HTG Molecular Diagnostics, Inc.
Q1 2018 Earnings Call Transcript

Published: 11 May 2018

[Operator:]

Good day, and welcome to the HTG Molecular Diagnostics' First Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Monique [indiscernible] from LifeSci Advisors. Please go ahead.

[Unidentified Company Representative:]

Thank you. Earlier today, HTG released financial results for the quarter and year ended March 31, 2018. 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 expected revenue and other benefits from pharma collaborations, possible additional collaborations from existing pharma customers, revenue and operating expense expectations for the full-year 2018 and expected improvement in gross margins. These forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond HTG's control that may cause HTG's 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 filings. HTG cautions listeners not to place undue reliance on any forward-looking statements. HTG is providing this information as of the date of this call and HTG undertakes no obligation to update any forward-looking statements. With that, I would like to now turn over the call to T. J. Johnson, Chief Executive Officer. T.J?

[T. J. Johnson:]

Thank you, Monique. Good afternoon, everyone and thank you for joining us on our first quarter conference call. Let me begin by expressing my gratitude to each of the HTG employees for a great start and strong start to 2018. We finished Q1 with $4.2 million in revenue an increase of 200% over Q1, 2017. We remain confident in our full year revenue guidance and have increased the low end of our guidance to $21 million from up from $20 million. During the quarter, we continue to execute well in each of our Biopharma precision diagnostic partnership or PDP programs. Meeting plan milestones with good and solid feedback from our clients. During the quarter, we added a third PDP program that is now in early phase development. Inside the second amendment for our first PDP program adding milestones worth an estimated most single millions of dollars associated with final assay development and regulatory submission preparation activities. In addition to our three active PDP programs. We increased our earlier phase pipeline to approximately 45 projects across our US and European teams at quarter end. As we've discussed on earlier calls, this is an important metric for us [indiscernible] biomarker projects to our pipeline or feeder system for our PDP program opportunities and future diagnostic menu. Historically, we've grown our research use only or RUO profiling business by approximately 25% to 30%. This growth has been driven primarily by our increased biopharma project pipeline, but also expansion of our work with academic medical centers in the US and Europe. From much of 2017 and early 2018, our R&D resources were fully deployed on the PDP programs driving our collaboration revenues and more importantly new possible companion diagnostic assays. Recently we've been able to increase our development capacity and now have three new RUO profiling assays in development. During our last earnings call, I mentioned our plans to launch a new amino oncology profiling panel. After extensive analysis with our key immune-oncology advisory members I'm thrilled to announced the early access launch of the HTG EdgeSeq precision Immuno-Oncology Panel with the first deliveries be available by early Q3. We're featuring this product at the ASCO Conference this year being held at Chicago on June 1 to 5. This new cutting edge panel is expected to set the standard for gene expression profiling in the IO or Immuno-Oncology space. With over 1,300 gene to content covering critical new applications. Our panel has been designed to simplify complex tumor biology and accelerate the development of clinical biomarkers. As Immuno-Oncology matures as a field. It is critical that translation tools evolved with the science to address immunotherapy required resistance or lack of response being in broader cancer patient populations. We have designed this panel to facilitate the molecular subtyping [ph] of tumors allowing for the potential stratification of cancer into biological sub groups. Which might be sensitive to newly developed combination treatments? The new panel builds on HTG's existing portfolio of assays which levers next-generation sequencing to advanced precision oncology. We believe this new panel should be additional catalyst to grow our pipeline of biomarker programs in the second half of the year. Diagnostics play a key role in Immuno-Oncology and HTG fully intends to be a key partner for our Biopharma clients. Commercialization of our CE-IVD products in Europe continues with excellent progress. Customers appreciate the value proposition of our HTG EdgeSeq ALKPlus EU products lower sample and fit requirement and the ability to multiplex several important fusion markers versus current standards such as immunochemistry and TISH [ph] which typically requires multiple sections of tissue as these marker is run separately. Our two early adopter sites in France and Germany have seen excellent correlation versus their gold standard test method and interestedly, when investigation this cordon [ph] cases [indiscernible] determined that the HTG Assay often has more robust results. Results of these studies will be shared at the German Pathology Congress later this month with another larger update at the European Congress of Pathology at September. As for our DOB sales sell of origin, EU Assay, we're working with reference sites in Germany, Spain, Switzerland and UK to gain acceptance in this emerging test. We continue to believe that new drugs targeting the cell of origin will be a driver of this test of the future. While oncology is a primary focus of our diagnostic efforts, we also just completed a non-exclusive license to supply agreement with Firalis assays that enables Firalis, to use HTG EdgeSeq instrument in chemistry to develop and commercialize a theranostic assay as intended to predict response to anti‑TNF assay therapy for rheumatoid arthritis patients. Their agreement also includes certain rights for other expressive research use only products and services for inflammatory autoimmune diseases. Firalis is one of our new [indiscernible] customers in Europe and we're excited to partner with them in this important precision medicine initiative. Our agreement with Firalis is another example of HTG utilizing collaboration to generate compelling test menu for our EdgeSeq platform. RA affects millions of patients and this theranostic assay could be a very meaningful revenue stream for HTG in the future. I'd also like to note that we believe the recent announcement by CMS concerning their national coverage decision for NGS based FDA approved companion diagnostics for advanced cancer is believed to be very favorable for our business. The majority of our plant diagnostic assays are expected to be improved companion diagnostics with what now appears to be a clear reimbursement path for US market. Also during the quarter we successfully completed in honor with our registrar who's recommending continuous certification and transition to the ISO 1345 2016 standard in July. Maintaining a strong quality system is very strategic and crucial to our growth plan. So in summary, we had a very productive first quarter. Q2 is off to a good start and we remain excited about 2018 and beyond. With that I'll now turn the call over to Shaun to review quarter one financials.

