Biocept, Inc.
Q4 2016 Earnings Call Transcript

Published: 8 Mar 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Biocept 2016 Fourth Quarter 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 call is being recorded today, March 7, 2017. I would now 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; Tim Kennedy, Senior Vice President of Operations and Chief Financial Officer; and Mike Terry, Senior Vice President Commercial Operations. During this call, management will be making a number of forward-looking statements within the meaning of 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, believes, could, estimates, expects, intends, may, plans, potential, predicts, project, should, will, would or the negative of those terms. Forward-looking statements involve known and unknown facts, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results as well as performance or achievements that are expressed or implied by the forward-looking statements. For details about these risks, please see the company's SEC Filings. The content of this call contains time sensitive information that is accurate only as of today, March 7, 2017. Except as required by law Biocept disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. Now I would like to turn the call over to Michael Nall. Mike?

[Michael Nall:]

Thank you, Jody, and thanks to everyone for joining us today. I'm proud to report that we achieved revenues of $3.2 million in 2016, more than a five-fold increase from 2015. We ended the year on a high note achieving revenues of nearly $1.3 million in the fourth quarter and exiting the year with an annual run rate of more than $5 million. We are enthusiastic about these results and believe that 2017 will be a transformational year for Biocept. Liquid biopsy is gaining traction in the medical community and there is a growing awareness of our Target Selector platform and the unique benefits we offer to physicians and their patients. Our progress in the market continues to be driven by our focus on delivering high value actionable information to physicians, broadening health plan reimbursement for our liquid biopsy services and increasing patient access to our solutions across the United States and throughout the world. As pharmaceutical and biotechnology companies continue to developed targeted cancer therapies the long life and minimized side effects the need for our technology grows with our proven ability to find more patients with actionable biomarkers. Our Target Selector platform enables oncologists to obtain real-time biomarker information with high clinical value in a way that it’s both non-invasive and cost effective. In addition to our strong growth in test volumes and revenue, our many accomplishments over the past year are building the basis for continued growth in the future. Among these are the expansion of our commercial test menu with three new liquid biopsy biomarker assays AR for prostate and breast cancer, ret for lung cancer and PD-L1 which marked our entry into the new Immune oncology treatment market; entry into six new managed-care contracts including direct agreements with two Blue Cross Blue Shield plans and selection by a national GPO for a large U.S. Health Plan Association to support additional network coverage; to signing up clinical trial for collaborations three world-class medical institutions including Columbia University Medical Center, Georgetown University Medical Center and the Masonic Cancer Center at the University of Minnesota to further demonstrate the clinical utility of our platform in multiple cancer types; entry into a Master services agreement with the major biopharmaceutical company to develop liquid biopsy test for targeted therapy now in clinical trials; the presentation of the study data at four major oncology conferences including analytical validation results demonstrating 100% concordance for our PD-L1 immune oncology test; expansion of our intellectual property state with patent issued in the U.S., China, Japan and Australia bringing our total number of issued patents to 18; the completion of two financing totaling approximately $15 million including capital from sophisticated institutional healthcare investors plus additional funding coming in through warrant exercises; and we entered into distribution agreements to market our test in Canada, Israel and the Philippines, and signed an agreement with Quest diagnostics of Mexico to market EGFR lung cancer assays in collaboration with the major pharmaceutical company. I'd like to reiterate the four key areas of our business that I believe provide Biocept with a sustainable competitive advantage in the liquid biopsy market. First, our Target Selector dual platform leverages both circulating tumor cells or CTCs and circulating tumor DNA or ctDNA resulting in a comprehensive menu of assays focused only on clinically validated cancer biomarkers. Second, our CDC and cDNA platforms leverage our proprietary biomarker enrichment technologies resulting in industry-leading test performance. Third, the cost effectiveness of our liquid biopsy solution continues to drive our preferred provider status with health plans and increases the efficiency of our claims collections; and lastly, our technologies are amenable to the development of Target Selector in vitrio diagnostic or IVD kits. With the future development of our diagnostic kits we have potential to significantly scale our business by enabling our liquid biopsy test be performed in laboratories around the world. Before Tim provides our financial review, I would like to introduce Mike Terry who recently joined Biocept as a Senior Vice President of Commercial Operations. Mike has over 25 years of experience managing sales teams and successfully commercializing innovative technologies including IVD kits in the molecular diagnostic and medical technology fields. In addition to directing our commercial initiatives, Michael receives our business development efforts, an area which he has significant experience and a strong track record. Welcome Mike. We're glad to have you on the team.

