HTG Molecular Diagnostics, Inc.
Q1 2019 Earnings Call Transcript

Published: 10 May 2019

[Operator:]

Good day and welcome to the HTG Molecular Diagnostics Inc. First Quarter 2019 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to your, Monique Kosse. Please go-ahead ma’am.

[Monique Kosse:]

Thank you, [Dorie]. Earlier today, HTG released financial results for the quarter ended March 31, 2019. Before we begin the call, let me remind you that the company's remarks include forward-looking statements within the meaning of federal securities laws, including potential go-forward decisions by PDP customers, recent product launch expected instrument placements in Europe, expansion of the company’s relationship with Illumina, product development efforts, possible additional collaborations with pharma customers and revenue expectations for the full-year 2019. These forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond HTG's control that may cause HTG actual circumstances, events or results to differ materially from those projected on today's call. Factors that could cause events or results to differ materially include those risks and uncertainties described from time to time in HTG's SEC filing. HTG cautions listeners not to place undue reliance on any forward-looking statement. HTG is providing this information as of the date of this call, and HTG undertakes no obligation to update any forward-looking statement. With that, I’d like to turn the call over to John Lubniewski, Chief Executive Officer. John?

[John Lubniewski:]

Thank you, Monique. Good afternoon, everyone, and thank you for joining us on our first quarter conference call. I’m pleased to be here today on my first call as CEO of HTG. I’m passionate about billing a company that helps us improve the lives of patients, creates challenging and exciting work environment for employees, and provides a strong economic return for investors. Even though there’s been a change in the CEO position, our company mission remains the same. To enable precision medicine at the local level. It’s been a very smooth transition as TG and I continue to work closely on key business strategies. I’m pleased with the progress we continue to make as we move forward in our goal of advancing that precision medicine. We finished the first quarter with $3.2 million in revenue, which was above what we had guided on our last earnings call. As a company, we’ve made tremendous strides this quarter in the areas that we can control our profiling business, which was up 54%, compared to last year. Revenues during the quarter, however, were impacted by the pause in our two active PDP programs, which continued as our clients evaluated results. As we previously communicated, we’re waiting go-forward decisions and expect news on one or both of these programs soon and plan to update investors once we have decisions from these partners. While we await the decisions on our PDP programs 2 and 3, we’re pleased to see continued growth in our profiling business driven primarily by our increased Biopharma project pipeline, which now sits at total or 70 total programs in Europe and United States and the expansion of our activity in the academic medical centers also in the United States and Europe. Setting the stage for continued growth in this segment, we recently announced the launch of a new HTG EdgeSeq Mouse mRNA Tumor Response Panel. This panel measures so 1,600 mouse mRNA targets in one extraction-free assay, and is designed for use in mouse oncology models to help identify and quantify expression of genes and gene pathways in a variety of sample types, including formalin-fixed, paraffin-embedded tissue. We expect the newly launched mouse mRNA panel to continue to help drive our growth and believe it’s a logical adjunct to our HTG Seq human based tissue panels already in early stage pharma activity. Commercialization of our CE/IVD products in Europe continues with steady progress. While negatively nice with first quarter revenues was 189,000 versus 46,000, an increase of almost 300% over first quarter last year. We’re seeing interest from a broad range of potential clients and are very excited about the capital sale of an EdgeSeq instrument to one of our early adopter diagnostic laboratories in Germany during the quarter. This laboratory specifically noted the low sample requirements and the ease of implementation of our workflow as the two key reasons for adopting the EdgeSeq technology and test menu. They plan to offer our HTG DLBCL, and ALKPlus CE/IVD test for patients and we look forward to working with them to help them grow. We’re expecting additional instrument replacements in Europe during 2019 as we continue to grow our diagnostic business in this very important geography. Earlier this month, we announced the expansion of our IVD test development and component supply agreement with Illumina. Under the amended agreement, HTG can now submit development plans to Illumina in the fields of autoimmune, cardiovascular, and fibrosis disorders and diseases, adding to our ability to submit oncology development plans. We’re excited about the possibility of expanding our work with Illumina as we expect it to further position HTG to develop new RNA based diagnostics in these additional disease areas. Next, I want to highlight the tremendous work that the team has done to successfully open our San Carlos, California Development facility on April 1. Our key technical and business staff are now on board and have moved into the new facility and are beginning their early stage work for HTG's comprehensive breast assay, our flagship MDX project. Our mission in San Carlos is to develop FDA approved clinically relevant test kits using HTG’s unique EdgeSeq technology capability that provides clinicians with actionable clinical information to enable a more precise and timely treatment plan for cancer patients. This is team is expected to develop diagnostic assays that are unique to HTG, but complement our emerging companion diagnostic portfolio. We expect to be able to share our initial product roadmap for this initiative by late summer. Finally, during the quarter we successfully completed our recertification audit for the ISO registrar who's recommended continuous certification for ISO 1345 2016. Maintaining a strong, and compliant quality system remains a foundation for our business strategy. In the long-run, we believe that building high-quality products and being a good corporate citizen from a compliance standpoint will be market differentiators for HTG. In summary, we had a very productive first quarter and Q2 is off to a very solid start. We remain very excited about 2019 and beyond. With that, I’d like to turn the call over to Shaun of a review of our Q1 financials.

