HTG Molecular Diagnostics, Inc.
Q2 2017 Earnings Call Transcript

Published: 9 Aug 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the HTG Molecular Diagnostics’ Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference maybe recorded. I would now like to turn the conference over to your host, Mr. Jamar Ismail, with Westwicke Partners. Sir, you may begin.

[Jamar Ismail:]

Thank you. Earlier today, HTG released financial results for the quarter ended June 30, 2017. 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 second half and full-year 2017. And expected improvement in gross margin. 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 to not 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, President and Chief Executive Officer. T.J.?

[T. J. Johnson:]

Thank you Jamar. Good afternoon everyone and thank you for joining us on our on our second quarter conference call. On today’s call, I will provide a summary of progress in our business and momentum toward our long-term goals. I will also provide our views of the balance of the year and then turn the call over to our CFO, Shaun McMeans to cover our Q2 financial results. After that, I will make some closing comments and open the call to your questions. We are extremely pleased with the progress of the Company in the second quarter, most notably our pharma companion diagnostic pipeline. During the quarter, we initiated two new clinical development programs which bring the number of pharma companion diagnostic based projects up to three. All three are associated with different pharma customers. Our new clinical assay development projects are expected to provide near-term revenue via phase development fees and milestone payments that are equally important. These are Phase 3 clinical drug programs, indicating higher potential for companion diagnostic regulatory filings in 2018 and/or 2019. We believe our strategy to develop compelling diagnostic menu via companion diagnostic relationships with pharma is working. These agreements help set the stage longer-term for future HTG EdgeSEQ instrument placements and the resulting anticipated reagents annuity revenue streams if the drugs are approved and testing is widely adopted. Both new programs announced in the second quarter are associated with our companion diagnostic development, commercialization and manufacturing agreement with QIAGEN. Our most recent development program announcement follows the June 3 announcement by QIAGEN, and it has signed a new master agreement with Bristol-Myers Squibb to explore the use of NGS technologies to develop gene expression assays for use with Bristol‑Myers Squibb’s immuno-oncology therapies. I’d like to note that our pharma companion diagnostic agreement with QIAGEN is exclusive in oncology. We believe these new pharma collaborations further validate the combined value proposition that our partnership brings to pharma clients. Revenue recognition for these programs are difficult to forecast on a quarterly basis, due to steps controlled by our partners. We currently expect our incremental revenue from the new pharma programs to contribute at least $4 million in the second half of 2017 and we now estimate full year revenue between $9 million and $12 million. We realize this as a fairly broad range. As you can see an increasing portion of our business relates to significant CDX programs and large pharma customers. A shift in our work under any single CDX program could impact our revenue recognitions in any one fiscal period. We are very pleased with the state of the business and excited about momentum we have built. I’ll now turn the call over to Shaun.

[Shaun McMeans:]

Thanks T. J. Our Q2 revenues were $1.8 million, bringing our first half 2017 revenues to $3.1 million, an increase of 13% over the same period last year. And comparing Q2 for 2017 and 2016, it is important to note that Q2 2016 had a large $1.1 million single customer project and service revenue. As T. J. indicated earlier, we believe we have enough visibility into our new clinical programs to provide full-year revenue guidance in the $9 million to $12 million range. This guidance certainly indicates expected significant growth in the second half of 2017. We continue to see a strong interest in our service offerings by our current and potentially new pharma customers. While our year-to-date revenues were up 13% over 2016, operating expenses are down $2.5 million, or 18%. Operating expenses were lower across all categories, again reflecting the 2016 realignment of our U.S. salesforce and curtailment of Project JANUS in favor of other R&D opportunities – other R&D priorities. We do expect OpEx spending to increase in Q3 and Q4 as we increase activities associated with our pharma clinical programs, sales and marketing investments and headcount and ALK Plus clinical diagnostic commercialization in Europe. We believe full year 2017 operating expenses will be in the $23 million to $25 million range, with variability driven by clinical development costs and timing uncertainties. We have made important investments into organization to assure capacity for the expected service activity growth in the back half of 2017 and beyond. These investments in lab equipment and personnel have pressured our gross margins in the first half of 2017. As a result our gross margins were $0.5 million in Q2, compared to $1 million in Q1 2016. We expect these additional costs to decreases as a percent of our revenues as our service revenues increased, improving service and overall gross margins in future periods. Only a portion of cost including gross margin are variable an increase with volume. For Q2 and the first six months of 2017, the variable cost percentage was less than half of our total cost of revenue. Our operating loss for Q2 was $5.5 million, compared to $6.4 million in Q2 2016. Net loss per share was $0.60 for Q2 and $0.98 for Q2 2016. We ended Q2 with $13.4 million in cash and equivalents. As of June 30, we raised $15.4 million of gross proceeds from our ATM facility. In summary, we had a solid first half in 2017 with revenue growth, and prudent cash management. We believe we have made the necessary investments to enable significant growth in the second half of 2017 and 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 some closing comments.

