Celera Corporation Teleconference February 17, 2009 Management Remarks for Fourth Quarter Calendar 2008 Earnings Call
- February 17, 2009
Good afternoon everyone and thank you for joining Celera management to discuss the fourth quarter calendar 2008 financial results that we issued earlier this afternoon. Present today are Kathy Ordoñez, our Chief Executive Officer, and Joel Jung, our Chief Financial Officer, as well as other executives from Celera and Berkeley HeartLab.
During this call, we will be making forward-looking statements about Celera’s business. Forward-looking guidance, financial or otherwise, is only provided on conference calls or in our press releases. Any statements in this conference call about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words and phrases such as believe, will, expect, anticipate, estimate, think, intend, plan, foresee, could, should and would. For example, statements concerning 2009 financial guidance, financial condition, regulatory approvals and timelines, possible or assumed future results of operations, growth opportunities, industry rankings, plans and objectives of management and future economic conditions are all forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Factors that might cause such differences include, but are not limited to, those discussed in our SEC Filings. Copies are available on our website, as well as the SEC’s website at www.sec.gov, and on request from our Investor Relations department.
We also will be discussing historical and forward-looking non-GAAP financial measures. These non-GAAP financial measures are not in accordance with or an alternative for, GAAP and may be different from non-GAAP financial measures used by other companies. A reconciliation of GAAP and non-GAAP financials can be found in today’s press release and on the Financial Reports page of the Investor Relations section of our website at www.celera.com.
Please note that after this call, the text of these prepared remarks will be posted on the Investor Relations section of the Celera web site.
First, Kathy Ordoñez and Joel Jung will comment on the performance of Celera during the quarter, and then we’ll open the call up to questions.
Thank you, David, and good afternoon everyone.
We had a great fourth quarter of calendar 2008, closing out a very busy year for us. We revised the terms of our alliance with Abbott into two new agreements that were structured to simplify both the financial and operational aspects of our relationship, while providing both companies with greater autonomy to work independently and increased transparency regarding the financial aspects of the arrangement. We saw sustained adoption of the blood-based KIF6 testing service offered by Berkeley HeartLab, with more than 80,000 tests ordered to date. BHL is now actively marketing StatinCheck, a cheek swab testing service for KIF6, in a pilot market. BHL’s laboratory developed blood and cheek swab tests for KIF6 identifies those carriers of this gene variant that recent studies indicate, are at elevated risk for coronary heart disease and may benefit from statin therapy.
From a financial perspective, the fourth quarter of calendar 2008 was strong, as revenues grew 17 percent over the prior year quarter, with a 73 percent gross margin for the business translating into increased earnings on a non-GAAP basis for the quarter. This quarter’s performance allowed us to exceed our goals for the six-month transition period that ended in December 2008 following our separation from Applera. Revenues for calendar 2008 were approximately $175 million and resulted in Celera achieving its first profitable year on a non-GAAP basis. We’re very proud of this achievement, which was a significant goal for us when we transformed the business to focus on diagnostics and personalized disease management just a few years ago.
Since Celera recently switched to a calendar year reporting period, the historical calendar year results I just referred to are not for a reported or audited period. To arrive at these figures, we aggregated our reported quarterly results during calendar year 2008. We have provided the reconciliation tables for each of these quarters on our website. Actual results for the calendar period may differ slightly from the aggregation of quarterly results.
As the business has evolved over the past few years, we have transitioned what we believe are the most promising of our large research programs into product feasibility and development projects. Having substantially completed the discovery aspect of our proteomics program in cancer in Rockville, MD, we expect to close that leased facility by the third quarter of 2009, resulting in a workforce reduction of approximately 20 positions over the next several months. We expect to transfer the promising diagnostic lung cancer program initiated in Rockville to Celera’s Alameda facility for further advancement.
Our Lab Services segment, or BHL, recorded revenues of $29.2 million during the fourth quarter of calendar 2008, a 38 percent increase over the prior year quarter - driven in large part by an increase in the number of samples processed in the lab and the addition of KIF6 to the menu of tests offered at BHL.
