Bionano Genomics, Inc.
Q3 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Greetings. And welcome to Bionano Genomics Incorporated Third Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ashley Robinson with Investor Relations. Thank you. You may proceed.

[Ashley Robinson:]

Thank you, Otanya, and good afternoon, everyone. Welcome to the Bionano Genomics third quarter financial results conference call. Leading the call today is Dr. Erik Holmlin, CEO; and he is joined by Chris Stewart, CFO of Bionano. After market closed today, Bionano issued a press release announcing its financial results for the third quarter 2020. A copy of the release can be found on the Investor Relations page of the Company’s website.

[Dr. Erik Holmlin:]

Thank you, Ashley, and good afternoon, everybody. Let me begin by saying that we are really pleased with how the third quarter came together. Most of our commercial indicators grew over the prior quarter as we saw significant momentum returning to the business as more and more geographies opened up with easing of COVID-based restrictions. We saw significant progress in key areas of market development, including presentation and publication of evidence in support of Saphyr as a potential replacement for traditional cytogenetics methods. We transformed our leadership team with the addition of two key executives Dr. Alka Chaubey, who is our first Chief Medical Officer. Alka joined us from PerkinElmer, where she was the head of cytogenetics for PerkinElmer Genomics and Vanadis. And Chris Stewart, our Chief Financial Officer, who previously worked at Tesla, and has had a successful career in the tech and semiconductor industries. Finally, we acquired the CLIA diagnostic services business Lineagen in a stock-based transaction. The acquisition has the potential to expand our commercial services offering to customers who need CLIA-based data services. It has the potential to grow total revenues through sales of Lineagen’s proprietary testing services for pediatric neurodevelopmental disorders, and it has the potential to provide critical strategic ingredients to outline the path for other CLIA labs to obtain payment for services on Saphyr from third-party payers, including insurance companies and governments.

[Chris Stewart:]

Great. Thanks, Erik. First off, I want to say that I’m very excited to be here. And I really appreciate a warm welcome that I received from the Bionano team. I’m convinced that this is the perfect time to be joining Bionano. As you can see by the announcements from just this quarter, we’ve made substantial advances to make Saphyr more usable, and we are building toward critical mass on the depth and breadth of published data on efficacy, including concordance with multiple existing cytogenetics standards of care, while we’re also starting to see evidence being published that Saphyr can increase diagnostic yields. I plan to leverage my experience in managing companies through periods of change to channel the momentum we are seeing into business success. We will continue to build out the infrastructure and business processes to support the profitable growth that we expect. The reagent rental program and the services product have been very well received in the market and are having the intended effect as we are getting Saphyr systems and data into the hands of influential people. We believe that this will translate into the growth of our consumables business, which is expected to be the long-term profit driver for the Company. Now, let me turn to a breakdown of the commercial results for the quarter. Revenue in Q3 was $2.2 million, up 86% sequentially from Q1 -- from $1.2 million in Q2. Revenue was comprised of about $725,000 or 33% in instrument sales, $855,000 or 39% in consumables, including those related to our reagent rental program, and $616,000 or 28% in services and other revenue. Q3 services revenue includes approximately $445,000 of revenue from Lineagen for the period from August 21st through the end of the quarter. Going forward, we will include Lineagen with our services revenue. Organically, by Bionano revenue was up 48% quarter-on-quarter. This increase was driven by the start of a recovery from the COVID shutdown that we experienced in Q2. Europe was particularly strong, returning to levels we were seeing at the end of 2019. While many customers are still not back in their labs, and there’s certainly a risk of a COVID resurgence that can continue to impact our business, it was encouraging to see the enthusiasm with our customers as they started to get back to working with Saphyr systems in there. Cost of sales in Q3 were $1.5 million, resulting in a gross margin of 34%. Gross margin was down from 49% Q2, due mainly to the higher mixture of instrument sales versus consumables and services that we saw in Q3 -- in Q2. Second quarter operating expense was $11 million, an increase of about $3 million over last quarter. The increase was primarily due to $1.5 million of transactional related costs for the Lineagen acquisition, as well as additional operating expenses related to Lineagen acquisition. We also returned salaries to their pre-COVID levels, after the reduction in salaries that management took in Q2. Finally, as of September 30th, our cash balance was $18.9 million. This includes about $15 million received in the quarter pursuant to warrant exercises. Therefore, we believe we have adequate cash that carries into the first quarter of next year. As we’ve talked about before, we have an S-3 in place, and believe we have sufficient options available to raise cash in the future. Looking forward into 2021, we are focused on growing revenue with the continued underlying goals of building on the published data, and exposing more researchers and clinicians to the advantages of Saphyr, and creating a path to reimbursement for Saphyr testing in the clinic. We will build on both, our sales and marketing, and R&D teams prudently through the year. With that, I’ll turn it back over to Erik.

