Celera Corporation Teleconference August 6, 2009
Management Remarks for Second Quarter 2009 Earnings Call
ALAMEDA, CA - August 06, 2009
Good afternoon everyone and thank you for joining Celera management to discuss the second quarter 2009 financial results that we issued earlier this afternoon. Present today are Kathy Ordoñez, our Chief Executive Officer, and Ugo DeBlasi, our Chief Financial Officer, as well as other executives from Celera and Berkeley HeartLab.
During this call, we will be making forward-looking statements about Celera’s business. Forward-looking guidance, financial or otherwise, is only provided on conference calls or in our press releases. Any statements in this conference call about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words and phrases such as believe, will, expect, anticipate, estimate, think, intend, plan, foresee, could, should and would. For example, statements concerning 2009 financial guidance, financial condition, product launches, 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.
Kathy Ordoñez and Ugo DeBlasi will now comment on the performance of Celera during the quarter, and then we’ll open the call up to questions.
Thanks, David. Good afternoon everyone and thank you for joining our call today. This has been a challenging period for us and we’re disappointed with the results we posted for the second quarter of 2009. As we disclosed in July, we saw revenues contract over the prior year quarter, and this shortfall, combined with a write-down for bad debt at Berkeley HeartLab, translated into a substantial loss for the quarter. We have reacted swiftly to the situation, implementing cost saving measures in the mature parts of our business, which included the redeployment of resources at BHL to provide what we expect to be a more efficient delivery of disease management services. Meanwhile, we are gearing up in our efforts to drive KIF6 and our other cardiovascular genetic tests into the primary prevention market, which we believe has significant promise for our future.
Before I begin with a review of the quarter’s performance, I want to reinforce how important it is to me personally, and to the rest of the Celera management team here with me today, that we're transparent and effective in communicating the dynamics affecting our business and also in demonstrating our commitment to realizing the value from our genetic findings, which we expect to both help lead the way to personalize medicine in the coming years and create shareholder value.
Focusing first on BHL, revenue for the quarter was $25.2 million. You may recall that in our conference call with investors last quarter, we indicated that we had not yet seen an impact on our business from the worsening economy through the end of the first quarter. Unfortunately, however, during the recently completed quarter, we did not experience the pickup in sample volume that we had observed during the last four sequential quarters, when sample volume grew at an average of 20% per quarter over the prior year. Indeed, in the second quarter of 2009 compared to the prior year quarter, BHL sample volume grew by only 2% as we lost accounts due to our efforts to collect aging receivables in addition to the broad economic conditions noted above.
As noted in our pre-announcement, we also have experienced a pattern of sporadic denial of reimbursement from certain payers in some territories. For example, in early June, we were advised by our largest private insurance carriers that they would not pay, retroactively, for certain BHL legacy tests, such as homocysteine, HDL 2b, Apo B and Apo E. We are contesting this reversal of coverage based on local coverage determinations. Meanwhile, Medicare and most other PPO’s are paying on these tests. It is a complex situation, and we are trying to both reverse these denials and adjust our business practices to accommodate them.
One of the highest priorities at BHL has been to improve our collections, reduce DSO and move more of our payers under contract. To that end, one of our largest private payers moved under contract in early April and is now paying within 2-3 weeks. Currently, approximately 55% of BHL’s sample volume is either derived from Medicare or contracted private payer patients. We intend to continue efforts to increase the contracted proportion of samples covered over the coming months, which is expected to negatively impact revenues, but improve collections and predictability in managing the business. In the meantime, we collected approximately $25 million during the second quarter of 2009, compared to average quarterly collection rates of about $21 million for the past three quarters. We hope to sustain this level of collections. Moreover, we think we have made the prudent decision to write-off all accounts over 360 days and tests that have been denied for reimbursement.
Also, in an effort to improve the financial profile at BHL, we restructured and redeployed resources in that part of the business to provide our disease management services through a phone and web-based model, which is expected to be more efficient, uniform, and in many cases, easier for patients to access.
We launched a new vitamin D test to the BHL physician base in early July and have already seen more than 15% of the samples coming into the lab now include a request for this test. On the genetics front, we are also seeing sustained adoption of KIF6 testing, we expect to introduce LPA testing by the end of the year, and we anticipate that 9p21 will follow in 2010, with tests for risk for DVT and stroke to follow thereafter.
