HTG Molecular Diagnostics, Inc.
Q4 2017 Earnings Call Transcript

Published: 23 Mar 2018

[Operator:]

Good day, and welcome to the HTG Molecular Diagnostics’ Fourth Quarter and Full Year 2017 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, Bethany. Earlier today, HTG released financial results for the quarter and year ended December 31, 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, anticipated revenue and operating expense 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 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, Ashley. Good afternoon, everyone and thanks for joining us on our fourth quarter and yearend conference call. I'd like to start by expressing my gratitude to each of the HTG employees for a phenomenal year. We entered 2017 with specific goals to accelerate customer adoption, expand our biopharma pipeline, initiate commercialization of our CE IVD products in Europe and strengthen our balance sheet. 2017 exceeded our performance and expectations and we moved into 2018 looking forward to building on our momentum. As I've often discussed, a key aspect of our strategy is to develop compelling diagnostic menu via our partnerships with BioPharma. Execution of these BioPharma clinical development programs provided the catalyst for revenue growth in the second half of the year and especially in the fourth quarter, which was particularly noteworthy as we completed certain milestones ahead of schedule and recognized our first full quarter of profit sharing. We also announced a new program with a third client under the QIAGEN Master Agreement in January of this year 2018 and this exciting program is underway with the initial significant milestones and expected profit sharing occurring in the second half of this year. To date we have contracted four clinical development programs with three of the programs under our QIAGEN Master Development Manufacturing and Commercialization Agreement. We refer to these as our Precision Diagnostic Partnership or PDP programs. One of the three PDP programs, which we will call Program A has completed the assay development and clinical trial phase and we anxiously await the full analysis of the data from our BioPharma client. Topline analysis with a decision on go, no-go for the submission is expected in Q2. At the request of our BioPharma partner, we are preparing in parallel for multiple potential 2018 regulatory submissions and later geographic commercialization again assuming positive trial results and a go-forward decision. Program B under the PDP agreement is associated with the QIAGEN BMS immuno-oncology collaboration with the gene expression clinical trial assay currently in the development phase. This assay is expected to be the clinical trial assay for at least three indications with the potential for more. We also announced the amendment of our workplan under the HTG BMS immuno-oncology research collaboration adding to the value of the initial research and development program and we are working continuously to expand our value add to BMS in their biomarker programs. PDP Program C was recently announced and just completed its kickoff meeting. We are very excited about the potential of this program due to the targeted indication in the initial athlete development is underway under a statement of work with QIAGEN. We anticipate that this program will have a very aggressive timeline with the key milestones including the potential for regulatory submissions in late 2018 or early 2019. We'll know more specifics once the full schedule is locked down and will provide added information on future calls. The fourth program contracted directly with Merck KGaA, Darmstadt under our Master Companion Diagnostic Agreement is an early Phase 1 program and we do not expect meaningful revenues from it in 2018. We did announce an expansion of our research collaboration with Merck, Darmstadt in the fourth quarter and are currently developing a large multiplex gene expression assay expected to be utilized in biomarker studies across at least six indications. We are very positive about the overall growth opportunities and relationship with Merck, Darmstadt and affiliates. So, in summary, our BioPharma business is strong and customers are responding very favorably to our partnership with QIAGEN. We're investing in additional sales positions to accelerate our early phase pipeline and increasing development capacity to meet expected increasing demand. I want to emphasize we are expecting continued growth in collaboration-based revenues in 2018 as a whole compared to 2017, with several anticipated critical diagnostic milestone catalysts as I described. But as I said before, our PDP revenue recognition in any single quarter will be lumpy due to the timing of milestones and other factors. As an example, due to early completion of milestones in Q4 2017, we do expect our Q1 PDP revenue and as a result our total Q1 revenue will be lower than the PDP until the revenue we recognized during the fourth quarter. Most importantly, we continue to believe that our BioPharma approach to developing menu for our HTG EdgeSeq platform is the right approach and while we cannot control when the first development program moves to diagnostic regulatory submissions, we do believe it's just a matter of time. The HTG research use only profiling business also demonstrated continued steady growth in 2017, powered by our microRNA Whole-transcriptome panel, Oncology Biomarker Panel and immuno-oncology panel, we grew approximately 30% for the third consecutive year. Customers continue to prefer our [indiscernible] service offering versus product purchases in this segment and we expect this trend to continue in the near-term. While we would like to place more instruments, we are most focused today on development and application of future companion diagnostic assays, working together with biotech and pharmaceutical customers. We therefore did not release any new RUO products in 2017, as our development resources were fully dedicated to the BioPharma programs. We do plan to release a new version of our immuno-oncology panel with double the content later this year and we'll provide more specifics in that effort and others on future calls. As a strategic reminder, our limited and targeted participation in the research tools market is a means to an end. This market provides us access to diagnostic content, the artwork with BioPharma and other collaborations and translational centers. Our longer-term primary target market is clinical molecular diagnostics. We are developing assays for this market in two ways. First through our BioPharma collaborations for Companion Diagnostics and second through targeted expression assays for molecular subtyping such as the HTG EdgeSeq DLBCL cell of origin and HTG EdgeSeq ALKPlus Assay now in early commercialization in Europe. During 2017, we played several instruments and early adopter accounts in Europe. These customers have been processing samples and utilizing our assays in parallel with their current standard assay for performance comparison purposes. Initial results appear to be promising and we expect to publish broader results later this year. Also, we have recently hired additional resources into our European team, focusing 100% on diagnostic commercialization, including overseeing our collaboration and reimbursement efforts. While we're not forecasting material sales from CE IVD products this year, we're setting the stage for 2019. For the US ALK market, we are currently responding to FDA comments on our modular PMA and have funded our final clinical studies in 2018. We do have some timing uncertainties associated with this submission due to other planned submissions associated with our BioPharma programs. In summary, we are planning for the Diagnostic segment to begin ramping in 2019, as we continue our focus on our HTG EdgeSeq ALKPlus and DLBCL diagnostic efforts in Europe and early planning for possible 2019 commercialization of at least one companion diagnostic. I will now turn the call over to Shaun for our financials.