[Shaun McMeans:]

Thanks T.J. our Q1 revenues were $4.2 million compared to $1.4 million in Q1, 2017 reflecting an increase of 203%. This growth was driven by a collaborative development service revenues of $2.4 million in Q1 compared to zero dollars in Q1, 2017. Including Q1 revenue was $150,000 in profit sharing from our pharma clinical programs. Our development revenue continues to have a significant impact in our total revenue and is expected to drive 2018's overall results. Product and product related service revenue increased to $1.7 million in Q1 compared to $1.4 million in Q1, 2017 an increase of 26% year-over-year. Our Q1 reflects the expected unevenness to pharma revenues and the period-to-period variability mentioned in our prior earnings calls. And as T.J. indicated earlier we have increased the lower end of our full year 2018 revenue guidance and now expect 2018 revenue to be in the range of $21 million to $25 million. The expenses related to our collaborative development programs amounting to $1.6 million are included in research and development expense, which was partially responsible for the increase in our operating expenses to $8.2 million in Q1 compared to $5.5 million in Q1, 2017. Selling, general and administrative expenses were $1.4 million or 33% higher in Q1 compared to Q1, 2017 mainly attributable to non-cash stock compensation expenses. OpEx spending is expected to increase in Q2 relative to Q1 as we increase our activities related to our pharma clinical programs. We will continue to invest in sales and marketing programs as we increase our pharma sales headcount and commercialization efforts of CE-IVD products in Europe. Our gross margin increased significant to $3 million in Q1 from $76,000 in Q1, 2017. This significant gross margin increase reflects our pharma clinical program revenue for which related costs are reported in operating expenses as development cost and we generally expect these associated costs to be greater as percentage of revenue during the early phases of our collaborative development programs. Our operating loss for Q1 was $5.2 million compared to $5.4 million in Q1, 2017. Net loss per share was $0.22 for Q1 and $0.73 for Q1, 2017 and reflects approximately 19.6 million additional shares issued since Q1, 2017 from the sale of equity under our AGM facility and a recent follow-on transaction. As a reminder, from its inception in 2017 through January 8, we raised approximately $21.1 million of gross proceeds from our ATM facility which we mutually terminated on February 23. On January 23, we completed our follow-on equity financing raising approximately $40.4 million in gross proceeds in sale of our common stock. We currently have approximately 28.4 million shares of common stock outstanding. We ended Q1 with $45.7 million in cash, cash equivalents and short-term available for sale securities. This includes net proceeds of $2.5 million from the refinancing of our senior debt facility in late March. Our new debt facility provides the company additional near term cash runway with interest only terms replacing amortization of the prior facility and revolving line of credit to leverage a portion of our working capital. In addition, we've access to $13 million of additional term loan proceeds in 2019 and are able to expand the revolving debt to total of $10 million both under certain conditions. We believe this financing activity has significantly strengthened the company's balance sheet adequately funding the company for future periods and allowing our management team to focus on the execution of the business plan. I look forward to reporting additional progress on future earnings calls. At this point I would like to turn the call back to T.J. for closing comments.