[Mike Terry:]

Thanks, Mike, and hello everyone. It's an exciting time liquid biopsies are accelerating their move into the clinic. While I've only have been on board for a few weeks it's clear to me that Biocept has the team, the technology platform and the market strategy to build on its leadership position. I joined Biocept because company's novel approach to liquid biopsies they made the ability to isolate both circulating tumor DNA and circulating tumor cells to identify and track validated cancer markers to aid physicians in the treatment decision. This dual platform approach in the company's unique sample collection and processing methods offer one of the strongest technology platforms in the industry. According to American Cancer Society, over 80% of cancer care is delivered outside academic medical centers and I believe that Biocept is best-positioned to dominate in the largest market segment for liquid biopsy, the community oncology segment. Our test offerings are focused on empowering oncologist to obtain actual actionable information for our patients' cancer accurately non-invasively in many cases more rapidly than traditional method such as tissue biopsy or cancer imaging. In 2016, Biocept began to generate significant test volumes in revenue and that experiences allow us to better understand the sales process. These learnings are key as we plan to grow the sales organization from nine account executives at the end of 2016 to a range of 15 to 20 by the end of the year. We plan to build on our already strong relationships with market influencing physicians and to leverage our customers to fulfill a peer to peer selling in local territories. Our marketing program will focus on creating high quality education activities that facilitate the transfer of knowledge to our customers to help them successfully use our kit and improve the management of the patients. We are also focused on delivering a first grade experience to our customers and making this a competitive advantage in the market. Before I turn the call back to Tim, I want to mention a bit about our corporate development strategy. As you know, Biocept is focused on potential strategic opportunities with other life science and diagnostic companies and we seek to expand the distribution of our testing platform here in the U.S. and abroad. Additionally, we remain focused on partnering with pharmaceutical and biotech companies to use our technology to improve the development of new target therapies and to work with these companies commercially to identify more patients with actual cancer biomarkers that can benefit from personalized treatments. I've been very active in the business development since early days of liquid biopsies and I look forward to helping Biocept create value through various corporate development initiatives. And now I will turn the call back over to Tim Kennedy for our financial review and update.

[Tim Kennedy:]

