Biocept, Inc.
Q1 2018 Earnings Call Transcript

Published: 15 May 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Biocept First Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, May 15, 2018. Now I’d like to turn the call over to Ms. Jody Cain. Please go ahead, ma’am.

[Jody Cain:]

This is Jody Cain with LHA. Thank you for participating in today’s conference call. Joining me from Biocept are Michael Nall, President and Chief Executive Officer; and Tim Kennedy, Senior Vice President of Operations and Chief Financial Officer. During this call, management will be making a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that are not historical facts and generally can be identified by terms such as anticipates, estimates, believes, could, expects, intends, may, plans, potential, predicts, projects, should, will, would, or the negative of those terms. Forward-looking statements involve known and unknown risk, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those statements, as well as performance or achievements that are expressed or implied by the forward-looking statements. For details about risks, please see the company’s SEC Filings. The content of this call contains time sensitive information that is accurate only as of today, May 15, 2018, except as required by law, Biocept disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occurred after this call. Now, I’d like to turn the call over to Michael Nall. Mike?

[Michael Nall:]

Thanks, Jody, and my thanks to everyone for joining us on the call. I am pleased to report that we brought test volume back on track during the first quarter, bringing in 1,084 billable samples, up from 982 billable samples for the fourth quarter of 2017. Going forward, we remain focused on returning to year-over-year volume growth. On our last conference call, we discussed actions to improve volume through adjustments to our sales strategy. We are completing that process and have team of experience sales professionals with a focus on lung cancer profiling and monitoring where the need for liquid biopsy is high. Our sales team continues to employ and campaign message to educate physicians on the benefit of using our liquid biopsy solutions along with traditional tissue biopsy to assist in quickly and accurately detecting biomarker status thus enabling faster decision making for patient treatment. We are educating physicians with two patients case studies recently published in peer-reviewed journals that support the use of our target selector test for patients with lung cancer. Our sales calls also incorporate the new clinical guidelines recommending the use of liquid biopsy in patients with lung cancer that would develop through the collaboration by The College of American Pathologist, the International Association for the study of Lung Cancer, the Association for Molecular Pathology and the American Society for Investigative Pathology. We are also continuing to raise awareness of our target selector testing for lung cancer through industry conferences. The American Society of Clinical Oncology or ASCO meeting in June is the industry's largest cancer conference and we will have a well-located booth on the exhibition floor where our sales team will have the opportunity to interact with and attract new physician accounts to use our target selector technology. Turning to our Empower TC, where we partner with local pathologist to utilize our liquid biopsy platform, we can report that this program is gaining traction. This unique liquid biopsy offering enables our sales team to penetrate large hospital networks and the pathology groups who serve them by providing local pathologist with the ability to participate in the reporting of liquid biopsy cases. Importantly, as stated on past calls, we've already taken the actions necessary to prepare our clear laboratory for volume growth as these initiatives gain traction. Circling back to the two recent patient case reports, I mentioned. Both demonstrate the clinical utility of our liquid biopsy assays in patients with lung cancer and real-world settings. The spring 2018 issue of Oncology & Hematology Review features a report by oncologist, Dr. Alejandro Calvo. Dr. Calvo needed to determine the presence of an ALK rearrangement or an EGFR mutation in a patient with advanced non-small cell lung cancer, without knowing these genomic alterations the treatment options would be chemotherapy or palliative care. Following a tissue biopsy that provided inadequate material for molecular analysis, the patient was tested using our target selector platform. From a simple blood sample, our target selector test revealed an ALK rearrangement