Turning to our Products business, revenue grew by 7% in this last quarter to $9.7 million from $9.1 million in the prior year quarter, primarily due to increased royalties from Abbott on sales of RealTime™ assays used on the m2000™ system. To date, Abbott has placed around 650 m2000 systems, which continue to generate an income stream for Celera.
Revenue from the Corporate segment in the second quarter of 2009 was $6.5 million compared to $7.8 million in the prior year quarter. The reduction in revenue in the second quarter of 2009 was due to the completion of payments by a licensee, which had been anticipated, in addition to unanticipated reduced royalties received from another licensee, both of which were partially offset by $1.5 million from two new real-time licenses we described last quarter. We expect to record the remaining $4.5 million in fees related to these two new licenses over the next three quarters. I’d like to remind you that one of our licensees that makes quarterly payments will complete that schedule at the end of this year. So, we expect some of these revenues to convert to a royalty base and consequently, to be significantly reduced in 2010.
While the restructuring that we announced on July 22 was primarily focused on BHL, we also reduced headcount in the Products and Corporate segments, and in total we reduced our headcount by approximately 80 full-time positions across Celera nationally. The restructuring will result in anticipated pre-tax charges totaling approximately $3.2 million, and we expect to save between approximately $7 and $8 million on an annualized basis based on these changes, starting in the fourth quarter of 2009.
Against this background of disappointing business results, we believe that we have made substantial progress in determining how best to capitalize on our genetics findings – which we expect to be the driver of future growth and value for Celera. This has always been our intention, and we continue to work toward the objective that these tests will become an integral part of routine clinical care.
KIF6, the gene variant we discovered and BHL broadly commercialized just over a year ago, is being used to identify cardiovascular risk and help direct statin treatment. The acceptance of the test as a tool in cardiovascular disease management in secondary prevention continues to grow and, to date, we have performed nearly 130,000 KIF6 tests at BHL. Recently, working with external collaborators, we have made significant progress in understanding the underlying biology of KIF6, which we believe has important medical ramifications that we plan to present at scientific meetings before the end of the year.
We have also completed the pilot study with a buccal or cheek swab version of the KIF6 test, through which we learned that physicians use the test primarily in three ways: first, to make decisions about statin use in intermediate risk patients who are carriers of the gene variant; second, to optimize treatment to aggressive lifestyle change recommendations and alternative therapies beyond statins for non-carriers; and third, to encourage compliance in carriers already on statins. Based on this market intelligence, we are expanding our cardiovascular business to target the substantially larger primary prevention market, moving beyond secondary prevention where BHL is currently focused.
We believe the pilot study also revealed that the most effective way to capitalize on KIF6 and our other cardiovascular genetic assets is through partnerships that can provide access to physicians involved in primary prevention. To that end, for example, we recently entered into an agreement with Aurora Health Care providing it access to KIF6 testing for its patients. Aurora is a large mid-western health care network. Our expectation is to first educate its cardiologists, which has already begun and then expand the program to its internal medicine and family practice physicians. The approach of targeting the primary prevention market through a “top down” partnering with major health care providers requires that we are flexible in how we offer the testing, either through BHL or by licensing intellectual property to a laboratory affiliated with the health care provider, or through the sale of products from our Products business.
We expect to complement this “top down” approach with “bottom up” sales and physician education efforts in the primary care market, and in the meantime, we are assembling a group of people dedicated solely to the purpose of integrating KIF6 and other new genetic tests into routine clinical practice. This effort will draw on some of the best people in the existing segments of Celera and BHL, but will also require that we bring in new talent as we increase our investment in SG&A to drive broad adoption of new genetic testing. We are fully committed to our mission of making these genetic tests the standard of care in the characterization of cardiovascular disease risk and in the management of the disease.
We have built the expected investment required for this endeavor into our guidance for the remainder of 2009, and you can see this in the SG&A line of our outlook. While it does impact our profitability in the short-term – and probably into next year as well -,we anticipate that this investment to support the adoption of our differentiated, high value proprietary genetic tests, should ultimately yield solid returns.
The majority of our tests are for cardiovascular disease and these include KIF6 for CHD risk and statin benefit followed by the expected introductions of LPA for heart attack and stroke risk and aspirin benefit, then 9p21 for risk and management of modifiable risk factors for CHD, and other genetic tests for risk for thrombosis and stroke. We believe this concentration of tests in cardiovascular disease is important because as we build out our channels and infrastructure to ordering physicians and through our targeted “top down” healthcare partners whom we expect to incorporate KIF6 testing into their routine clinical care, we believe it will be that much easier, and more cost effective, to take additional tests, such as LPA, into the market. The disease indication is not insignificant either: more people suffer from some sort of cardiovascular disease in the U.S. than any other disease.
