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Transgenomic Inches Toward Profitability via Consolidation, Growth in Research Services

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Wrapping up a quarter in which it aggressively reduced costs through consolidation of its operations and saw revenues in its discovery research business grow by 300 percent, Transgenomic appears to be moving toward a better financial situation.
 
“We are investing in our strongest growth opportunities, controlling costs aggressively, and managing the transition from an unprofitable to a profitable company,” Transgenomic CEO Craig Tuttle told investors during the company’s second-quarter earnings call this week.
 
Tuttle said Transgenomic expects to break even by year end and reach $25 million in annual sales.
 
Transgenomic posted a net profit in the second quarter ended June 30 of $226,000 compared to a net loss of $383,000 for the second quarter of 2006. Since the company reported $ 11.2 million in net loss in the fourth quarter of 2005 due to its decision to liquidate its Nucleic Acids operating division, it seems quarter-over-quarter Transgenomic has been making changes to aggressively reduce costs.
 
The 2007 profit included $937,500 from the sale of Pinnacle Pharmaceuticals in May and $647,000 in expenses related to restructuring activities. Operating expenses from continuing operations were $4.2 million during the second quarter of 2007 compared to $3.4 million during the same period of 2006.
 
Excluding the sale of Pinnacle and the added restructuring costs, the company would still be very close to breaking even for the quarter with less than a $100,000 net loss, according to Debra Schneider, Transgenomic chief financial officer.
 
Transgenomic’s restructuring plan includes three components, Schneider said. First, Transgenomic’s Omaha, Nebraska, facility saw a “reduction in force;” second, the company closed its Cramlington, UK, production facility; and third, it closed its administrative office outside of Paris, France. The company did not say how many employees were let go from the Nebraska site.
 
Tuttle said the company expects the restructuring to reduce the company’s operating expenses by $1.5 million, and that additional planned reduction activities should also save $250,000 in operating expenses.
 
Transgenomic expects to complete these restructuring efforts in the third quarter. “Once these activities are complete, we will have one remaining site internationally that will be located in Glasgow, Scotland,” Schneider said during the earnings call. “We have completed the Omaha, Nebraska, reduction. We are well underway on the production closure, and we have made good progress on the French office closure.” According to Schneider, the fourth quarter should show the majority of the improvement to the company’s cost structure.
 
Revenues from continuing operations were $6.3 million during the second quarter of 2007, slightly up from the $6.2 million accrued during the comparable period of 2006. Most of the increase came from Transgenomic’s discovery research business, which includes its CLIA laboratory and pharmaceutical research services. Revenues for this division were up 300 percent in the second quarter, netting $521,000, with CLIA services driving a majority of that growth.
 
According to Tuttle, the growth in revenues from the CLIA lab is “due to greater awareness of the value and accuracy of our services,” as well as an increase in sales and marketing investment.
 
“We’re beginning to add key resources to continue growing this business particularly from an increased field sales focus. Our discovery research business is growing due to servicing our pharmaceutical partners now and an expanding awareness in the market for the value of mutations driving or causing disease, particularly cancer,” he added.
 
Transgenomic completed seven projects for pharma partners and netted two new contracts with pharma partners during the quarter, Tuttle noted, without giving further details.
 

“We are investing in our strongest growth opportunities, controlling costs aggressively, and managing the transition from an unprofitable to a profitable company.”

“We believe this business will continue to grow based on the current projects we have underway and the projects we have under negotiation,” he said. “There is a substantial volume of mitochondrial disease testing that can be done and that we can capture in the marketplace, and a variety of genetic markers for inherited diseases that we are targeting or already providing services for that will further drive that growth.”
 
Despite the addition of new projects with pharma partners, Transgenomic’s existing research relationships have been slow to come to fruition. According to Schneider, second-quarter results were in line with expectations with one exception: the company’s pharmaceutical research group.
 
The timing of this division’s ongoing research projects was slower than hoped, Schneider said, but “we are starting to see the samples come in from our partners,” she added.
 
In recent months, Transgenomic announced a deal with OSI Pharmaceuticals for cancer genetic analysis, renewed its collaboration with Fiuotecnica to develop and market a gene panel for heart disease, and developed a relationship with Arup Laboratories to provide reference laboratory services for the analysis of patient samples for mitochondrial DNA mutations.
 
Meanwhile the company’s bioinstruments sales were down 10 percent to $3.4 million from the previous quarter. Transgenomic sold 17 Wave instruments in the second quarter, compared to 24 Wave instruments during the same period in 2006. Additionally, bioconsumables sales were down 3 percent to $2.2 million.
 
Transgenomic’s products include its Wave DHPLC Systems, Surveyor Detection Mutation products, and Cytogenetics Automated Systems. Transgenomic’s discovery and lab services group uses these products to offer mutation scanning tests for more than 700 cancer-associated genes. The group also offers more than 60 CLIA-validated diagnostic tests to pharmaceutical and biotech companies, as well as research and clinical laboratories.
 
Tuttle noted that he plans to raise the company’s profile by doing more speaking engagements at scientific conferences, as well as form a scientific advisory board with nationally recognized members and bring in an investor relations group. 
 

As of June 30, Transgenomic had $7.9 million in cash and cash equivalents.

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