patients receive platinum based therapy when an average of only 25% of the patients benefit from this therapy. With ERCC1 testing, studies have shown up to 53% response with platinum therapy.

Similarly physicians ordering Response DX: Colon tests would begin with the ERCC1 test interpretation. The majority of patients receive a platinum based therapy regimen in colon cancer, this is [flyfouricel xla platen] which physicians refer to as [fulfox] the studies show that only patients with low ERCC1 benefit from this therapy. Results from Response DX: Colon yielding high ERCC1 or TF would suggest that the non platinum arenotecan based therapy; referred to as [fulfury] would be a better treatment choice. Additionally the physicians can use the results of the KRAS mutation status test to guide the use of EGFR therapy in combination with either [fulfox or fulfury]. With each DX test result there are adequate options of therapies in the treatment guidelines from which the physicians can choose. Without testing data, the physician often uses the same therapy for all patients and is directed to change therapy only after a patient fails the drug. All would agree that getting the right therapy to each patient the first time gives the best odds of long-term survival for the patient, as well as subjecting patients to less toxicity and that’s a better quality of life.

The main point I want to convey here is that it is now possible for through Response DX testing to present patients with more treatment options other than the one size fits all standard chemotherapy. Up until now physicians have not had the tools to accurately identify which patients would benefit from a particular chemotherapy. We feel Response DX: Lung and Response DX: Colon are such tools.

Now I would like to discuss our progress in the pharmacogenomic clinical trial analysis business.

The pharmaceuticals service business, which includes clients such as GSK and Tyho continue to use our testing services for the clinical trial samples. On January 22, we announced that Response Genetics has begun performing the MAGE-A3 gene expression screening assay for GSK’s clinical trial of investigational MAGE-A3 antigen specific cancer immunotherapeutic. This large clinical trial is for adjuvant therapy in MAGE-A3 positive patients as tested by Response Genetics in earlier stage non small cell lung cancer. The confidential nature of these partnerships prevents us from getting updates on the status of the trials, but the samples do continue to ramp.

I’ll turn you now back to Tom, to discuss our financial results.

Thomas Stenkovich

Thank you, Kathy. I’d like to summarize, briefly, our fourth quarter and full year results.

Our fourth quarter revenue for 2007 increased by 11% to 2.4 million, compared to 2.2 million in the fourth quarter of 2006. Cost of revenue for the fourth quarter 2007 was 1.1 million, compared to 834,000 for the fourth quarter of 2006. Research and development expenses were 566,000 for the fourth quarter ’07, compared with 400,000 for the same period in the prior year. General administrative expenses of 1.8 million for the fourth quarter 2007 increased from 1.7 million in the fourth quarter for the prior year. The total operating expenses for the fourth quarter of 2007 increased to 3.6 million, compared to 2.9 million for the same period last year.

Turning to our full year results; our full year total revenue for 2007 increased by 30% to 7.8 million, compared to 6.0 million in the 12 months of 2006. This increase was primarily generated by the companies existing pharmaceutical contracts related to pharmacogenomic testing services and the introduction of new testing services being offered by the company to its’ pharmaceutical clients.

Our cost of revenue for the 12 months ended 2007 was 4 million, compared to 2.5 million for the 12 months ended ’06. Research and development expenses were 2.5 million for 12 months of ’07, compared with 1.3 million for the same period in the prior year. General administrative expenses were 6.9 million for the 12 months of 2007, compared to 4 million in the same period in 2006.

Our total operating expenses for the 12 months of ’07 increased to 13.4 million, compared to 7.7 million for the same period last year. These increases in operating expenses were primarily due to non cash stock based compensation to employees and key personnel to support the company’s growth which totaled approximately 2.1 million. Additionally operating costs related to the start up and continuing operation of the European laboratory totaled approximately 1.5 million. Additional costs involving new testing services the company’s offering and additional reagent supplies totaled approximately 900,000. And lastly, increases in maintaining the company’s intellectual product portfolio, completion of the company’s IPO, other costs associated with being a public company and additional depreciation, all totaled 1.1 million.

Our net loss for the 12 months ended 2007 was 5.5 million or $0.78 per share, compared with a net loss of 2.3 million or $0.84 per share for the 12 months of ’06.

Our cash balance at December 31, 2007, was $17 million, compared to 4.9 at December 31, 2006. This large increase is primarily due to the IPO proceeds received last June. Our current net cash burn rate is approximately 1.2 million per quarter.

I would like to take a moment and talk about our stance on financial guidance at this point.

