HTG Molecular Diagnostics, Inc.
Q3 2016 Earnings Call Transcript

Published: 15 Nov 2016

[Operator:]

Good day, ladies and gentlemen and welcome to the HTG Molecular Diagnostics Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to introduce your host for today’s conference, Mr. Jamar Ismail of Westwicke Partners. Sir, you may begin.

[Jamar Ismail:]

Thank you. Earlier today, HTG released financial results for the quarter ended September 30, 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 HTG’s planned clinical diagnostics and IVD strategy and activities, expected growth from pharma collaborations, HTG’s strategic initiatives, including planned menu expansion, potential market adoption, anticipated regulatory interactions and submissions, instrument development and installed base progress and revenue, gross margin and expense expectations. 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 TJ Johnson, President and Chief Executive Officer. TJ?

[TJ Johnson:]

Thank you, Jamar. Good afternoon, everyone and thank you for joining us on our third quarter 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 Q3 financial results. After that, I will make some closing comments and then open up the call to your questions. HTG continues to advance our strategies and programs targeting the clinical diagnostics markets. Our first master campaigning diagnostic agreement completed with Merck KGaA, Darmstadt, Germany validates our position as a strong campaigning diagnostic partner for pharma. We very much appreciate our relationship with Merck and our teams have already begun the work for the project milestones in early 2017. The initial development agreement utilizing the HTG EdgeSEQ DLBCL Cell of Origin assay has the potential for up to 10 million in payments to HTG. Changes to the World Health Organization’s guidelines for utilizing gene expression profiling for sub-classification of DLBCL along with new drug programs utilizing Cell of Origin classification as a possible companion assay have us very excited about the future potential of this product. With our DLBCL Cell of Origin assay now CE IVD mark, we plan to begin commercialization in Europe in early 2017. Our immunooncology and oncology biomarker panels continued to gain interest with pharma as well as our VERI/O service lab offerings. As an example our 549 gene immunooncology panel was featured in a late-breaking oral presentation at the Society of Immunotherapy of Cancer Conference last week. The presentations by Dr. Rom Leidner, medical oncologists Providence Cancer Center was titled interim Phase 1/2 data show encouraging clinical benefit for lirilumab in combination with Opdivo in patients with advanced platinum refractory squamous cell carcinoma of the head and neck. The presentation provided preliminary efficacy clinical data from Bristol-Myers Squibb and Innate Pharma’s double-isle combination trials studying lirilumab in combination with nivolumab for treatment of advanced head and neck squamous cell carcinoma. We are very encouraged to see our products now being utilized in such important clinical studies. Moving on to our HTG EdgeSEQ out plus development program, we have recently completed our intralab reproducibility studies, a 3 site clinical study and exceeded our expectations on performance. We are finalizing the data reports and plan to submit our third module to the FDA prior to the end of the year. We are also beginning our preparation for the final phase of the clinical trial with the method comparison study which will begin soon. We certainly have remaining risk in this program, but are very pleased with our progress. We still plan to have this product commercialized in 2017 and have begun commercialization planning. Coupled with our CE IVD mark DLBCL Cell of Origin assays, we do expect to generate modest capital placements in 2017 in diagnostic labs. Europe is also a very important market for our clinical diagnostics commercialization and we will enter 2017 with direct coverage in the UK, France, Germany, Switzerland, Belgium and Nordic countries with distribution partnerships with Spain, Portugal, Italy and Israel. They have also been able to setup significant key opinion leader relationships of each country to assist in our diagnostic commercial efforts. I will now turn the call over to Shaun.

