HTG Molecular Diagnostics, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Mar 2021

[Operator:]

Greetings and welcome to HTG Molecular Diagnostics Inc. Fourth Quarter 2020 Earnings 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 Monique Kosse.

[Monique Kosse:]

Thank you, operator. Earlier today HTG released its financial results for the year ended December 31, 2020. Before we begin the call, let me remind you that the company's remarks include forward-looking statements within the meaning of the federal securities laws.

[John Lubniewski:]

Thank you, Monique and welcome everybody. We're pleased to be here today to review our year end and our earnings. It's hard to believe that we're just past the one-year mark of a significant portion of the world being shut down or significantly impacted by the COVID pandemic. When we sat down 12 months ago to review our year-end earnings with you, no one could have imagined this. We had just completed a strong growth here in 2019 and we're looking forward to continued momentum. The impact of this pandemic on our business and on our lives from that point forward was considerable. We saw many of our customers significantly reduce or completely shut down their operations in response to the COVID-19 pandemic. We saw borders close and governments issue stay-at-home orders throughout the world. Many customers froze or significantly adjusted their research budgets as they prepared for the uncertainty and reprioritized their development priorities toward COVID testing and other COVID-related studies. We felt the most significant impact of these changes on our business in the second and third quarters of 2020. In the fourth quarter, we began to see some signs of business recovery and expect that that will continue in 2021. While I can only hope that none of us will ever have to experience a year like 2020 again, I'm proud of the commitment that our team has shown throughout the year. The efforts made to reach our development goals and pivot in the face of commercial challenges has allowed us to be nimble and execute in the face of these extraordinary circumstances. Before I get into the details of our 2020 operating results, I want to take a minute to review our core beliefs and fundamental business strategies, which have guided us this past year helping us emerge with a strong vision and a belief in what HTG can and will be.

[Shaun McMeans:]

Thanks John. Total revenue for 2020 was $8.5 million, compared to $19.2 million for 2019. Direct revenue defined as product and product-related services revenue on our financial statements was $7.9 million in 2020, compared with $14.6 million in 2019. We believe this was primarily the result of a decrease in direct revenue associated with our COVID shutdowns -- with COVID shutdowns impacting all aspects of our business in 2020. With an especially extensive impact on our business with US pharma customers, we've been slow to return to previously planned studies and programs than our academic and European customers. In addition, in 2019, product-related services revenue included significant levels of sample procurement and subcontracted laboratory services revenue for pharma customer programs, which did not recur in 2020. While we believe that there will continue to be some lag in our pharma business as clinical trial activity returns to pre-COVID levels, we are hopeful based on ongoing discussions with our customers that previously planned studies and programs will resume as our customers return to normal operating levels.

[John Lubniewski:]

Thank you, Shaun. While the world continues to be impacted by the COVID-19 pandemic, we are hopeful that almost on a daily basis we're seeing our markets slowly recovering and moving back to pre-COVID operating levels. While we can't predict the pace of this process, we expect to regain our revenue growth momentum in 2021 and beyond. Our customer and market diversification strategies are working and we expect to continue to add new customers and move our technology into new markets. We also expect that we'll be able to rebuild our pharma pipeline as more biopharma companies and clinical trials come back online. Additionally, we remain enthusiastic about the potential for our planned groundbreaking transcriptome product. The transcriptome project is running on time and on spec and we believe the early adopter interest is a clear sign of the commercial potential for this product. This product will be sold into molecular profiling in academic medical centers into biopharma as a universal companion diagnostic and as a platform for LDT technology development as well as to other large centralized diagnostic companies. We believe we have a winning formula for the business. In 2021, our key priorities will continue to be the

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. And our first question is from Alex Nowak with Craig-Hallum. Please proceed.

[Alex Nowak:]

Great. Good afternoon everyone. I was hoping to start with the 15 organizations that have now signed up for the early access program. Can you just provide some more detail? Who are these customers? What's the traditional makeup of them? Are they doing this for translational science? Is this for a pure researches-only sort of work? Just any detail there would be helpful. And then also, just economics with those partners. Are they paying for the panel? Are they getting access to it for free with anticipation they'll pay later? Thanks.