[Shaun McMeans:]

Thanks T. J. Our Q4 revenues were $7.9 million bringing our full-year results for 2017 to $14.8 million, reflecting increases of 442% and 188% respectively over the same period in 2016. Collaborative development service revenues were our primary revenue component accounting for $5.5 million of revenue in Q4 2017 and $8 million of revenue for the full year 2017. This development revenue is expected to have a continuing significant impact on our revenue in 2018. Product and product-related service revenue increased to $2.4 million in Q4 compared to $1.5 million in Q4 2016, an increase of 63% year-over-year. Our Q4 revenue punctuates the continuing success in our Pharma collaborations since early 2017. Our strong Q4 2017 also reflect the expected unevenness of the Pharma revenues and the period-to-period variability that TJ mentioned earlier, with Q4 including approximately $2.3 million of profit-sharing revenue. We're delighted to report these strong results and look forward to a strong 2018. Primarily as a result of our 2017 collaborative development programs for which related expenses are included in research and development expense, our operating expenses increased by $2.8 million and $2.2 million over Q4 2016 and full year 2016 respectively. Selling, general and administrative expenses were $0.5 million or 13% higher in Q4 compared to Q4 2016, mainly attributable to compensation expenses. Our full year 2017 selling, general and administrative expenses were only $86,000 higher than full year 2016. OpEx spending is expected to increase in Q1 as our activities related to Pharma clinical programs including now a third program ramp up. We will also continue to invest in sales and marketing, headcount and pursue commercialization of our CE IVD products in Europe. Our gross margins increased significantly to $6.6 million in Q4 from $0.2 million in Q4 2016, driven by the revenue from our Pharma clinical programs. Included in Q4 and our full year revenue was $2.3 million in profit-sharing from our Pharma clinical programs, contributing 100% gross margin for this period. Full-year gross margins grew to $9.8 million from $1 million in 2,016 reflecting the significant gross margin contributions from our Pharma clinical programs for which related costs are reported in operating expenses as development costs. Operating expenses associated with Pharma clinical revenue amounted to $2.5 million for Q4 and $0 million for Q4 2016. We generally expect these associated cost to be greater as a percentage of revenue during the early phases of our collaborative development programs. Our operating loss for Q4 was $1.7 million compared to $5.2 million in Q4 2016. Net loss per share was $0.15 for Q4 and $0.76 for Q4 2016 and reflects $5.5 million additional shares issued in 2017 from the sale of equity under our ATM facility through December 31. From its inception in 2017 through January 08, we raised approximately $21.1 million of gross proceeds from our ATM facility, which was mutually terminated in February 23. We ended Q4 with $10 million in cash and equivalents, including gross proceeds of $3 million from the issuance of a subordinated convertible promissory note. On January 23, we closed our follow-on equity financing, raising approximately $40.4 million in gross proceeds through the sale of 13,915,000 shares of our common stock. We currently have approximately 28 million shares of common stock outstanding. In summary, we believe our Q4 and full year results reflect substantial progress and the key inflection point towards solid revenue growth, prudent cash management and finally significant success in strength in our balance sheet and adequately financing the company for future periods. I look forward to reporting additional progress on our future earnings calls. At this point, I would like to turn it back T. J. for closing comments.

