Biocept, Inc.
Q3 2017 Earnings Call Transcript

Published: 11 Nov 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Biocept 2017 Third 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 November 9, 2017. I’d now like to turn the call over to David Moskowitz, Vice President of Strategy and Corporate Communications. Please go ahead, sir.

[David Moskowitz:]

Thanks, operator. Thanks, to all of you for participating in today’s conference call. Joining me from our team at Biocept are Michael Nall, President and Chief Executive Officer, 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, would, will, 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 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, November 9, 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’d like to turn the call over to Michael Nall. Mike?

[Michael Nall:]

Thanks David, and thanks to everyone for joining us on the call today. This has been a productive quarter, where we began developing new distribution channels, launching key bio-marker test and initiating an important clinical study all aimed at supporting further physician adoption of our Target Selector liquid biopsy platform. By signing a distribution agreement with VWR and launching our pathology partnership program, we are executing on key steps towards our strategy to move to the distribution of our patented technologies. While, also continuing to be a leader in the liquid biopsy services space. In reviewing our third quarter financial results, our sales increased by 6% and total samples were up 7% over the prior year period. These results reflect the impact on sales and volume from the hurricanes in Texas and Florida, the earthquake in Mexico City and fewer sales days in the third quarter of this year. Even with such impact on our third quarter results, our sales for the year-to-date period have more than doubled and our samples received are up nearly 20% from the prior year. Tim will cover the financial metrics in more detail during his prepared remarks. Over the past few months, we announced several initiatives aimed at growing our business and increasing our share of the liquid biopsy market. In August, we launched our tests for NRAS mutations, expanding our platform to include 15 clinically actionable cancer biomarker test. NRAS is requested by many of our physician customers and with the launch of this assay, we now have full coverage for biomarkers included in the NCCN guidelines for colon cancer and melanoma. NRAS can also serve as a useful biomarker for lung cancer patients. Also in August, we announced an exclusive worldwide agreement with VWR to market and distribute our proprietary blood collection tubes for liquid biopsy. VWR is a leading global laboratory product supplier and this agreement is one sign that we are executing on our broader strategy to distribute our proprietary technologies to laboratories around the world. In October, we entered into a promotion and marketing agreement with Miraca Life Sciences to market our testing services to community based oncologist and hematologist in certain U.S. territories. This is a pilot program, it has potential to be expanded throughout the United States. Through the Miraca agreement, we may have the ability to expand our sales and marketing footprint without bearing the full cost of staffing certain U.S. territories with our own sales professionals. Also in, October we launched our pathology partnership initiative and enabling pathologist to access our cutting edge liquid biopsy technology for circulating tumor cells in their own practice. This model is unique to Biocept and splits the technical component and the professional component of processing and billing for our test. In doing, so we allow local hospitals and pathologists to remain in the critical path of a patient's treatment and share in the economics of liquid biopsy, while we continue to process patient samples from this program and are CLIA-certified, CAP-accredited laboratory right here in San Diego. And just last week we validated our testing platform in both pancreatic and ovarian cancers. Our prior platform addressed melanoma, lung, breast, colon gastric and prostate cancers bring the total number of cancer indications validated on our platform to eight. Over 75,000 Americans are diagnosed with pancreatic and ovarian cancers each year and these new indications are expected to enable our sales professionals to expand our business. We continue to focus on strategic initiatives and are evaluating multiple opportunities to leverage our intellectual property and our infrastructure in the U.S. and abroad. I'd like to review the seven key initiatives that Biocept has focused on delivering. These are number one; entering into strategic partnerships to capture value from our patented and proprietary technologies domestically and outside the U.S. This includes our intent to expand into China with our strategic partnership and the help of our largest shareholder, Ally Bridge. Two, increasing the number of physicians ordering our liquid biopsy test and expanding test volumes from our current base of accounts. Three, collaborating with top-tier oncology institutions and integrated healthcare delivery networks to increase commercial adoption of our liquid biopsy platform. Four, executing on our pathology partnership strategy to serve hospital and institutional clients. Five, driving down our cost per patient sample through economies of scale and operational efficiencies, six signing additional health plan agreements to support third-party reimbursement for our tests. And seven expanding our test menu with the introduction of new clinically actionable oncology biomarker test. We look forward to reporting our progress on these initiatives as we achieve certain milestones. We continue to drive market awareness of the unique benefits of our Target Selector platform as we invest in our commercial organization. We now have 16 sales executives in the field in addition to sales management and marketing. This is consistent with our previously stated objective to have between 15 to 20 sales executives in the field by the end of the year. Our visibility and growth 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 in the U.S. and abroad. As drug companies continue to develop targeted cancer therapies to prolong life and minimize side effects, the need for our technology increases with our proven ability to identify more patients with actionable cancer biomarkers. While still in the early stages liquid biopsy has the potential to become one of the largest markets in medical diagnostics. As the field can significantly improve patient outcomes with noninvasive, cost-effective testing from molecular biomarker profiling as well as for cancer monitoring, as always one of the most important things we do is to help those diagnosed with cancer or providing information to their physicians that can be used to qualify them for optimal therapy. The number of patient success stories we see continues to grow as we help patients who are not having success with traditional surgical methods. These patients are benefiting from our technology and the ability to access targeted cancer therapy. We made good progress in the first nine months of this year and we believe the Biocept closed 2017 in a strong position. And with that, I'll turn the call over to Tim Kennedy to review the financial highlights of the third quarter. Tim?

