HTG Molecular Diagnostics, Inc.
Q1 2016 Earnings Call Transcript

Published: 13 May 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the HTG Molecular Diagnostics First Quarter 2016 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] I would now like to introduce your host for today’s conference, Mr. Jamar Ismail from Westwicke Partners. Please go ahead.

[Jamar Ismail:]

Thank you. Earlier today, HTG released financial results for the quarter ended March 31, 2016. 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 activities under HTG’s collaboration agreement with Bristol-Myers Squibb anticipated sample profile services and related revenue, expectations for growth, expectations regarding gross margin and HTG’s strategic initiatives, including planned menu expansion, market adoption, anticipated FDA interactions and submissions and instrument development. 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 us 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 TJ Johnson, President and Chief Executive Officer. TJ?

[TJ Johnson:]

Thank you, Jamar. Good afternoon everybody and thank you for joining us on our first quarter 2016 conference call. On today’s call, I will provide an update on our recent highlights and progress toward our long-term goals. I will then turn the call over to our CFO, Shaun McMeans, to cover our Q1 financial results. After that, I will discuss our 2016 priorities and then open up the call to your questions. I would like to start the call off by discussing our just announced collaboration agreement with Bristol-Myers Squibb or BMS. This is clearly one of the most significant agreements in the Company’s recent history, not just this agreement but the expansion of our relationship with BMS. We consider this a major validation of both our technology and our organizational capabilities. I want to thank the teams at HTG and at BMS for the work in making this happen. We’re honored that BMS has rewarded us with their continued confidence. Under the collaboration agreement, we expect to engage in custom panel development, the first of which will be in the IO field. This highlights what we believe as our merging leadership positions in the immuno-oncology RNA profiling arena. Following panel development, there are obvious possibilities for sales and supply of custom as they to [ph] get BMS as well as expected sample processing services to be performed in our Tucson lab. I will discuss sample processing in a little more detail in a few minutes. As you can imagine, we’re not really able to predict the size or timing of revenues right now, but initial work streams have commenced and multiple studies are expected to extend over the next six to eight quarters. More importantly for us, we’re excited about the additional opportunities, this collaboration could generate, as we work through various developmental programs. We plan to seize every opportunity. We believe this agreement may serve as a catalyst for additional opportunities throughout the immuno-oncology field and facilitate conversion of our existing pharma pipeline and the academic market where we believe there is robust demand for IO profiling. As I stated, we’re focused on the clinical diagnostic market and look for immune-response biomarkers to accelerate into molecular diagnostic test panels. Regarding sample processing, as we become more closely aligned with our pharma customers, they are increasingly looking to us to profile samples in support of their biomarker and clinical trial studies as they serve us. As a result, we have substantially increased the capacity of our service lab, with new sequencers, sequencing supplies, and added lab technicians. We are approaching 1 million in investment into this expansion as we look to support expected growth in service volumes. We exited Q1 with a sizable pipeline and expected service volumes, and we see several benefits to grow in this portion of our business. Not does this result in near term revenue with comparable margins to our product business but we feel it solidifies our relationship with our pharma customers as we become more intimately involved in their development programs. A likely impact is that our service revenue may be lumpy on a quarterly basis, particularly in the near-term when our overall revenues have not yet scaled. We see this trend continuing and expect service revenue will be a much larger portion of our overall revenue in the near-term. Over time, we do expect significant placements of our instruments in pharma. In Q1, we established a separate sales team