HTG Molecular Diagnostics, Inc.
Q2 2018 Earnings Call Transcript

Published: 12 Aug 2018

[Operator:]

Good day, and welcome to today’s HTG Molecular Diagnostics’ Second Quarter 2018 Earnings Call. I would like to remind everyone this conference is being recorded. And now I would like to turn the floor over to Monique Kosse. Please go ahead.

[Monique Kosse:]

Thank you, Greg. Earlier today, HTG released financial results for second quarter ended June 30, 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 the capabilities of the Company’s technology, activities expected to occur under the company’s various collaborations and other agreements, planned product launches and related expected benefits, expected benefits from pharma collaboration and revenue and operating expense expectations for the full year 2018. 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 turn the call over 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 second quarter conference call. Let me begin by expressing my gratitude to each of our HTG employees for their focus and execution on our 2018 targets and longer term strategies. Resulting in a compounded quarterly growth rate or the last six quarters of 22%. We have worked hard on our talent management initiatives. And as a result, we have a group of employees who are delivering outstanding customer service on a daily basis and the feedback I get frequently is that our dedication really differentiates us and makes a tangible difference for our customers. This brings me to three important highlights I would like to cover with you today that we believe are fundamental differentiators for us in our business. First is our technology. Second is our balance sheet and third is innovation in the incredible set of opportunities in front of us. First on our technology. We believe I want to reinforce that our key technology advantages matter. Our ability to analyze extremely small samples in highly multiplex fashion, utilizing the existing installed next generation sequencers without extraction is highly valued by customers. As our HTG EdgeSeq technology has entered only its third full year of commercialization, its benefits are now being described in a growing number of customer abstracts, posters and publications. The number of which we have tracked over the years. In 2015, we saw 16 customer abstracts, posters and publications. In 2017, that number grew to 22. And in 2018 we have tracked 22 so far to July, a 2x run rate over last year. I want to feature a few of the premier customer publications, starting with the Gerard at our clinical cancer research paper titled and express a signature is an Aid to Histological classification in non-small cell lung cancer, most non-small cell lung cancers are diagnosed from small specimens. In classification using standard pathology can be difficult. The purpose of this study was to develop a messenger RNA expressive signature as an adjunct test for routine histopathological classification of non-small cell lung cancers. Stated in the papers results section, we have developed a practical. We developed a practical version of a classifier using the HTG EdgeSeq nuclease protection based technology in combination with next generation sequencing and that can be applied to Formula six terabytes of data tissues and small biopsies. The HTG EdgeSeq technology was feature for our capability worth was extremely small biopsies which is highly relevant considering a frequent use that needle biopsies and lung cancer and our overall value proposition and clinical diagnostics. Seconds is a January, 2017 Lancet paper by Sharma, P. et al. titled Nivolumab in Metastatic Urothelial Carcinoma after Platinum Therapy

[Shaun McMeans:]