[T. J. Johnson:]

Thank you, Shaun. To wrap things up we are extremely pleased to have completed follow-on financing and now have a strong balance sheet. Post-closing of our financing, we have terminated our aftermarket or ATM facility and continue our efforts to cost-effectively execute our growth plans. We've communicated topline guidance in the range of $20 million to $25 million and although early in the year, we are comfortable with this range. That said, I want to reiterate that our quarterly revenue will be lumpy, not linear due to the collaboration revenues, the periodic lumpsum nature of certain profit-sharing payments received, progress of our pharmaceutical industry partner's clinical programs and regulatory filings and the future timing of our milestones. Our strategic goals for 2018 remain consistent. Continue acceleration of customer adoption, commercialize our CE IVD products in Europe, Excel in the implementation of our PDP programs, while expanding the BioPharma pipeline and maintain a prudent approach to cash management. While we have much to do, we are encouraged by our 2017 progress and excited about this year. So, in closing, I want to again thank our employees for a great 2017 and our customers and shareholders for your trust and belief in HTG. I'll now open up the call to any questions.

[Operator:]

Thank you. [Operator instructions] And our first question will come from Mark Massaro of Canaccord Genuity.

[Mark Massaro:]

Hey guys. Congratulations on a strong end of the year in firming up the balance sheet. My first question, obviously I understand that the collaboration revenues are lumpy, but this is now two straight quarters of gross margins above 70% coming in at 83% this year, I was modeling 53% for '18. Basically, given the expectation to do revenue of $20 million to $25 million in '18, is there a particular level of gross margins you think you can come in?

[Shaun McMeans:]

I believe Mark that because of the mix of our business and the fact that the cost associated with our PDP revenues or the collaboration revenue falls into R&D project expense, we will continue to see extremely high gross margins probably in the 60% plus range on the year and again, we look at it both as pure margin as it relates to the programs and then on a more fully basis, when we approach and pull those R&D expenses up under the project. But with our current accounting we're pretty confident that we're going to be at 60% plus range for the year and for full year, we could be running really close to where we were in Q4.

[Mark Massaro:]

Got it, that's really helpful and then you indicated that your operating expenses will likely be up in Q1 now that you've stabilized the balance sheet. So, can you give us a sense for the size of your sales force today and maybe comment if you've made some additions even post delays. Give us a sense for where, where the spending will go and what your goals are to build about the sales force?

[T. J. Johnson:]

Yes, sure I think that comes in two factors Mark, first we are expecting what I would consider modest overall expense increase year-over-year. We're working very hard to leverage our P&L and really past the revenue growth down into reducing our burden on operating losses. So, what we really don't expect, what I would consider any substantial leaps in spending in anywhere other than the ramp up that we'll see in the R&D expense as our third clinical program kicks into the highest gear a little bit later this year. So on the sales side, we are investing into the sales team, both in the U.S. and in Europe, but I would consider it fairly modest, somewhere in the area of 20% to 30% additional headcount in both US and Europe, but our belief is that we've got a very leverageable fixed cost base right now, both here in Tucson as well as in the field and that we expect our revenues to ramp much faster and much higher than any spending.

[Mark Massaro:]

Got it, and it looks like your product revenue, which is your lab business grew about 63% in the quarter, which outpaced the growth for the full year which I think came in at around 33%. Can you speak to what drove the stronger growth in Q4 and should we be thinking of full-year lab business to hover somewhere in that 20% to 30% range for '18?

[T. J. Johnson:]

We are expecting that that 30% number is a good number for the full year. I think what we saw in Q4 was some of the traditional push by some of our customers to get their projects done within the end of the fiscal quarter. Some of that push to us was stronger than we expected, resulting in our extremely strong Q4. But I don't think Q4 is representative of what we're going to see for the full year. I believe it's going to be pacing more in that 25% to 35% range.