[John Lubniewski:]

Yes. Thanks, Alex. This is John. In regards to the kind of the demographics of that group, it's about one-third pharma, two-thirds academic translational medicine. It's predominantly being used in a transmed spot. It's being positioned as an alternative to RNA-Seq, relative to really less sample faster turnaround time. And in regards to the economics, the first couple of samples that we're running, our first couple were kind of quid pro quos, so we can get access to cohorts. But the expectation is that the vast majority of these will actually start paying for the product and will be our essentially our day one customers when we launch in Q3.

[Alex Nowak:]

That's great. How -- I guess, how are you thinking about pricing though? And any thoughts on -- do you plan to use any external partners to help with commercialization? And is commercialization still in Q3? Did I hear that correct?

[John Lubniewski:]

Yes. So full commercialization. Obviously, the early adopter program is the start of commercializing the product because we're looking to build kind of -- build up market demand for the product. In regards to pricing, we're still finalizing that. Obviously, we're very aware that where RNA-Seq is from a total cost standpoint and what other service providers are charging for full transcriptome RNA-Seq and we'll be looking to position the product relative to that.

[Alex Nowak:]

That's great. You mentioned the -- some of the competitive advantages. So I guess, as you're going out there and talking to the partners or the potential partners in the academic centers and pharma. I guess, what is the response that you're hearing from them? I guess, what's the major pushback? And then ultimately, what's the major interest that they have in the platform? Is it the ability to do this on degraded samples less sample quantity? Where is the real, the secret sauce why the customers sign up so far?

[John Lubniewski:]

Yes. Good question. I was actually surprised because, I thought it was going to be something different, but it's turning out to be the assay failure rate associated with RNA-Seq is a real pain point, especially on FFPE tissues. Again, I keep saying RNA-Seq is a fantastic technology, but you need very pure and quite a bit of purified RNA. And in the real world specifically in retrospective cohorts that frequently isn't the case. So the number one driver is our ability to deliver a quality data set from archived FFPE, what then follows which also is a little surprising to me was the faster turnaround time. And the turnaround time that we cited in the paper, assumes you've got biostats resources available to analyze your RNA-Seq data. In many institutions, those are kind of precious commodities and to go sample to data for RNA-Seq can take weeks by the time you get it back from bio. So the turnaround time is kind of the ease of use with our bioinformatics is probably another big, big upside. In regards to adversity or headwinds, it's going to be the fact that RNA-Seq is perceived as the gold standard. So we have to be able to provide something different and something better. And I think initially, when we position the product in market, it will be a coexist product. It will be for hey, if you've got a FFPE or if you don't have a lot of sample left, this is a very good alternative to RNA-Seq, where you otherwise might not. But then, I think the benefits that we're bringing up ease of use faster turnaround time high-quality data and low assay failure rate will I think will start nibbling into the rest of the business.

[Alex Nowak:]

That's great. I guess, just two quick questions. One on guidance. No guidance here for 2021, but how should we be thinking about growth over the course of this year? Should we think of sequential growth off of the Q4 $2.6 million number? Is that accurate? Or – and then how are you incorporating WTTx into that growth?

[John Lubniewski:]

Good question. So, I wish, I had a crystal ball that's going to say what each of the quarters is going to look like. We are expecting turbulence is probably a good way to put it in this year and we've seen some of that in Q1, where we had some unexpected border closures in Europe that impacted us and our ability to either install instruments or get samples out. And we saw some similar events in the US both in academia and pharma. So it's going to be hard for us to predict every quarter, but we – I continue to believe we will be back in that 30% to 40% growth range year-on-year. I think it's going to be lumpy based on wherever the hotspots are for COVID. And then, what we've done with the WTTx, or what we're now calling whole transcriptome is because we're launching in the second half usually we have a business rule not to layer in revenue for that. So it's a pretty modest revenue contribution for 2021. Obviously, we'd love to exceed that with a strong early adopter program, but we're I think being conservative with that, but we do have very high expectations for the product in 2022.