[T. J. Johnson:]

Thanks Shaun. As discussed, Q2 was very productive with new pharma clinical projects, but we also had other notable accomplishments. Having a strong quality system is a system is crucial for our diagnostic expansion plans and we successful achieved recertification of our ISO 13485 status. We have also successfully passed a number of quality audits by our pharma clients. I want to acknowledge the great work of our organization led by our quality team. In addition to developing companion diagnostic menu, we are also setting the stage for growth, by providing a next-generation sequencing-based workflow that over time can augment and possibly replace certain immunohistochemistry and FISH testing. We completed the launch of the new HTG EdgeSeq PATH Assay as our flagship product in the strategy, another important strategic accomplishment, including working closely with Illumina to extend our IVD development agreement, adding new test opportunities to this agreement. The amended 10-year agreement sets the stage for multiple products concepts we are contemplating in future programs. As a reminder to date we have our HTG EdgeSeq out plus and HTG EdgeSeq DLBCL CE IVD assays on the Illumina sequencing platform. So in closing, we believe we are extremely well-positioned for a strong second half of the year with momentum carrying into 2018. I like end my comments with thank you to the HTG team for your contributions and commitment to the company and to our investors for your continued support. For those of you who would like to learn more about the HTG and our initiatives, we are presenting at the Canaccord Genuity Growth Conference on Thursday at 9

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Yi Chen from H.C. Wainwright. Your line is now open.

[Yi Chen:]

Thank you for taking my questions. My first question is for third quarter and fourth quarter do you expect the revenue to mainly lean towards the first quarter, or they can be evenly distributed between two quarters?

[Shaun McMeans:]

Hi, Yi. I would say probably somewhere in between those two. We will see a material impact in Q3 as both of our new programs are well underway. But we do have a significant number of milestones that are coming at the end of the year. So I would weight it a little toward Q4, but Q3 will certainly be improved.

[Yi Chen:]

Okay thanks. And if I recall correctly, from what Shaun said, that as you collect more revenue from pharmaceutical partners that the gross margin can further improve or it should remain relatively stable at the second quarter level?

[Shaun McMeans:]

Yes, over half of our cost that we include in our cost of sales are what we would label as fixed cost such as our facility equipment and other costs that are not variable to volume. So as volume increases we would expect gross margin to improve and be leveraged quite quickly. So there we are definitely expecting improved margins in the back half of the year as our volume increases, but yet our cost remain fairly flat to not little increases.

[Yi Chen:]

Okay, got it. And regarding the extension of IVD Agreement with Illumina should we expect additional tests to be announced during the remaining 2017?

[T. J. Johnson:]

No comment on that at this point, but we’re certainly evaluating a number of options.

[Yi Chen:]

Okay, great. And finally, could you provide some color on the source of cash because as of the end of June cash is significantly higher than the end of March cash position. And also can you provide the end of – the shares outstanding at the end of the second quarter?

[T. J. Johnson:]

Yes I’ll cover the first part of and then Shaun can comment. But all of our proceeds are from our aftermarket program through Cantor Fitzgerald. And Shaun the share count?

[Shaun McMeans:]

Approximately $11.5 million, $11.5 million.

[Yi Chen:]

Okay, got it. Thank you very much.

[T. J. Johnson:]

You’re very welcome

[Operator:]

Thank you. And our next question comes from the Mark Massaro from Canaccord. Your line is now open.