[Tim Kennedy:]

Thanks Mike and good afternoon everyone. I want to first point out that the natural disasters and the fewer sales days that Mike mentioned earlier have an overarching impact on multiple areas of our financial results in the third quarter. The impact starts with volume, which impacts then revenue, net income and DSO calculations, as well as other per accession metrics. Now let me walk you through our results. Revenue for the third quarter of 2017 was $1.1 million up 6.1% from the third quarter of 2016. Third quarter 2017 revenue is comprised of $1.04 million from commercial testing and $67,000 from development services. Year-to-date 2017 revenue of $4.1 million was up 111% from the $1.9 million reported in the same period last year. Our commercial reimbursement based on historical mix and test per accession continues to be in the $1,100 range on average. As a reminder, we converted to accrual based revenue recognition at the end of Q1 2017. Total samples accession in the third quarter were 1,343, which also includes samples submitted for research and validation purposes. Research and validation samples 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. We accessioned 1,203 billable samples in the third quarter of 2017, which represented year-over-year volume growth of approximately 1.7%. As I mentioned, we believe the natural disasters and fewer sales days negatively impacted our volume by approximately 15% to 20% in the third quarter of 2017. As a reminder, billable samples are defined as commercial cases plus those samples that come from our development services. Commercial cases are tests ordered by a physician for which, we submit a claim to an insurance company, hospital or other third parties 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 per sale day averaged approximately 19 in the third quarter of 2017. The third quarter of 2017 had two fewer sales days than did the third quarter of 2016. New account startups in the third quarter of 2017 were 79 with same-store growth or base account referral volume increasing by 6% over prior period averages, despite the fewer sales days in the recent period. In the third quarter of 2017, we continue to expand our sales force and we have hired eight new sales executive so far this year. As a reminder, we anticipate that sales executives will take about six months on average to fully ramp up from when they first joined the company. Now moving on to our expenses. In the third quarter of 2017 cost of revenue was $2.5 million compared to $1.9 million in the third quarter of 2016. The increase was attributable to direct cost associated with higher total assay volume and the addition of excess capacity in our lab operations to service expected higher volumes in the coming months as a result of our sales force expansion and the recent launch of our pathology partnership initiative. As mentioned previously, we need to hire in advance of volume increases in order to properly train new employees to effectively process the expected higher number of tests. Research and development expenses in the third quarter of 2017 were $857,000 compared with $601,000 reported in the same period last year. This increase was due mainly to the addition of personnel for the development of new biomarker assays, greater consumption of materials associated with this development, a higher proportion of lab allocation costs and other costs associated with R&D activities. General and administrative expenses for the third quarter of 2017 were $1.8 million, a decrease from $1.9 million reported in the prior year period. The decrease was primarily due to reduced fees for outsourcing offset partially by an increase in personnel costs associated with bringing in-house billing, human resources and investor relations functions. Since bringing our billing in-house in April of this year, we've been able to accelerate collections of our receivables. Our Days Sales Outstanding or DSOs have decreased from over 100 days in the first quarter of 2017 to the 80-day range in the third quarter of 2017. Sales and marketing expense in the third quarter of this year were $1.7 million versus $1.3 million in the prior year period due to the expansion of our team of sales professionals. The net loss for the third quarter of 2017 was $5.8 million or $0.20 per share. This compares to a net loss for the third quarter of 2016 of $4.7 million or $0.57 per share. The year-over-year increase in net loss was largely driven by our sales force expansion and a creation of excess capacity in our operations to support additional expected growth. Year-to-date through September 30, our cash generated from operations averaged approximately 15% of the company’s total cash need. While our overall expense base grew to support higher current and future period volumes, we expect that our cash generated from operations will continue to fund a higher percentage of the company's overall cash need as incremental volume is expected to leverage fixed cost associated with the excess capacity we created. Cash and cash equivalents as of September 30, 2017 totaled $5.9 million compared to $4.6 million on December 31, 2016. During the third quarter the company spent approximately $500,000 in one-time costs to upgrade our lab information system and preparation of launching our pathology partnership initiatives, as well as for next generation sequencing equipment and facility needs. And with that, I'll now turn the call back over to Mike. Mike?