Thanks TJ. Our Q2 total revenue was $4.9 million compared to $1.8 million in Q2, 2017 reflecting an increase 179%. Driving total revenue with our collaborative development services revenues of $2.9 million in Q2 compared to $300,000 in Q2, 2017 included in Q2, 2018 revenue was $486,000 in profit sharing from our former clinical programs. We have discussed expected - I have given you revenues on past calls. Since Q4, 2016, our compounded quarterly growth rate in revenue was approximately 22%, which places us in a run-rate equivalent to a compounded annual growth rate in excess of 88%. Product and product royalty services revenue increased to $2 million in Q2 compared to $1.5 million in Q2, 2017 an increase of 39% year-over-year. As previously discussed initiatives to grow product sales are beginning to appear in our product based revenues with year-over-year increases in instrument and consumable sales. $1.7 million of expenses related to our collaborative development programs are included in research and development expense. And we are primarily responsible for a $1.5 million increase in our operating expenses compared to Q2, 2017. Our research and development expenses unrelated to our collaborative development programs were $1.1 million Q2 compared to $1.4 million Q2 2017. This decrease in non-collaboration R&D spending reflects the shift of R&D resources into our collaboration programs in late 2017 and early 2018. With expansion of HTG's RUO profiling menu, evidenced by T.J's earlier comments on the 3 new panels being launched in the second half of 2018. We expect non-collaboration R&D spending to increase in second half of 2018 in support of our product and product related services revenue growth. Selling, general and administrative for $4.8 million or approximately 8% higher in Q2 compare to Q2 to 2017, mainly attributable to marketing expense, increased headcount and related compensation expense. In addition, with the expansion of our pharma sales team in June 2018, we expect our second half selling expenses to be higher than the first half of 2018 and, while increasing in absolute dollars, we expect selling expenses to remain consistent as a percent of total revenue. Our gross margin increased significantly to $3.5 million in Q2 from $500,000 in Q2, 2017. This increase continues to reflect our pharma clinical program revenue for which associated development costs are reported in operating expenses as research and development expense. We generally expect these development costs to be greater as percentage of collaborative development services revenue during the early phases of our programs. Our operating loss for Q2 was $4.1 million compared to $5.5 million in Q2, 2017. Comparing Q2 with Q2 2017 a $1.4 million decrease on our operating loss has contributed to a lower cash burn rate, together with the elimination of loan amortization with our recent senior debt refinancing, Net loss per share was $0.14 for Q2 and $0.50 for Q2, 2017 and reflects approximately $17.1 million additional shares issued since Q2 2017 primarily from the sale of equity under our former ATM facility and our follow-on equity transaction completed in Q1. We currently have approximately 28.4 million shares of common stock outstanding. We ended Q2 with $40.7 million in cash, cash equivalents and short-term available for sale securities. With our solid balance sheet and started 2018 we are pleased to reiterate our annual guidance of $21 million to $25 million of revenue. I look forward to updating you again on our 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. As Shaun discussed, we are halfway through the fiscal year and also a solid start. Our revenues are up significantly from same period last year and as previously mentioned, approximates a compounded annual growth rate in excess of 88% with our stellar fourth quarter of 2017 a positive outlier driven by substantial collaboration program milestones. As discussed on our last call, we are early in the actions to further improve our profiling product-based sales, and we saw an uptick in profiling product revenues in this quarter with three unit placements. As discussed, we expect to double our profiling menu over the next three quarters which we believe will further incentivize customer capital purchases and boost overall growth rates in our profiling business. I will reemphasize that our RUO profiling business is extremely important as it is our feeder system for future companion diagnostic opportunities and other diagnostic collaborations. Top-line growth is also expected to be very leverageable at our gross margin line as we continue to manage our fixed costs based. We know, we have a lot of work ahead of us, we are optimistic about our future. Q3 and Q4 will be heavily focused on the launch of our new IO panel and the following mouse panels, the continued execution of our PDP programs and getting our new sales team members up to speed and productive. In closing, we believe HTG is well positioned strategically in the precision diagnostic market. I want again to thank our customers and shareholders for your trust and believe in HTG and I look forward to future updates. I will open up the call to questions.

[Operator:]

[Operator Instructions] And first we will hear from Mark Massaro with Canaccord Genuity.

[Mark Massaro:]

Congratulations on the oncology deal. They are a Cambridge mass based company. They seem to have a pretty decent pipeline with ongoing trials. Are you able to share, which cancer states your collaboration is targeting? And then can you maybe comment on any of the terms of the deal and should we expect any payments in the near-term?

[T. J. Johnson:]

Sure Mark. Thanks for the question. First, I’m not able to provide additional color just yet. We are very early in our collaboration and work. We do believe it will have broad relevance across their portfolio and yes, we would expect to see revenues from this in the back half of this year.

[Mark Massaro:]

Okay, that’s helpful. And then wanted to ask about your expanded panel that you showed at ASCO. You indicated that you took orders, but you haven’t yet launched it. I think you are planning to launch imminently. Curious, if there was any delay there or how should we think about that rollout in the back half? And maybe can you talk about the pricing of that panel relative to some of your others?

[T. J. Johnson:]

Sure. First of all, when we preannounce the product at ASCO, we referenced in August launch, I believe we are actually launching Monday, so we are exactly on time to where we plan and expect it to be. We simply have to finalize a lot of our quality system documentation for the official launch of the product as we ship initial customer orders. We wanted to use ASCO and others as a way to, principally get after market to understand the value of this panel. So the folks had an opportunity to think about it as they were looking after back half of your programs and use in the field. We have not really discuss pricing of the product out in the market, but I think market would be very consistent with how we priced other products in the market.

