Management Remarks for Third Quarter 2009 Earnings Call
- October 28, 2009
Good afternoon everyone and thank you for joining Celera management to discuss the third quarter 2009 financial results that we issued earlier this afternoon. Present today are Kathy Ordoņez, 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 Ordoņez 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. Despite challenging conditions, we were encouraged with the overall performance we posted for the third quarter of 2009. We recorded revenues that were in line with our expectations, and with a higher than expected gross margin at BHL, along with lower operating expenses, this translated into a substantially better than expected bottom line performance for the quarter - as we were close to breakeven on a non-GAAP basis. Our cash and short-term investments increased by approximately $1 million from last quarter to approximately $321 million, with no debt.
The main reason for the decline in revenue in the last quarter was lower Lab Services revenue of $24.2 million compared to $30.1 million in the prior year quarter. This lower revenue was primarily the result of lower reimbursement rates, reflecting the continued impact of certain denied tests that we described last quarter. We also saw a marginal decline in sample volume through the lab in the recently completed quarter versus the prior year period, as we lost some accounts. We believe these losses resulted from our decision to change the delivery of disease management services to a web-based model and our efforts to collect receivables from patients, in addition to adverse economic conditions. It's worth noting that despite the modest decline in sample volume due to these factors, we also saw growth in new physician accounts.
We're implementing a number of activities we believe will return BHL to a growth trajectory for revenue and change its cost structure, which we expect to translate into improved profit margins within the business.
Increasing the sample volume is at the heart of our efforts to reignite growth at BHL, and the highest priority for us in this respect is to drive our cardiovascular genetic testing beyond the secondary prevention market where BHL has traditionally been focused and into the primary prevention market. This involves a broad "top down" approach of creating strong visibility around the importance of genetic testing through national societies and academic centers, partnering with major health care networks and pushing this through with new local representatives on the ground and clinical marketing initiatives to support adoption in major markets.
A good example of how we're implementing the "top down" approach is today's announcement that BHL entered into agreements with Geisinger Medical Center and Proven Diagnostics, a clinical laboratory service recently launched by Geisinger Health System. Proven Diagnostics will market select offerings from BHL's menu of proprietary tests and services aimed at optimizing cardiovascular treatment. Separately, both Proven Diagnostics and Geisinger Medical Center will be the first external clinical laboratories to have access to KIF6, providing them with the ability to offer a more personal approach to the treatment of patients with cardiovascular disease.
Building on the pilot program implemented over the summer, we have assembled a dedicated marketing team and 5 local representatives in southern CA, the northwest, Phoenix, Las Vegas, and Denver who are focused solely on the primary prevention opportunity for our cardiovascular genetic tests. We are working now to fill out a national program to support this effort in the coming months, including about 20 local representatives. All in, we expect this effort to involve over 30 people by the middle of next year, including additional resources providing physician education, reimbursement, and other support activities. Our strategy is to bring on new accounts for genetic testing, and then focus on converting them to BHL's traditional disease management offering.
Physician education is integral to the adoption of our cardiovascular genetic testing. We presented data at three large cardiology meetings in August and September: one included CME Tutorials in the Tetons 35th annual meeting on new genetic issues that described KIF6, 9p21, and LPA; a second was an overview of KIF6 data at the National Lipid Association Scientific Forum in Cincinnati; and a third was the inclusion of KIF6 and LPA in a symposium at the Transcatheter Cardiovascular Therapeutics 2009 conference in San Francisco. We have also been an active participant in invited grand rounds and numerous CME courses, and we expect to have a strong presence at next month's AHA meeting in Orlando, where we will present data and sponsor a live satellite event discussing the role of cardiovascular genetics with a panel of four key opinion leaders.
To complement these efforts, we have also assembled a group of cardiovascular medical experts expected to help guide the business around medical developments and facilitate the adoption of our cardiovascular genetic tests.
Another important component of our growth strategy includes expanding the menu of tests at BHL, which we believe should allow us to leverage the existing cost base for added return. Since launching a new vitamin D test to the BHL physician base in early July, for example, we have already seen that approximately 25% of the samples coming into the lab now include a request for this test. On the genetics front, we're also seeing sustained adoption of KIF6 testing, and the acceptance of the test as a tool in cardiovascular disease management continues to grow. To date, we have performed approximately 160,000 KIF6 tests at BHL, which we believe is an outstanding achievement for a new molecular test.