[Dr. Erik Holmlin:]

Great. Thanks, Chris. And let me say welcome aboard and let me say the same to Alka. It’s really great to have our team at critical mass. And with that, I will turn it back over to the operator to open up the call for Q&A. Operator?

[Operator:]

Thank you. At this time we will conduct a question-and answer-session. Our first question comes from Kevin DeGeeter with Oppenheimer. Please proceed.

[Kevin DeGeeter:]

Hey. Good afternoon, guys. I want to add my congratulations to the new members of the team, and what looks like a really solid quarter here. I guess, a couple of questions, if I may. Starting off with the publication this week, your data was very impressive. And I guess my question here is, do you think you need large datasets in other hematologic subsets to really kind of change practice, particularly here in the U.S. or do you think it’s sufficiently broad study to be -- practice changing sort of across cytogenetics, at least in terms of hematologic community?

[Dr. Erik Holmlin:]

Look, more data are better. And nobody is ever satisfied with the amount of data that’s available, you know that. But, what I will say is that across the leukemias, this is a seminal data set. We expect it to be submitted for a peer review public -- peer review and publication later on this year. And our studies will continue. What I would say overall in hematologic malignancies is that we would like to expand our datasets in multiple myeloma specifically, and lymphomas to really round out the heme malignancy space. And we will continue to add more and more studies in leukemia. But, this is really a seminal data set for us that goes a long way.

[Kevin DeGeeter:]

And then, my next question, which may be somewhat related. You did touch on engagement with MolDX as an important component of the payer and third-party reimbursement discussion. Can you just comment, sort of where that stands currently? Have you had any interaction with the folks there? And how should we think about potential timelines and critical milestones sort of along that process?

[Dr. Erik Holmlin:]

Sure. So, the Company has been engaged with folks at MolDX and Palmetto, and those engagements and interactions that have influenced our thinking and helped us form different strategies. What we are now engaging in with them is a very specific conversation, based on the datasets that we now have available, and this paper from the Columbia consortium is something that really helps us have those conversations, because in a very objective way, we can lay out how Saphyr transforms the current standard of care. And so, it’s really about taking those general conversations and making them more and more specific, and so, we can get into what coverage would be like. And when it comes to a timeline, I think that we’re pursuing three strategies in parallel, leveraging existing codes. And so, we can do that essentially right away, engaging with MolDX, as you picked up on, as well as the PLC code process. And these will unfold certainly for the remainder of this year and into next year and will be driven by the sort of standardized timelines that are out there for this process. I do think it’s going to take into next year before we see a lot of measurable outcomes from this work, but we’re very much engaged and moving along at a rapid pace.

[Kevin DeGeeter:]

Okay. And then, just maybe one more follow-up and a housekeeping if I may. Can you remind us under existing codes, when a lab submits, sort of what that reimbursement rate or range can be? And the housekeeping here, if I think about the 1,785 flow cells in the quarter. Should we think about those as principally all through the research market or are there some early cytogenetic and clinical volumes that kind of feed into that number?

[Dr. Erik Holmlin:]

Yes. With regard to what is the average reimbursement around existing codes, this is always dependent upon what a lab has in their contract with the payer. But, these range in the $1,000 to $2,000 range, depending upon indication and can even go higher. It just depends upon the specific application. But, they are in that range solidly, between $1,000 and $2,000. With regard to where these flow cells are going, of course, we have an installed base, which is primarily research, I would say 80%. But, when we look at the adoption that we’re seeing, that’s actually the other way around. It’s probably 80% clinical. And a lot of these flow cells are going there to support the reagent rental contracts that they’ve entered into. So, very crude back of the envelope math would probably put that at 50-50, which is incredible.

[Kevin DeGeeter:]

Yes. That’s great. Thanks so much, Erik. I appreciate taking the questions.

[Operator:]

Our next question comes from Jeffrey Cohen with Ladenburg Thalmann. Please proceed.

[Jeffrey Cohen:]

Hi, Erik, Chris and Alka. How are you?

[Dr. Erik Holmlin:]

Good. Thanks. How are you?

[Jeffrey Cohen:]

Just fine. I wanted to start with some of the -- so you placed the revenue and it’s -- so there’s 96 in the fleet. Could you talk about the backlog a little bit, you mentioned 21 units. Do you expect those to be in place, and up and running by the end of the year or is that a spillover into Q1 as well?

[Dr. Erik Holmlin:]

Yes. If I had to make an estimate, over the course of the third quarter, we installed 9. So, I think, we went from 87 to 96. So, we were able to install 9. So, if our access to labs stays where it is, probably improves a little bit, I think, we can cover probably about half of these, at least, and maybe a little bit more. But part of the problem is just getting access to labs. And as everybody should know, the situation is not stable in Europe, for example. So, restrictions are being reintroduced. And, our best guess is that those restrictions will not completely prohibit us from installation, but it could delay. So, I’m going to say -- let’s said that in the fourth quarter, we can do roughly half of those.