[Shaun McMeans:]

Thanks John. As John mentioned, total revenue for Q1 2019 was $3.2 million versus $4.2 million in Q1 2018. Our Q1 profiling revenues increased by approximately $900,000 or 54% to $2.7 million versus $1.7 million in Q1 2018. Building on the strong profiling growth we reported in 2018, we are very pleased to report our profiling revenue growth in Q1 2019, which continues to reflect the growth in our recurring base business of products and product-related services and the potential downstream opportunities and future diagnostic assays. As expected, the collaboration development services revenue decreased in Q1 2019. We reported $0.5 million in Q1 2019 collaboration revenue versus $2.4 million Q1 2018, primarily reflecting the pause in PDP activity mentioned previously. Our cost of product and product-related services revenue was $2 million in Q1 2019, compared to $1.1 million in Q1 2018, reflecting the increase in our profiling revenue. The profiling margins for the first quarter of 2019 were impacted by revenue associated with lower margin, subcontracted laboratory services for an ongoing pharma customer program. Selling, general, and administrative expenses decreased approximately 22% to $4.4 million in Q1 2019, compared to $5.7 million at Q1 2018. This decrease is mainly attributable to a decrease in stock-based compensation cost in Q1 2019 versus Q1 2018. New product related research and development expenses unrelated to our collaborative development programs amounting to $1.6 million for Q1 2019, compared to $1 million in Q1 2018. Our increase in non-PDP R&D spending reflects increased activity developing additional profiling menu such as our new Mouse mRNA and autoimmune panels and the initial activity from our California-based [breast assay] development team. PDP R&D reflects the low level of activity in Q1 2019 versus Q1 2018, as we await news from our PDP customers. As we have spoken to in prior calls, PDP R&D spending can vary significantly from one period to the next due to the timing of key program milestones and development activities, generally tracking changes in PDP revenue. Our operating loss for Q1 2019 was $5.3 million, compared to $5.2 million in Q1 2018. Our operating cash burn for Q1 2019 was approximately $6.1 million and reflects variable and other compensation payouts, which were accrued for in 2018 and paid in Q1 2019. Net loss per share was $0.19 for Q1 2019 and $0.22 for Q1 2018. The reduction in our year-over-year loss per share reflects additional shares of common stock issues from our stock compensation program. We currently have approximately 28.6 million shares of common stock outstanding. We ended Q4 with $25 million in cash, cash equivalents and short-term available for sale securities. The company is continuing to provide top line guidance for full-year 2019 in $23 million to $28 million range. We continue to respect our 2019 RUO profiling revenues to grow at 40% or more over the prior year and continue to model a wide range of potential PDP revenues based on our clients timing and go forward decisions. I appreciate the tremendous efforts of our team and look forward to reporting our Q2 results in August. At this point, I would like to turn the call back to John for closing comments.