[T. J. Johnson:]

Thank you, Shaun. Our strategic goals for 2018 remain consistent. Continue acceleration of customer adoption, commercialize our CE-IVD products in Europe. Excel in implementation of our PDP programs while expanding the biopharma pipeline and maintain a prudent approach to cash management. We've progressed well in all of our objectives with our broadening and deepening of our customer base, excellent initial results from our CE-IVD product studies in Europe and expanding pharma pipeline, excellent execution by our PDP teams and strong balance sheet position. The recruitment, retention and development of talent is of top priority for me and our senior team. We continue to make important investments in field of support resources for our sales growth as well as capacity for added product development programs. HTG is an exciting growth company and we're having success bringing in experienced talent in addition to continue development of our existing organization. We believe talented people make the difference in today's competitive markets. In the first quarter, we promoted John Lubniewski to President and Chief Operating Officer after serving for seven years as our Chief Business Officer. John has done a tremendous job for us in and his promotion is a natural progression for HTG as we continue to align our organization to our strategic objectives and provide growth opportunities for our team. In closing, we believe HTG is well positioned strategically in the precision diagnostic market and we're off to falling start to 2018. I want to again thank our customers and shareholders for your trust and belief in HTG and look forward to future updates. I'll now open up the call up for questions.

[Operator:]

[Operator Instructions] and we will take our first question from Mark Massaro with Canaccord Genuity.

[Mark Massaro:]

I want to just congratulate John on his promotion President and COO, certainly well deserved.

[John Lubniewski:]

Thanks Mark.

[Mark Massaro:]

Congrats in all the progress. I guess I'm interested in the Firalis deal, predicting patient response for therapies in rheumatoid arthritis. T.J. maybe could you comment on whether or not this particular program needs to be successful in order to maybe spawn additional agreements in areas like immune disorders because obviously early applications and next-gen sequencing tend to be focusing oncology. So I guess I'm curious if you could maybe paint a picture of where you see your growth in oncology versus disease states like arthritis and others related.

[T. J. Johnson:]

Yes, Sure Mark. First of all we've been working with Firalis for a number of years now, they were one of our first customers to adopt our technology in Europe. They've developed this prognostic assay via working with us in a research project. The agreement now provides them the license and ability to move that assay from research into the clinic. I'm certainly not an expert in the area of rheumatoid arthritis, but we are very excited about this partnership because of the size of the market and the - what appears to be an unmet need with the sizable number of patients not responding to the primary therapy and obviously knowing that for having a prognostic in advance have to very beneficial for caregivers and clinicians. We're highly oncology focused. We've got a laser approach to how we're looking at our growth mark in Immuno-Oncology but we're certainly not limited and we do not believe that gene expression profiling is limited to only one disease state. So in addition to Firalis, we have a number of other customers that are working with our technology and other disease states. So while we focus our internal development and work primarily in oncology. We're constantly looking for collaborations that would allow us to expand the utilization of our technology, but we want to do that in a clinical market where we can leverage or raise [indiscernible] financial model. So I think Firalis is very important to us. I don't think it's a pivotal yes or no type of answer to our ability to operate outside of oncology, but we felt it was certainly a great place to play some initial bets.

[Mark Massaro:]

It's great and for the new IO panel targeting over 1,300 genes. For those that are maybe less familiar with the competitive landscape for large gene panels in oncology. Can you just comment on the competitive environment and also as it relates to reimbursement for this panel? Where do you think that reimbursement will come in for a panel of that size?

