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Despite Wide-Ranging Cost Cutting Measures, Ciphergen s Q4 Net Loss Widens to $9.2 Million

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Ciphergen reported during its fourth-quarter earnings call last week that it is continuing to cut costs by reducing headcount, trimming R&D spending, paring back shipping costs, diminishing travel expenses, and subletting space.

Despite these cutbacks, Ciphergen's fourth-quarter revenues fell 35 percent to $6.6 million from $10.1 million during the year-ago period, resulting in a net loss of $9.2 million, or $0.26 per share, versus a net income of $10.3 million, or $0.35 per share in the fourth quarter of 2004.

Ciphergen's cost-saving efforts were undermined during the quarter by $400,000 worth of expenses associated with its second-quarter earnings restatement (see ProteoMonitor 11/11/2005; 12/23/2005). In addition, the company shelled out $630,000 during the quarter in severance pay for two executives who are no longer with the company — namely former CEO Bill Rich and former biosystems division president Martin Verhoef.

However, Gail Page, who replaced Rich about six weeks ago (See ProteoMonitor 12/23/2005) seemed confident that the cost-saving measures would have an impact in the long run.

Turning the Page

Since Page became CEO, Ciphergen has implemented several changes that are intended to cut costs and get more out of the company's assets, Page said.


"We believe that these measures will collectively have an impact as the culture of the company changes."

For the first time in the company's history, a "true commission" program, rather than a bonus program, has been put into operation for Ciphergen's sales force, Page said. The program is intended to focus on revenue from all sources, rather than concentrate only on the number of systems sold. In particular, there is a "major effort" to increase the number of customers who renew their warranty programs after their first year of service, said Page.

In another effort to save dollars, Ciphergen is subletting space and continuing to trim headcount, which is already 27 percent below what it was on June 30, 2005. Plus, research programs that are "tangential to immediate goals" have been cut, resulting in a 20-percent savings in R&D spending, which fell to $3 million in the fourth quarter 2005 from $3.7 million year over year.

In addition, greater oversight has been imposed over travel expenses, and the company has made an effort to use more cost-effective methods of shipment.

"We believe that these measures will collectively have an impact as the culture of the company changes," said Page.

As of Dec. 31, 2005, Ciphergen had $25.7 million in cash and cash equivalents.

SELDI Sales

In terms of its core SELDI business, Page said Ciphergen has "not seen the growth in the systems and chip businesses that we had anticipated" during the fourth quarter.

According to chief financial officer Matthew Hogan, instrument sales, including upgrades and accessories, generated about 40 percent of total revenues, or about $2.6 million, during the fourth quarter, compared with $5.3 million, or about 52 percent of sales, year over year.

Ciphergen placed 19 new SELDI systems in the fourth quarter of 2005, compared with 31 new systems in the year-ago quarter.

Protein Chip sales generated about $1.9 million, or about 28 percent of total fourth-quarter revenues, compared with $2.8 million, or about 27 percent of Q4 2004 revenues. Service revenues, including revenue from collaborative services, maintenance services, and paid training activities, generated about $2.1 million, or about 32 percent of total fourth-quarter revenues, compared with $2.1 million, or 21 percent of total revenues in Q4 2004.

Ovarian Cancer Tests

Ciphergen continues to bank on its potential diagnostics business, namely its ovarian cancer program, to generate future revenue.

The company said it expects to release at least one ovarian cancer test this year with Quest Diagnostics. According to terms of agreement between Ciphergen and Quest, which were disclosed in July 2005 (see ProteoMonitor 7/29/2005), Quest will have an exclusive license to the companies' co-developed diagnostic tests for three years following FDA approval.

Page said Ciphergen is developing "at least two to three tests" as part of its ovarian cancer program.

She declined to give a more detailed timeline for the development of the ovarian cancer tests.

"We can't divulge that for competitive reasons," she said.

In August 2005, the company conducted a "mega assay" with more than 1,000 patient samples to validate a test to distinguish between benign and malignant pelvic mass.

"We successfully validated our biomarkers, and generated more candidate biomarkers," said Page.

In addition, Ciphergen recently conducted a prospective study for the ovarian cancer indication with 202 samples. Results of the study were previewed at the winter Society of Gynecological Oncologists meeting on Feb. 2, and will be formally presented at the SGO annual meeting, which is scheduled to take place March 22 through March 26.

According to Ciphergen, the prospective study showed that its multi-protein biomarker panel, in combination with the standard CA125 ovarian cancer biomarker, had a significantly better positive predictive value that CA125 alone in identifying ovarian cancer among patients with a suspicious pelvic mass. However, it remains to be seen if the test is specific enough to be used for ovarian cancer screening.

Hogan said that Ciphergen does not want to disclose specificity or sensitivity percentages for its ovarian cancer test at this time.

According to Andrew Berchuck, a professor of gynecological oncology at Duke University who spoke to ProteoMonitor last year, a test that is suitable for ovarian cancer screening should have a specificity of at least 99.5 percent.

"If you have too aggressive of a screening test, you could end up doing surgery on people who don't need it, and you could cause more harm than good," he said at the time.

Asked what the potential market is for the ovarian cancer test that Ciphergen is developing, CEO Page said the market for the current CA125 test is around four to five million in the US.

"Those are the types of numbers we're building our model off of," she said.

Ciphergen's test to distinguish benign pelvic mass from malignant pelvic mass would cost around $300 to $500, said Page. However, a test for ovarian cancer recurrence could cost around $2,500, she added.

"How much of the market we could capture and ramp is not clear, but there's a pretty substantial market opportunity," said Page.

Page added that though Ciphergen has an exclusive alliance with Quest in the US to develop and sell its first three diagnostic tests, Ciphergen has the right to go to market in the rest of the world without Quest. The reference lab giant owns 17 percent of Ciphergen's stock.

"We do have certain rights to go to market in the rest of the world however we choose," said Page. "We could partner with an in vitro diagnostics company, another clinical lab, or we could go direct."

Bill Sullivan, the vice president of operations at Ciphergen, noted that Ciphergen could launch its diagnostic in Europe earlier than in the US because the regulatory process there could be less cumbersome.

— Tien-Shun Lee ([email protected])

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