HTG Molecular Diagnostics, Inc.
Q3 2018 Earnings Call Transcript

Published: 9 Nov 2018

[Operator:]

Good day, and welcome to the HTG Molecular Diagnostics Third Quarter 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ashley Robinson. Please go ahead, sir.

[Ashley Robinson:]

Thank you, Operator. Earlier today, HTG released financial results for the quarter ended September 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 company's performance trends, growth of its RUO profiling business, activities expected to occur under the company's various collaborations and other agreements, planned product development and launches and related expected benefits, expected benefits from pharma collaborations, and revenue and operating expense expectations for the fourth quarter and 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 filing. 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 statement. With that, I would like to turn the call over to TJ Johnson, Chief Executive officer. TJ?

[Timothy Johnson:]

Ashley, thank you very much. Good afternoon, everyone, and thank you for joining us on our third quarter conference call. This quarter, our top line grew 26% compared to the same quarter last year. More importantly, top line growth for the 9 months compared to the same period last year has grown a very strong 101%. Our biopharma early stage pipeline has grown to nearly 60 trial-related projects, and our two active PDP programs have been extended and expanded. Our net losses versus the same nine month period last year have been reduced by $2.7 million or 16%. Our performance trends are in the right direction as we continue to execute against our business objectives. I am extremely proud of the team. Our RUO profiling business is growing, our PDP programs are progressing and expanding, and we are quite pleased with the momentum we are building. We believe we will finish the year strong as a company and expect top line revenues to be in the middle of the range of the current guidance. We believe Q4 is looking strong, and we will be in the $7 million to $9 million range. But as discussed, that's very dependent upon the achievement of key end-of-year milestones associated with our 2 PDP programs. To that end, we did see a key milestone slip through Q3 into October, which we recognized in October on one of our programs. We also anticipate a push for completion of large profiling studies prior to year-end, which should provide strength to the quarter for our RUO profiling segment. Looking to some of the broader drivers of our business as we come quickly to the end of the year and prepare for 2019, we are launching our new mouse panels, driving productivity of our expanded pharma sales team, completing large custom profiling panels for multiple customers, and executing well with our PDP programs, which will have a number of very important and potentially meaningful milestones in the next few quarters. Our companion diagnostic development teams in the last year have achieved customer acceptance of 3 multiplex gene expression assays, 2 that are now being utilized in numerous clinical trials to determine if they are predictive of drug and drug combination responses. I'm extremely proud of the commitment and perseveration to deliver these assays against extremely aggressive timelines. Importantly, our high-level performance demonstrates and underscores what we have always internally believed and what is crucial to our biopharma strategy, that HTG is a trusted companion diagnostic partner that can execute and deliver. Last week, HTG announced the strengthening of its executive management team with the appointment of Dr. Maureen Cronin as our Senior Vice President and Chief Scientific Officer. This newly created role fits exactly into our strategic diagnostic development plans, and having a proven industry executive join our team is a tremendous asset. Barring Maureen's extensive experience in developing high-value diagnostic tests, especially in breast cancer, and as such, she will lead a new company initiative that is developing a potentially exciting test impacting the care of breast cancer patients. We have been assessing the breast cancer market with collaborators, and believe there is an opportunity to innovate and are excited to have kicked off our development effort. I'll look to feature more about this program in future updates. As a company, we are focused on establishing medically relevant diagnostic menu to power our next drug category. We are fully committed to our approach of building diagnostic menu through collaborations like our biopharma PDP programs. With that being said, we are not putting all of our eggs in one basket, which is why we are balancing our diagnostic pipeline with HTG-generated assays in areas such as lymphoma, lung and breast cancer. We believe HTG's technology, especially our ability to effectively work with very small sample amounts, addresses many of the significant issues faced in clinical labs with existing technologies. 2019 is setting up to be a very important year in the building of our diagnostic business as we believe we have established a strong presence in biopharma-based biomarker and companion diagnostics, launched CE/IVD marked assays, and generated numerous diagnostic collaborations in Europe, and have now kicked off internal development with the breast cancer program being led by an accomplished industry leader who was instrumental in the Oncotype DX program [indiscernible]. With that, I'll now hand over the call to Shaun for more details on our financials.