Last week, BHL launched a new laboratory developed testing service for the LPA gene variant into both the primary and secondary prevention markets. Published data indicate this testing service helps identify people who benefit from taking aspirin to reduce risk of heart attack and stroke and, importantly, people whose risk for a major bleeding event outweighs the benefit they derive from the protective effects of aspirin by up to 15-fold.
Last quarter, we also initiated a study with Medco to evaluate whether testing for KIF6 increases patient adherence with statin therapy through a prospective, randomized, open-label, multi-center study called AKROBATS. The study is expected to run over 18 months to address the primary question of whether patient adherence with newly prescribed statin therapy is higher in those patients tested for KIF6 status than in those who are not offered the test. As part of the study, physicians will be educated on the clinical utility of KIF6 testing. We are hopeful that these physicians may order the test outside of the study to better manage cardiovascular disease in their patients.
We also recently licensed three laboratories to develop and offer their own KIF6 test in Germany as part of our global effort to drive adoption of cardiovascular genetic testing. All three laboratories are expected to start commercialization of KIF6 testing early next year. We expect to achieve CE registration for our KIF6 test during the first half of 2010.
Another important activity at BHL has been to improve our collections and lower our allowance for bad debt. We believe we made considerable progress in this endeavor as we reduced bad debt to our expected goal this quarter and we collected nearly $24 million during the third quarter of 2009.
From a payer perspective, last quarter we spoke about our experience of reversal of coverage on certain legacy tests at BHL based on local coverage determinations by a large payer. We continue to contest this decision - especially since Medicare and many PPO's are paying for these tests. It is a complex situation, and we are trying to both reverse these denials and adjust our business practices to accommodate them.
Separately, we learned recently that rather than send payments to us for tests we performed for its members where we are out of network, Blue Cross / Blue Shield resumed sending checks as payments to its members. This shifts the onus to us to pursue and collect these outstanding monies from the patients themselves. As you'd imagine, this impacts our collections activities and exposes us to additional bad debt risk. We understand this practice is occurring in all states except Alabama, where we moved in network in April of this year. We're in dialogue with BC/BS to move under contract as soon as possible, but this process can take a long time. We're working on how best to resolve this, and we intend to explore all potential avenues to rectify this situation.
As you may recall, we restructured and redeployed resources at BHL to provide our disease management services through a phone and web-based model. While we believe this has resulted in a more efficient, uniform, and in many cases, easier access model for patients, the change impacted the business in the third quarter as physicians adjusted to this new practice. However, we believe this is not only a more cost effective means of doing business for us, but it also provides a more scalable business model that allows us to move into new markets more quickly. The emergence of our proprietary genetic tests, such as KIF6 and LPA, allows BHL to target a new client base - we think effectively providing a channel to move these new accounts into disease management. We believe we're on the right path with the new model, although it may take a while until we see the desired effects of this change.
Early in 2010 we expect BHL to launch a laboratory developed test for the 9p21 locus that identifies people at risk for early MI, and to add a second laboratory developed genetic test later in the year. We believe this concentration of tests in cardiovascular disease genetics provides us with a platform for the future growth of our business.
Turning to our Products business, revenue in this last quarter was $10.0 million compared to $10.5 million in the prior year quarter, driven by royalties from Abbott on sales of RealTime assays used on the m2000 system. This decline in revenues in the third quarter of 2009 was largely attributable to the lumpiness of sales of Celera-manufactured products, with the prior year quarter including a large order for these products. Separately, Abbott had placed more than 700 m2000 systems by the end of September, 2009. These royalties continue to generate an important income stream for our Products business and while they contribute less to the revenue growth on a percentage basis they do however have a substantial impact on the business's bottom line.
An important part of our strategy for growth within the Products business is to register new proprietary cardiovascular tests, like KIF6 and LPA. We are moving forward to register the KIF6 test in the US and expect to follow this with registered tests for LPA and our other cardiovascular assets.