with a dedicated area director 100% focused on capital placements within pharma and expect to have this team fully staffed soon. In Q1, we also added two new business development positions within our pharma companion diagnostic team to capture anticipated higher demand in our CDx business. We believe our role in pharma immuno-oncology programs could be a catalyst for our future diagnosis business. To summarize our views on our pharma business, it is a new day for us. When we decided to concentrate our efforts in pharma, we knew the first deal and strategic relationship would be hard for us, [ph] yet we achieved this huge milestone in less than two years from the launch of HTG EdgeSeq technology and only two quarters after the launch of our first immuno-oncology product. We have a great opportunity with BMS to serve a major pharma player in the high growth market of immune response and believe that other pharma deals may follow. I have been personally engaged with a number of our pharma customers and the feedback is very encouraging. With the success we are seeing now and the pipeline of opportunities we have created, a great sense of confidence and excitement exists within our Company. We are only scratching the surface of what we can do. Now for an update on our European expansion. Our VP of Commercial for Europe is moving quickly with two new commercial hires and we have completed distribution agreements with Gamidor Diagnostics and Durviz. Gamidor offers state-of-the-art diagnostics solutions to a diverse set of hospital, health and academic systems in Israel. And Durviz is the distributor of NGS reagents and library preparation systems in Spain and Portugal. We believe these agreements will expand HTG’s reach outside the United States and service models for additional agreement with distributors in other global markets. We continue to view as the 2017 catalyst for us but are very happy with the progress to-date. While we see growing strength in our pharma business, the academic translational market, a secondary market for HTG, has some pockets of success, but we are few quarters from being on the growth path. We were slower than anticipated to fill sales positions in Q4 last year and Q1 but in Q2 fully staffed. We are focusing efforts on improving our sales organization activities. I expect to see better results from these efforts in the coming months. Also negatively impacting sales in Q1, we have been observing a lower consumable order pattern from a large customer. While we continue to see orders and are discussing other potential programs, we do not expect their volumes to return to their 2015 rate this year. We also released our new miRNA pro version in Q1, but a six-week delay caused delays in a number of instrument evaluations. I want reinforce that our efforts in the academic market are focused on important KOLs and large translational centers, which will support our longer term diagnostic strategies, not being a broad base tools company. We recently participated in the AACR meeting in New Orleans and saw some significant successes there including qualified leads that were two times our targets numbering over 100. We presented two posters with focus on our immuno-oncology and oncology biomarker panels. And our IO franchise lead, Dr. Mark Stern was invited and participated in a panel discussion titled Advancing Your Immunotherapy Research. I’d also draw attention to our GenomeWeb webinar scheduled for Thursday May19th at 11 a.m. Eastern Daylight Time, named Expression-based Profiling of Challenging FFPE Tumor Samples, with speakers Dr. Adi Gazdar, Professor of Pathology & Deputy Director, Hamon Center for Therapeutic Oncology, UT Southwestern Medical Center, Dr. Luc Girard, Assistant Professor, also the Hamon Center and Dr. Bryan Lo, Medical Director, Molecular Oncology Diagnostics Lab, Ottawa Hospital. This webinar is a strong indication of the type of programs we are involved with in a number of our key academic centers. As for the first quarter financial results, we reported revenue of $0.9 million and we added four instruments to our install base, ending at 53. We now have 23 sold units, six reagent rentals, 21 in performance evaluation programs, and three in KOL sites. Although first quarter revenue results are below our expectations, we expect acceleration over the next few quarters, powered by our pharma business. We the capital placements, our approach remains quality over quantity and that has been intensely emphasized and reinforced with our team. I’ll now turn the call over to Shaun.