[Mark Massaro:]

Great and clearly, if I can ask maybe at higher level question. Obviously, Illumina is having an unbelievable period of execution. I was wondering if you could comment on any HALO effect you are seeing just as Alumina goes out and strikes deals, are you seeing maybe a similar type of inflection? And I guess if you could maybe speak to your pipeline, I think you commented, if I heard you right 50 partners total I think many of them are from pharma. But can you just speak to the funnel in which disease states or areas are most excitement right now?

[T. J. Johnson:]

Yes, sure. I don't know how much of the called HALO or the pool is Alumina based or just a general velocity of change and advancement in precision medicine. Certainly when we look at what's happening with additional discoveries of that next generation sequencing enables. That is fueled the funnel into the middle of the portfolios in the translational phase. We taking those discoveries and in essence determining clinical relevance. So from our perspective, there is no question and that's a more the effort discovery. And research market accelerates that has been a absolute positive for our business. I think when we look at our portfolio and yes, the number of earlier stage programs mostly Phase 2s that were part with Biopharma. Our predominant focus is in the area of the immune-oncology applications and so many of our customers are looking at combination therapies. These combination therapies approach and trials are more complicated, biologies are little more complicated and we think that that is compelling the advancement of importance of gene expression in these pipelines again very positive overall for HTG as a RNA and gene expression based Company.

[Mark Massaro:]

That is great. And just one last housekeeping one for me. I think the last call, you indicated plans to grow your sales force. I think the number I have in my notes is around 28 or so folks at the end of the year. Am I in the right ballpark?

[T. J. Johnson:]

You are.

[Mark Massaro:]

That is it for me. Thanks guys.

[T. J. Johnson:]

Thank you, Mark.

[Operator:]

And moving from Leerink Partners, we have Puneet Souda.

[T. J. Johnson:]

Hi, Puneet.

[Operator:]

Puneet, you might have yourself on mute, we aren’t able to hear you. I suppose hearing no response, we will move to Chan from H.C. Wainwright. [Operator Instructions].

[Julian Harrison:]

Hi there, this is Julian on for Yi. Regarding that Qiagen collaboration. Are you able to provide us with an approximate date with the next go, no go out decision at this time?

[T. J. Johnson:]

Yes I think that best we can provide is that we believe that the late this year or very early next year on SLW3 which is the second active program. Again it kind a hits that first initial go, no go, the program is associated with BMS. We have not announced any particular for instance going on all goes. The next phase of that program is the application of the assay that we completed into a number of trials, and we will be updating everybody on progress there on future updates.

[Julian Harrison:]

Okay. Got it. Thanks for that. I know this was touched on earlier in the call, but I was just curious if you could talk more about the expected revenue contribution of the Oncologie partnership for the remainder of this year as well as 2019, if possible.

[T. J. Johnson:]

Yes, we did not laid out specifics associated with Oncologie at this time. We will evaluate that as we move forward with the overall partnership, but at this point in time we are not disclosing any specifics.

[Julian Harrison:]

Okay. For my last question, and I'm sorry if I missed it, but I was just curious if there are any updates regarding the ALKPlus Assay Module 4?

[T. J. Johnson:]

Yes, sure. As I noted, no problem. We have had recent conversations with FDA about adding additional gene targets to that panel. Lung cancer has advanced as far as the number the relevant markers over the last three years since we originally designed the product, and those discussions with FDA were very constructive. So our expectation is that, we will be proceeding with that PMA. But right now, we have not finalized the timing associated with it, and I will definitely be keeping everybody abreast as we make those decisions.

[Julian Harrison:]

Okay, great. Thank you for taking my question.

[T. J. Johnson:]

You are welcome.

[Operator:]

Alright. And we will move back to Puneet Souda with Leerink.

[Puneet Souda:]

Yes, hi, T.J sorry about that. I'm just wanted to understand in terms of how you have looked at the funnel before in terms of projects that we are entering the funnel versus where you stand now and how the enthusiasm is among the biopharma to get companion diagnostics. Let me just understand, how are you seeing that versus before? Are you seeing more projects coming into the funnel? What is your outlook sort of here in the next couple of months to a year and when you look at the overall funnel of the projects that are where you are getting introduced to the biopharma early on at the table?