Thanks, Michael, and good afternoon to everyone. Revenues for the fourth quarter of 2016 were $1.3 million representing a nearly six-fold increase from the same period in 2015 and a 23% sequential increase from the third quarter of 2016. As most of you know, our revenues are currently reported on a cash basis meaning that they are only recognized once cash payment is collected. Despite the impact of normal seasonality related to major holidays in the fourth quarter such as Thanksgiving, Christmas and New Year's Eve, cash collections continued to be robust in the period. We accessioned a total of 1,175 samples in the fourth quarter of 2016. Of that total, 1101 were billable samples, which is nearly double the 618 billable samples in the prior year period. Importantly, new account start-ups in the fourth quarter of 2016 were the highest in any quarter last year and increased approximately 20% from the third quarter. Also, the number of specimens per sales day, a key metric that I focus on, trended upward throughout the fourth quarter of 2016 and I'm pleased with the performance of this metric so far this year. 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 our physician for which we submit a claim to an insurance company, hospital or other parties responsible for payment. Development cases are testing services performed for either a research partner, a pharmaceutical company or under an international distribution agreement. Remaining samples in the fourth quarter were submitted for research and validation purposes which are not billable but do support the use of our liquid biopsy tests, awareness of our services, and the development of our pipeline of new biomarker assays. Moving to expenses, we continue to leverage our fixed cost, total expenses for each individual line item of our reported expenses declined in the fourth quarter as a percentage of our sales; we expect this trend will continue in 2017. Cost of revenues for the fourth quarter of 2016 were $1.9 million compared with $1.3 million for the fourth quarter of 2015. The increase was primarily attributable to direct cost associated with higher commercial assay volume in the 2016 period. As I mentioned previously, the increase in our volumes enable us to leverage the fixed components of our cost. Year-over-year, our cost per accession declined nearly 30% from over $1,900 in the fourth quarter of 2015 to less than $1,400 in the fourth quarter of 2016. R&D expenses for the fourth quarter of 2016 were $668,000, a decrease from the $784,000 reported in the same period last year. The decrease was due to less consumable or consumption, I should say, of materials and fewer lab costs associated with research and development activities. G&A expenses for the fourth quarter of 2016 were $1.6 million an increase of 17% compared with the $1.4 million reported in the fourth quarter of 2015. The increase was due mainly to personnel costs associated with the expansion of both our in-house billing and investor relation functions, as well as higher outsourced third-party billing fees resulting from our increased cash collections. Sales and marketing expenses of $1.2 million in the fourth quarter of 2016 were essentially flat year-over-year despite higher accession volumes. The net loss for the fourth quarter of 2016 was $4.2 million or $0.27 per share. This compares to a net loss for the fourth quarter of 2015 of $4.6 million or $0.73 per share. In the beginning of 2016, less than 5% of the company's cash need was provided by internally generated cash or cash from operations, and at the end of 2016, over 20% of our cash need was generated from operations. This is an important concept that I want to make clear. While our overall expense base is expected to grow due to the expansion of our sales force and investment in our lab infrastructure to support volume growth, we expect that our cash generated from operations will continue to fund a higher percentage of the company's cash need until the business breaks even and ultimately becomes cash flow positive. Because liquid biopsy is an emerging market segment and we are in the process of establishing a track record of predictable reimbursement, we are currently reporting revenues on a cash basis or when cash is collected. Our expenses, on the other hand, are reported on an accrual basis as required by GAAP accounting. As our collections continue to track more closely with samples process, we anticipate converting our revenue recognition from cash to an accrual basis which we expect to positively impact our operating margins. We continue to believe that we will execute on the switch to accrual accounting by the middle of this year. However, first quarter dynamics can complicate this initiative from a timing standpoint due primarily to the reset of patient deductibles in the New Year. Because patient deductibles are higher in the first quarter of the year and Biocept has a limited history with regard to collecting on patient deductibles predicting net revenue per patient sample becomes challenging. We first have to wait for health insurers to adjudicate their portion of the claim before we can bill patients for their deductibles. As a result, if we switch to accrual accounting earlier in 2017, we will take a conservative stance initially with regard to accruing for patient deductibles. Turning to highlights for the new -- for the full year 2016. Of 4,539 samples we accessioned in 2016, 4,211 were billable; this is up more than two-fold from the 1,824 billable samples accessioned in the comparable period in 2015. Revenues for the full year of 2016 were $3.2 million up from $610,000 for 2015. I want to remind everyone that by introducing new biomarkers, we are able to increase the number of actionable tests per patient sample. In 2015, we averaged 2.6 tests per patient sample and, in 2016, we averaged 3.6 tests per sample. This is one reason that the value per commercial patient sample has increased from approximately $760 in 2015 to an average of approximately $1,100 when the company receives payments from third-parties. The net loss for 2016 was $18.4 million or $1.92 per share based on $9.6 million weighted average shares outstanding. This compares with a net loss of $16.9 million in 2015 or a loss of $3.07 per share based on 5.5 million weighted average shares outstanding. Cash and cash equivalents as of December 31, 2016 totaled $4.6 million compared to $8.8 million at the end of 2015. With the strong performance of our stock this year, we recently benefited from a significant number of warrant exercises related to the financing that we completed in October 2016 approximately 4.2 million of those warrants have been exercised to-date resulting in cash proceeds to the company of about $4.6 million. And with that, I'll now turn the call back over to Mike.