During the recent quarter, we continued to add resources in the field at BHL and promoted Scott Bland to Vice President of Sales. We expanded our presence and focus on selected market areas including Southern California, South-eastern Texas, and the Greater Atlanta area by hiring three new disease management consultants, or sales representatives. Lab Services revenue grew 26 percent to approximately $107 million in calendar 2008 from approximately $85 million in calendar 2007. The number of physicians referring samples to BHL increased from 4,200 in 2007 to more than 4,700 in 2008. As stated above, the quarterly reconciliation tables which comprise calendar year 2008 are posted on our website. Actual Lab Services revenue for calendar 2008 may differ slightly from the figure presented were this an actual reported period.
We also saw uptake of testing for KIF6 this quarter from physicians ordering for first-time patients and physicians integrating KIF6 into their treatment approach for patients who had already had BHL tests performed. We expect KIF6 blood-based testing to now grow with the anticipated expansion of the BHL footprint.
Our new StatinCheck testing service is designed to drive KIF6 testing beyond BHL’s current target market for blood-based testing, while serving as a means to introduce BHL to new physicians. Since the test uses a non-invasive cheek swab, the sample can be collected by a physician during an office visit and thereby avoid the need for phlebotomy. BHL is now conducting a pilot market for the KIF6 buccal swab testing service with physicians in Nevada and Arizona, which it intends to augment through its sales force in other territories later this quarter. BHL has developed materials aimed at educating physicians on the science and utility of the StatinCheck test, including a new website - statincheck.com We’re very excited about this program and we expect KIF6 testing - both as a blood-based and cheek swab test - to grow and become one of the top revenue generators for BHL.
During the recent quarter, Celera’s SG&A expenses increased 34% over the prior year period. While some of this expense growth was due to the Corporate infrastructure build-out as a result of our split-off from Applera and the expansion of our sales efforts at BHL, the single major driver was an increased allowance for bad debt at BHL. Currently, approximately half of BHL revenues are derived from testing reimbursed by Medicare and private payors under contract. We historically have received timely payments from these payors, making this portion of our business fairly predictable from a collections perspective. For the remaining half of BHL’s revenues, we have exposure to changing and inconsistent payment patterns from non-contracted payors and patients. We have experienced an increase in Celera’s DSO as a consequence of an increased aging of the BHL non-contracted payor and patient receivables.
During the fourth quarter of 2008, our allowance for bad debt increased $3.7 million over the prior year period. This increase included a discrete charge of approximately $1.0 million associated with a billing dispute with a contracted payor. We now have a concerted program to improve collections at BHL. We have increased our internal efforts, and have retained an experienced third-party vendor to assist us. We also have a goal during 2009 to increase the percentage of testing under contract at BHL. While we expect new contracts to result in price reductions and impact our revenue growth rate on a short-term basis, we believe this is the best path forward as BHL continues to grow, as it is expected to improve both the predictability of the business as well as collections over the medium- to long-term.
Turning to our Products segment, revenues grew by 18 percent in this last quarter to $11.2 million from $9.5 million in the prior year quarter, primarily due to increased sales of certain Celera-manufactured products and royalties from Abbott on sales of RealTime™ viral load assays used on the m2000™ system. On its recent earnings call, Abbott reported that it launched an HPV assay on the m2000 in Europe, and we believe this should provide further competitive advantage for this system, which has performed well outside the U.S.
An important part of our strategy for growth within the Products business is to register new genetic tests, like KIF6, with regulatory organizations around the world. We have a follow-up meeting with the FDA soon during which we expect to clarify the regulatory pathway for a KIF6 diagnostic product in the U.S. We are also moving forward to make KIF6 testing available outside the U.S.
Under the new relationship with Abbott, the Products segment will be collecting revenues from sales from Celera-manufactured products and royalties on the sale of Abbott’s m2000 reagents, instruments, service and related consumables.
Recently, the Products business launched the AlleleSEQR® Chimerism product, which differentiates and quantitates mixed DNA samples such as those present in bone marrow transplant recipients.