[T. J. Johnson:]

Yes, sure. No, we have definitely seen a fairly consistent growth in our funnel, Puneet, over the last two to three years. Our number today approximately 50 is kind of a high point for us. But our expectations are, with more than doubling of our commercial theme for pharma now in the field that we should see that number continue to grow, and grow fairly quickly. We think it's a very heavy appetite in the market for these late-phase trials. As I communicated before, we believe that the advancement of precision oncology, the need to look at combination trials, has driven a lot of business into RNA expression for molecular subclassification. It's potentially relevant for predicting response. So we are seeing a significant uptake in the overall inquiries. And quite frankly, we believe the limiting factor of our historical growth in the projects was not the market but our market access via our number of people in the field. Now that we have a strong balance sheet and we have brought on number of new highly experienced folks, we are very excited about seeing that pipeline growth in the back half of this year and we will be reporting on it anxiously during our quarters. And I also believe it’s important for investors to understand that certainly a small percentage of these programs in Phase II move into Phase III, which would be considered a clinical development or precision diagnostic partnership opportunity. But the more of these that we have, the better our possibilities and opportunities for converting into these Phase III companion diagnostic deals. So I don’t have any clairvoyance on immediate timing of that we are certainly expecting continues significant growth in front end, and very hopeful that in the near-term, mostly also new opportunities for companion diagnostic agreement. Either within extensions of existing customers or new customers.

[Puneet Souda:]

Okay. And then I just wanted to understand now that you have had experience with pharma one project. How are you, obviously that gave you some level of experience here and now these trials are progressing. And I know pharma two and three are independent, but help us just understand how do you look at the probability success there and any insights that are helping you get gain more confidence with these projects? Thank you.

[T. J. Johnson:]

Yes, sure. We would expect that our both batting average of being associated with the right trials would be better than the industry average. We are very close with our customers through their earlier stage work. Certainly we are not given access are privy to a lot of the confidential information. But I do believe we have got appropriate insights to these collaborations and partnerships to give us a sense that we would expect comparable or better, let’s say hit rate on the programs and are moving forward. Believe me, I think we are going to need a lot more history to needs before we can start putting statistical analysis these things. But in our view is that 50% or so of these Phase III has a pretty good number for how many would progress into a regulatory submission. So I don’t know if that is three out of six or one of our first two but we think that will time will probably likely pan out.

[Puneet Souda:]

Okay. And then just one more, if I can squeeze in. In terms of the early projects that you are receiving from biopharma. Is higher sensitivity still a driving factor for them to get involved early on and help us just educate us in terms of the overall landscape that you are seeing out there in terms of liquid biopsy offerings versus other tissue offerings that are competitive versus I believe, your product which is more delivers more on sensitivity versus other competitors. Just help us understand how their value proposition is resonating?

[T. J. Johnson:]

Sure. I think first and foremost for us without question. Our ability for work with extremely small sample quantities in tissue is our number one advantage in the marketplace. The fact that customers and profile are very large, several thousand gene panels form as well as one sect of a five micron tissue sample is greatly valued. These samples that pharma and researchers have are precious and the fact that they can do more with less with our technology and the value proposition that resonates and without question is our number one pool into these accounts. I think also our team's broad experience and partnering with pharma all the way from biomarker discovery through regulatory submission and commercialization both from our times as an [panel] (Ph) and here. And it also greatly valued as pharmas looking for a very agile, fast-moving and very capable diagnostic partner. We believe tissue is going to continue to be dominant and extremely important, but as I indicated in my comments, we believe the liquid biopsy market has great value for us in the future. And we are actively working with the number of our key opinion leaders and advisors on bringing appropriate applications for the HTG EdgeSeq technology in liquid biopsy as I mentioned earlier areas such lysosomes and platelets as an example. So we are absolutely monitoring and excited about the liquid biopsy market. We think it has probably less immediate clinical value as a lot of this science being worked out and we believe tissue will always be extremely important, but we definitely will play and take advantage of the market as the sample type become more applicable into the action clinical labs as we move forward.

[Puneet Souda:]

Okay great. Thank you.

[T. J. Johnson:]

You are very welcome.

[Operator:]

And ladies and gentlemen, that does conclude our question-and-answer session for today. I would like to turn the floor back to management for any additional or closing remarks.

[T. J. Johnson:]

Yes. This is TJ. I want to thank everyone for joining us today. And I enthusiastically look forward to providing more information on our next earnings call. Have a good rest of the day.

[Operator:]

Once again ladies and gentlemen that does conclude today's earnings call. Thanks for joining us. You may now disconnect.