[Michael Nall:]

Thank you, Tim. Moving forward there are eight key initiatives that we are focused on delivering this year, these are, number one, increasing the number of physicians ordering our liquid biopsy tests and expanding test volumes from our current base of accounts. Number two, signing additional health plan agreements to support third-party reimbursements for our tests; three, collaborating with top tier oncology institutions to increase commercial adoption of our liquid biopsy platform and conducting clinical studies with these institutions to further validate the use of our tests; four, transitioning to accrual accounting from our current method of reporting revenue on a cash basis; five, continuing to drive down our cost per sample accession through economies of scale and operational efficiencies; six, broadening our test menu with the introduction of new clinically actionable oncology biomarker assays; seven, entering into potential partnerships in the U.S. and abroad to expand the distribution of our tests; and eight, initiate our commercial pilot program to enable hospital-based pathologist to interpret the results of our liquid biopsy test locally through our pathology partnership strategy. We look forward to reporting our progress on these initiatives throughout the year. So in summary, we have made significant progress establishing our brand in the market and increasing our commercial sample volume. We have achieved record revenues in the fourth quarter while reducing our cost per test thus making progress towards achieving positive and sustainable margins. And importantly, we are helping more patients and their physicians rapidly access the actionable information they need to meaningfully improve treatment outcomes. On behalf of the entire company, I want to thank our investors for their support and thank you all for dialing in today's call. Operator, we are now ready for the Q&A portion of the call.

[Operator:]

[Operator Instructions] One moment please for the first question.

[Mike Terry:]

While we are waiting for the first question, I'd like to announce that we would be presenting at the 29th Annual Roth Conference next Monday, March 13 here in Laguna Niguel, California. A webcast of our presentation will be posted to our corporate website at biocept.com for those of you who will not be in attendance. Okay, operator, we are ready for the first question.

[Operator:]

The first question comes from Chris Lewis with ROTH Capital Partners. Please go ahead.

[Michael Nall:]

Hey, Chris.

[Chris Lewis:]

Hey, guys, good afternoon and thanks for taking the questions and congrats on the continued progress.

[Michael Nall:]

Thank you.

[Chris Lewis:]

Just wanted to start, if we look at the year as a whole, you more than doubled your billable sample volumes in 2016 versus 2015. I know you don’t give any type of guidance but can you just kind of walk us through how should we think about kind of that billable sample volume growth number and the sustainability of that in 2017 and beyond?

[Michael Nall:]

No I think that is a good question, Chris. Of course, as we grow and grow doubling may not always be the case but we are early in this adoption of liquid biopsy in the clinic today. And I would use the baseball analogy and we are getting started there, so I would say maybe we're at the top of the third now, there is lot of ball game to play. So a lot of ways we can grow, I will let Tim weigh into with some of his experience about some of the way that the metrics grow over the year.

[Tim Kennedy:]

Thanks Mike. Chris, it's really good question. I just want to remind everyone that invested in the company back at the beginning of October of 2016, when we did that funding we told the investors that we were going to utilize that money to expand our sales force and build the infrastructure within the laboratory in order to support volume growth. Throughout 2017 that is exactly what we intend on continuing to do increasing the size of our sales force and growing specimen volume. Through 2016 I think on average I'd say we had about nine or so sales reps that produced the volume that we had in 2016. So as we continue to move throughout 2017 and expanding the sales force, again we expect that volume to continue on a growth trend as well.

[Chris Lewis:]

Okay, great. I think just so the net addition for this year is about five to 10 in terms of sales force. Can you give me color around the cadence of when you began bringing those reps on board and how long it will typically take for rep to become fully productive?

[Tim Kennedy:]

Yes, we already started that, we ended the year with nine and we've got two more that we are hiring now in Q1, so bringing people on board as we go. I will let Mike say a few words too about how we plan to expand the team throughout the year.

[Michael Nall:]

Yes, there's a steady stream of approximately two a quarter but I want to mention, Chris, that the focus really is onboarding this people quickly, I mean we have a very focused program to do that, so they get up to speed as quickly as possible. So that will be a key part of our sales management focus.

[Chris Lewis:]

Okay, I appreciate the color there. And then Tim, in your prepared remarks, you pointed out new account start-ups record number here in the fourth quarter. I was wondering if you could provide the number of just how many accounts you had at the end of the year and then for those new account start-ups from the fourth quarter what have you seen so far just in terms of reorder rates so far this year?

[Tim Kennedy:]

Yes, I mean I would say if I understand your question right, Chris, throughout 2016, we’ve had in excess of 1,000 physician accounts referring to the company throughout the course of the year, and certainly having the largest referring quantity of accounts in the fourth quarter we expect that will obviously reward as we continue throughout as we move forward throughout here in 2017. I'm not sure if that fully answered your question or not but…

[Michael Nall:]

And of course that’s also, keep in mind, that in Q4 there was less kind of lab days due to the holidays and we get slowing down around the holidays each time as you would expect, especially the way the holidays fell this year seemed more people took more time off than I remembered in years past.

