Third Wave hopes to revive its slumping revenues partly with new diagnostics, including a test to help guide warfarin treatment and another to detect human papilloma virus.
The company this week posted disappointing fourth-quarter earnings featuring a 28-percent drop in revenues and an increase in losses year over year. In a conference call with investors, Third Wave officers presented the quarter's results alongside a three-point plan to boost its prospects in the long term as it continues its fitful switch to molecular diagnostics from genomics tools.
That plan involves "immediately" launching new diagnostics and other products, controlling the budget to ensure effective R&D investment, and exploring partnering arrangements that can help Third Wave widen distribution and product adoption.
Third Wave plans to bring the warfarin and HPV tests to market "as quickly as possible," CEO Kevin Conroy said during the call.
The former test should launch this year, pending FDA clearance, said Conroy. "While this market is still emerging, we know that there are more than 300,000 new prescriptions written for these blood thinners each year," he said. The company is in discussion with potential partners about how to accelerate distribution of the test.
"We certainly expect [the FDA to decide whether to relabel warfarin] this year — most likely in the first half of this year."
In November, the FDA's Clinical Pharmacology Subcommittee of the Advisory Committee on Pharmaceutical Science voted to relabel warfarin to reflect the ability of genetic tests to guide dosing. The FDA typically follows the decisions of its subcommittees.
Third Wave doesn't know what actions the FDA will take regarding warfarin relabeling , although "we certainly expect [the FDA's to make its final decision] … this year — most likely in the first half of this year," said Conroy. "That's one of the reasons we're very focused on getting that product to the FDA and approved as quickly as possible."
The more valuable of the two diagnostics, however, is the HPV test, which the company plans to submit for FDA clearance in 2007, said Conroy. "The financial impact of capturing even a small portion of the HPV market in 2007 would be significant for the company and our shareholders," he said.
The worldwide market for HPV testing is about $150 million and is growing at 30 percent to 35 percent annually, with the potential to grow to $1 billion, said Conroy. The US share of that potential market is "more than $500 million, or over 35 million tests," but Third Wave believes that between 15 percent and 20 percent of that market is currently penetrated, he said.
Meantime, Third Wave is studying additional applications for its UGT1A1 test. "The UGT1A1 gene is being examined for its effect on both new and existing drugs beyond [Camptosar]," Conroy said. "Studies are ongoing to determine the role it also plays in predicting the efficacy of new and existing drugs." Similarly, Camptosar, the colorectal cancer drug for which Third Waves test is now used to determine efficacy, is being evaluated for 15 new indications, he said.
Third Wave also plans to submit its cystic fibrosis inPlex product to the FDA during 2006, said Conroy.
The company will provide a further update on its diagnostics pipeline during its second-quarter conference call in July or August, he said.
"You will see a highly focused and disciplined company in 2006 — a company that will invest in the growth of our clinical molecular diagnostic business by actively managing the company's cost structure," said Maneesh Arora, the company's new CFO.
The company's recent moves to settle patent-related lawsuits have been part of an effort to control costs, in part to ensure that the firm will be free to invest in the clearance of its HPV assay with the FDA, said Conroy.
These moves include Third Wave's decision to take a license from Innogenetics for hepatitis C virus diagnostics rather than pursue legal options; its agreement with Bayer Healthcare and Chiron to quit litigation regarding HPV diagnostics; as well as its agreement with Digene to seek dismissal of lawsuits also related to HPV diagnostics. Only the company's lawsuit against Stratagene remains to be completely resolved, as Stratagene appeals the verdict against it. Conroy said Third Wave expects that process to run its course in 12 to 18 months.
Third Wave's revenues for the three months ended Dec. 31, 2005, fell to $5.8 million from $8.1 million in the fourth quarter last year. Revenues fell short of expectations, and the company used more cash than planned, said Conroy.
The company's quarterly net losses increased to $5 million from $4.7 million in the year-ago period, while the company's net loss for the full year grew to $22.3 million from $1.9 million in 2004.
Several times during the call, officers referred to the firm's 18-percent growth in US molecular diagnostics revenue during the full year of 2005, as well as a $23-million decline in Japanese research revenue, but they did not directly address reasons for the 9-percent decline in fourth-quarter diagnostic revenue until Robert W. Baird analyst Quentin Lai asked them.
Answering Lai, Conroy cited the timing of orders and a decline in sales to countries other than the United States. "Some of that [decline] is related to timing of orders, but there's also a mix-shift," he said. "We did see … good growth in our Q4  US clinical results offset by some … Japan and [European Union] declines. … Those are the two key factors that are driving that decline," he said.
In fact, a decline in Japanese research revenue made for "unfavorable year-over-year top-line comparisions each quarter," said Conroy.
The company is assuming very little revenue from its clinical diagnostics segment will come from outside the US this year, Conroy said. The company will focus on enhancing its distribution capabilities in Europe during 2006, he added.
"We anticipate that research revenue [in Japan] will continue to decline in 2006, and despite the growth we expect in clinical molecular diagnostics, total revenue for the year will be between $23 million and $25 million as a result," Arora said, which would represent either a decrease of 4 percent or an increase of 5 percent, year over year.
Third Wave's R&D spending for the fourth quarter declined to $1.8 million from $2.9 million in same quarter one year prior. The company is "committed in 2006 to increasing R&D spending, with the majority of this increase in HPV clinical trial costs," Arora said.
As of Dec. 31, 2005, the company had cash, cash equivalents, and short-term investments totaling $38.7 million.
The company plans to become profitable "towards 2007," said Conroy, although he declined to say when the company would become cash-flow positive.
— Chris Womack ([email protected])