Revenue in our Corporate segment in the third quarter of 2009 was $5.8 million compared to $5.2 million in the prior year quarter. Recall that in the third quarter of 2008 we moved to a cash basis for Cepheid, so there was no royalty revenue from this licensee in that quarter. I'd also like to remind you that one of our licensees that makes quarterly payments will complete that schedule at the end of this year and two other additional licensees will complete their payment schedules in the first quarter of 2010. As these licensees shift to solely paying running royalties in 2010, we expect revenues in our Corporate segment to be significantly lower than what we expect to record in 2009.
So, looking out beyond 2009, we're focusing our efforts on building value from our cardiovascular assets in our Lab Services and Products businesses. We have considered the initial investments required for this endeavor in our guidance for the remainder of 2009, and our investments are anticipated to continue into 2010. We believe that we're implementing the required structural changes to enable our product and service portfolios to serve as a foundation for the business as we aggressively build this new genetics program. We view the strength of our balance sheet as a strategic asset that enables our ongoing investment toward the commercialization of our genetic tests in cardiovascular disease, while providing us with additional strategic options for the future.
I'll close my comments with a brief update on the cathepsin K inhibitor that we licensed to Merck, and which is currently in Phase 3 trials for the treatment of osteoporosis. You may have recently seen some press on this from Merck, which has disclosed it expects to file an NDA for this compound in 2012. This compound could be a potential replacement for Merck's Fosamax franchise, which generated more than $3 billion in 2007 and $1.5 billion in 2008 after Merck lost marketing exclusivity in the US. Under the terms of our agreement with Merck, Celera will receive certain milestone payments and mid to mid-high single digit royalties upon the commercialization a drug.
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 third quarter of 2009 were $40.0 million, compared to $45.8 million for the third quarter of 2008. For the third quarter of 2009, Celera reported a net loss of $7.4 million, or $0.09 per share, compared to a net loss of $7.0 million, or $0.09 per share, for 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 third quarter of 2009 by $7.1 million, and included expenses associated with the previously announced restructuring program and other charges. Net loss on a non-GAAP basis, excluding the items listed in the reconciliation table, was $0.3 million, or at breakeven on a per share basis for the third quarter of 2009 compared to net income of $0.6 million, or $0.01 per share, for the prior year quarter.
SG&A expenses for the third quarter of 2009 were $22.6 million compared to $25.2 million in the prior year quarter. The decrease was primarily due the reduction of allowance for doubtful accounts of $2.6 million in the third quarter of 2009 compared to $3.8 million in the prior year quarter, and lower compensation and employee-related costs.
Excluding the allowance for doubtful accounts, SG&A expenses for the third quarter of 2009 were $20.0 million, or 50.0% of revenues, compared to $21.4 million, or 46.7% of revenues in the prior year quarter. Days sales outstanding in the third quarter of 2009 were 71 compared to 68 in the second quarter of 2009.
We continue to closely monitor our aging of accounts receivable and exposure to bad debt. Our efforts to improve the systems and processes that support the billing and collections function are progressing as expected. We believe our actions are making this expense more predictable and allow us to identify and address issues timely. Assuming we can maintain current DSO and collection levels, we expect our bad debt 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, which is where this variable came in this quarter.
R&D expenses for the third quarter of 2009 declined by $1.7 million compared to 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. Operating expenses were generally lower than what we had anticipated in the third quarter of 2009 due to timing of certain projects, and we expect to incur some of these operating expenses in the current quarter.
The restructuring we announced in July resulted in a pre-tax charge of approximately $3.2 million, and we expect to save between approximately $7 - $8 million on an annualized basis, starting in the fourth quarter of 2009.
Celera anticipates that its 2009 financial performance could be affected by various factors, including acceptance and utilization of our testing services and diagnostic products, reimbursement practices, and economic pressures 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.
For 2009, total revenues are anticipated to be $163 - $167 million, the same mid-point as prior guidance of $160 - $170 million.
For 2009, SG&A expenses are anticipated to be $110 - $114 million, compared to prior guidance of $110 - $118 million, and R&D expenses for 2009 are anticipated to be $28 - $30 million, compared to prior guidance of $28 - $32 million.
For the fourth quarter, Celera anticipates a net loss of $4 - $6 million, or $0.05 - $0.07, on a non-GAAP basis.
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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