qualifying the patient to receive ALK inhibitor therapy. This targeted therapy resulted in a dramatic reduction in the patient's tumor load with only minimal side effects. Despite very aggressive disease, this patient went on to live for an additional two years. Our second case report was published as a letter to the editor in the May 2018 issue of the Journal of Thoracic Oncology, which is the journal for the International Association for the study of Lung Cancer. This report documented the use of our target selector test to confirm the detection of the rare ROS1 gene fusion alterations, which had previously been identified by tissue biopsy. Based on the results of our liquid biopsy test and the tissue analysis, the patient was treated with a targeted therapy and has remained alive for 40 months as of the publication of the case report. Importantly, another panel-based liquid biopsy test was used by the clinician, but it was unable to detect the ROS1 gene fusion. The reports author oncologist Dr. Luis Raez noted the importance of being able to detect ROS1 alterations using a non-invasive blood sample in patients with lung cancer. Published case reports such as the help our sales team provide education to physicians about the clinical utility of our target selector platform. They also can be important to health plans, which rely on peer-reviewed publications to make coverage decisions. We plan to submit additional case reports later this year to be considered for publication. We continue to execute on our other corporate priorities and today I am pleased to announce that our global distribution partner VWR begin the commercial launch of our blood collection tubes for liquid biopsy. We expect to begin seeing revenues from this collaboration in the second quarter of this year. This is a major first step in our transition of Biocept from a represent only offering to becoming a diagnostic kit manufacture as well. Additionally, VWR's global distribution of our blood collection tubes is an important step in bringing Biocept outside of the U.S. Just a few weeks ago, Biocept announced our collaboration with Thermo Fisher Scientific. This partnership gives us access to the next-generation sequencing products and supports our plan to launch a molecular oncology as a panel in the third quarter. Once launch we will have the potential to team up with Thermo Fisher to market molecular diagnostic products and services to pharmaceutical companies. As stated on our fourth quarter call, the agreement calls for us to become a Thermo Fisher Liquid Biopsy Center of Excellence once the assay panel is validated in our lab. We have also jointly agreed to evaluate the development of additional products and services through the combination of molecular diagnostic technologies from both companies and we expect to report on progress in the coming quarters. On the strategic front we continue to evaluate additional opportunities to expand our business domestically and internationally, including in China. In late March we announced the issuance of our first patent in China that covers our switch-blocker technology. This technology enriches patient specimens for oncogenetic mutations of interest, resulting in ultra-high sensitivity and specificity for the detection of cancer-associated mutations, which are found in blood, tissue and other biological sources. This is our fifth issue patent in China with the others encompassing our core circulating tumor cell assay platform and its components, such as our microchannel device and enhanced staining methods. As a reminder, our priorities for 2018 are to remain focused on advancing our business by; one, increasing target selector's market penetration in the emerging liquid biopsy segment; entering into strategic partnerships in the U.S. internationally; advancing our collaboration with Thermo Fisher Scientific to become named as a Thermo Fisher Center of Excellence and to grow our business in the pharmaceutical sector; signing additional and Empower TC agreements with pathology groups and major hospital systems; capitalizing our newly issued industry guidelines that support use of liquid biopsy for patients with lung cancer; facilitating the launch of our blood collection tube sales under the VWR marketing and distribution agreement; signing new third-party help line contracts and agreements with integrated health care delivery networks; launch additional oncology biomarker assays and publishing additional clinical case studies that validate the use of our target selector assays. With that, I will turn the call over to Tim Kennedy to review the financial results of the first quarter. Tim?