[Shaun McMeans:]

Thanks TJ. Our service and product revenue was $0.9 million, an increase of 9.6% compared to $0.8 million in the first quarter of 2015. This increase excludes non-recurring grant revenue for Q1 2015. Total revenue for Q1 including the non-recurring grant revenue in 2015 decreased 15.5%. Service revenue, as TJ explained, increased to $0.3 million in Q1 compared to $62,000 in Q1 2015, reflecting success working with our pharma customers and their current preference for outsource sample servicing. Going forward, we anticipate that service revenues will continue to be an increasing percentage of our revenues. Our Q1 margin was 2.5% compared to 12.7% in Q1 2015. Given the size of our overall revenues, relatively minor expenses can have a disproportionate impact on gross margin percentages. As an example, reduction over standard cost in Q1 resulting from the revaluation of our inventory had a non-cash but negative impact on our gross margins. However, this adjustment also reflects cost reductions from in-sourcing our instrument manufacturing in Q1. As we’ve stated in prior earnings call, a significant portion of our cost of goods is fixed operating expense and will decrease as a percent of revenue, as we scale our business, resulting in improving margins. Our operating expenses increased to $6.7 million for Q1 from $4.1 million in Q1 2015. We continue to focus our spending on strategic initiatives driving our clinical strategy and putting R&D to allow HTG EdgeSeq to product menu expansion and sales and marketing to accelerate our market adoption, both domestically and in Europe. In comparison to Q1 2015, our selling, general and administrative cost increased 36.5%. A significant portion of this increase was in connection with becoming a public company in May 2015 including an increase of $0.6 million in accounting and legal services and zero [ph] insurance premiums compared Q1 2015. Research and development expenses were $2 million in Q1 compared to $0.7 million in Q1 2015. These increases were driven by scientific bioinformatics and product development staff additions, and the cost of the initial stages or JANUS program. Specifically we incurred $0.7 million of development fees in Q1 2016, which is accounted for the largest increase in Q1 -- versus 2015. Project JANUS will continue to scale; our ALKPlus clinical trials cost for our PMA and our planned menu expansion in IO [ph] will account for the balance of planned spending increase in 2016. Net loss for Q1 was $6.7 million compared to $4 million for Q1 2015. Net loss per share was a $1.02 for Q1 and $14.99 for Q1 2015. The decrease in loss per share reflects the conversion of the Company’s preferred stock and the sale of our common stock in our May 2015 IPO. We ended the quarter with $32.8 million in cash and investments, which included the remaining $5 million available on our credit facility borrowed in Q1. At this point I would like to turn the call back to TJ for closing comments.

[TJ Johnson:]

Thank you, Shaun. As we have communicated, we have three major strategic objectives for 2016, the fist is to accelerate market adoption of our technology and products. The progress we’ve made this year to date with pharma punctuated by the BMS agreement is hugely validating. We are also seeing progress throughout our pharma clinical pipeline and are deploying additional resources to accelerate anticipated growth. The second is to submit our PMA to the FDA and achieve CE/IVD mark for our lung fusion ALKPlus product. Our ALKPlus program is progressing into final verification and validation studies. We’re now in the process of contracting with our clinical trial sites including site visits and detailed planning for execution of our clinical trials. We expect to start our trials in the next quarter or two. In addition to ALKPlus, we’re now planning to see CE/IVD status on our DLBCL Cell of Origin Assay this year and commercialize into 2017 in Europe. And a third is to continue to execute our development plan with Project JANUS for 2017 year end launch. We’ve also seen accelerating progress with Project JANUS and expect our first two prototype units to be delivered later this month. The version 2 chemistry, which will enable measurement of DNA mutations is progressing on schedule and the initial mutation data we have seen has us optimistic about this program moving forward. We also recently completed research study of 100 NGS clinical labs via [indiscernible], evaluating the JANUS concepts and other factors such as menu and workflow. The data is very new to us but also encouraging. And one data point of particular interest was 97% of respondents indicated an interest in the JANUS value proposition. In sum, we’re thrilled with the positive response to our oncology biomarker panel and our IO panel, which contributed to our new BMS agreement and relationship expansion. These panels have also been positively evaluated by a number of other pharma clients. Our position within the immuno-oncology research market has significantly strengthened, leading to our added investments into accelerating this business. Our service business is going to be very strong and a much higher percent of our business than planned but variants [ph] to our plan that we’re told about. We have work to do on our capitals business within the academic market, the confidence that our focus on quality over quantity will pay off in time. I’ll now open up for your questions.

[Operator:]

[Operator instructions] Our first question is from Dan Leonard of Leerink Partners. Your line is now open.