An important part of our strategy for growth within the Products business is to register new proprietary cardiovascular tests, like KIF6, with regulatory organizations around the world and we expect to receive CE certification for submit the KIF6 test in the first half of 2010, while we continue to work with FDA here in the U.S. to register the test.
We also believe that we have made substantial progress in our lung and breast cancer programs as well. In breast cancer, we are moving forward with the development of m2000 versions of our gene expression tests, which are expected to be registered worldwide. These tests were described at ASCO this year and were recently commercialized under license by LabCorp.
We were also pleased by the presentation of data at this week’s IASLC or International Association for the Study of Lung Cancer meeting regarding the replication of previous data and the preliminary validation of our panel of 9 blood-based protein biomarkers that detected lung cancer with 92% sensitivity and 93% specificity in an independent cohort by immunoassay testing. We expect to partner the future development of this test.
In closing, despite the disappointments of the second quarter and outlook for the balance of the year, we want to underscore that it is our expectation that the basis for future growth for the business relies on the expansion of our menu of high value and high margin genetic tests. We believe that we’ve implemented the structural changes to allow our product and service portfolios to serve as a foundation for the business as we aggressively build this new program out. We believe our strong financial position will serve us well as we implement these strategies for growth and building long-term value.
Now, Ugo DeBlasi will make a few comments regarding the financial results for the quarter and the outlook for the remainder of 2009.
Revenues for the second quarter of 2009 were $41.4 million, compared to $42.7 million for the second quarter of 2008. For the second quarter of 2009, Celera reported a net loss of $31.7 million, or $0.39 per share, compared to a net loss of $104.1 million, or $1.30 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 second quarter of 2009 by $12.6 million. The net loss on a non-GAAP basis, excluding the items listed in the reconciliation table, was $19.1 million, or $0.23 per share, for the second quarter of 2009 compared to a net loss of $1.1 million, or $0.01 per share, for the prior year quarter. Included in the determination of the net loss for the second quarter of 2009 was an allowance for doubtful accounts charge of $20.1 million, or $0.25 per share. This compares to an allowance for doubtful accounts expense of $4.3 million, or $0.05 per share, in the second quarter of 2008.
SG&A expenses for the second quarter of 2009 were $41.1 million compared to $25.2 million in the prior year quarter. This increase was primarily due to the provision for BHL’s accounts receivable over 360 days old and tests that have been denied for reimbursement. These balances were primarily due from patients. We believe this assessment reflects our recent collections efforts, current business conditions and future expectations.
Excluding the allowance for doubtful accounts, SG&A expenses for the second quarter of 2009 were $21.0 million, or 50.7% of revenues, compared to $20.9 million, or 48.9% of revenues in the prior year quarter.
The allowance for doubtful accounts in the second quarter of 2009 was $20.1 million, or 48.6% of revenues, and days sales outstanding were 68. This compares with allowance for doubtful accounts of $5.1 million, or 11.2% of revenues, and DSO were 98 in the first quarter of 2009.
We have taken steps to address our aging of accounts receivable and will continue to implement changes that we believe will o mitigate our exposure to bad debt. Our anticipated move to contract with additional out-of-network payers is expected to positively improve efficiencies in this area. We are also replacing our legacy billing systems and continue to improve processes that support the billing and collections function. The actions we’ve taken to address our exposure to bad debt should make this expense more predictable going forward and we would expect these levels to be more in-line with industry norms for a lab services business of our size – somewhere in the high single digits to low double digits as a percentage of BHL revenue.
R&D expenses for the second quarter of 2009 were $7.4 million, compared to $9.4 million in the prior year quarter, as a result of the completion of certain discovery research and development projects, a reduction in employee-related costs, and the termination of the strategic alliance with Abbott. 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.
In the second quarter of 2009, Celera recorded a pre-tax non-cash charge of $15.7 million for the impairment of intangible assets relating to the trade names of BHL and Atria Genetics that were acquired in October 2007. The impairment charge was a result of broad economic pressures and the effects of changing business conditions.
Celera anticipates that its 2009 financial performance could be affected by various factors, including broad economic pressures and the potential impact on sample volume, reimbursement rates and the healthcare system generally. 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, Celera expects the following performance. I will only touch on key metrics here since the full outlook is contained in today’s release.
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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