ScoliScore/C-GAAP Should Drive Clinical Lab Revs in 2013 By Brian Marckx, CFA

Q3 2012 RESULTS

Transgenomic (TBIO) reported financial results for Q3 ending September 30, 2012 on November 8th. Revenue fell just over 4% yoy and was well below our estimate due to relatively disappointing numbers from the Pharmacogenomics and Instruments/Diagnostics segments. While Clinical Lab revenue was dead-on with our $4.5 million estimate, the 10% yoy growth in this segment was more than offset by a very poor showing in Pharmacogenomics ($220k, -60% yoy) and Instruments ($3.2 million, -12% yoy).

As a reminder, Pharmacogenomics activity can be highly variable q-to-q, largely dependent on customer directives and not in direct control of TBIO which makes forecasting this line difficult on a short-term basis. Nonetheless Pharmacogenomics revenue in aggregate has disappointed over the first nine months of the year - which we think relates at least in part to longer than anticipated timelines (and potentially delays) of TBIO's phase III clinical trial customer(s). TBIO is still awaiting the green-light from a pharma customer to commence processing for a phase III trial - our model had assumed this work would have already commenced - we are now pushing this assumption and the related revenue back to 2013.

The quarter did have some important positive highlights, namely the ScoliScore acquisition and new collaborations with ICE COLD PCR (with NYU and Univ of Nebraska). Management also noted that C-GAAP, TBIO's Plavix response test, has seen strong physician interest and was a substantial contributor to the 10% growth in Clinical Lab revenues. ScoliScore, as we noted in our 8/9/12 Investor Note (see below), looks like a very solid addition to TBIO's Clinical Lab business and one which we think will make a meaningful top and bottom line impact as early as next year.

The collaboration with NYU's Langone Medical Center involves the use of ICE COLD PCR in the detection of mutations in the blood related to non-small cell lung cancer and response to existing a new therapies. Similar to the collaboration with the MD Anderson Cancer Center (Univ of Texas), the NYU study will focus on circulating tumor cells (CTCs) and use TBIO's CTC capture ScreenCell devices. The collaboration with the University of Nebraska Medical Center involves the use of ICE COLD PCR in the early detection of pancreatic cancer and is being funded by a $100k NIH grant awarded to TBIO which was announced in August. The project could result in a diagnostic test for early stage pancreatic cancer which is almost always fatal if not caught early.

Revenue

Q3 revenue was $7.9 million, down 4% y-o-y and $1.1 million (13%) less than our $9.0 million estimate. The difference came from a $555k variance ($220k A vs. $775k E) in Pharmacogenomics revenue and a $607k variance ($3.2 million A vs. $3.8 million E) in Instruments/Diagnostics with Clinical Lab revenue in-line with our $4.5 million estimate.

Similar to Q1 and Q2, GM came in well softer than our estimate. Q3 GM was 48% compared to our 55% estimate. Lower than expected revenue from Pharmacogenomics continues to impact GM due to the fixed laboratory costs - while this segment should be highly leverageable with growing revenue, margins will be almost non-existent at the ~$250k and lower revenue level (this quarter was $220k). Management also noted that they've made some investments related to their Clinical Lab segment to improve efficiencies in anticipation of increased sales of C-GAAP and ScoliScore which slightly impacted margins in that business in Q3. We continue to look for GM to widen with growing revenues in Pharmacogenomics, an increase in contribution from the higher margin bionconsumables (as opposed to instruments) from the Diagnostics/Tools business and potentially (depending on reimbursement) very beefy margins from ScoliScore as well as C-GAAP.

Net Income / EPS

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ScoliScore/C-GAAP Should Drive Clinical Lab Revs in 2013 - Analyst Blog