[Michael Nall:]

Thank you, Tim. Before we move on to the Q&A 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 on cancer biomarkers with clear clinical utility. We are differentiated by marketing both CTCs and ctDNA analysis in a liquid biopsy to physicians and therefore can offer a more complete answer by providing the same biomarker information that physicians obtained from a surgical tissue biopsy all with a simple blood drop. Second our test leverage, our proprietary biomarker enrichment technologies resulting in industry-leading assay performance including very high concordance with tissue biopsy. Third, the cost effectiveness and reimbursement strategy of our liquid biopsy solution continues to drive our preferred provider status with health plans and increases the efficiency of our claims collection. And lastly, our technologies are amenable to the development of Target Selector in vitro 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 to be performed in laboratories around the world. So, in summary, we've made significant progress establishing the Target Selector brand in the marketplace. Most importantly we are helping more physicians and their patients rapidly access the actionable information they need to meaningfully improve treatment outcomes by identifying more patients for targeted therapies. I want to thank our employees at Biocept for their constant dedication and hard work, our customers for their trust, our investors for their support and thanks to each of you for dialing in to today's call. Tim and I, will now be happy to answer questions. Operator, please pull your audience.

[Operator:]

Thank you. [Operator Instructions]

[Michael Nall:]

While we’re waiting for that first question, I’d like to announce that we’ll be presenting at the LD Micro 10th Annual Main Event Investor Conference being held in Los Angeles on December 6. We look forward to seeing those of you attending that. Also we will be holding meetings in San Francisco during the JPMorgan Healthcare Conference on January 8 through 10. Please contact LHA if you're interested in scheduling a meeting during this time. Okay, operator, we’re ready for the first question.

[Operator:]

Our first question comes from Keay Nakae with Chardan. Please go ahead.

[Keay Nakae:]

Yes, thanks. For Mike and Tim just in terms of how you are able to quantify the natural disaster impacts, can you give still more insight to how you're assessing that?

[Michael Nall:]

Yes, thanks. It’s a good question. I'll let Tim give you a little bit more detail. But just to remind everybody that we do have coverage throughout the U.S., but Texas especially is one of our biggest producing states as well as a fast growing area in Florida. And then in Mexico, in Mexico City, we hit quite a bit of business through our relationship with Quest and AstraZeneca that they used to qualify patients for their therapies. And so those were all amounted to a one, two, three punch for us this last quarter as you've heard from other laboratory providers. So with that tee up I'll turn it over to Tim and he can talk more about the detail.

