HTG Molecular Diagnostics, Inc.
Q2 2019 Earnings Call Transcript

Published: 6 Aug 2019

[Operator:]

Good afternoon, and welcome to HTG Molecular Diagnostics Second Quarter Earnings Conference Call. My name is Amy, and I will be your coordinator for the call today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes.I would now like to turn the conference over to Monique Kosse from LifeSci Advisors for a few introductory remarks.

[Monique Kosse:]

Thank you, Amy. Earlier today, HTG released financial results for the quarter ended June 30, 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 statements regarding possible additional collaborations with pharma customers, anticipated continued growth in RUO profiling business and related revenues, expected growth in benefits from biopharma programs and collaboration, product development and commercialization activity, 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 second quarter conference call. It's a pleasure to be here again today to report on our business results, and to provide an update on the progress that we're making in building a precision medicine company that can help improve the care given to cancer patients.So first, some high level numbers, we recorded $5.8 million and $9 million of total revenue for the three and six months ended June 30, 2019, which was on track with our current year guidance. Our revenue during the second quarter continued to be driven by strong performance in our product and product-related services business, which grew 119% over the same quarter in 2018. We recognized product and product-related services revenue, including the sale of RUO profiling products and services, as well as the sale of our CE/IVD products in Europe, a $4.4 million and $7.1 million for the first three and six month periods ended June 30, 2019, respectively. This increase primarily reflects the expansion of our menu of RUO assays, and the continued success of our expanded commercial team driving the increasing adoption of our products in the United States and Europe.We recognized collaborative development services revenue of $1.4 million and $1.9 million for the three and six month periods ended June 30, 2019 respectively, representing a 52% and 64% over the respective periods in 2018, reflecting the lower development activity in these programs, and the decrease in the number of active programs from three in 2018, to two in 2019. Our collaborative development services revenue will continue to be episodic. However, we believe in the long-term value of these programs. The R&D expenditures related to these programs and the associated collaborative development service revenues are essentially subsidized development expenses for a potential high-value companion diagnostics for HTG. Although we would have liked to have added a new program this year, we remain optimistic and confident that there will be new programs inbound as we continue to grow our biopharma RUO profiling business.On that subject, our biopharma profile business continues to grow, and we're pleased with its ongoing progress. We now have a dedicated biopharma sales specialist in Europe, and have grown our pipeline to 72 active programs at the end of Q2. We expect this pipeline to continue to grow, both in the number of clients and in the number of programs per client as we finish the rest of 2019. We believe the planned launch of our autoimmune panel later in the year will also further our biopharma market opportunities going forward. As a reminder, our biopharma RUO profiling programs are the feeder system for future CDx opportunities.Moving on to our proprietary diagnostic development efforts, specifically our breast program, we continue to make great progress in our new San Carlos, California facility. The development laboratory is now operational, and we've started the first phase of this project. Our initial product is expected to be a comprehensive RUO breast [technical difficulty] which will be positioned at KOLs [ph] and used to define the future HTG IVD products. We will then follow with a series of IVDs that address currently unmet medical needs and diagnostic intervention points within the breast cancer treatment paradigm.We're very excited about how far and how fast we've come in such a short amount of time. And having a facility in the Bay Area has greatly expanded our capabilities, not only through HTG staff [technical difficulty] with other technology providers and partners.In Europe, we continue to work with lead users to drive the adoption of our products throughout the region. We are adding new customers, and slowly but surely increasing our diagnostic revenues. And with our new biopharma specialists on the ground we expect to begin building out a strong biopharma franchise just as we've done in the U.S. Lastly, we continue to bring new assays and capabilities to the market to continue to drive our RUO profiling business. Most recently, we announced the release of our EdgeSeq Reveal, version 1.2.0 analytical software. The new release contains enhanced functionality enabling data analysis for the HTG Precision Immuno-Oncology Panel, the Oncology Biomarker Panel, and the newly released Mouse mRNA Tumor Response Panel.This updated version of our Reveal software allows customers to analyze and model their data, and then present their findings in graphical forms to share their insights gained from their experiments. We also completed the development procedures necessary to introduce two of our previously released assays, the HTG DLBCL Cell of Origin Assay, and our Lung Fusion RUO Assay, making them compatible with the Thermo Fisher Ion Torrent S5 platform. This makes these assays more appealing in Europe, where Thermo has a larger sequencing footprint. This let's customers work with our assays in a sequencer-agnostic manner, eliminating a potential barrier of adoption.So in summary, we're executing on our business plan and delivering the results on the elements that we can directly control. Our performance this past quarter reflects strength in our core business, especially the strong revenue surge in RUO profiling. We'll continue to be relentless at driving this business, and are very excited about the second-half of 2019.With that, I'd like to turn the call over to Shaun for a review of our Q2 financials.