[T. J. Johnson:]

Yes, first of all we believe this panel at the gene content is going to be at least double the content of other competitive products. Obviously some folks are utilizing full RNA seek to do similar types of studies, but for targeted panels in this space. We believe this will be a very comprehensive panel and larger than other offerings. We designed this panel with work from a fairly extensive advisory group of Immuno-Oncology specialists and experts to cover a broad range of applications. And Mark that's really how we came at the design of the panel. We started first with, what are the unmet needs or the emerging applications that translational and clinical researchers are trying to uncover and learn about the field of IO and then based on that, what are the genes that are relevant to those applications and then let's build them and [indiscernible] panel. Our expectation is that, this panel would not be one that we would take into the clinic as of exist today, but it would be utilized in a broader way to establish, determine smaller signatures and smaller panels in all of these various applications. So our aspirations are, that this panel will be a broad tool for our customers and within generate a multiple other smaller panels that would be very specific to a drug or combination therapy. So we're very excited about this product. We've not launched new products into our RUO profiling business in quite a while as the dominant use of our R&D resources have been for our PDP programs. Now that we've got a strong balance sheet, we've been deploying that into added resources and R&D, to not only work on these PDP programs, but now to really begin to pump the front end of our pipeline and we believe this next generation IO panel will be the first of several new product launches for us in the balance of the year. We're really featuring this hard at ASCO in June and really looking forward to getting further customer feedback on it.

[Mark Massaro:]

That's great and I apologize. I got in the call late. Did you provide an update on the FDA submission and are you still optimistic of an approval by the end of 2018?

[T. J. Johnson:]

Yes if you're referring the ALKPlus, no I've not provided any different update that we're still fully budgeted to finish that program in this fiscal year. But we're also currently working pretty feverishly on preparation of other PMA filings and based on how those play out with our pharma clients in the near term. We will make the final determination on the timing of the module for ALKPlus, we're further incentivized on ALKPlus in the US. Obviously by CMS with national coverage decision that because we believe the ALKPlus test fits the description under that national coverage decision for reimbursement perfectly.

[Mark Massaro:]

Yes, I was asking ALKPlus. Thank you for that. And obviously congratulations on strengthening the balance sheet. Your G&A was a little bit higher than us, can you comment on where you're with the sales force and any hirers you might have made in the quarter?

[T. J. Johnson:]

Yes I think our SG&A was a little above our expected run rate in the first quarter. And that was associated with lot of what I think within one-off expenses. We would expect our SG&A rate to run a little lower than that for the full year. but our current plan and we're already in process is taking our full field resources both in US and Europe and in field based folks from about 20 to nearly 30. So the bulk in that, that's going to be focused on pharma team for actively on boarding and interviewing and recruiting to really add some booster capacity to our team to take advantage of what we think is the available customer demand.

[Mark Massaro:]

Great and last one from me is a two-parter [ph] I guess understanding that your business is lumpy and subject to timing from payments from partners. Do you expect revenue to increase sequentially and then on a similar token, you've now driven gross margins north of 70% for three consecutive quarters. Should we expect that trend to continue?

[T. J. Johnson:]

On your second question, the answer is yes. We believe margins that we saw in Q1 are going to be very indicative of what we expect to see for the full year. As far as the lumpiness we obviously are measuring ourselves sequentially year-over-year. We do not expect to see sequential quarters. We don't have enough history yet Mark to say that there's some sort of trend then we can look back on to seasonality or patterns. So we're learning about how these milestones are going to fall and how revenues are going to fall as we go, but we're highly confident in our year-over-year sequential growth. We're just not able to predict sequential quarters just yet.

[Mark Massaro:]

Great, thanks guys. I look forward to seeing you at ASCO.

[T. J. Johnson:]

Thank you, Mark.

[Operator:]

[Operator Instructions] and we'll take our next question from Yi Chen with H.C. Wainwright.

[Julian Harrison:]

This is Julian on for Yi. I do apologize if this was already covered in your prepared remarks. I wasn't patched into the call and filled out 4

[T. J. Johnson:]

No, it's not. It's a separate agreement.

[Julian Harrison:]

Okay, are there any updates on that at the time?

[T. J. Johnson:]

No updates at this time. We're patiently or impatiently waiting.

[Julian Harrison:]

Okay, great. Thank you. That's my only question.

[T. J. Johnson:]

You're welcome.

[Operator:]

[Operator Instructions] it appears there are no further questions at this time. I would like to turn the conference back to management for any additional or closing remarks.

[T. J. Johnson:]

Yes. Thank you everyone for joining us today. I really look forward to updating being on our next earnings call. Have a great afternoon and evening.

[Operator:]

That concludes today's presentation. Thank you for your participation. You may now disconnect.