[Shaun McMeans:]

Thanks, TJ. Q3 closed with total revenue of $4.7 million compared to $3.7 million in Q3 2017, reflecting a 26% increase. Collaborative development services associated with our pharma PDP programs continued to be the primary driver of growth, with revenues of $3.4 million in Q3 compared to $2.1 million in Q3 2017. Included in Q3 2018 revenue was $649,000 of profit sharing from our pharma clinical programs. As TJ stated previously, our 9 months revenue grew over 100% year over year to $13.8 million for the 9 months ended September 30 from $6.9 million during the same period in 2017. This year-to-date growth reflects a $6.3 million increase in collaborative development service revenues over 2017. Based on the low end of our full year 2018 guidance, our compounded quarterly growth in revenues since Q1 2017 would then exceed 26%, finishing 2018 at an annual compounded revenue growth rate in excess of 100%. RUO profiling product and product-related services revenue was $1.3 million in Q3 compared to $1.6 million in Q3 2017. RUO profiling product and product-related service revenue for the 9 months ended September 30, 2018 was $0.6 million or 15% higher than the same period in 2017. Our Q4 product and product services pipeline is robust, and we believe we could propel our full year revenues into the range of our 30% annual growth target. Our previously discussed initiatives to grow product sales continue with our recent and planned RUO menu expansion and the 2018 additions to our pharma sales team, both of which we believe will fuel our product-based revenues in future quarters. Transitioning to spending, $2.3 million of Q3 expenses related to our collaborative development PDP programs are included in research and development expense. New product-related research and development expenses unrelated to our collaborative development programs were $1.2 million for Q3 2018, and we expect to increase the spend going forward as we continue to innovative new RUO panels and fund the breast diagnostic program. Selling, general and administrative expenses were $4.7 million, or approximately 11% higher in Q3 compared to Q3 2017, and were $15.1 million, or approximately 17% higher for the 9 months ended September 30, 2018 compared to the same period in 2017. This increase is mainly attributable to increased headcount, related compensation expense and consulting costs in 2018. Our gross margin increased to $3.5 million in Q3 from $2.6 million in Q3 2017. Year-to-date gross margin increased to $9.9 million from $3.2 million in the same period in 2017. These higher gross margins continue to reflect the impact of our pharma clinical program revenue for which associated development costs are reported in operating expenses as research and development expense. For Q3 2018, we saw improvement in our average selling price in both products and services, which is a positive trend and a key focus of our sales leadership. We continue to expect improving margins as we leverage our fixed cost base, improved pricing with innovative new products, and see our sales mix move towards product versus service sales. Our operating loss for Q3 was $4.8 million compared to $5.1 million in Q3 2017. Our cash burn for Q3 was $3.7 million, primarily reflecting a smaller quarterly loss than Q3 2017 and the elimination of loan amortization with our senior debt refinancing earlier this year. $3.3 million of cash has been restricted as collateral for the repayment of a convertible note and has been reclassified as a non-current asset. I am extremely proud of our team as we continue to grow the business, establish future opportunities and manage to our targeted shape of the P&L. Net loss per share was $0.17 for Q3 and $0.46 for Q3 2017. We currently have approximately 28.5 million shares of common stock outstanding. We ended Q3 with $33.8 million in cash, cash equivalents and short-term available securities. I look forward to reporting our full year results in a few months. At this point, I would like to turn the call back to TJ for some closing comments.

[Timothy Johnson:]

Thank you, Shaun. In a little over 3 years ago, mid-2015, HTG launched its first EdgeSeq messenger RNA panel, the HTG EdgeSeq Oncology Biomarker Panel. We exited 2015 at $4 million full year revenue. This quarter, we launched our 6th new RUO panel and completed IUO level development of 3 possible companion diagnostic tests of which 2 are very actively in use, and have 5 other panels in late-stage development; our mouse panels and 3 custom assays for clients. We believe we are on a trajectory to surpass $21 million in annual revenue, which would be greater than 400% growth since that first messenger RNA panel was launched. We have had our fair share of struggles along the way, but stayed steadfast in our strategy. As we finish up 2018 on a strong note and plan for 2019, we will stay relentlessly focused on execution of our business objectives, which are expanding our pharma franchise, advancing our diagnostic portfolio, and managing our company to a targeted shape of the P&L. We believe our journey over the last 3 to 4 years has strengthened our market position and better illuminated our opportunities to make a difference in precision medicine to positively impact lives and to create value for our stakeholders. I'll now open up the call to any questions.