[Mike Sarcone:]

This is actually Mike Sarcone in for Dan. Good afternoon guys. So, just first question, on the consumables, I know you cited a slowdown in orders from one large customer. Could you may be just give a little bit more color on that and more specifically with that customer, was that related to some kind of macro or market condition that maybe could affect other customers, just trying to get a sense of is there more to come from other customers?

[TJ Johnson:]

No, it had really nothing to do with macro issues. They completed the first phase of the major project in Q4 last year. And I think this is a natural pause or slow down as the things finish up with that program and then eventually move on to others. So, I think it’s more a natural progression of the research market, projects being completed and others kicking in over time. But due to the fact that this customer was such a large percent of our consumable trail, it’s going to have a fairly bouncy effect on us.

[Mike Sarcone:]

And then just my follow-up, does this slowdown affect how you view your cash burnt and maybe potential cash need going forward?

[TJ Johnson:]

It doesn’t in any way, shape or form. We actually see the strength of our pharma business exceeding any modest slowdown we may see in the academic side. I don’t really think we will see in a trend pattern consumable slowdown. I think we are just going to see very lumpy flow within that business, until we reach a broader scale of instrument install base.

[Operator:]

Thank you. Our next question if from Mark Massaro of Canaccord Genuity. Your line is open.

[Mark Massaro:]

I wanted to ask if you could, TJ, provide a little more color as far as what we might expect out of BMS over the coming couple of quarters. I think you called out potential inflection and sample processing out of your Tucson lab but if you could provide anymore color, as far as some of the signpost we can watch out for in the next couple of quarters?

[TJ Johnson:]

Believe me, I’d love to be able to provide a lot more detail, but due to the confidential nature of the agreement, I’m going to air to the conservative side. I do think in general, when you think about this agreement, there will be a media flow to our topline. We would see that flow being pretty lumpy, as we move through various stages of the research agreement over the next six to eight quarters. We definitely believe we will see a heavy amount of that hitting our service line. But obviously, we’ve provided the options within the BMS agreement for them to go service or to utilize their existing EdgeSeq system was consumables. Now, the way I’d also frame it up for you and others is the potential of this research agreement has the ability to reach numbers larger than our 2015 total revenue.

[Mark Massaro:]

You mentioned roughly 100 leads or so at AACR, more than double your expectations. Any more clarity as far as if these leads are predominantly in the IO side or are you seeing some diffuse large B-cell lymphoma side, just be curious to learn where your interest in your platform is from AACR?

[TJ Johnson:]

It’s definitely, Mark, more on the OBP the oncology biomarker panel than the immuno-oncology panel. What we are finding is customers are using those two panels in concert in their efforts. Obviously, the OBP panel has been on market for just over year, and our IO panel for just two quarters now. So, we are not really surprised by kind of the timing and phasing of the growth in the pharma market versus the academic market, as our products for the academic market have been on market for a lot less time. the DLBCL product for the academic market in the U.S. really isn’t a product predominantly pharma associated with those that are developing late stage drugs where the cell of origin classifier is a potential indication of response to the drugs. So, we still see a heavy amount of a engagement with pharma on the DLBCL cell of origin product. Clearly the IO and OBP panel are growing very rapidly for us in pharma and they were the predominant area of interest for the academic research market at AACR.

[Mark Massaro:]

And then, just maybe a clarifying question on the consumable revenue and maybe I missed this. Is this largely a function of your customer , doing les testing as a result of using another platform or another method? And can we expect this level that you saw in Q1 to kind of hover roughly flat in the out quarters of ‘16 or do you think it could come down even further?

[TJ Johnson:]

Sure. No, the effect with our customer was more of a completion of their project. They are continuing at a slower burn rate with that exiting project but definitely continuing on our platform and will continue this year. We just believe that due to the phasing of their program, it will be at a lower rate. I would expect our overall consumable business, ex this customer, to grow this year. But I will take a quarter or two for us to kind of offset the delta between the consumable rate of a large customer as we bring other customers on. But I think we’re still very pro what our consumable rate’s going to be in that market this year. We definitely see the pharma business leaning heavily toward service, which is why as we look at our business model mix, for the rest of this year, will definitely be much more in service than what we would have said two quarters ago.