[John Lubniewski:]

Thank you, Shaun. As mentioned earlier. I believe we’re off to an excellent start in 2019. We're going to continue to measure our success in three ways. First, our ability to grow our base profiling business greater than 40% year-over-year to help fund continuing operations, as well as to create new PDP opportunities. Next, growing our Pharma and PDP pipeline in both numbers, our customers, and numbers of projects. And last, growing our molecular diagnostic business whether it be with the positive PDP readout, continuing to grow our European diagnostic business, or by achieving key project milestones in our newly initiated our breast program. We continue to see tremendous opportunity at HTG. In the last quarter, we've added significant organizational capability, expanded our potential markets, and demonstrated strong execution against our plan. We believe we’re setting the company up for significant revenue growth in the coming years. In summary, I believe HTG to be very well-positioned to help drive precision medicine by developing advanced RNA-based NGS diagnostics that help us get the right therapy to the right patient. We’re excited about what this means to patients to investors and to our employees. With that, I’d like to open up the call for questions.

[Operator:]

[Operator Instructions] And we will take our first question from Alex Nowak with Craig-Hallum Capital Group. Please go ahead.

[Unidentified Analyst:]

Hi, good afternoon everyone. This is actually Will on for Alex today. Thanks for taking our question. Just a couple of quick one’s for you. To confirm, I guess first, the timelines for the [indiscernible] of both PDP programs that shifted a little bit the last couple of quarters, the team said on the last call, the next one or two quarters is kind of what we should be expecting, just trying to get a sense of you guys current expectation? Thanks.

[John Lubniewski:]

Thanks, Will. This is John. Obviously, trying to predict when Pharma is going to move is challenging at least. We are in contact with them just about every single week if not multiple times a week. We’re still expecting as is indicated in the script that we will have some news on both of these programs again within probably one to two quarters if not sooner.

[Unidentified Analyst:]

Perfect. Thanks that’s very helpful. And then you John. Just concern out there are about PDP two says it’s a go and wants to move forward, just what does that mean for HTG, may be if you could just lay out the pathway here from a go decision to getting your test FDA approved, getting it into the sales channel and then into the end-lab customers, if you could just lay that out, that would be helpful as well? Thanks.

[John Lubniewski:]

Thanks again Will. So, with the go decision, essentially there will be a registration trial, clinical data set that would then be generated that essentially is the clinical module associated with the PMA. We will then submit that PMA or we would go in with the drug or most likely for a co-approval. That process depending upon whether it’s an expedited or traditional could be four months, it could be 12 months. Simultaneous to that, we will be working with our PDP partner QIAGEN to essentially ensure that we’ve got adequate market access in all of the countries that PDP client Number 2 would look to commercialize upon getting approval for that therapy. So, that body of work would be happening simultaneous to the clinical submission for the PMA. And so probably somewhere between 6 and 12 months from now we would expect to start breaking that test for actual patient testing upon approval of the drug.

[Unidentified Analyst:]

Perfect. Thanks again. And then just one more to wrap it up. You said previously, you were planning to get 1 to 2 new PDP's per year. I know it’s tough, there is limited visibility there, but do you reiterate that goal for 2019?

[Shaun McMeans:]

We do. I think we’ve got visibility on at least one that we’re hoping. Probably very late in the year and obviously we’ve got a sales team out and we’re working with a variety of different clients and two would be our objective.

[Unidentified Analyst:]

Understood. Thanks guys.

[Operator:]

And our next question comes from Jordan Abrams with Cantor Fitzgerald. Please go ahead.

[Jordan Abrams:]

Hi guys. Just confirming. Early-stage projects in quarter, what was the number there?