[Operator:]

[Operator Instructions]. We will now take our first question from Puneet Souda of Leerink Partners.

[Puneet Souda:]

First of all, just hoping to understand, and if you could elaborate on the line of sight to the projects. You made a good progress here with 60 projects. Just can you give us a sense of how the funnel is looking as the quarter is evolving here? And sort of hoping to get if that number could change dramatically either way as we head into 2019 and any sense there would be very helpful. And I have a follow up.

[Timothy Johnson:]

Sure, Puneet. First of all, our pharma early stage project funnel is looking very healthy. As I've talked about in a lot of calls, we have an internal target of getting to 80 by the end of the year. I think we're very comfortable in that number, and we expect to see continued significant growth into 2019. Our new hires into our pharma business development team have now been in the market for 3 to 4 months, and we're seeing a lot of upfront activity. So I think we're feeling very, very solid about that. We're expecting Q4 results as it relates to that team to be pretty strong, which give us a pretty good sense for how 2019 could shape up.

[Puneet Souda:]

Okay. And then just trying to understand on the competitive front, we have obviously seen -- we're obviously seeing new entrants come to market more along the lines of liquid, but I was just wondering, giving the convenience factor there in potentially advanced cancer settings for I/O or targeted therapy, has that changed your view on the competitive landscape? And as you reach the biopharma discussions, are you still getting increased -- you seem to be getting solid traction with the 60 projects that you have there, but I'm just trying to get a sense of is there a more heightened competition in this space in terms of liquid versus tissue? Any change you are seeing there from the biopharma partners that you have?

[Timothy Johnson:]

Yes. No, it's a great question. Obviously the competitive dynamics in this market are very strong. I've always held the belief that great markets create great competition. We're not seeing what I would call a transition from tissue-based biomarkers to liquid-based sample biomarkers, but a lot of investigation going on wanting to look at both. But we see this as not necessarily a threat to what we do, but potentially a bolt-on or additive. As I've mentioned before, we already are actively involved in many liquid-based biopsy projects, and a part of our efforts for our research team is expanding our capabilities into new liquid biopsy sample types, such as exosomes, platelets or intracellular vesicles. We're obviously watching it very closely. We definitely see increasing interest from biopharma in liquid-based sample types, and we believe we'll be able to enjoy that trend as it continues to mature.

[Puneet Souda:]

Okay. And just lastly, if you could provide any color, any expectations of any conferences where you'll be attending. Anything meaningful from SITC or any other conferences where you expect to present in the near term?

[Timothy Johnson:]

Yes, sure. Well, obviously the team is at MBC as we speak and SITC. Then I think it goes pretty quiet on that front. We were just at AMP, and then we'll kind of hit the restart button on stuff again long into next year.

[Operator:]

We can now take our next question from Mark Massaro of Canaccord Genuity.

[Max Masucci:]

This is Max on for Mark. First on companion diagnostics, can you speak to which indications you're initially targeting, which indications you hope to target over time? And understanding that the sales companion diagnostic assays is your largest revenue opportunity long term, can you just frame for us your market opportunity for the indications you're targeting?

[Timothy Johnson:]

I think we're pretty much targeting all indications in oncology. I would say when we look at our portfolio, there's pretty much every area covered. We have a tremendous focus in immuno-oncology, which is really a pan-cancer opportunity and one that we think is the largest opportunity. We're not really able to specifically lay out the late stage trials that are in play for our 2 current companion diagnostic partners, but I think it would be safe to say that we're covering the entire oncology space. I think also as we look at 2019, our customers are starting to pull up into other areas. One that we'll be paying very close attention to, and probably starting to speak about in early 2019, is the area of autoimmune. We have plans to launch a new autoimmune RUO profiling panel early next year, and we're already getting a request from existing customers to do some work for them in that area.

[Max Masucci:]

Great. And can you frame for us just the key milestones that are in play once you enter into these PDP programs? Is there a certain conversion rate that you have a goal internally for these early stage projects to progress to later stage projects? And then can you just currently, can you speak about where you stand with your current two PDP programs as it relates to milestones?

