Q1 Revenue In-Line. Amgen Deal Is Encouraging - Analyst Blog
May 10 2013 - 4:53AM
Zacks
By Brian Marckx, CFA
Q1 2013 RESULTS: Revenue
In-Line, EPS Miss on Higher SG&A. Amgen Deal is
Encouraging…
Transgenomic (OTC:TBIO) reported financial results for Q1 ending
March 31, 2013 on May 8th. Revenue was up 2% yoy and dead-on
with our $7.4 million estimate. While Laboratory Services
revenue of $4.4 million was slightly lower than our $4.6 million
estimate, it rebounded nicely from a disappointing Q4 (-6%),
turning in about 11% growth yoy in Q1. As we had anticipated,
the revenue rebound was attributed to accelerating sales of C-GAAP,
the Nuclear Mitome test and at least some (although maybe only
marginal right now) contribution from the newly acquired ScoliScore
test. Meanwhile, revenue from the Diagnostic Tools business
(diagnostic instruments and related consumables) came in at $2.9
million, down about 8% yoy, but just ahead of our $2.8 million
estimate. Also, as we had expected, instruments revenue fell
yoy but consumables posted positive growth (8%). As a
reminder, the majority of our modeled revenue growth of the
Diagnostics Tools business relates to anticipated increasing sales
of consumables, particularly with the introduction of additional
assays such as new cancer kits.
The expected major catalysts to growing near-term revenue in the
Lab Services business continues lie with the company's newer and
higher priced tests including C-GAAP (Plavix response), Nuclear
Mitome, and ScoliScore. Management laid out a multi-pronged
approach to accelerating sales of ScoliScore, which as we noted in
previous updates, could be a multi-million $ per year product for
the company. This includes beefing up their sales force
(which has already commenced), direct-to-consumer marketing, and
collaborating with key opinion leaders to help drive awareness and
generate clinical data - which is expected to lead to published
manuscripts. TBIO is also active in pushing for greater
reimbursement for the test - which as we noted in previous updates
is currently somewhat spotty and has constrained its broader
use. We expect the back half of 2013 will see a much greater
contribution from ScoliScore 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 awareness-building.
Another potential meaningful near-term contributor to the Lab
Services segment (as well as to the Diagnostic Tools segment)
relates to the recently consummated agreement with Amgen
(NasdaqGS:AMGN) whereby the two companies are collaborating on a
KRAS an NRAS gene mutation assay kit to screen patients for
colorectal cancer. The RAScan test is currently available for
research use only (RUO) in the U.S. (which will run through Lab
Svcs) and for clinical use in Europe - which could help accelerate
instrument placements (through Menarini) as well as increase
consumables sales.
As of Q1 2013 TBIO no longer breaks out Laboratory Services revenue
into the respective Clinical Lab and Pharmacogenomics
segments. So while we no longer have insight into the revenue
contribution from each segment, management did indicate on the call
that Pharmacogenomics may take several more quarters until it's
generating significant revenue related to clinical trial business
from pharma partners that the company has alluded to over the
recent past. The deal with Amgen, in our opinion, is a
meaningful step towards potentially also seeing additional revenue
from Pharmacogenomics.
Relative to the Diagnostics Tools business, instruments sales have
been somewhat choppy q-to-q and not likely to be a significant
driver of this segment going forward. The European
introduction started in 2012 through TBIO's distributor, Menarini,
but it has been somewhat anticlimactic so far. The bigger
catalyst to driving growth in the Diagnostic Tools business should
instead be new test kit launches. The aforementioned
colorectal cancer kits should be the first of several new launches
over the near-to-mid term including, eventual ICE COLD PCR
kits.
Revenue
Q1 revenue was $7.4 million, up 2% yoy and in-line with our $7.4
million estimate. Laboratory Services and Diagnostic Tools
revenue were $4.4 million (+11%) and $2.9 million (-8%),
respectively, compared to our $4.6 million and $2.8 million
estimates.
Gross Margin
Gross margin at 49.9% ticked up slightly from the previous two
quarters (48.2%, 48.6%) and was substantially better than our 46.5%
estimate. Management noted on the call that higher sales
prices and better margins on the Nuclear Mitome test benefitted Lab
Svcs margin while instruments mix aided Diagnostic Tools
margin.
Over the mid-to-long term 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 ($3.8) million and ($0.04) compared to our
($2.8) million and ($0.03) estimates. All of the miss came
from higher than modeled operating expenses - mostly SG&A
expense ($6.7MM actual vs. $5.4 million estimate). SG&A
jumped in part to the recent hires to promote C-GAAP and ScoliScore
and also in part to a much higher than average bad debt
provision.
Cash
Transgenomic exited Q1 with $7.7 million in cash and
equivalents. TBIO also has ~$1.6 million available under
their credit facility with Third Security. Cash used in
operating and investing activities were $3.3 million and $1.1
million in Q1. About $847k of the cash used in investing
activities relates to a payment for the ScoliScore
acquisition.
OUR 2013 OUTLOOK
We've again made some updates to our model. We now model 2013
revenue of $32.4 million, implying growth of 3% from 2012. We
look for Laboratory Services and Instruments to generate revenue of
$20.0 million (+4%) and $12.4 million (+2%), respectively. We
think net income and EPS come in at ($12.7) million and
($0.14).
Laboratory Services
Our $20.0 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. The recent Amgen collaboration is a meaningful step
towards accelerating activity in the Pharmacogenomics segment as
well as in development of new assay kits.
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).
RECOMMENDATION / VALUATION
We value TBIO using comp P/S ratio. Based on an average P/S
comp of 5.1x, Transgenomic is valued at approximately to
$2.00/share. The shares currently trade at $0.41. We are
maintaining our Outperform rating.
Please visit SCR.Zacks.com for additional information on
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