[Shaun McMeans:]

Thanks, John. We are extremely pleased in the growth of our product and product-related services revenue. As John highlighted earlier, total revenue for Q2 was $5.8 million versus $4.9 million in the same period in 2018, led by $4.4 million in product and product-related services revenue compared to $2 million in Q2 2018. The primary driver of this increase was our RUO profiling business, which included increases on instrument and consumables revenue and in services revenue compared to 2018. This shows the strengthening of our base proprietary technology adoption and the extended reach of our RUO profiling product and product services into increasing opportunities for downstream success in diagnostic applications.As we anticipated, our collaborative development services revenue decreased from the prior year, with Q2 revenue at $1.4 million versus $2.9 million in Q2, 2018, continuing to reflect lower levels of activity in our PDP programs in 2019. Future cost of product and product-related services revenue was $2.5 million versus $1.5 million in Q2 2018, primarily relating to our increased profiling revenue and continuing to reflect lower margin contracted laboratory services for ongoing biopharma customer programs. Selling, general, and administrative expenses decreased slightly in Q2 to $4.7 million from $4.8 million in Q2, 2018. Our research and development expenses increased to $3.3 million in Q2, from $2.8 million in Q2, 2018. This additional R&D expense is being primarily driven by the development of our additional proprietary RUO assays and diagnostic products in 2019.This increase of $2.3 million for Q2 compared to $1 million in Q3 2018 is reflected in research and development expense that's unrelated to collaborative development services revenue. Our operating loss for Q2 was $4.7 million compared to $4.1 million in Q2, 2018. Net loss per share was $0.17 for Q2 compared to $0.14 for Q2, 2018. We currently have approximately 28.7 million shares of common stock outstanding. We ended Q2 with $21.6 million in cash, cash equivalents, and short-term available-for-sale securities. We also have $3.3 million in restricted cash.The company is providing the revised top line guidance for full-year 2019 in the $23 million to $26 million range. We are adjusting the top end of our prior full-year guidance to reflect our expectation for the lower collaborative development services revenue for the reminder of 2019. We continue to expect our 2019 RUO profiling revenue to grow compared to the prior year. I look forward to reporting our Q3 results in November.And 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 think we're off to an excellent start in 2019, [technical difficulty] momentum. We are going to continue to measure our success in three ways. First, we will look to continue to grow our base profiling business to both fund continuing operations as well as to create new PDP opportunities. We believe our Q2 surge in this area validates our strategy and our ability to execute on this strategy. Second, we're going to look to grow our pharma and PDP pipeline in both the number of customers and the number of projects. Our year-to-date pharma program growth reflects a positive trajectory, and we anticipate this trend will continue.Finally, we look to grow our molecular [technical difficulty] business. The progress that we've made in our breast program, the increased adoption of our technology by European customers, and our steady climb in European diagnostic revenue continues to show solid execution against our strategy and expectations. HTG is positioned to be a leader in RNA diagnostics for precision medicine. This has been another strong quarter in executing our business strategy and building out diagnostic franchise, expanding our RUO profiling business, growing our pharma collaborations, and validating our business model. We're energized by these opportunities and look forward to the second-half of the year.With that, I'd now like to open up the call to any questions.

[Operator:]

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] The first question is from Jordan Abrams from Cantor Fitzgerald.

[Jordan Abrams:]

Hey, guys. Thanks for taking the questions. So, last quarter and this quarter you highlighted expanding RUO activity with academic medical centers in the U.S. and in Europe. Can you provide some color on the types of projects that are coming out of those academic customers, and also highlight the traction that you're seeing?

[John Lubniewski:]

Yes, thanks, Jordan. This is John. Actually that growth is coming from two areas, one, yes, is the RUO in the academic medical centers as well as the European medical centers. It's also being driven by the increased, not PDP programs, but the RUO profiling in pharma. But we are having, I would say, above expectations growth in the academic medical centers, and this is driven primarily by people using our products, specifically our Oncology Biomarker Panel and our Precision Immuno-Oncology Panel as a surrogate for using full RNA-Seq cohorts that may range from 200 to a thousand samples. And the reason why they're doing that is because they can get a pretty comprehensive RNA-Seq surrogate off of those panels and only use one cut of tissue. So we're -- these are predominantly coming from key opinion leaders as opposed to principal investigators. So, we had very modest expectations going into the year, and we're actually very excited by the performance of that line of business for us.

