Transgenomic Reports Second Quarter 2012 Financial Results

Transgenomic, Inc. reported financial results for the three and six months ended, June 30, 2012, and provided a business update.

“In the second quarter, our core businesses delivered strong, fundamental growth, enabling significant progress in many of our strategic initiatives. Compared to the second quarter of 2011, our Laboratory Services segment grew 41% and our Diagnostic Tools segment grew 17%,” said Craig Tuttle, President and Chief Executive Officer. “In the second quarter, we completely recovered from the sample processing backlog in our Clinical Laboratories division that we discussed last quarter and that arose in connection with the failure of the laboratory information system (“LIMS”) at our New Haven facility. Further, with the improvements made to our LIMS, we are well positioned for the continued growth in volumes that we expect in our Clinical Laboratories division following the launch of our C-GAAP® (clopidogrel genetic absorption activation panel) test, a simple but comprehensive saliva test that accurately predicts a patient’s response to Plavix® (clopidogrel), particularly following our recent announcement concerning Medicare coverage for our C-GAAP test.”

Recent Corporate and Business Events

Some of Transgenomic’s recent accomplishments of significance include:

•    Launch of Breakthrough Blood-Based Cancer Gene Testing Technology: In June, the Company announced the commercial launch of its REVEAL® Kit which utilizes ICE COLD-PCR mutation detection technology, a breakthrough technology enabling unmatched sensitivity and complete DNA mutation detection using the standard sequencing equipment already installed in laboratories around the world. This extremely high sensitivity enables detection of mutations from virtually any sample type including tissue biopsies, blood, and circulating tumor cells (CTCs). The broad use of ICE COLD-PCR has the potential to revolutionize cancer screening, diagnosis, monitoring, and therapy selection since it has the ability to perform safer, less invasive, and more frequent assessments of a cancer and its mutations, all through a simple blood draw.

•    Secured High-Value Commercial Collaboration with the Medical College of Wisconsin: In July, the Company announced a commercial collaboration agreement with the Medical College of Wisconsin Laboratories, a world-renowned institution with a robust presence in genomics and genetic testing, to offer next-generation genetic testing services. In addition to traditional sequencing services, MCW is the first lab to offer Transgenomic’s proprietary NuclearMitome Test which is the most comprehensive test available to detect mitochondrial disorders.

•    PIK3CA Gene Patent Issued: In June, the Company announced that the U.S. Patent and Trademark Office issued patent number US 8,137,919 entitled “Method of Determining the Sensitivity of Cancer Cells to EGFR Inhibitors including Cetuximab, Panitumumab and Erlotinib.” The patent inventors demonstrated that key mutations in the gene PIK3CA are powerful predictors for the efficacy of EGFR-targeted cancer therapies. The addition of this patent allows Transgenomic to effectively apply high sensitivity mutation detection technologies, such as SURVEYOR® Scan, REVEAL® ICE COLD-PCR and BLOCker™-Sequencing, to PIK3CA assays in order to be able to detect genetic variations in very low mutant load samples and is a valuable addition to its genetic biomarker intellectual property portfolio.

•    Acquired Clinical Sample Biorepository from Gene Logic: In May, the Company acquired biorepository assets from Gene Logic, Inc. The biorepository contains thousands of diverse, high quality human tissue samples and extracted DNA specimens that can be used to validate diagnostic assays developed by Transgenomic. This biorepository acquisition provides strategic and operational benefits as well as significant long term cost savings.

•    Achieved CE IVD Mark in Europe for the WAVE MCE System and SURVEYOR® Scan KRAS Kit: In May, the Company achieved CE IVD Mark registration in Europe for the diagnostic use of its proprietary WAVE MCE System and SURVEYOR® Scan KRAS Kit. This kit contains a simple, yet highly sensitive test to identify mutations in the KRAS gene, which are key determinants of the effectiveness of modern cancer drugs. Gaining the CE IVD Mark expands the market reach significantly by allowing product sales in the European Union.

•    Additions to Business Development Team: In June, the Company announced the appointment of John M. McAuliffe as Vice President of Business Development, Neurology, and Matthew W. Beer as Vice President of Business Development, Oncology. Mr. McAuliffe and Mr. Beer have strong backgrounds in business development for the life sciences and will lead the Company’s expansion efforts in their respective areas of focus.

Second Quarter Financial Results
Net sales for the second quarter of 2012 were $9.1 million compared with $7.7 million for the same period in 2011. This revenue total includes the testing volume that was delayed by the LIMS failure at the end of first quarter. All delayed samples were completed in the second quarter along with the higher volume of Familion samples received.

Gross profit for the quarter was $4.6 million or 50% of net sales, compared with gross profit of $4.6 million or 59% of net sales for the same period in 2011. The lower gross profit margin for the quarter is primarily attributable to costs incurred in connection with the failure of the New Haven LIMS, including costs relating to repairs and processing of the sample backlog, a change in the mix of our revenues and the impact of foreign currency valuation changes.

Operating expenses were $5.9 million during the second quarter of 2012, compared with $6.2 million in the prior year. The decrease in operating expenses is primarily due to lower stock compensation and bad debt expenses.

The net loss for the second quarter of 2012 was $0.6 million or $0.01 per share compared with a net loss of $6.0 million or $0.13 per share for the second quarter of 2011. The decrease in net loss is primarily due to items of income or expense resulting from the adjustment in fair values of our preferred stock and related warrants and our warrants to purchase common stock.

Modified EBITDA, which is a non-GAAP measure that Transgenomic views as an appropriate and sound measure of the Company's results, was a loss of $632,000 for the second quarter of 2012 compared to a $369,000 loss for the same period for 2011.

Cash and cash equivalents were $6.3 million as of June 30, 2012, compared with $4.9 million as of December 31, 2011. In addition we had short term investments of $9.0 million as of June 30, 2012.

Six Month Financial Results
Net sales for the six months ended June 30, 2012 were $16.3 million compared with $15.1 million for the same period in 2011. Gross profit was $7.7 million or 47% of net sales, compared with gross profit of $8.7 million or 58% of net sales for the same period in 2011. The lower gross profit margin for the quarter is primarily attributable to costs incurred in connection with the failure of the New Haven LIMS, including costs relating to repairs and processing of the sample backlog, a change in the mix of our revenues and the impact of foreign currency changes.
Operating expenses were $11.5 million for the six months ended June 30, 2012, compared with $11.1 million in the prior year.

The net loss for the six months ended June 30, 2012 was $3.3 million or $0.05 per share compared with a net loss of $8.8 million or $0.19 per share during the comparable period of 2011. The decrease in the net loss is primarily due to items of income or expense resulting from the adjustment in fair values of our preferred stock and related warrants and our warrants to purchase common stock.