[Jeffrey Cohen:]

Okay, got it. Chris, could you speak to the SG&A line. I know that there’s 1.5 in transaction relation from Lineagen and 1.3 in bad debt, in combination with the 33 used for Lineagen. So, for forecasting, what would that look like going forward? What’s the baseline on the SG&A line going forward? Should that be referred back to something on the order of Q2, or would we expect this to be the new baseline going forward?

[Chris Stewart:]

No. Certainly, accounting for the one-time expenses, we expect to be back in the range where we work towards the end of 2019 and early 2020, as far as organic Bionano, and then the Lineagen business has another 15% of that. So, that’s probably the way to think about it.

[Jeffrey Cohen:]

Okay, got it. And then, lastly, Erik, could you talk about -- looks like pretty nice utilization. Could you talk about the throughput and efficiencies, as far as the time to process, and could you see more efficiency or faster throughputs going forward with the current equipment or other development that’s going on?

[Dr. Erik Holmlin:]

So, in constitutional genetic disorders and in cytogenetics overall, 100 samples a week is like a sweet spot. And we’ve been driving towards that. And we are there in the constitutional genetic disorders. Now, in some of the cancer applications, because these specimens are highly heterogeneous and the pathogenic variants may be present at very low abundance, you got to collect a little bit more data on them. And so, what we are doing is accelerating the methods, through a variety of tweaks. These are just turning knobs here and there to speed that up and get that up to the 100 sample a week level. Of course, genetic diseases will speed up as well. But, where we’re at now is really a good place, even for both indications. And so, the improvements in speed that we get will be gravy. There are other areas of optimization that we are working on. And that will make it easier to process multiple samples, let’s say, at one time. And so, ultimately, we’re going to be able to bring cost per sample down through that process that some of the longer term R&D initiatives that are underway. And then, we want to simplify data analysis by adding features and capabilities to the software. And that has the effect that it speeds the process up, because the people who are interpreting the data will have to do less work. And so, those are really three programs that are ongoing, and will continue to progress. As we get more and more adoption of Saphyr, higher and higher volumes, labs use it, they’re going to want things to go faster and faster. And so, we’re constantly pressing in that direction.

[Jeffrey Cohen:]

Okay. So, no current gaining limitations but on possibly others that you’re addressing on the commercial side, going forward?

[Dr. Erik Holmlin:]

Yes. That’s correct.

[Operator:]

Our next question comes from Scott Henry with ROTH Capital.

[Scott Henry:]

A couple of questions. First, the leukemia market, how should we think about that in terms of the target market for placements in that category, as well as procedures?

[Dr. Erik Holmlin:]

Yes. I mean, there are about 200,000 people diagnosed with leukemia every year in the U.S. And those are just the patients that are diagnosed. So, many, many more are tested, and then you’ve got the lymphomas to go along with that. And so, this is a substantial patient population overall. We would estimate it to be in the neighborhood of 1 million patients reliably. And that testing in the U.S. is spread out across, so between 550 and 750 labs. And so, that would be the placement opportunity and the volume opportunity. I do think that a lot of these labs are going to end up adopting multiple Saphyrs. So, let’s say that minimum is 550 to 750, and then the total number of Saphyrs is going to be driven by the testing volume itself.

[Scott Henry:]

Okay. Thank you. And…

[Dr. Erik Holmlin:]

And those are U.S. numbers. And -- by the way, in Europe and in Canada, where they have a rational single payer health system, they’re ahead of us in adoption. And so, the combination of Europe and Canada together, probably represent the same kind of economic opportunity that we see here in the U.S.

[Scott Henry:]

Okay, great. And the flow cells number, is that a figure you’re going to give us going forward?

[Dr. Erik Holmlin:]

Yes. That’s our intention. Yes. I think, we’ve -- we certainly reported it last quarter, and I think we did the quarter before that. But, that’s really the best way. If we talk about chips, some chips have two flow cells, some chips have three. So, then, you need to know which chips. But, if we just tell you how many flows cells went out, then you have a sense of the amount of consumable capacity that’s being purchased by the market. And as long as they keep purchasing it, it’s because we’re growing the installed base and the existing installed base is using what they purchased.

[Scott Henry:]

Okay. And I think, I took down 34% year-over-year. What was the sequential change, or if you could just give me the 2Q flow cell number?

[Dr. Erik Holmlin:]

It’s 24%, I think, versus the second quarter -- 25% over Q2 2020, and 34% over third quarter 2019.

