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Third Wave, Fresh from Restructuring, Nurtures Molecular Dx Goals

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At A Glance

NAME: Rod Hise

TITLE: Manager of Corporate Communications, Third Wave Technologies

AGE: 39

 

Third Wave is a company in transition. In the waning days of 2002, the firm was putting the finishing touches on a massive restructuring that saw headcount shrink by 125 people.

Falling revenue and rising net losses also forced the company to shutter its in-house oligonucleotide manufacturing for research projects (the company continues making oligos for its clinical products), sell much of its manufacturing equipment, and shave its break-even point to the low $40 millions from $125 million.

These days, Third Wave appears to be rounding a corner. Though its first-half revenues and R&D spending continue to fall year over year, the company is marking modest growth in its nascent molecular diagnostics business as it nears the end of 2003.

Third Wave also recently scored a legal victory in a patent-infringement skirmish with EraGen. In exchange for Third Wave’s promise to drop the suit, filed last September, EraGen agreed to cease developing and selling its Gene Code products 1.0, 1.2, and 1.3, and will no longer use technologies employing invasive cleavage.

“EraGen is a small, emerging company, and we decided our funds are better spent on research and development and introducing new products, rather than on protracted litigation,” said Irene Hrusovsky, EraGen’s president and chief executive officer. The statement might just as easily have come from Third Wave chief Lance Fors.

There have been other bright spots for the small Madison, Wis., company. Last November, CFO John Puisis blamed Third Wave’s poor earnings during the second half of the year on hiccups in the Japanese market, which is “very important” to Third Wave, said spokesman Rod Hise. This week, Puisis was in Japan, and though Third Wave would not specify the nature of his trip, the company has disclosed that researchers at the Riken Center and the University of Tokyo have begun using the Invader technology to analyze their country’s share of the genome for the Hap Map Project.

SNPtech Reporter caught up with Hise to talk about where Third Wave stands financially, and how it sees itself in its market.

What, in broad terms, is the current state of Third Wave’s financials?

Third Wave reported continuing financial improvement in the second quarter. We reported improved revenues for the third consecutive quarter and continued to show very strong growth margins of more than 60 percent again for the third consecutive quarter.

We continued to improve our cost structure and to aggressively manage our cash. In addition, our financial condition continues to improve.

In April, CEO Lance Fors said: “Now our focus is on building our clinical molecular diagnostics business.” Over the past two year-over-year quarters — the first quarter and second quarter (see page 6) of 2002 and 2003 — Third Wave has reported fallen revenues and decreased R&D spending. What will the company do to ensure that Lance’s goal will be met?

We’re already beginning to see some fulfillment of that promise. If you take a look at year-over-year clinical molecular diagnostic revenue for the first and second quarter, it … doubled. Third Wave continues to be a company that is transitioning to clinical molecular diagnostics, but we’re on track [in this space]. We’re making very good progress.

What exactly is this track?

This track is to transition the company — a transition that began with the restructuring last year-from one-time predominantly low-margin revenue derived from large genetic research projects to recurring higher margin clinical diagnostic product revenue.

We streamlined and refocused the company’s operations in late 2002. The financial and operational restructuring of the company is complete, and now we are continuing to transition the company’s revenue mix from revenue derived from research products to clinical molecular diagnostic revenue.

But you’re not planning to abandon the former for the sake of the latter — you’re going to continue selling the Invader, but you’re also going to increasingly use the platform to make ASRs?

That’s correct.

As I said earlier, R&D spending over the first half of this year has fallen when compared with the same period in 2002. Will R&D spending increase in the second half — you appear to have enough projects to fund?

We haven’t talked about where we see our R&D spending, so I really can’t say. But I think we are very comfortable with the resources we have behind building what we think will be a very attractive product pipeline that will secure the long-term growth of the company.

Let’s talk about the Invader. The platform helped you make 10 ASRs to date. Your web site reports you have ASRs for use in CLIA-registered labs, including tests for cystic fibrosis, Factor V Leiden, ApoE, Tay-Sachs, and a new one for Connexin 26. The site also said Third Wave is “currently developing a number of additional clinical products for a variety of applications.” How many more are planned, what disease states are targeted, and when do you expect to market them?

We have said over the last two quarters that we continue to build a very attractive product pipeline; a pipeline of applications for the core Invader technology. But for competitive reasons, we will continue to refrain, at least for the next quarter or so, from talking about specific products that may be [in development].

How about in general terms. How many new ASRs can customers and investors expect to see by the end of the year?

We have talked about three general markets: genetic testing, emerging pharmacogenomics, and infectious-disease testing.

Infectious disease and genetic testing is obvious — the ASRs you’re marketing are addressing these areas. Tell me about your pharmacogenomics goals. I thought the first two categories — genetic testing and infectious-disease testing — are both components of pharmacogenomics?

We will continue to refine our focus on specific [pharmacogenomics] targets. For now, the company remains focused on pursuing emerging opportunities in pharmacogenomics.

Other companies in the SNP-genotyping and molecular diagnostics space are continuing to diversify; they tell us the markets are becoming increasingly crowded, and there is the risk of creeping commoditization. Do you agree with this? If not, why? If yes, does Third Wave plan to diversify?

We are focused very, very sharply on continuing to transition the company to molecular diagnostics. … While the market continues to be very competitive, we think we are competing very nicely in the market. And because of the uniqueness of our product, we don’t see the kind of commoditization that may occur with ASRs built on other platforms.

Third Wave closed 2002 with around $60 million in the bank. While that is more than the industry average — the SNP-genotyping space on average closed 2002 with just under $45 million — your company is still in the midst of a transition, revenues are down year over year, and you’re very quiet about future product releases and the specific direction Third Wave is going. What will the company do to ensure that cash-burn doesn’t get out of hand, and that its cash position at the end of the year doesn’t evaporate?

Third Wave is going to demonstrate that the company’s strategy is working, and that we’re going to continue to meet the objectives that we set out … at the beginning of the year: higher gross margins, lower cost structure, and improved cash situation.

We’re going to continue to move the company toward higher revenue with a focus on molecular diagnostics. We indicated earlier in the year that clinical revenue will exceed $10 million for 2003, and we continue to affirm that goal. In addition, Third Wave is continuing to announce key product launches beginning in the second half of 2003, and we also look forward to providing details of key customers later in 2003.

So we continue to feel that our transition into molecular diagnostics is on track and that the fruits of our efforts will begin to become increasingly apparent later this year and into 2004.

Editor’s note: In April, SNPtech Reporter published a financial snapshot of nine pure-play SNP-genotyping companies [See tables here] — Lynx Therapeutics, Orchid Biosciences, Genaissance Pharmaceuticals, DeCode Genetics, Sequenom, Illumina, Pyrosequencing, Third Wave Technology, and Transgenomic.

Today’s interview is the second of nine sessions with chief financial officers — or, in the case of Third Wave, a communications manager because CFO John Puisis was on business in Japan — for each of these companies. The goal of these interviews, which are conducted soon after each firm releases its mid-year earnings report, is to shed light on the financial health of the companies mid-year, and to gauge projections for the second half.

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