[Jordan Abrams:]

Good, thank you. And then switching over to the MDx business in Europe, you talked about having a biopharma specialist. Now you have the capability for [indiscernible], how are conversations going with potential customers or recurring customers, like can you give us any insight into what you're seeing in your European business? Thanks.

[John Lubniewski:]

Yes, so just to make sure we're talking right, the specials we put on was actually for biopharma. We've always had a U.S.-based team; we never had a dedicated specialist in Europe. With the addition of that we're expecting that we're going to be able to build up and obviously not the same size of the U.S., but a nice portfolio of phase 1 and phase 2 programs in pharma focused on biomarker and translational work. In regards to the MDx, which is I think is the core of the question; we have essentially lead users in all of the big countries that are bringing up our DLBCL and our ALKPlus Assay. So they're -- last year was the year that they had to do the concordant studies. This year, they're starting to bring them up to run clinically, as well as to seek reimbursement, and each country is different.Adding the Thermo S5 compatibility was important because as we started to take these products clinically in Europe we found that Thermo actually has a bigger footprint than they do in the U.S. where it's predominantly an Illumina on your MiSeq install base. In Europe, it's probably at least 50% Thermo when it comes to clinical. So now that that barrier has been removed we can move forward with approaching customers with Thermo equipment.

[Jordan Abrams:]

Okay. And lastly, so 72 biopharma pipeline projects now. What's the expectation for the end of the year or what's the goal?

[John Lubniewski:]

We'd like to see close to a hundred. And just to kind of frame that up, because it's a number that people don't always understand. We've got a very rigorous way that we score these. And just back-of-the-envelope if we don't have activity or if the program doesn't continue, we remove it from the list, so for example, just hypothetically if we walked into the year with 70 programs we would expect that 35 of those would just naturally trip [ph] out. So in other words, for us to hit a hundred programs going forward we have to re-up 35 of the 70, and then we have to go find and get put on to 65 new programs. And that's essentially the task of our pharma team, and that's how those numbers come together.

[Jordan Abrams:]

Okay, thank you. That's helpful.

[Operator:]

The next question comes from Alex Nowak at Craig-Hallum.

[Alex Nowak:]

Great. Good afternoon everyone. John, since we talked last we had a failure from one of the indications from PDP Two. Could you just provide investors some more color around what happened here, if it was a failure with your assay, your technology or if it was a failure with the drug partners, the drug? And what are the go-forward steps here with this partner?

[John Lubniewski:]

Yes, so thanks, Alex. Hope things are good for you in the north. Yes, PDP Two is actually, as mentioned before, it's a big program, it cuts across 12 indications. And so the decision not to go forward with our assay was a rescue program where the no-biomarker strategy did not reach its endpoint. They then looked at three biomarkers, a DNA, and RNA, and an IHC. The DNA was not predictive, the RNA and the IHC were essentially about the same. And whether or not they -- this client moves forward, we don't know. They're continuing to work on this indication with us. But I think a lot of it has to do with how well is their response rate for this indication versus what they're competitors are doing.We'll probably continue to know more on this as the year progresses. However, we anticipate that this assay is now going to be used across the other 11 indications by which it's been validated. And I think -- so this PDP Two I think is going to take a couple, three years for it to play out across all of the indications as they start using it in registration trials. So it's not anything that's going to be a short-term play. I think it's all positive, and eventually one of them we would expect is going to have a positive readout using the RNA as the biomarker.

[Alex Nowak:]

Okay, understood. And then just switching over to PDP Three, that program, that's still ongoing as well, we really don't have any color there. Is there anything you can provide us, what we should be watching for this program, timing, and what's your confidence this program can turn into to a companion diagnostic?

[John Lubniewski:]

Yes, PDP Three is a different one, it's more narrow. It's also a combination therapy. It's in one of the big four tumor types. This is a product that went on pause in the first-half because they ran out of sample. And so basically they ran out of the primary sample type. They then asked us to go back and revalidate our assay on a different sample type that they had more of, those are trying to get a big enough end to power the trial with the FDA. That now is back going again, and so we're in the process of generating data for this client. This is a high priority project for this client. I still expect that we should have some information on this by the end of the year, that's the guidance that we get. Whether my optimism or pessimism, I don't know. I mean truthfully they -- we don't -- get the response data. So we're kind of working in a black box.

