TBIO: Look For Resurgence In 2013
By Brian Marckx, CFA
Q4 2012 RESULTS
Transgenomic (OTC:
TBIO
)
reported financial results for Q4 ending December 31, 2012 on
March 13th. Revenue was down 15% yoy and far below our
estimate due to relative weakness in Clinical Lab and the
Diagnostics Instruments businesses, partially offset by a
slightly better than modeled Pharmacogenomics number.
While Clinical Lab revenue had been a highlight through the
first nine months of 2012, posting 17% yoy growth over that
period, Q4 fell 10%. Some of the decline may be
attributable to disruptions caused by Hurricane Sandy. And
while Clinical Lab revenue disappointed in Q4, that trend is not
expected to continue as the shift in focus towards newer and
higher priced tests with more growth opportunity is still
underway - these include C-GAAP (Plavix response), Nuclear
Mitome, and the recently acquired ScoliScore test. TBIO
recently began beefing up their sales force in anticipation of a
broader roll out of these tests.
While TBIO does not disclose individual product sales, we
think it's likely ScoliScore contributed very little in 2012 -
partly due to the acquisition happening late in the year but also
due to current spotty reimbursement and TBIO still assembling an
appropriate sales force and marketing materials. We expect
2013 will see a much greater contribution from ScoliScore,
particularly towards the back half, as TBIO expects to have
additional data to support their marketing efforts and their
quest to broaden reimbursement base, has additional and more
experienced feet on the ground promoting the product, and has the
benefit of a full-year's worth of
sales.
Relative to the Diagnostics Tools business, TBIO noted that
despite revenue from this segment dipping 11% in 2012, the number
of instruments sold actually increased compared to the prior
year. The disconnect being that much of the sales in 2012
were to Menarini (European distributor) at significantly lower
prices. Management indicated on the call that a meaningful
portion of the Menarini sales were for demonstration purposes for
their sales reps - and also noted that they expect more in the
way of pull-through end-user demand during 2013 which should be
aided by the expected near-term launch of several new assays
(consumables that are processed on the machines). We model
the instruments portion of the Tools business to remain somewhat
flat but growth in the segment to come from the consumables -
which should have a fairly regular flow of new launches,
including ICE COLD PCR cancer kits.
Pharmacogenomics revenue, while better than our estimate in
Q4, has yet to really accelerate - likely due to some delays from
testing relative to TBIO's phase III clinical trial
customer(s). TBIO is still awaiting the green-light from
two pharma customers to commence processing for phase III
trials. However, based on management's comments on the call
(including that they expect to be able to name who one of these
customers is in the June timeframe), we think this is now getting
closer to happening. We continue to model a greater revenue
contribution from the Pharmacogenomics segment in 2013, largely
related to these trials.
Revenue
Q4 revenue was $7.3 million, down 15% yoy and $1.9 million
(21%) less than our $9.2 million estimate. The difference
came from a $1.1 million variance ($4.1 million A vs. $5.2
million E) in Clinical Lab revenue and a $987k variance ($2.5
million A vs. $3.5 million E) in Instruments/Diagnostics with
Pharmacogenomics revenue ($678k A vs. $500 E) partially
offsetting those misses.
Gross Margin
Similar to the first three quarters of the year, gross margin
came in softer than our estimate. Q4 GM was 48.6% compared
to our 52.3% estimate. While some relative strength in
revenue from the Pharmacogenomics segment, which is highly
leverageable as revenue increases, aided GM in Q4, as did a
somewhat surprising (particularly given that average instrument
selling prices have been lower as a result of distributor sales)
healthy margins from the Tools business, this was more than
offset by soft GM in Clinical Lab.
We continue to look for GM to widen with growing revenues in
Pharmacogenomics, an increase in contribution from the higher
margin bionconsumables (as opposed to instruments) from the
Diagnostics/Tools business and potentially (depending on
reimbursement) very beefy margins from ScoliScore as well as
C-GAAP.
Net Income / EPS
Net income and EPS were ($2.5) million and ($0.03) compared to
our ($1.8) million and ($0.02) estimates. The miss coming
from revenue, softer GM and higher SG&A ($6.2 million A vs.
$5.6 million E) relative to our modeled numbers. SG&A
was elevated due to some bad debt expense and TBIO beefing up
their sales force and marketing materials in anticipation of a
stronger roll-out of the aforementioned new clinical lab
products. Management noted that they expect to see SG&A
as a % of sales come down in 2013 as they leverage these recent
investments, coupled with top-line growth.
Cash
Transgenomic exited 2012 with $4.5 million in cash and
equivalents. Pro forma for the recent stock sale and credit
facility (a portion of which paid off the o/s notes), cash
balance plus borrowing capacity was roughly $14 million.
Cash used in operating activities was $2.5 million in Q4 and
$10.2 million for the full year 2012.
Financings
Subsequent to 2012 year-end, TBIO further shored up their cash
balance and paid off the remainder of the PGxHealth/Dogwood
notes. In January TBIO sold 16.6 million shares at $0.50
for gross proceeds of $8.3 million. The stock sale included
50% warrant coverage - the warrants are exercisable @ $0.75 for
five years. Then in early March TBIO secured an $8 million
credit facility through Third Security - which includes a $4
million revolver (greater of 4.25% or prime+1%) and a $4 million
term loan (greater of 9.1% or 1mth LIBOR+6.1%). The loans
mature in 9/2016. The loans will be used in part to pay off
the $6.2 million of PGxHealth/Dogwood notes that remained at the
end of 2012.
OUR 2013 OUTLOOK
We've again made some updates to our model. We now model
2013 revenue of $34.1 million, implying growth of 8% from
2012. We look for Laboratory Services and Instruments to
generate revenue of $21.9 million (+13%) and $12.2 million (+1%),
respectively. We think net income and EPS come in at ($8.5)
million and ($0.10).
Laboratory Services
Our $21.9 million revenue estimate for Laboratory Services
assumes meaningful contribution from new products in the clinical
lab segment, including the C-GAAP Plavix response, ScoliScore,
and nuclear mitome tests. Very early indications are that
there is real interest in TBIO's C-GAAP test. TBIO began
adding headcount to promote C-GAAP earlier in 2012 and, with
Medicare coverage now in place, expects the roll-out to gain even
more momentum going into 2013. Management also has high
expectations for ScoliScore. While reimbursement is
currently somewhat spotty and payer specific, this could improve
over time and with increased awareness and additional study data
supporting use of the test. TBIO has already added
headcount to help support their sales and marketing efforts of
ScoliScore and thinks, depending on the level and prevalence of
reimbursement, that they could break even on the $4.4 million
purchase price in relatively short order.
As noted, Pharmacogenomics revenue has been somewhat
lackluster recently, but will hopefully rebound with the
initiation of work on one or more phase III clinical trials which
management has alluded to. Clearly there's real and growing
interest in ICE COLD PCR which is further reinforced by the
ongoing and recent collaborations with elite medical
institutions. Management continues to indicate that there
is substantial interest in their technology from some prominent
names in pharma and they continue to score more and more clinical
trials business. This remains the impetus to our
expectations of significant growth in pharmacogenomics revenue
over the longer term. And, as noted, due to its
scalability, as this business grows TBIO's overall gross margins
and profitability should accelerate at an even faster
pace.
Instruments
We model the equipment portion of Transgenomic's instrument
business to stay somewhat flat from current levels.
Meanwhile we look for the consumables portion of the diagnostic
tools business to turn in double digit growth in 2013,
benefitting from the launch of several new product launches
including new cancer kits (K-RAS, BRAF, EGFR,
PIK3CA).
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