[Max Masucci:]

Hi this is Max Masucci on from Mark. Congrats on the great quarter.

[T. J. Johnson:]

Thank you.

[Max Masucci:]

So your guidance implies a material ramp in the back half of the year. And I understand the magnitude is nearly related to milestone payments. Can you speak, I guess, broadly about what we should expect from may be consumables or instrument placements?

[T. J. Johnson:]

Yes, we think the mix that we will see will continue to mix stronger toward our service line that would include our new companion diagnostic agreements. We are expecting some reasonable growth on the product side, which would include our instrumentation and reagent pull-through. So we do predict growth there, but not at the rate that we see in our services businesses associated with pharma growing. So we’re not really breaking out the mix of that at this time, but, I think, you should expect continuing mix movement toward the service in pharma line.

[Max Masucci:]

Okay, great. So what are some of the key milestones as it relates to your development work with QIAGEN? How impactful do you think some of these milestones can be in the near-term and just to tack on to that may be some milestones related to your request Merck and the potential impact?

[T. J. Johnson:]

Yes sure. The Merck KGaA, Darmstadt, Germany agreement that we announced last year, starts to ramp up in 2018, but it’s still fairly modest since it’s on early phase drug – excuse me drug program in 2017. Both of our new companion diagnostic agreements that have been won in relation to our QIAGEN precision diagnostic partnership are late-stage drugs and have a fairly rapid set of milestones and objectives targeting 2018 potential submissions. So we’re not really communicating the specifics of those, but the timelines are very rapid and very quick over the next 12 months.

[Max Masucci:]

Thank you. Can you provide a little more color as far as what’s going on with the fourth module? Can we get an update to the potential moving parts you are actually planning to submit by the end of the year, receive clearance by the first half of 2018?

[T. J. Johnson:]

Yes sure. In reference to our HTG out plus PMA, as we’ve discussed before, all three of the first modules have been submitted and we’ve been making nice progress with FDA on clearing the review of those modules. We’re currently in dialogue with FDA as it relates to the statistical analysis plan associated with the method comparison study and it’s somewhat of the primary requirement within the module for submission. In parallel to that, we are also continuing to acquire additional ALK positive and negative samples in the patient population of our intended use. I’m not sure and we’re not trying being specific right now as it relates to timing. We’re hopeful that we’ll still be able to complete the Phase 4 in the back half of this year. But until we get full alignment with FDA on the statistical analysis plan I can’t predict specifically. Our primary focus right now is on the ALK Plus commercialization in Europe. That has been our main plan all along is that we would start in Europe with the ALK Plus product and then bring that commercialization start up here in the U.S. And we’re making nice progress really featured by a multicenter study right now that has begun that will allow us to have the correlation data from multiple centers across Europe, comparing our HTG ALK Plus Assay [ph] to the current gold standard of FISH assays in the these various institutions. We expect to have this study completed this year that would be a primary catalyst for us in driving adoption of the assay in Europe in 2018.

[Max Masucci:]

Thank you for that. Just no more quick one. Do you specify the number of instrument placements? In Q2 you’re…

[T. J. Johnson:]

Yes, sure, our current install base is 42 instruments.

[Max Masucci:]

Okay.

[T. J. Johnson:]

In the quarter, we had one capital sale to a large CRO to support future pharma trials that are expected. We did remove a number of RAF instruments that were not providing the annuity expectations. We also have placed several new instruments in our key diagnostic collaboration sites that once the validation studies are complete, we would expect to convert and be able to generate ongoing reagents. I think our expectation for the second half of the year is fairly modest on instrument placements that we are expecting to continue our focus on pharma and on key academic medical centers where collaborations for diagnostic menu make sense to us. And we continue our focus on not driving placements based on competing as a life science tools and application company.

[Max Masucci:]

Great. Thanks for the questions. And congrats on a great quarter.

[T. J. Johnson:]

Thank you sir.

[Operator:]

Thank you. I am showing no further questions at this moment. Now I like to turn the call back T. J. Johnson for any further remarks.

[T. J. Johnson:]

I would just like to again thank all the HTG employees for a great first half of year. And we’re poised for tremendous growth in the back half of the year. And wish everybody a nice afternoon and evening. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.