HTG Molecular Diagnostics, Inc.
Q2 2021 Earnings Call Transcript

Published: 12 Aug 2021

[Operator:]

Greetings, and welcome to HTG Molecular Diagnostics' Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. I would now like to turn this conference over to your host, Ms. Monique Kosse, LifeSci Advisors. Thank you ma'am. You may begin your presentation.

[Monique Kosse:]

Thank you, Operator. Earlier today, HTG released its financial results for the second quarter ended June 30, 2021. Before we begin the call, let me remind you that the company's remarks include forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond HTG's control, including uncertainties regarding the ongoing COVID-19 pandemic and its impact on HTG and its customers that may cause 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 the company'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, August 12, 2021, and the company undertakes no obligation to update any forward-looking statements. With that, I would like to turn the call over to John Lubniewski, Chief Executive Officer. John?

[John Lubniewski:]

Thank you, Monique. It's real privilege to be here today to review the results of the second quarter. It was a very eventful quarter for the company and there's quite a bit to talk about, so let me get right to it. Our total revenue for the second quarter of 2021 was $2.1 million versus $2 million for the same period last year. However, there was no collaboration revenue generated in Q2 2021, so our direct revenue, which is our revenue from our product and product related services increased 20% versus 2020 second quarter direct revenue of $1.7 million. This was some of the recovery we were expecting as we saw our customers returning to pre-COVID operating levels in the quarter, with direct revenue growth of 45% from the first quarter to the second quarter in 2021. This was an all-around solid performance by all of our commercial teams. North America Academic, European pharma . To add some color, we added 17 new customers in the quarter. We also expanded our active install base by four instruments. On the pharma front, we finished the quarter with 63 active pharma programs. The breakdown of that for the first six months was we added 30 new programs, extended eight, and timed out of 17 due to lack of activity. This year, we expect to see more programs time out than in years past due to the significant impact COVID had on clinical trials in 2020 and the first half of 2021. However, we're continually adding new programs to replace the programs that are timing out and expect to see those new programs drive the further growth in our portfolio for this business. We also expect our revenue recovery to continue into the third quarter. Finally, on the publications front, we added 32 new publications in the quarter, bringing our cumulative total to 318 -- again demonstrating strong market and scientific adaption of our technology. This was also an exciting period because last week, we launched our nearly 20,000 gene HTG Transcriptome Panel or HTP for sale in the U.S. and Europe. Until now, with the exception of our best-selling whole transcriptome miRNA product, we've released smaller panels that represented subsets of the transcriptome and inevitably we were missing somebody's favorite gene on that panel. This new product should open up new market opportunities for HTG. We are delighted with the capabilities of this product and are proud of the fact that we met or exceeded every performance specification that we established. Even more, we are thrilled with the performance of our development team who managed to complete development of this product ahead of our established timeline without a single missed milestone throughout the entire development process. We believe HTP is a unique product in the market. It's designed to enable a full transcriptome gene expression profiling using our novel and patented HTG EdgeSeq technology. This powerful technology is intended to enable scientists, researchers and clinicians to profile the entire transcriptome from a very small sample without having to do RNA extraction or reverse transcription. The white papers that we've released over the past year have demonstrated our technical superiority over traditional RNA-Seq in several key areas, including our ability to work with between a quarter and an eighth of the sample needed the load RNA-Seq, our ability to work with archived integrated samples that would have insufficient RNA for RNA-Seq, and 96% plus samples pass rate versus only 65% to 75% for RNA-Seq, and a three-day turnaround time including bio-informatics processing versus a week or more for RNA-Seq. We expect that there will be an initial validation phase by customers as they bring the assay online followed by a ramping up of sales for this breakthrough new product. With all of this in mind, this has been an exciting and rewarding quarter for our core profiling business, solid market performance demonstrating the beginning of a recovery in our primary customer markets and outstanding product development execution providing our commercial teams with the next major product for HTG. This quarter, we also announced the formation of our HTG Therapeutics Drug Discovery Unit. This opportunity came to us because of the development of our HTG Transcriptome Panel, caused us to ask whether we could use this powerful platform technology to develop drug candidates a better way especially in the new and exciting field of drugs targeting RNA modifications or the proteins that deposit, remove and recognize RNA modifications. We believe we're in a great position to build a pipeline of high-quality and well-qualified drug candidates for either outlicensing or clinical development. As previously noted, we had three late stage collaborations with large pharma, who attempted to use our technology defined subsets of patients who might respond to the therapies. We thought why wait so long? Given the leading causes of late-stage failure in drug development, our efficacy and safety, why not look for that in the screening and hit the lead process? Why not use this technology earlier in the drug discovery process? We believe gene expression and pathway activation can be measured and used to inform small molecule design. By doing this, we believe we can improve physio-chemical properties that create better starting points for drug discovery. As we begin our studies and consult at key opinion leaders in the field, we came to realize the importance of also including whole transcriptome miRNA. This will help us better-understand the regulation of gene expression by miRNAs and its impact on gene expression profiling. And we already have a whole transcriptome miRNA product that can do just that. The next platform of technology we knew we needed to have was a tool to measure RNA modifications, like methylation. With that in mind, our research team spent the last several quarters, developing a technology that we call EpiEdgeSeq, for which we achieve technical feasibility in June. EpiEdgeSeq expands of our core EdgeSeq technology that enables us to measure RNA modifications. This results in three internal platform technology pillars