[Tim Kennedy:]

Sure, Keay. So to arrive at our estimate of 15% to 20%, we looked at our overall accessions per sales day prior to the couple of hurricanes and as well as the earthquake in Mexico, so we look pre and post, what our run rate was prior and what our run rate was post in order to come up with that range of – estimate of 15% to 20%.

[Keay Nakae:]

Okay. So now that there's some time has passed, are you seeing those numbers kind of revert back up to the prior trend?

[Tim Kennedy:]

Well, I'd like to say that Texas has rebounded completely, but I think Houston has taken a bit of time to kind of rebuild if you will down there. So while we've seen some improvement, I wouldn't say that we were completely back to where we were prior to those – to that hurricane.

[Keay Nakae:]

Okay, thanks.

[Michael Nall:]

And I think also the two less sales days was a meaningful to that too.

[Tim Kennedy:]

Yes, absolutely. So if you're looking at year-over-year performance, as I mentioned, those two less sales days we’re averaging or in the third quarter we averaged 19 accessions per sales day, billable. And having two less sales days I guess you could do the math, on expectation or perhaps what those few days may have been for the third quarter of 2017, if not for the two less days.

[Keay Nakae:]

Okay, just a follow up question in terms of the sessions per day as they relate to two things one the overcapacity, at what point do you think you start seeing the leverage there and then also sales force productivity. So the hires earlier in the year, for using six months as a time frame to get up to speed or are you meeting your expectations there.

[Michael Nall:]

So, let me respond. So as far as the expectation of leveraging the fixed component of our cost and with the excess capacity that we've created, every incremental accession leverage is that component. So that's a great question. So, if we created excess capacity and those expenses for the bite of the apple if you will of the next wave of growth comes on board, we won't need to go out and increase expenses, in those specific areas of the CLIA laboratory, those specifically being in microscopy and clinical laboratory scientists in particular. Now over time, I would say to that, as I said our sales reps on average take about six months. And in analyzing our normal performance if you will of reps that are being with the company for six months or longer, in the third quarter I would say the reps that have been with the Company for six months or longer have contributed about 75% of our volume in the third quarter.

[Keay Nakae:]

Okay, well that's good. And then just one final question, if I can. With respect to Miraca, so give us a sense of what their footprint is. If you're able to, be able to use your efforts to maybe alleviate the need to hire maybe at least one sales person but is it more than that given the size of the footprint.

[Michael Nall:]

It could be. Right now, we're just trying it out in a couple of territories to supplement where we have very large territories and the reps can’t get to. Very often, and I think we're really just in the training stage at this point. And getting ready to launch it. But that the idea is that we would not have the need to invest in a 25 to 30-plus person sales team over time. We would be able to rely more on our partners to have more feet on the street and use our sales team as kind of the experts that go in and help close the deal for them. And Miraca, for those that don't know is one of the largest diagnostic companies in the world. They're a Japanese company that had acquired a big anatomic pathology laboratory service. In fact, I think to cover part of where Tim used to work, two companies merged together and an offered that here in the U.S. as a go to market strategy doing kind of general pathology working in oncology testing kind of similar to what you would find at Neogenomics or somewhere.

[Keay Nakae:]

Okay, thanks, that's all I had.

[Michael Nall:]

Very good.

[Operator:]

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

[Lauren Chung:]

Hi thanks, for taking my call. I have a question on reimbursement. Can you talk about current reimbursement, how you are receiving, what you are billing and any other plans in the horizon and on the PAMA can you talk about some of the reimbursements have been cut there and how does that impacts Biocept’s reimbursements?

[Michael Nall:]

Yeah now that is great question. And for those that don’t know that PAMA is law that went into effect protecting access to Medicare or something like that. And it's designed to create a competitive pricing for Medicare compared to what private payers pay for the same testing and the impacts for that was neutral for us. So, we were very pleased about that so we didn't really see a meaningful change in the amounts that were put forward versus what we historically had been paid. So that's great news for us and our strategy that’s playing out. As far as other payments that we're getting from the other payers, I will remind you that of course what we bill and what we expect to collect are different things just like anybody they get the bill from their doctor will see, what they bill and what the insurance allows are two different things. But we haven't really seen any change over the past several quarters on a per test basis and what we would expect to collect. And I’ll let Tim add any more color to that.