[Alex Nowak:]

Okay understood. And then, when should we expect to see a PDP Four even a PDP Five, is this a second-half '19 event or is this more like a 2020 event at this point?

[John Lubniewski:]

Good question. Thanks for that one. Obviously we have optics on the pre-PDP progress. I'm fairly bullish that we will see one or two programs early in 2020.

[Alex Nowak:]

Okay, got it. And then just two more real quick, when do you expect your launch the breast cancer program into the clinical markets, and when do you think you're going to share some more detail about the rest of that internal menu that you're developing?

[John Lubniewski:]

Another great question, so we will expect to have the RUO version panel, the bigger panel out early next year on that, depending upon how quickly we can access the clinical cohorts for validation of the clinical product, we will kind of index when that product -- I still think it's a late 2020 or early 2021. We do expect to be able to put on a Analyst/Investor Day on breast. We're trying to line up some dates right now for that in early October, and you should hear more from us on that within the next couple of weeks. And then at that meeting we'll be able to provide -- yes.

[Alex Nowak:]

Got it, that's good to hear, and then, just one for Shaun here, just want to keep you here, have you used the ATM at all this quarter and what are your plans for that facility going forward?

[Shaun McMeans:]

We have not used ATM yet, but we are not ruling out utilizing it in Q3.

[Alex Nowak:]

Okay, got it. Thank you.

[Operator:]

The next question comes from Puneet Souda at SVB Leerink.

[David Delahunt:]

Hey guys, this is Dave on for Puneet. I wanted to get your expectation on additional biopharma programs that could register into the PDP stage, and any color around your longer term expectations there?

[Shaun McMeans:]

Yes, thanks, Dave. As kind of mentioned, we have visibility as our -- as these are pharma programs that we have 72 of these are kind of moving through the pipe and are watching what our partners are doing. As I mentioned, you know, I would have expected we would have had one new one this year, little disappointed that we didn't get there. That being said, I have great optimism that early next year we will have one if not two new ones. In addition to that, we've got two of our -- two top five biopharma that are currently doing a very in-depth study on our technology platform that could potentially graduate us to the same level of platform technology that we've established with PDP Two with that client, and that could really open up a lot of potential trials to us.So, this is a grinded out. It's nice because the business continues to grow. As I mentioned, over 100% of this quarter we still think that this is long-term a 50-plus percent growth business for us in RUO profiling, and eventually they graduate into the PDP programs. So it kind of keeps the business going and builds us in as a platform technology, and over time it will give us these premium diagnostics, which are companions. And then, simultaneous to that, obviously, things that are completely in our control, we will start generating proprietary diagnostics coming out of our San Carlos facility.

[David Delahunt:]

Great. And then, I was hoping you could add any additional color on the conversion rate of these projects into the PDP programs?

[John Lubniewski:]

Yes, it's a bit -- well, right now, unfortunately we're open to PDP readouts, statistically 50% move forward. So we've lost two-point losses so far, but it's -- we're executing the plan, we're adding new customers, I think our reputation in the industry is a number of publications we have just continues to grow. I think we're viewed as a leader in gene expression profiling, especially from tissue, and I think that's eventually -- while we're continuing to grow our business at a nice clip, eventually we'll get one of these homeruns.

[David Delahunt:]

Great. Thanks, gentlemen.

[Operator:]

[Operator Instructions] The next question comes from Yi Chen at H.C. Wainwright.

[Yi Chen:]

Thank you for taking my question. How should we look at the operating expenses during for the remainder of 2019?

[Shaun McMeans:]

I think the operating expenses you should be essentially patterned after what you've seen in the first-half of the year. We certainly see our R&D expense tracking where you saw increase in Q2, and SG&A in general, I think, as we pursue more opportunities on the pharma -- in our pharma pipeline, we see some increases in marketing and selling, but I think first-half is a good indication.

[John Lubniewski:]

Yes, in the first-half, as I mentioned, we basically outfitted the San Carlos lab. So there were some, I would say, calm one-time expenses associated with that. We will probably still spend that same level of spending. It just may move the services and supplies, but I would not like to see us any step change increase in expenses.

[Yi Chen:]

Got it, thank you.

[Operator:]

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

[John Lubniewski:]

Yes, well, first of all, I just like to thank everyone for joining us today, especially for the questions. Also in particular, I'd really like to thank the employees here at HTG for their tremendous work that they put in again this quarter, especially our VERI/O lab. That was tremendous work from the employee base. Initially, I'd like to thank our board and our shareholders for their continued support, and we look forward to updating you again in our next earnings call in November. Thank you.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.