Revenue from the Corporate segment in the fourth quarter of calendar 2008 was $6.9 million compared to $9.6 million in the prior year quarter, with the decline due to lower royalty and service revenues. While we received the last of ten quarterly payments from a major licensee in the fourth quarter of calendar 2008, we have entered into additional licenses that will be reflected in the Corporate segment in 2009.
While the broad economic conditions present new challenges, we’re focused on delivering on our strategy for growth for the business. We expect BHL to continue to grow in a two-fold manner: first, by increasing its geographic reach and consequently, the number of physicians that order its services; and second, by expanding the menu with higher margin and high value tests that are based mostly on Celera discoveries. We think StatinCheck is an exciting innovative test that addresses both of these growth strategies, while introducing the BHL brand to a new audience of physicians, who may then order other BHL tests.
Four of the tests in our Products segment continue to enjoy market-leading positions. These are cystic fibrosis, ViroSeq for HIV genotyping, our HLA products and our ASRs for Fragile X Syndrome. We think our diverse product and service portfolio and strong financial position will serve us well as we implement our strategies for growth and building long-term value for Celera. With approximately $316 million in cash and short-term investments, no debt, and our expectation to generate modest positive cash flow in 2009, we believe we are well-positioned to fund our business operations while managing risk. Our balance sheet also allows us to consider potential partnerships or acquisitions that hold promise of a good return on investment.
With the achievement of our first profitable year on a non-GAAP basis in calendar 2008, and with the measures we are taking to streamline the financial profile of the company, we believe the financial performance we recorded in 2008 will continue into 2009. Now, Joel Jung will make a few comments regarding the financial results for the quarter and the outlook for 2009.
Revenues for the fourth quarter of calendar 2008 were $47.3 million, compared to $40.3 million for the fourth quarter of calendar 2007. For the fourth quarter of calendar 2008, Celera reported a net loss of $6.1 million, or $0.08 per share, compared to net income of $0.3 million, or $0.00 per share, in the prior year quarter.
Results for both periods included items that affected the comparability of results. A breakdown of these items is listed in the reconciliation table in today’s release and posted on our website. These items increased the net loss for the fourth quarter of calendar 2008 by $8.2 million. Net income on a non-GAAP basis, excluding the items listed in the reconciliation table, was $2.1 million, or $0.03 per share, for the fourth quarter of calendar 2008 compared to $1.7 million, or $0.02 per share, for the prior year quarter.
SG&A expenses in the quarter were $27.0 million compared to $20.1 million in the prior year quarter, of which $3.7 million was due to an increased allowance for bad debt at BHL, including the $1.0 million charge that Kathy referenced earlier. Additional contributions to this increase in SG&A were from Corporate infrastructure build-out and transition activities related to Celera’s separation from Applera Corporation (now Life Technologies, Inc.), and costs associated with expansion of sales efforts at BHL.
R&D expenses for the fourth quarter of calendar 2008 were $7.6 million, compared to $10.6 million in the prior year quarter, as a result of the completion of certain discovery research and development projects and associated lower employee-related costs in the Corporate and Products segments, and the restructuring of the strategic alliance with Abbott.
Celera ended the recent quarter with cash and short-term investments of approximately $316 million, compared to approximately $317 million at September 27, 2008.
Celera anticipates that its 2009 financial performance could be affected by various factors, including uncertainty in the global economy and its potential impact on the healthcare system. Subject to the inherent risks and uncertainties that may affect Celera’s financial performance, which are detailed in the Forward-Looking Statements section of today’s release, the guidance that we can provide for fiscal 2009 is as follows:
We believe this outlook could be affected by a number of factors and other risks and uncertainties outlined in today’s press release and in our filings with the SEC.
These comments reflect management’s current outlook. Celera does not have any current intention to update this outlook and plans to revisit the outlook for its businesses only once each quarter when financial results are announced.
We will now take your questions regarding Celera.
Thank you all for participating in the call today. As a reminder that management's remarks will be posted within the hour on our web site, and the audio replay will be available later today using the phone numbers listed in today's press release. Thanks.
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