[Tim Kennedy:]

Sure. As I mentioned, our commercial reimbursement based on our historical mix and test per accession continues to be in the $1,100 range on average. Keep in mind that launch of our pathology partnership initiative and what that does from a reimbursement perspective is it basically shares, it's a sharing if you will of the global reimbursement offered a physician fee schedule. So about 85% of the physician fee schedule is attributable to the technical component of testing and about 15% is to the professional component. Now as we ramp up our pathology partnership initiative, our expectations there is that our volumes will increase obviously, which is why we did it. But at the same time, part of our reimbursement associated with that may come down over time. But the thing that really drives the economies of scale that we've talked about numerous times on calls is really the incremental volume that's what is ultimately going to drive what Keay had asked about which was how do we leverage that excess capacity, and it really comes in the form of that incremental volume and we expect to see that out of this pathology partnership initiative, as well as our sales force expansion.

[Lauren Chung:]

Thank you. And just a comment on the competitors, can you comment on what you see in the field against Biocept test and any updates in the liquid biopsy in the industry overall?

[Michael Nall:]

Sure. Thanks Lauren. As anybody that Googles liquid biopsy would find there's a lot of hits when you get that. And it's challenging because the liquid biopsy the term that's meaningful but being used for all types of questions and answers for all kinds of questions and diseases other than oncology but even within oncology. It's a much smaller amount of folks that are actually competing in liquid biopsy for predictive biomarker testing like we are in oncology. And in fact the fact that we have both the circulating tumor cell analysis, as well as the cell-free circulating tumor DNA sets us apart because we provide a broader range of answers than folks that are generally just focused on circulating tumor DNA. So that's one of the key differentiators for us and the reason physicians are choosing our test. But in reality, we really haven't seen even though a lot of folks have announcements. We haven't seen a lot of competition out in the clinic. It's still very early in liquid biopsy. So that may change over time but the market's going to grow as well. So right now, we remain one of the leaders in the space and are really developing a nice part of our market where we are the first alternative when tissue biopsy is not adequate. And where we see the market going is more and more towards this idea of using tissue and blood to profile a patient to make sure a patient gets the answer that they needed for the correct treatment decision by their physician. And so that's a big difference. In addition, our reps are getting the right meanings but sometimes it can take months after they start with us to get as they're targeting getting entire practices converted rather than one physician at a time. And as Tim mentioned that pathology partnership, which is a really unique go-to-market strategy for us, no one else that will aware of, and liquid biopsy is offering an opportunity for pathologists to be part of this value stream and they're integral in the continuum of care for patients. They're the first ones to know when tissue biopsy is not adequate and they have very strong relationships with medical oncology and surgery. So they're in a great position to advocate for using liquid biopsy, it was very well received our launch at the College of American Pathology meeting when we launched this strategy in October and has already resulted in numerous leads coming into the company.

[Lauren Chung:]

Thank you.

[Michael Nall:]

Thanks, Lauren.

[Operator:]

Our next question comes from Michael Murphy with New World Investor. Please go ahead.

[Michael Murphy:]

Thank you. I just wanted to give a comment on the cash situation and what your alternatives are there?

[Michael Nall:]

Yes, we just had reported that we had…

[Tim Kennedy:]

$5.9 million

[Michael Nall:]

$5.9 million at the end of the quarter and it's our goal to continue to fund the company and we are evaluating numerous alternatives for that as we speak.

[Michael Murphy:]

Okay, thank you.

[Operator:]

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

[Michael Nall:]

Thank you all for participating on today's call and for your interest in Biocept. We look forward to sharing our progress on our next conference call for our year-end results. Thanks to everybody and have a great day if you're here on the West Coast and have a great evening for our friends on the East. Thanks.

[Operator:]

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