[Tim Kennedy:]

Thanks, Mike, and good afternoon, everyone. Let me start my review of our financial results by reminding everyone that we switch to accrual-based revenue recognition for commercial accession in the first quarter of 2017, which resulted in an 874,000 one-time benefit for the first quarter of last year. The first quarter of 2018 did not have this benefit. While reported revenue for the quarter is difficult to compare with the prior year given this accounting change, we estimate that on an accrual basis revenue for Q1 2017 would have been 809,000 and this compares to the revenue for Q1 2018 of 807,000, also on an accrual basis. Note that the first quarter of 2017 had one additional sales day versus the recently reported period. Commercial reimbursement for -- on a per test basis increased by approximately 6% in Q1 2018 to $1,088 per test versus $1,029 per test in Q1 17. As a reminder, the first quarter of the year is typically impacted by seasonal resets of health insurance deductibles that occur annually in January. The impact from patients’ deductibles in the first quarter of 2018 was about $60 per billable accession. Overall, our commercial reimbursement based on historical mix and test for accessions receive continues to be in the $1,100 range on average. In Q1 2018 we had 1,084 billable accessions versus 1,107 billable accessions in Q1 2017, which as I mentioned included one additional sales day. As a reminder, billable samples are defined as commercial cases plus those samples that come from our development services. Commercial cases are test ordered by physician for which we submit a claim to an insurance company, hospital or other third-party responsible for payment. Development cases are testing services performed for either a research partner, a pharmaceutical company or under an international distribution agreement. The number of billable samples for sales day averaged 17.5 in the first quarter of 2018. As mentioned on our last conference call, liquid biopsy is still in the early stages of acceptance and adoption, so referral patterns from physicians can be sporadic. Given our restructured sales force, the ability to leverage new liquid biopsy guidelines and our recently published case studies along with the recent launch of our Pathology Partnership Program, we anticipate returning to growth and sample volume during the coming quarters. Moving on to our expenses, Cost of revenue for Q1 2018 was $2.4 million, compared with $2.1 million in Q1 2017. The increase was attributable to higher software amortization and other information technology and laboratory equipment costs as we invested in our laboratory information system and certain laboratory equipment. The higher cost of revenue was also impacted by an increase in direct costs from the addition of capacity in our lab operation to service expected higher test volumes in future months, including those associated with the signing of pathology partnership agreements. As mentioned on previous calls, we need to hire in advance of volume increases in order to properly train new employees to effectively process the expected samples. Clear laboratory excess capacity has provided the ability to improve upon our current testing performance, as well as validate new testing such as the Thermo Fisher Oncomine test that Mike mentioned, which we expect to begin selling later this year. Research and development expenses for Q1 2018 were $1.1 million, compared to $800,000 in Q1 2017. This increase was due mainly to the addition of personnel for the development of new biomarker assays and a higher proportion of allocated laboratory costs due to increased research and development activities. General and administrative expenses for Q1 2018 were $1.9 million, essentially flat with Q1 2017. Sales and marketing expenses for Q1 ‘18 were $1.6 million versus $1.3 million in Q1 2017, with the increase due primarily to a higher number of sales professional year-over-year. The net loss for the first quarter of 2018 was $6.4 million or $0.11 per share on $57 million weighted average shares outstanding. This compares with a net loss for the first quarter of 2017 of $4.4 million or $0.21 per share on 21 million weighted average shares outstanding. Cash and cash equivalents were $9.3 million as of March 31, 2018, compared to $2.1 million as of December 31, 2017 and in January of this year we raised about $13.3 million in net proceeds from offering of common stock and warrants. We expect that our cash generated from operations will fund a higher percentage of our overall cash needs as incremental volume is expected to leverage the fixed components of costs. And lastly, as mentioned on our Q4 ‘17 conference call, we are implementing a cost reduction program that is expected to save an estimated $1 million to $1.5 million annually. Additionally, we plan to make the final payment on our long-term debt obligation in July of this year, which is anticipated to reduce our annual cash needs by more than $2 million, bringing total expected annual savings in a range of $3 million to $3.5 million. And with that, I'll turn the call back over to Mike. Mike?

[Michael Nall:]

Thank you, Tim. Looks Biocept has become an established leader in the emerging field of liquid biopsy and we are taking steps to build upon our accomplishments. Our liquid biopsy test to be performed on approximately 14,000 patient samples and our test menu provides physicians with the clinically actionable information they need to develop personalize treatment plans for their patients with cancer. Our proprietary biomarker assays are based on a unique platform that leverages information from both circulating tumor cells or CTCs and circulating tumor DNA or ctDNA and we continue to generate clinical evidence that supports the high sensitivity and high specificity of our biomarker assays. And finally, in addition to organic growth, we are focused on expanding opportunities through strategic partnerships and other alternatives. Importantly, we remain dedicated to our mission of improving the outcomes of patients diagnosed with cancer. And with that overview, we are now ready to take your questions. Operator?

[Operator:]

[Operator Instructions]

[Michael Nall:]

Operator, while we are waiting for the first question, I'd like to mention that we will be making a company presentation at the LD Micro Invitational Conference on June 5 in Los Angeles. We hope to see some of you there and if not a webcast of our presentation will be posted to the Investor section of our website at www.biocept.com. Okay, Operator, we are ready for the first question.

[Operator:]

And the first question comes from Jason McCarthy from Maxim Group. Please go ahead.

[Jason McCarthy:]

Hi. Thanks for taking the question.

[Michael Nall:]

Hey, Jason.

[Jason McCarthy:]

So my question is a bit more broad and focused on another aspect of the diagnostics and liquid biopsy platform as it relates to Biocept?

[Michael Nall:]

Okay.

[Jason McCarthy:]

You view the company as an emerging leader in the diagnostics. There’s also space for multiple cancer types. My question is, how can you leverage the platform to integrate into drug development itself from discovery to commercial. So we have seen pharmas and biotechs in CAR-T and gene therapy aligning or incorporating testing platforms to discover drugs, enrich trials and expand labels, where can Biocept fit into this area? And do you see the company moving this direction as it grows?