[Shaun McMeans:]

Thanks, TJ. After a strong Q2, we recognized Q3 revenue of $0.9 million versus $1 million in 2015. Q3 service revenue increased $408,000 from $37,000 in 2015. Product and service revenues were roughly split for the quarter, a trend we expect to continue along with an increasing component of service revenues from our VERI/O lab. For the 9 months ended September 30, 2016, revenues were $3.7 million compared to $2.8 million in 2015, a 30% year-over-year increase. Several capital HTG EdgeSEQ placements expected to close in Q3 fell into October. As of today, we have already recognized sales from 4 HTG EdgeSEQ instrument placements, 2 from direct sales and 2 evaluation conversions, a solid start to the fourth quarter. As discussed in our past calls, we expect non-linear sales trends to continue month-to-month and quarter-to-quarter in 2017. Our standard product margins remain very strong and we continue to see leverage of our stable fixed cost basis with continued top line growth. Our Q3 margin reflects a $0.3 million non-cash charge to our inventory reserves representing remaining excess reader inventory from the company’s original HTG Edge product offering prior to switching to our HTG EdgeSEQ platform. Absent this charge, our gross margin would have been 9% for the quarter and 29% for the 9 months ended September 30, 2016 compared to 20% and 10% for 3 and 9 months ended September 30, 2015. Our operating expenses increased to $5.8 million in Q3 from $5 million in 2015. Our spending remains focused on the strategic initiatives which will drive our clinical strategy, including R&D, HTG EdgeSEQ product menu expansion and initiatives in sales and marketing, which we believe will accelerate our domestic and European adoption. Our selling, general and administrative costs increased 6% to $3.9 million primarily related to a $0.3 million increase in employee salaries and benefits in the United States and Europe from expanded commercial activities, and an increase in non-cash stock-based compensation expense. Research and development expenses were $1.9 million in Q3 compared to $1.3 million in 2015. This increase was driven by direct costs incurred in the effort to obtain FDA approval for our first IBP panel, along with spending on Project Janus, which was largely curtailed in Q3. As we mentioned in our Q2 call with temporary suspension of our development effort on Project Janus, our research and development costs will be lower in the second half of 2016 versus 2015. Our primary R&D spending remains directed at out plus clinical trials, development of our Version 2 Chemistry for Mutation Analysis, and supporting other customer’s funded assay development programs. Net loss from operations for Q3 was $6.1 million compared to $4.8 million in 2015. Net loss per share was $0.92 for Q3 and $0.76 for 2015. We ended the quarter with $16.6 million in cash and investments. At this point, I would like to turn the call back to TJ for some closing comments.

[TJ Johnson:]

Thank you, Shaun. HTG is our emerging molecular diagnostic company who has matched our proprietary extraction prechemistry with next-generation sequencing detection. We are a purpose-built diagnostic company leveraging the key market drivers such as acceleration of precision medicine, the migration of molecular testing to NGS workflow, the movement to smaller and less invasive biopsies, the need for greater sensitivity, the need to fit into the healthcare economics and the need to have automation and easy-to-deploy workflow. We also believe we are at the right place at the right time to benefit from the growth in immunooncology. To use an analogy, we have been skating to where we believe the molecular diagnostic market is headed and we believe we are extremely well positioned to take full advantage. We will now open up to your questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of [indiscernible] of Rodman & Renshaw. Your line is now open.

[Unidentified Analyst:]

Hi, how are you guys doing? Hi. Thanks for taking my questions. I have got a several that I would like to ask, so the first one being how many units of the edge sequencing have you sold during the third quarter and what plans do you have to improve sales moving forward?

[TJ Johnson:]

Yes. We had no closes in Q3 Ram, on the EdgeSEQ. All four that we felt would be closing in Q3 moved into October at which they did close. So we at this point in time have 47 instruments in our install base, 33 which have been sold, 11 evaluation units and 3 in care well sites. Our prediction in moving forward in the last earnings calls was that we were going to bring down our evaluation fleet substantially from its high of 21 units in evaluation and move to more of a direct sales model. Now, we believe we now have enough data and experience that we no longer need we place in a great number of evaluation units. So we would expect our install base to remain fairly flat over the next quarter or two quarters, but we will be pushing it obviously to sold units versus units in evaluations. We are not particularly overly concerned about how many instruments we are placing at this point in time. The bulk of our placements are tied to large programs either in pharma or within our academic markets. So until we are able to get our clinical menu up and running which will be starting in 2017, which will drive the more classic razor blade model, we would see kind of a continuing slow placement schedule in key areas that relate to diagnostic development or critical pharma accounts. And then we would expect to start seeing acceleration in the actual placement numbers as our clinical menu deploys in 2017 driven by the DLBCL Cell of Origin in the out plus assay.