[Chris Lewis:]

Right, right, okay. And then Mike, a question for you. Just wanted to key in on one of the announcements specifically around the, you’ve entered into this group purchasing agreement with a large national health plan association, and I guess just our understanding of that out of the larger national payers, the national association from Blue Cross Blue shield we believe as the only one within associated GPO. So would appreciate if you can just comment on accuracy of that assumption and any additional color around GPS agreement you secured.

[Michael Nall:]

Sure. Well, as you know, many of these large partners we have whether it's be pharma or on the peer side don’t like to have press releases unless they are the ones generating them, so we’re restricted little bit about press releasing too much information, but I think you’re on track with the Blue Cross; that’s a big win for us that we had to go through a rigorous RFP process to earn that. And so it's a partnership you have with the GPO and they'll help market your services to the 38 member plans that are all part of that. So we’re excited about this but we’re really in the early stages of this partnership and just really developing the strategy with them as our partners as we speak.

[Chris Lewis:]

Okay, that’s great to hear. And just one for more me, as a follow up to that, I guess that of the 38 kind of independent franchises under the Blues umbrella, typically do you have kind of the percentage of how many kind of follow the GPO kind of agreements and how many kind just do their own thing?

[Michael Nall:]

Well, they are some do their own thing I think they all take a look at through the GPO because it’s actually in their best interest to support the vendors that are partners with the GPO, but we estimate based on talking with other companies that we know in the industry that have previously earn this that you could probably expect about half or little bit more that will get right on board with the national association and the other ones take a little bit more convincing. But as I said before, what we understand and had validated by other laboratory partners they have is that the GPO is very supportive of the vendors they partnered with and very helpful and getting those other plans on board.

[Chris Lewis:]

Okay, guys, thanks for the time.

[Michael Nall:]

Great, thank you, Chris.

[Operator:]

[Operator Instructions] The next question comes from [Kay Nakai] with [Chardon]. Please go ahead.

[Michael Nall:]

Hi Kay.

[Unidentified Analyst:]

Thanks. Yes, how are you guys doing?

[Michael Nall:]

Good.

[Unidentified Analyst:]

My question you talked going back to the new account added in the quarter and what’s the understanding that we have their own diversity of customers and how well-covered are those new accounts in terms of reimbursement so that your billable test can generate revenue?

[Michael Nall:]

Generally, we don’t see wide variation between different accounts, so I say their pretty indicative of most of what we see across the board. As you know, Kay, I think we've talked about little bit more than 40% of our specimen volume have Medicare for their coverage and then the next biggest bucket is what we’re excited about and that’s the Blues plan which is little bit over 20% and everybody else makes up the rest. And so do you see that pretty much across the board. They are some regional variations but generally that’s the case notably Hawaii, which is interesting because it’s got whole reimbursement system out there but most states have a similar mix to what I broke down with.

[Unidentified Analyst:]

Okay. And then just in terms of when you switch over from cash to accrual, is there a percentage that you are looking to reach that allows you to do that or what will be other criteria that make that appropriate time to make the switch?

[Michael Nall:]

I’ll let Tim jump in and answer that one.

[Tim Kennedy:]

Yes, Kay, it really is just a matter of having enough rear view mirror of fully adjudicated claims in order to understand what your go-forward reimbursement is going to be payer by payer. It's difficult to predict what they are going to pay until you actually see payments coming in the door. So as we are here in 2017 and continue to make really good progress towards collecting our receivables that does give us the ability to have that clarity that we need in order to be able to look at our current period volume and if you will predict what will ultimately get paid. So we're going to make that call as we continue to proceed here in 2017 as to when we actually implement that switch from cash to accrual.

[Unidentified Analyst:]

All right. That is all I had, thanks.

[Tim Kennedy:]

Thanks Kay.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back to Mike Nall for any closing remarks.

[Michael Nall:]

Thank you. I want to thank 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 quarterly call. Thank you very much and have a great day everybody.

[Operator:]

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