The company’s current revenue is coming from pharmaceutical partners and supporting their clinical trials. The lack of control we have over the progress of these trials precludes us from being able to accurately estimate the amount of samples our lab will be processing on any given quarterly basis. As far as our cash burn, we feel that we are adequately capitalized to commit the resources necessary to the initial launch of Response DX and determine the commercial launch strategy. This will be an ongoing evaluation as we continue through this initial launch. Once our company gets to a broader commercial launch stage, we will revisit the idea of giving financial guidance.

At this time, I’d like to turn the call back to Kathy, to discuss the strategic update and development plans for 2008.

Kathleen Danenberg

Thank you, Tom. The information gathered, to the initial launch of Response DX: Lung and Response DX: Colon will be the backbone of our broader commercialization strategy. We’ll be evaluating multiple options for the broader launch during this phase. As a first step, we’ve added Chris Emery to the management team in February, as the Vice President of sales and marketing. Chris will be responsible for overall marketing strategy and sales of the company’s suite of genetic tests in the healthcare community. Chris has more than 10 years experience in the diagnostic and therapeutic industries. While US Lab, the cancer diagnostic division of Lab/Cor initiated the launch of several new molecular tests into the market, we’re very excited about the experience that Chris brings to the team at Response.

Although the focus of the company right now is Response DX: Lung and Response DX: Colon, we are continuing to move the rest of the diagnostic pipeline along in other tumor types. Since platinum based therapies are standard of care for about 500,000 newly diagnosed cancer patients per year in the US, we are validating the use of these single gene tests in other tumor types, such as gastric, ovarian and esophageal cancers. We’re also on target for the development timelines originally set for our multi-gene tests. We will continue to support our pharmaceutical partners as outlined in our current agreement for the clinical trials and are currently evaluating additional opportunities to work for the pharmaceutical industry.

We’d now like to open up the calls to any questions you might have.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question and answer session. (Operator Instructions) One moment please, while we pull for questions. Our first question comes from Zarak Khurshid with Caris & Company. Please proceed with your questions.

Zarak Khurshid-Caris & Company

Thanks. Hi Kathy and Tom, congratulations on the launch of Response DX and your progress in other aspects of the business. First question, just on housekeeping; the R&D line looked pretty good sequentially versus in the third quarter of ’07. Can you just maybe describe what was the improvement there and how should we think about that playing out for the rest of the year?

Thomas Stenkovich

Sure, Zarak. Thank you for your question and your remarks. The increase in the R&D expenses primarily resulted in a couple things; we are processing more and more research samples which adds to the cost. This year versus last year we also had expenses that did not occur last year such as expenses related to stock option expense and some patent costs that were previously accounted for in G&A expenses. So you know the increase year on year of approximately 1.2, $1.3 million is a sizable increase, but there are expenses in there that did not exist last year.

Zarak Khurshid-Caris & Company

Sure. I was a little more interested in the improvement that we saw versus last quarter.

Thomas Stenkovich

The fourth quarter R&D?

Zarak Khurshid-Caris & Company

Yes.

Thomas Stenkovich

Yes it increased a lot for the same reasons. We are processing more research samples this year versus last year. We did not have the stock option expense which is a big number for us this year.

Zarak Khurshid-Caris & Company

Got it, okay great and then just moving onto the diagnostics side of the business; what has sort of been the initial, I guess interest from the clinical community, what is the current price of the test and how should we be thinking about the total addressable market there?

Kathleen Danenberg

Initial interest is, you know we have received from some strategic institutions, lung and colon samples as it’s only been really available for a very short time, but we have processed some of those successfully, go them back out. There continues to be interest in that area from the physicians. As far as the pricing goes, we’re competitively right now we really don’t want to publicly disclose the price, we are using CPT codes that exist and we feel that there’s 160,000 colorectal cancer patients in this country that will see a platinum based therapy and could use our test as well as the approximate 200,000 lung cancer patients that could benefit from the test. So there’s a very big market out there and we’re just getting started now with these strategic institutions understanding the best way to take their orders, make it very easy for the physicians. And, I might mention that some of these CME courses that are being offered, our test is, in lung cancer patients, with lung cancer physicians, there is a very high percentage, up towards around 80% of doctors that will push the button on their voting, what do you call it, and vote that they would use these tests. So we believe there is going to be uptake, we just have to get out there and get it.

Zarak Khurshid-Caris & Company

Great and then lastly, before I jump back in the queue, could you maybe perhaps describe the strategy around reimbursement, you know what are your thoughts and plans there? And are you looking towards establishing a specific CPT code for your test? And what may be the, you know, biggest hurdles for Response DX to gain traction in the clinical market place?