[Alex Nowak:]

Okay. Got it. And then, how do you think about need and desire to raise additional capital? It looks like you use the ATM again in the first half of the year. So I'm just curious, you got about two years of cash it looks like at the current burn rate, why raise additional capital now versus weight towards the whole transcriptome panel launches and starts to generate revenue at that time?

[Shaun McMeans:]

Alex, this is Shaun. We're just trying to be responsible to the bank and making sure that we have enough runway to get through these key milestones that we've talked about on the earnings call. So, again, opportunistically enter the market we have the tools available to extend runway. And as we indicated in the call, we'll use them when we think they're appropriate.

[Alex Nowak:]

That's great. All right. Thank you. Appreciate it.

[John Lubniewski:]

Thanks, Alex.

[Operator:]

And our next call is from Kristen Kluska with Cantor Fitzgerald.

[Kristen Kluska:]

Hi, everyone. Thanks for taking the question. So I wanted to follow-up about the 15 organizations through their early access program. I know, you're also using this program to collect any last feedback ahead of the launch in the third quarter. So I wanted to ask, if you could talk about the diversification across the pharma and academic translational medicine centers are they using it all for different reasons? And how has the process been about collecting real-time feedback?

[John Lubniewski:]

Yeah. So it's a very structured process. We actually had demand that exceeded kind of the capacity for 15. We're probably going to sign up more. I think we're directionally looking toward maybe 30 by the time, it's all said and done. Right now, we're also trying to get releases so that we can actually start naming some of these folks, because to date, we're still under CDAs with everybody. But no – what we're trying to do is really push this assay around, and then see how it performs in, what I would call the real world. So we've got a white paper that – where we procured samples, but what we want to be able to do is beat it up with other tissue types beyond the five that we've looked at. And then begin to expand it into other sample types like PAX gene, like cells, purified RNA et cetera. And then, this is the time that we're going to make all the final assay tweaks, if you will to really get this product as robust as possible, and as previously mentioned, starting to charge people for the use of it, so that we've got day one customers.

[Kristen Kluska:]

And of these 15 organizations, can you speak to how many were involved for the publication and number two for the white paper? And to that note just curious about the feedback that you've gotten since this white paper two came out. Has it answered some of the questions that lingered since a white paper one came out?

[John Lubniewski:]

Yes. If you remember white paper one the RNA-Seq failed, which is why in the second white paper we increased the sample load for the RNA-Seq to four to eight cuts of tissue to make sure that we had more than -- hopefully more than adequate sample load. And we ran that against one cut from HTG. So by having both arms of that study we were able to show the Pearson coefficient correlation of 0.82 of our product relative to RNA-Seq, which was an important data point. And then again we followed up with the ERCC controls, which we would consider to be synthetic truth if you will to demonstrate co-accuracy and again our correlations there were 0.9 to 0.98. So I think that was a big piece of additional data. However, the 14 new customers we signed up or new organizations we signed up going into the year were signed up before that second white paper came out. We're very, very bullish on that…

[Kristen Kluska:]

Great.

[John Lubniewski:]

Commercially, it's looking good.

[Kristen Kluska:]

Great. Thank you so much. Appreciate it.

[John Lubniewski:]

Yes. Thank you, Kristen.

[Operator:]

And our next question is from Yi Chen with H.C. Wainwright. Please proceed.

[Boobalan Pachaiyappan:]

Hi. This is Boobalan dialing in for Yi Chen. Just really quick. Can you comment on the potential market size of the whole Transcriptome panel? And maybe if you can touch upon the projected revenue from this panel in 2021 and 2022 that will be appreciated. Thanks.

[John Lubniewski:]

Yes. Sure. In our investor decks, we've done quite a bit of analysis on what we consider to be the RNA gene expression profiling market. We sized that at around $1 billion growing at about 15% per year. So we expect it to double over the next five years. So we see that as the total available market for this product. So it's a pretty big market. Now this product is not going to do everything that our RNA-Seq does. RNA-Seq does other things like looks at methylation and alike, but 80% of the utility of RNA-Seq is gene expression. So we're hoping that we can gain either high single-digit or low double-digit share of that market with this product. It's not lost on us that. Our top-selling product today is our whole Transcriptome micro-RNA product and that's a much smaller market, much more niche. So we're again, cautiously optimistic that we've got a great product in a big and growing market with whole Transcriptome. And in regards to total expectations, we'll know a lot more on that once we're on market for a quarter or two.