[Shaun McMeans:]

Thank you, John. Total revenue for Q2 was $2.1 million compared with $2 million from the prior year. Our Q2 revenue was comprised completely of direct revenue, defined as product and product-related services revenue in our financial statements; whereas prior total year revenue included $0.2 million of collaborative development services. We currently do not anticipate any additional revenue from our existing collaborative development services programs. We're continuing to pursue new customer collaborations. Our cost of product and product-related services revenue was $1 million in Q2 2021 and the prior year. Research and development expense decreased by approximately $0.5 million in Q2 2021 compared with the prior year, primarily due to decreased collaborative development services related cost and staff reductions resulting from transitioning our California-based research and development efforts to Tucson in the second half of 2020. Costs related to our collaborative development services programs are recorded in research and development expense. Our continued new product-related research and development expenses unrelated to our collaborative development programs were approximately $1.3 million for Q2 2021, compared to $1.5 million for the prior year, again reflecting the consolidation of our development efforts into our Tucson facility in 2020. Our development team again successfully met our milestone goals in Q2 2021, including design lock for HTG Transcriptome Panel, leading to the announcement of the official commercial launch of the transcriptome panel on August 5. Our operating loss for Q2 2021 was $4.1 million compared with $5 million for the prior year, reflecting the recognition of $0.6 million and employee retention credits made available to the company as a result of the ongoing impacts of COVID-19 and our continuing management of overall expenses. Net loss per share was $0.39 for the quarter ended June 30, 2021 and $1.30 for the same period in 2020. This reduction reflects additional common shares of stock sold in 2020 and 2021 through our at-the-market facility and our 1-for-15 reverse stock split of our common stock. As of June 30, 2021, we had approximately 7.4 million shares of common stock outstanding. We ended the quarter with $29.8 million in cash, cash equivalents and short-term available for sale securities. I will now turn the call back to, John for his closing comments.

[John Lubniewski:]

Thank you, Shaun. I've said and I'll say again. I firmly believe the best days for HTG are still in front of us. We have built a performance culture and you're starting to see the results of that culture. At the end of the first quarter, I said I expected to see the business start to recover in the second quarter. And in the second quarter, we saw our core profiling business recover, showing strong growth over the first quarter. We saw new customer additions and the rebuilding of our pharma business. I said we're going to launch our HTP in the third quarter and we delivered again. I'm expecting that we will see continued momentum in our core profiling business as both our markets continue to return and we begin to fully capitalize on the opportunities afforded to us by our landmark of whole transcriptome HTP product. We also expanded the scope of our company, creating new revenue and valuation opportunities. In July, we came out of stealth and announced the existence of a new drug discovery business unit that is based on the platform technologies built within our core profiling business and then expanded into epitranscriptomic profiling and advanced chemical library design capabilities. We've been on the edges of this market for years and have deep insights on where and how to best use our technology to be disruptive at drug discovery. As we've done for our core business, we will begin to publish a milestone road map and then look forward to reporting out on the delivery of each of those milestones. I believe the next 12 months can be a breakout period for HTG. The core market for RNA profiling is over $1 billion and growing at 15%. We have a great team and we have a great new product to take advantage of this opportunity. And the new market opportunities afforded by the RNA-targeted therapeutics is a natural evolution for the company. I believe we can use our proven platform technologies to be disruptive and provide another revenue and value driver for the company. With that, I'd like to open up the call for questions. Operator?

[Operator:]

At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Kristen Kluska with Cantor Fitzgerald. You may proceed with your question.

[Rick Miller:]

Hi. This is Rick Miller, on for Kristen. Thanks for taking our questions and congratulations on the launch of the HTG Transcriptome Panel. Given RNA-Seq's position as the gold standard in this space, could you talk a little bit about strategies you're considering for growing the customer base from the early adopters, now that you've completed the full launch of the HTG Transcriptome Panel product?