[Scott Henry:]

Okay. Thank you. And then…

[Dr. Erik Holmlin:]

That was the highest number ever, that was the -- that is the world record to date.

[Scott Henry:]

Okay, great. And then, I didn’t see the 10-Q yet, but could you give me the shares outstanding? I didn’t see that in the release, but.

[Chris Stewart:]

Let me just get it for you, and then I’ll come back to you on it.

[Scott Henry:]

Okay. Fair enough. I think, this was a partial Lineagen revenue quarter. Now that you’ve kind of own that business for a little while, how do we think about the steady state revenue run rate of that business now? I think, the number was solid in the third quarter, but I’m not sure how much of it entailed.

[Chris Stewart:]

I’m sorry, I was looking for the share count number.

[Dr. Erik Holmlin:]

So, it was roughly $450,000 of revenue attributable to that services business in the third quarter. And the time period was August 21st through the end of the quarter, so roughly half of the quarter. And I think that that’s been their steady run rate this year, but their business is muted as a result of COVID because doctors’ offices are not operating at full capacity, which is needed to see patients and refer them for testing. So, there’s upside to that. But, please keep in mind that those revenues help and that cash comes in the door and that’s really important. We also value heavily the strategic capabilities like the clinical team that Alka inherited the day she joined. And so, there’s a tremendous strategic benefit. But, there is upside. If you say that they’re running at roughly $752 million per quarter, that’s probably what they’ve been doing this year, and we would expect that to tick up next year.

[Scott Henry:]

Okay. And just to follow up on your response. So, how we see the selling environment? When we think about Q4, it’s typically seasonally the strongest quarter. But COVID, I mean, how is -- should we think about that as a 25% haircut to the market right now, or how do you think about that environment out there for fourth quarter?

[Dr. Erik Holmlin:]

Yes. I mean, what we have seen is I think nice return here in the third quarter versus our first and second quarter. We do expect our fourth quarter to be better than our third quarter, reflecting this seasonality and so forth. However, without a doubt, there are limiters on the ability to get in and see customers. Customers are not operating their labs at the same levels of capacity. If you look at published information that’s out there, you’ll see that labs are running anywhere from a research lab -- say a cancer research lab, is going to be running anywhere from 25% to 75% capacity. So, what I would say, I’m not really going to try to quantify it for you. But, we are thinking that we’ll do better in the fourth quarter than we did in the third quarter, reflecting an ongoing improvement in the momentum. And the other thing that I would say is that, of all of our markets, the U.S. is toughest, not because the COVID situation is necessarily tougher here or not, but because of just where we’re at in terms of customer readiness to adopt. So, the researchers, they’re on board and they’re using the system, but they’re not working as much. The clinical folks are on board, but they need more, as we’ve been talking about. Whereas in Europe, the clinical folks are up and running more significantly. So, I think Europe is going to contribute significantly to the business in fourth quarter. We do see recovery in the U.S. So, I just want to say that we’ll do better in the fourth quarter than we did in the third, reflecting continued improvement.

[Scott Henry:]

Okay. Fair enough. And the final question is kind of a tough one, but I think, it’s a fair question. The scientific momentum, in my opinion, just seems like it’s never been better. You’re getting traction, you’re making a lot of progress. But, the burn rate kind of holds you back a little bit, because it’s still significant relative to the Company size. Do you think -- from Q3, do you think this is going to be a high watermark for the burn, meaning it should start to decline? And obviously, you got a little bit of a headwind and not having that $1.5 million transaction costs after Q3. But do you think we should start to see that decline now? Are we at that inflection point?

[Chris Stewart:]

Yes. I mean, I’d like to say definitively, yes, but it’s tough, right? Because what we need to do is continue down the path of building on the data that’s out there. So, we need to continue to get Saphyr systems into the hands of the people that can publish data. We do look the way we’re operating the rental program, we can do that and grow revenue at the same time. But, we’re still making investments. We still have to grow the sales and marketing team, especially on the clinical side, and we have some investments to make to expand even further on the capabilities to Saphyr, make it easier to use and things like that. So, I hope we’re not increasing the burn over time. But, I wouldn’t call it an absolute high watermark for the near-term future.

[Scott Henry:]

Okay, thanks. Thank you for the feedback.

[Chris Stewart:]

And the share count, the weighted average share count at the end of Q3 was about 133 million shares. And we’ve had a little bit of option exercise -- excuse me, warrant exercise. So, the share count is up a little bit from that as of today.

[Operator:]

Thank you, ladies and gentlemen. We have reached the end of the Q&A session. So, at this time, I would like to turn the call back over to management for closing comments.

[Dr. Erik Holmlin:]

Thank you, operator. And thank you to everyone for joining. And we look forward to speaking with you after the fourth quarter, and appreciate you joining. Thank you very much.

[Operator:]

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation. Have a great day.