[Mark Massaro:]

Great and you indicated that you're responding to comments on your ALK Plus assay to the FDA, given that you have more collaboration agreements in the hopper at this point, can you speak to whether or not the ALK Plus assays is anymore -- is it less important to the overall business, given that this would be the first FDA indication and can you maybe clarify whether or not you continue to expect to submit module four by the end of Q2 of '18.

[T. J. Johnson:]

Yeah, sure and that's a great and appropriate question. We currently have all of the studies that are remaining to be done in order to file our fourth module in our budget, but as I explained like, I went through the chronology of our current collaboration clinical programs with our Pharma partners. We believe that those programs will take precedent and are more important to us long-term than what ALK would be in the U.S. market. So based on timing issues that we will know more about here in the short run, as far as the requirements of those submissions of which are more than just the U.S. each of the programs that we're in are going to have multiple geography submissions that I believe will consume our resources and capacity on that front and we definitely believe from a long-term growth in driving our diagnostic business, those programs will take priority over our ALK US PMA. So right now, our focus is in driving the ALK in the DLBCL CE IVD products in Europe and we're greenlight going hard at that. We are entering over the next several quarters, critical milestones with some -- with one or more of our Pharma programs that will let us know definitively, timing around multiple geography submissions of those companion diagnostics and then based on that Mark, we'll kind of figure out how we would slot the ALK PMA product.

[Mark Massaro:]

Yeah okay, that makes sense. And do you have any particular viewpoint on the decision last Friday from CMS regarding action sequencing panels, whether or not you think the decision perhaps could be a tailwind or perhaps a headwind that you think about developing content in for NGS panels?

[T. J. Johnson:]

Yeah, we're obviously trying to dig deeper in understanding of the implications on our business. We're talking to a lot of other folks to kind of get a broad perspective there, but I think our first pass belief is that it's a positive for HTG.

[Mark Massaro:]

Excellent. I hope you enjoy the [indiscernible] and I'll talk to you on the next call.

[T. J. Johnson:]

All right. Thanks Mark.

[Operator:]

[Operator instructions] And our next question will come from Yi Chen of H.C. Wainwright.

[Yi Chen:]

Thank you for taking my questions. My first question is I would like to clarify whether you have changed your methods of categorizing product revenue versus service revenue, because based on numbers reported for the first nine months in 2017, it seems that you have a different way of categorizing the revenue. Is that correct?

[T. J. Johnson:]

No, we've not changed any of our categorization from an accounting perspective. We are grouping our revenue into what we would kind of call three buckets. Our RUO profiling business, which would include product and services, but we're breaking out both the product and service elements of that RUO profiling segment. The second would be our PDP or our collaboration revenue. And then the third bucket as that business starts to become material, will be our MDX or clinical diagnostic revenues. So as of today, we've not made any changes to how we’re categorizing revenues.

[Yi Chen:]

But in the third quarter of the press release there were only two revenue break down; one product and service. So, you have now three segments of revenue breakdown.

[T. J. Johnson:]

Well we've -- we've delineated what is collaboration revenues so that from a service perspective versus our base services. So yes, we now are specifically -- and we also did in our comments that delineating out what is associated with our PDP programs versus what is our base business services.

[Yi Chen:]

Okay. So, I noticed that in the fourth quarter above the research R&D and the G&A expenses have increased from the numbers in the third quarter. So how should we look at 2018 in terms of increasing R&D expenses and G&A?

[T. J. Johnson:]

As we communicated, we believe the R&D expenses and overall expenses will increase year-over-year. The bulk of that is being driven by increases in the R&D spend associated with the third new program coming in on the collaboration side of the business. So, all of the expenses associated with developing these Companion Diagnostics gets booked into R&D expense. As those programs ebb and flow through various milestones, we will see that ebb and flow in the R&D spending bucket. We would expect the other categories in our operating expenses to increase but increase fairly modestly and nominally.

[Yi Chen:]

Okay. Got it. Thank you.

[T. J. Johnson:]

You're welcome.

[Operator:]

And ladies and gentlemen, at this time there are no additional questions. So, I will hand it back to management for closing remarks.

[T. J. Johnson:]

I'd just like to thank everybody for your time and interest and we'll talk to you on the next call. Bye now.

[Operator:]

And ladies and gentlemen, once again this does conclude today's conference. We thank you for your participation. You may now disconnect.