TBIO: Look For Resurgence In 2013

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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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