[Shaun McMeans:]

[77].

[Jordan Abrams:]

On the last call it was about 80, I'm curious why this step down?

[Shaun McMeans:]

Some of the programs timed out. We have a set of rules by which we count them and if the project had around pause for more than 12 months, we actually time and out. Our goal still remains targeting 120 to exit the year.

[Jordan Abrams:]

Okay. Thank you. That’s helpful. And then also during the quarter, you mentioned it during the script that you extended the agreement with Illumina and in the past you called out autoimmune and you expect something this year, but you also mentioned cardiovascular and fibrosis, it would be helpful to have a little bit of color on maybe where in those markets you might be targeting or what you at least see as attractive?

[John Lubniewski:]

Yes. I mean as previously mentioned – so first of all thanks for calling Jordan. To us, the part about the Illumina expansion is exciting because those are very big markets. Autoimmune, we’ve already discussed a little bit in the last call. Cardiovascular, we actually have had collaborators and we’re working in areas like transplant for example in cardiology, and what’s exciting is some of these applications are actually a liquid biopsy sample type. Again, our technology works beyond just FFPE. We work with plasma and serum, and as our customers are pulling us into these new markets that’s where we will be developing new panels to move into various different indications.

[Jordan Abrams:]

Great. And just lastly, product revenue came in higher than your guide, I mean what’s your level of confidence that [indiscernible] from the REO business and the MDX business seem to continue and what’s driving that level of confidence?

[John Lubniewski:]

Yes. Thanks again for that question. I mean, we remain very bullish from the last time we have talked. We think we’re 40% to 50% growth in our core profiling business. This year and quite frankly in the out years as well. What’s driving that is a need to molecularly profile in the drug space are now increasingly we have a very nice quarter in the academic space. You know, we have got a very good solution for gene expression profiling for RNA. So, that’s what kind of drug drove the overage there and why we remain very consistent with our guidance for the year.

[Jordan Abrams:]

Okay. Thanks for taking the questions.

[John Lubniewski:]

The variable is obviously the PDP.

[Jordan Abrams:]

Okay. Thanks guys.

[Operator:]

[Operator Instructions] We’ll take our next question from Puneet Souda with SVB Leerink. Please go ahead.

[David Delahunt:]

Hi, guys. This is David Delahunt on for Puneet. I was wondering if you could add any more color around the strength of the pharma project funnel that you're seeing?

[Shaun McMeans:]

Yes. We added one new customer for the quarter Dave. That to me is a big metric, which is why we track both the number of programs and the number of new customers. I think what we’re teed up to kind of start growing that. Again, as indicated by TJ in a previous call, we had not a lot of sales presence in the field until about nine months ago when we added five sales territories and we’re now starting to see the effects of that commercial investment by starting to bring in some new programs.

[David Delahunt:]

Great. Thank you. And one more. If you could talk about your expectation for contribution from PDP Two and Three and the full-year guide? Sorry if I missed this in the script.

[Shaun McMeans:]

Right now, we have limited visibility on where those programs are going. We have had dialogue with PDP Two in the last couple of days. We’re hoping we’re going to be able to have some color there soon, so that we can even financially plan for it. PDP Three is still a program that is with the highest levels of management of that company and we have not heard a direction on where they are going with that.

[David Delahunt:]

Alright. Thanks for that color. Appreciate it.

[Operator:]

[Operator Instructions] And it appears there are no further questions in the queue at this time. I would like to turn the call back to management for any additional remarks.

[John Lubniewski:]

Well, thank you. I’d like to thank everyone for joining us today. In particular, I’d like to thank our team and employees here at HTG for the tremendous work that they’ve put in this quarter and previously. Additionally, I’d also like to thank our board and our shareholders for their continued support. We look forward to updating you again on our next earnings call. Thank you.

[Operator:]

This does conclude today's call. Thank you for your participation. You may now disconnect.