Kathleen Danenberg

Well we believe that the CPT codes that we have available to us right now are going to be workable. The establishment of a unique CPT code requires wide spread use, so we’ll have to get to the point where our tests are being wide spread used before we really visit that seriously. But, with the reimbursement that we have available, we believe we’re okay and then we can add additional tests at very low costs. We can also offer these tests at very competitive costs and as we develop nucleic acids, as we extract those from a patient’s sample, then it becomes easy to run additional genes. So right now we’re fine with the CPT codes that we have available to us and we will then be billing Medicare for those and a multiple of those to the other pairs.

Zarak Khurshid-Caris & Company

Okay great. And then with respect to kind of the biggest push back you may be seeing, you know for clinical adoption of Response DX?

Kathleen Danenberg

Well right now we haven’t seen any push back. The folks that are ordering right now understand the test. I mean we learn things from each physician; I can give you an example, there was a physician with an early stage lung cancer patient that wasn’t sure what to do with the ERCC1 test, because she didn’t believe there were platinum based therapies for adjuvant care in lung cancer, but when I point to the NCCN guidelines and showed her that there were, than she ended up ordering the test immediately. So I think it’s really just educating the physicians that there are other drugs available to their patients that can be used as alternates and can safely be use. I think during this initial launch though, we’ll probably find out some information and we’ll definitely be able to report that back to you next time.

Zarak Khurshid-Caris & Company

Okay, great. Thank you.

Operator

Thank you. Our next question comes from Jared Cohen with Cohen & Company. Please proceed with your question.

Jared Cohen-Cohen & Company

Yes, just two questions please. One, I know is more financial relate. One, I noticed a jump in receivables of $1.5 million sequentially and also a jump in deferred revenue of 3.1; if you could just go over the details of those.

Thomas Stenkovich

Sure Jared, thank you for the question. The answer is the same for both, for both line items receivables and deferred revenue. We had signed a supplemental agreement with GSK whereby they prepaid us for the rest of the monthly installments that they were going to be paying us through the course of 2008 and partially in 2009. We reached this agreement in December 2007, they paid us in January of ’08 and that corresponding amount was $2.4 million.

Jared Cohen-Cohen & Company

Okay so theoretically, when you got paid in January then, did deferred revenue come down by 2.4 or that depends on the recognition of that agreement over the time frame?

Thomas Stenkovich

Yes, it will depend on the recognition of the revenue as we process the samples.

Jared Cohen-Cohen & Company

Okay, thank you very much.

Thomas Stenkovich

Sure.

Operator

Thank you. Our next question comes from Gregory Leshenko with Maxim Group. Please proceed with your question.

Gregory Leshenko-Maxim Group

Congratulations on your continued success and progress. I would love to ask you about other test you may have in the pipeline at other stages of development. What other cancers, I guess, are you targeting?

Kathleen Danenberg

We’re targeting the same cancers we talked about in the IPO, pancreatic cancer, esophageal cancer, ovarian cancer and so you will be seeing some of our presentations in some of the big scientific meetings coming up where we have abject accepted on these, but we are at the level of being able to say that we are on target for developing these gene sets. For instance we did show in one of our press releases that we have a relationship with Margo Tenthro and UCSF and that’s pancreatic cancer, so you’ll be seeing some information on those genes, that’s also very soon. Does that answer your question?

Gregory Leshenko-Maxim Group

Yes, thank you.

Operator

(Operator Instructions) It appears we have a follow up question from Zarak Khurshid with Caris & Company. Please proceed with your question.

Zarak Khurshid-Caris & Company

Hi, thanks for taking the follow up question. Could you guys maybe talk about the international facilities and the expenses related to those and have we pretty much seen the bulk of that lay out and how should we be thinking about potentially those related expenses either increasing or declining through the remainder of 2008?

Thomas Stenkovich

Sure Zarak, let me address the European lab first, based in the UK. As you may recall, we opened that lab during the beginning of the second quarter of last year. We incurred start-up expenses and operating expenses there, for the year it totaled about $1.5 million, so that was for a nine month period, so in 2008 we’ll have a 12 month period of those same expenses. Now, as GSK Bio has started to ramp up their samples for us and the processing of those samples, additional costs related to reagent supplies could be added, but that’s not a huge major expense. We are staffed accordingly there and we are ready and able to process samples there for our pharmaceutical clients. As far as, to remind you that our China and Japan partners, those would both be considered as joint ventures, so there wouldn’t be a whole lot of additional costs as far as those two others are concerned.

Zarak Khurshid-Caris & Company

Thank you.

Operator

Thank you. There are no further questions in the queue at this time. I’d like to turn the call back over to management for any closing comments.

Kathleen Danenberg

Okay, thank you. In closing I would like to reinforce the management’s commitment to the successful execution of a full scale commercial launch of Response DX: Lung and Response DX: Colon and expanding the offering. We’re also continuing to support the pharmaceutical industry globally. Thank you very much and we appreciate your time.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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