[Timothy Johnson:]

Yes, sure. I don't know that I would say we've got a goal on conversion rate because we're not really in control of that. But I think historically, about 10% of early stage programs in pharma drug development make it all the way through. We are up at the 60 project range, and we see consistent growth in the 30% to 40% range in the number of projects. So we would expect that at a minimum, that 10% number should play out well for us. We would also look at our ability to have a better hit rate based on our knowledge of the pipelines and our ability to target what we think would be the drug programs that have the greatest potential of being successful. Our two existing PDP programs have both gone through the first phase, which is development and acceptance of the assays by the customer. They are now in the second phase, which is the clinical trial phase, where those assays are being utilized in retrospective studies against clinical trial cohorts. As soon as those cohort retrospective studies are complete, the clients go into their top line review. And based on a success of a top line review, we would move those into Phase 3 of the PDP programs, which are regulatory submissions in various geographies that are in the targeted drug market areas. So critical milestones for us is to see how the assay response rates for the drug in those marks. And as we've communicated, both of our existing PDP programs are in that phase, and we are expecting to hear about the various trial cohorts over this quarter and next. So we're very anxious to hear about those results, but also generating new and more shots on goal from other programs so that we don't look at these as kind of one-off decision points, but things that we're going to have a steady stream of, and that over time, the numbers will play out for us. We don't really have any knowledge about the likelihood of success of these pivotal trials, but we would hope that our opportunities and likelihood of success would be greater than 50/50, considering how far along these drugs and these cohorts have come.

[Max Masucci:]

Great. That's helpful. And then one more, if I can squeeze one in. Just on the patient sales hires, how many do you need to cover most, if not all the pharma? And then any evidence of early traction with the I/O panel would be great.

[Timothy Johnson:]

Yes, no worries. There's not that many biotech/biopharma that we need to cover, so we don't expect to see a tremendous amount of new hiring over the next 2 to 3 quarters. We are adding some resources in Europe to give us slightly better coverage, but we think we're pretty set in our U.S. team. And I forget your last question, so hopefully that covered it.

[Max Masucci:]

Yes, that's good for me.

[Timothy Johnson:]

Yes, you were asking comments on if there are early successes, and I think we're definitely seeing new customer that are asking us for proposals and/or doing exploratory work with us.

[Max Masucci:]

That works.

[Operator:]

[Operator Instructions]. We will now take our next question from Yi Chen of H.C. Wainwright.

[Yi Chen:]

Based on the third quarter revenue and the full year 2018 revenue guidance, it seems the fourth quarter 2018 will have the highest revenue, much higher than the first, second and third quarter. So I'm just wondering, do you expect the same pattern to repeat in 2019, or do you simply expect that the revenue could fluctuate from quarter to quarter?

[Timothy Johnson:]

Actually, that's a great question. We are beginning to see what we think could be -- I don't know that they're actually seasonal trends, but basically trends on how our business cycles. And based on 2017, and now 3 quarters of 2018 and how Q4 is shaping up, I think we would definitely start to say that we're getting a feel for how the business will cycle. And there are definite cycles, such as Q3 was impacted fairly significantly in Europe, but we already are seeing our European business at a least double the business in Q4 versus their Q3 number. So I think we will see a tremendous Q4, and I think we'll likely be looking at 2019 to see very similar trends between how the four quarter cycle.

[Yi Chen:]

Okay. And also, in the third quarter I noticed that the R&D expenses were meaningfully higher than the second quarter, while the SG&A expenses remain relatively stable. So do you expect the R&D expenses to continue to increase in the coming quarters?

[Timothy Johnson:]

We do. In the quarters where you see the PDP revenues up, which I think we were up over Q2 in the collaboration revenue, obviously that drives the R&D numbers. But we are expecting to see the non-collaboration R&D expense starting to climb as we move forward, because we are obviously funding at least 1 new RUO panel per quarter, and we kicked off our development team on our breast diagnostic program in Q4. You would expect to see it starting to hit a higher number and more steady state number in Q1 2019.

[Yi Chen:]

Got it. And finally, when do you expect to have the go/no-go decision for the next project?

[Timothy Johnson:]

Hard to predict. We're hopeful that we'll see at least 1, if not more than -- not more than 1 decision yet this quarter. But if not, we would expect that it will come fairly quickly as the year turns.

[Operator:]

As there are no further questions, we will hand it back to our host for any additional or closing remarks.

[Timothy Johnson:]

Yes, I'd just like to thank everyone for joining us on the call today, and Shaun and I look forward to updating you again on the next earnings call. Have a good rest of the day and evening.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.