[Mark Massaro:]

And you added four placements to your install base, how should we think about the pacing of units going forward in 2016? Obviously I understand it’s lumpy and there is lot of moving parts. But, as you think about your pipeline with respect to reagent rentals and converting rentals to capital purchases or from KOLs, how should we think about ballpark placement, do you think you can get into the high single digit or even low double digit placements per quarter or any color as to the moving parts would be helpful?

[TJ Johnson:]

Yes, sure. Really hard for us to predict at this point in time, Mark. I think the way to look at the breakdown of our capital and our placement business is that, it’s going to be very lumpy and a bit of a slug in the academic market. We do think it’s going to accelerate from where we’ve been in the past and expect that. I do believe that we’ll see a pickup in placements in the pharma, side our business later this year. We definitely still have some aggressive targets as it relates to our capital placement and install base. I think the other thing though to keep in mind is that where we are right now in the maturation of the business, it’s not a massive driver of our revenue potential moving forward in the short-term. As we move into the clinical business, Mark, next year after that, I think we’ll start to fall into more of this kind of install base with an ongoing kind of annuity linear flow model, but I don’t believe we’re going to get into that model cleanly until we enter the diagnostic market with obviously our lung fusion panel next year, and our whole series of diagnostic panels after that. Because we’re not approaching the academic market as a broad based tools company, we’re going to have to be very selective and very opportunistic about, how we handle that market. And I think that will then cause us to look more lumpy and ebbing and flowing on the academic side for several more quarters.

[Mark Massaro:]

Excellent and may be my last question. I’d be curious to learn more what put BMS over the edge to announce or enter into a collaboration agreement, relative to some of the other options they had. And as you think about your other 30 or so biopharma partners, could you may be talk about the differentiation of your 540 gene test panel and how that might be resonating with some of your other partners?

[TJ Johnson:]

Sure. Our fundamental belief is being validated, which is the power in combination of the qNPA extraction free chemistry, coupled with the sensitivity and dynamic range of the sequencers, is a superior solution. So, sample input sensitivity of being able to capture these genes at very low expression levels, which is very predominant in the immuno-oncology space and our ability to capture are wide dynamic range because of the dynamic range of the sequencers. So, I think we’re hearing the same thing over and over from our customers. In addition to BMS our IO panels now been evaluated by number of the other large biopharma companies. And we’re hearing very similar stories and feedback from them. And then it’s also important as our customers are looking at our technology, they realize that our technology is very new to the market and they are coming to us with unbelievable ideas about how we could continue to expand the value of our technology. That’s really invigorating to our organization because we fully believe we are barely scratching the surface of what we are going to be able to do with this technology.

[Mark Massaro:]

One more question. I wanted to ask if you are seeing any changes to the competitive dynamic, obviously not anything comparable to your expertise in RNA expression but as you’re working with other pharma companies, are you seeing appetite shift to any other technologies, any material change that you are seeing?

[TJ Johnson:]

I would say no, obviously especially as you look at the IO space, it’s an incredibly dynamic competitive market. Pharma is extremely hot and focused in this area. And people are learning extremely fast about branching into new opportunities and new applications. I do believe it’s important and we’re working right now heavily with our V2 chemistry; that will open up our ability to do not just RNA expressions and RNA fusions rearrangements but also being able to look at the actual DNA mutations in a targeted fashion so that we can bring a consolidated DNA, RNA solution to customers, which we’re definitely hearing a lot about. But I also believe from the feedback that we have received, and I have been in front of a lot of customers recently that the RNA expression is playing a very important role in immuno-oncology.

[Operator:]

Thank you and that concludes our Q&A session for today. I would now like to turn the call back to Mr. TJ Johnson for any further remarks.

[TJ Johnson:]

Yes, I just want to thank everyone for your time and interest in listening to our conference call and your support of our Company. Thank you.

[Operator:]

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