[Michael Nall:]

Yeah. No. I love that question. That's great, Jason. And yeah, absolutely, we've identified that as a big opportunity for the future. One of the goals here is always been to have both clinical business, as well as pharma business, and some of our first big wins, although we are starting to build the clinical side was to sign some pharma contracts that were both early and also later stage trials and we continue to have different pharma things. As you know, Jason, many times those are good hedges for the future, because of the drug doesn't move forward in the pharma's portfolio than the test goes along with the drug would not either. However, which has been the case for a few of the ones, and probably, the case for most of the development projects, frankly and you know more about that than most people. So, but in fact, the data we get from those is a side benefit of that. And so we are very excited about a lot of the data from the projects that we have done so far even if the drugs themselves haven't shown promising our test has worked. And so I -- the most I can say is that that data can be valuable for Biocept not only to gain additional pharma contracts as we de-identified the manufacturer on the data and be able to share that with other folks maybe in similar spaces as to what we've done as an example, but also to get data out there for clinicians them to have comfort in our testing. And some interesting data shows that we can use other fluids other than blood, so that’s a little bit for investors to keep an eye on that and I'm very excited about in the future for some critically in need patients. The other piece that pharma side is that it balances out sometimes on the clinical side and vice versa. Now we still enjoy our contract that we have with AstraZeneca, but that's really a clinical side of the business where we have to qualify patients for therapy in Latin America more than the development side that you're asking about, but you're exactly right with our broad platform of protein that we can get off the CTCs, as well as being able to look at mutations copy number et cetera from the plasma were good offering for that. So we’ve got a lot of good BD meaning business development meetings teed up for ASCO coming up in June. Thank you for the question.

[Jason McCarthy:]

All right. Thank you very much.

[Michael Nall:]

Yeah.

[Operator:]

[Operator Instructions] And our next question comes from Lauren Chung from WestPark Capital. Please go ahead.

[Lauren Chung:]

Hi. Thanks for taking the call.

[Michael Nall:]

Hi, Lauren.

[Lauren Chung:]

Hi.

[Michael Nall:]

Thanks.

[Lauren Chung:]

I have a question, a couple of questions. So, COGS as a percentage of revenues the higher than previous quarters and I'm wondering with Thermo Fisher and then all the other items that you have mentioned, if you project COGS [did peaking] slightly going forward with the partnership and increasing capacity and when would you start to see that go down, perhaps?

[Tim Kennedy:]

Yeah. So, Lauren, thanks for the question. As I mentioned, our clear laboratory excess capacity actually that we brought on board in anticipation of increased volume, actually has provided us with the labor that we need to bring up that Thermo Fisher Oncomine test. So we don't anticipate needing to bring on additional staffing in order to get that validated and ready for our sales force to begin selling later this year. And to answer your question, as far as the percentage of cost of revenue coming down as a percentage of revenue, as our volume increases through our sales efforts and we bring on that volume, we will not be needing to bring on additional staffing specifically in the laboratory in order to accommodate that volume growth. There will be some incremental costs associated with the variable components of increased volume where we use additional reagents in the laboratory to actually do our testing, but not to the level of where we would actually have to bring on additional staffing for that. So you'll start to see as we increased volumes here in 2018 you'll start to see that percentage of cost of revenue come down.

[Lauren Chung:]

Got you. And then just with follow-on to that, can you just comment on your integration, how things are going with the RETs as we have discussed some of that last quarter?

[Michael Nall:]

Sure. No. Going very well and I'm – we are on – it’s important whenever you have changes like that that you stay close, every week we have got, what we call the war room and we are on with the salespeople and the sales managers. And there's a very good vibe now. We've gotten our kind of some of the humps we had and I think sales team is very enthused about what's going on. So that makes all of us enthused when we get off the call here in [in-house] and things are going smooth there. We still have what -- a couple more positions to fill, but here in the room with me I have our people and cultural leader and we are just about to finish up with those as well, so making good progress.

[Lauren Chung:]

Got it. Thank you very much.

[Operator:]

[Operator Instructions] Seeing that there are no further questions, I would like to turn the conference back to Mike Nall for closing remarks.

[Michael Nall:]

Well, thank you very much to all of you for participating on today's call and for your interest in Biocept. We look forward to sharing our progress on our next conference call in August, when we report on our second quarter financial results. Thank you and have a great day.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.