[Unidentified Analyst:]

Okay. So my second question is when are you looking to receive the next milestone payment from Merck?

[TJ Johnson:]

Yes, the next set of milestones were scheduled for early 2017, right in the kind of late Q1 or Q2 timeframe.

[Unidentified Analyst:]

Okay. And then my last question is what’s your current cash run that you have?

[TJ Johnson:]

Yes. We currently exited the quarter with $16.6 million in cash and in investments and we would predict that to be somewhere in the area of two and a half quarters.

[Unidentified Analyst:]

Okay. Thank you so much and that’s all the questions I have.

[TJ Johnson:]

You’re welcome.

[Operator:]

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

[Mark Massaro:]

Hey guys. Thanks for taking the question. My first one is on the service revenue line TJ, could you just share like how we should be modeling, I understand product revenue is obviously lumpy, I think your service revenue would be less lumpy, so any clarity around the pacing of that would be helpful?

[TJ Johnson:]

Yes. Believe me Mark I wish we had clarity. We do believe that’s going to be extremely lumpy as well because these are pretty large programs and in essence they are tied to kind of completion of critical milestones or critical groupings. So we have a pretty sizable pipeline that we are working with right now. We are expecting a pretty healthy Q4 on both the service line and the capital line. But we think it’s going to continue to be on a quarterly basis fairly lumpy like growing steadily over looking at three months or four months or a quarter kind of timeline. So again it’s going to be highly predicated on where many of these programs fit into the kind of quarter dates. Obviously, these programs aren’t necessarily tied to our quarter, so we really can’t control the pacing trying to get back to the convenience of our quarters. But our pipeline as far as service business is growing and we suspect that it’s going to come through in kind of spurts or groupings, so we are expecting a pretty healthy Q4 with the amount of pipeline that we have pent up.

[Mark Massaro:]

Okay, great. And then the EdgeSEQ, I think in your prepared remarks and press release you mentioned you expect to have the third module submitted to the FDA by year end, what is your timing to submit all four modules?

[TJ Johnson:]

Yes. No, you have it right Mark, the major part of our submission was completing its three site clinical study or the intralab reproducibility studies. So we have now completed that and are finishing up what you could imagine the mass of amount of data preparation for the submission of the module three. We are waiting on some final instructions back or alignment back with FDA on our method comparison study. As soon as we get that back which we are expecting to be fairly soon, we will be able to start the method comparison study which is not going to take long – a few months. So ideally, we will definitely finish up the method comparison study and have that submitted to FDA early next year. We are still hopeful to be able to add the product. Once approved on market in the U.S. by mid-year, we will ask CE/IVD marking much sooner. We are planning to do that at the end of this year or very early next year so that we can launch initially in Europe and have a full year of efforts and then we are expecting about a half year of efforts in the U.S.

[Mark Massaro:]

Okay, great. And I think at the last call I believe you are at 34 biopharma customers, were you able to add any in the quarter and by a chance do you have the breakout of Phase 1 or Phase 2 projects?

[TJ Johnson:]

Sure and you would imagine that numbers moving month-to-month, but at the end of September we were at 35, 23 Phase 2s and 12 Phase 1s.

[Mark Massaro:]

Great. I think that’s all I have for now. I will see you later this week.

[TJ Johnson:]

Yes. We look forward to that. Thank you.

[Operator:]

Thank you. And I am showing no further questions at this time. I would now like to turn the call over to Mr. TJ Johnson for closing remarks.

[TJ Johnson:]

I would just like to thank everybody for your time and interest in HTG on behalf of all our employees. And we will be looking forward to providing more information on the company as we move forward. Thank you.

[Operator:]

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