[Boobalan Pachaiyappan:]

All right. That’s it from me. Thank you.

[John Lubniewski:]

Thank you.

[Operator:]

And our next and final question is from Puneet Souda with SVB Leerink.

[Westley Dupray:]

Hi, guys. It's Westley today on for Puneet. Thanks for taking my question and congrats again on getting the second white paper out. Just -- so I guess starting on the whole Transcriptome product. John, you mentioned a number of customers that you're focused on in the early days of launch when that time comes. Just curious, I mean, about one-third pharma and two-third academic in the early adopter program how does this kind of influence your -- plan on launch? And what type of acceleration should we be expecting to see on the P&L side or on the expense side of things when the launch does come?

[John Lubniewski:]

Yes. Again usually we have a business rule. So great question, Wes. That if something comes in in the second half we generally don't plan substantial revenue for it and we kind of almost leave it as upside. Now that being said because the feedback continues to be very positive from the early adopters and there's kind of more demand to come into that program than we can currently handle. We're actually looking at expanding our commercial team. So we've kind of opened up a couple of additional sales territories that we had not originally planned because we really want to drive this as hard as you possibly can when it becomes available. And it's Q3 that is still looking real good and that's a risk-adjusted plan. And we're really through all the heavy lifting. We're through design input lock. We're really close to design lock and that's the last big trigger before we go throttles up for the product.

[Westley Dupray:]

Great. And then I guess just following right off of that should we be expecting any additional updates on the data front or additional papers after the locks complete or will that be -- will that wait until commercialization?

[John Lubniewski:]

Yeah we'll probably have one more big white paper to support commercialization.

[Westley Dupray:]

Okay. And then I guess switching gears a little bit on the pharma side of things. You highlighted a number of trials that timed out during the year and efforts this year to bring more trials on board. Do you anticipate any of those timed out trials coming back into the funnel? I mean, just having them starting back up again essentially?

[John Lubniewski:]

No I don't. I think because there's usually a time sensitivity for the market windows that these customers are trying to hit with their drug and their indication. Once something times out it's -- they're probably relooking at their portfolio, which a couple of our customers did. And that -- it just continues to be painful to see that the trial volume is down, so substantially more than a 50% reduction in oncology. And it's -- like I said, it's forcing us and we have to go get new customers that are outside of the top five which we have kind of been -- that was our core business if you will. And also we -- moving into other markets besides oncology, specifically immune response is another area where RNA is a very valuable biomarker. We're getting some traction and we really need to continue to make that happen in 2021.

[Westley Dupray:]

Great.

[Shaun McMeans:]

Yeah. I believe our pharma business is probably where we're still going to face the most uncertainty in regards to how and when will it come back. Unfortunately for us pre-COVID that was our biggest market and our biggest driver. So we're working very hard to replace that growth with growth coming out of academia in the US and Europe. And then pushing our pharma …strategies into smaller and more midsized biopharma as well as market expansion. And we started to see the results of that in Q4. As I said, we're seeing a little hiccup here in Q1. We'll know more at the end of the quarter, but we do see the markets coming back. And again, we're looking forward to getting back on a growth trajectory.

[Westley Dupray:]

Great. Appreciate the color. Thank you.

[Shaun McMeans:]

Yeah.

[Operator:]

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And now I'd like to turn the call back over to John Lubniewski for your closing remarks.

[John Lubniewski:]

Great. Thank you, operator. I really want to thank everyone for joining us today, and I really want to thank the employees here at HTG. It was a really challenging year and they just did tremendous work, tremendous self-sacrifice and continue to demonstrate that we can grow this company attaining our technical milestones, our customer growth, our customer diversification what is extremely important for us. And I also want to take the time to thank our Board and our shareholders for their continued support and we look forward to updating you again on our next earnings call. Thank you.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great evening all.