[John Lubniewski:]

Yes, Rick. This is John. Thanks for joining us and appreciate the kind words. Clearly RNA-Seq is the industry standard. So, we're really looking at the market in two ways. For those people that already have invested in big RNA-Seq workflows, we're going to seek a kind of a co-exist strategy because of the advantages of our ability to work with low sample quantities. We're going to enable the customer to do a whole transcriptome gene expression experiment where they otherwise couldn't because they simply either have degraded sample, or they don't have enough sample to run on RNA-Seq. So, it's kind of co-exist. However, we think the bigger opportunity for us is actually in those customers that have not invested in RNA-Seq because it is such a difficult and challenging technology to bring into a laboratory. Our technology is mostly automated and can be run with technician-level labor. And so we think we actually enable the common man, if you will, or the regular research scientist to actually be able to do full transcriptome analysis, kind of faster, better, and cheaper than our RNA-Seq. So, those are our strategy, if you will, on commercialization. I hope I answered the question.

[Rick Miller:]

Sure. And if I may, one more. I believe you previously described in White Paper One is being critical and demonstrating comparability to RNA-Seq whereas White Paper Two really highlighted the key direct advantages. So, with that, I wanted to ask, how much of White Paper Three was written based on the feedback you've had from the trial and hearing what your customers were looking for and what were the key findings here with White Paper Three?

[John Lubniewski:]

Good question. So, as you recall, White Paper Two really demonstrated superiority of our technology over RNA-Seq, really in a couple of key areas. The first was the sample success rate where we actually had 100% sample success rate whereas RNA-Seq was between 65% and 75%. The second area was in sample usage where we worked with between one-quarter and one-eighth of the sample load of RNA-Seq. And then the third was turnaround time, which actually in the market is turning out to be one of the major reasons why customers are interested in us because in a perfect world, you can get RNA-Seq data in seven days, but more times than not, it can be four weeks or six weeks versus three days for us. So White Paper Three simply expanded the data set that we had used in White Paper Two. It was a larger and we pushed it across all of the disease states that we validated the panel on. So, it was basically a bigger and more expansive data set than White Paper Two and we reproduced those same differentiating aspects of our technology.

[Rick Miller:]

Okay. Understood. Thank you very much.

[John Lubniewski:]

Great. Well, thank you, Rick.

[Operator:]

Our next question comes from the line of Alex Nowak with Craig-Hallum Capital Group. You may proceed with your question.

[Alex Nowak:]

All right. Great. Good afternoon, everyone. Kind of following up to the last question there, John. Did you give the total number of customers signed out for the HTP either from our early access program or from a commercial standpoint? And maybe just give a little bit more color on those that have signed up to trial the panel. Are these early stage academics? Are these trends for translational use? Is this for more drug discovery? Or even on the commercial OEM side. Just any color there would be great.

[John Lubniewski:]

Sure. We've actually listed all of the signed contracts for EAP on our website. And if you go in, you'll see at mostly their academics so where the products being mostly used and what I would call translational medicine in lieu of using RNA-Seq, as you look at the accounts, the places like Duke University, MD Anderson, Mayo Clinic, folks that already have RNA-Seq capabilities but they see the value of bringing in our technology especially again because we can deliver results so much more quickly. The total number of people that had been in the program prior to launch was -- I want to say it was around 35. It took a while to actually get signed contracts, which is what we've listed on the website. It is significant to note that actually in Q2, we actually sold about $200,000 of product pre-launch to those early adopters. So, again, I'm expecting that now the product is available, either in our lab or in kit. Many people are going to bring it in, validate it and then we will expect to see quarter-on-quarter growth ramping up.

[Alex Nowak:]

That's great. Can you expand on how big the sales team is now and I assume it's going to be the core product salesforce that's going to be transitioning over to the whole transcriptome panel. But also, what about on the pharma relationship side? I know there are some opportunity there to build that pipeline.

[John Lubniewski:]

Yes, that's a great question. So, we kind of suffered over the last 12 months with the hiring folks and we just really are finished loading up our teams. We've got about three or four people in the pharma team, about four or five people in the U.S. Academic, our European organization is about seven or eight including service and support staff. I think we finally have the quantity of people that give us coverage. As we continue to get more success, we will be adding to that team. We just finished a fantastic sales meeting here in Tucson. We finally felt safe enough to bring everyone in before this delta variant thing flared up. And it was great to see these people. I don't think we've ever had a better team that's been more energized, that better understands our value proposition and can go out and evangelize that than the organization we have right now.

[Alex Nowak:]

Great and I appreciate that. And just a final question just on the drug discovery platform. I do think it's interesting. The history of HTG was doing a high throughput screening. So, you're kind of going back to your roots here a little bit. But maybe expand on how you ultimately plan to commercialize some of these drug targets that you find. Is this something that you'll do internally and that's a little bit for the reason of bringing that advisory team on board? Or is this going to be identify the targets, getting validated up and then ultimately spin those off either into a separate entity, or spin those off to pharma companies?

[John Lubniewski:]

Great question. So, kind of the boundaries of the business will be we will kick things up at this stage of what I would call novel, but validated targets. We are not moving into the world of target discovery. That's well proven not to be a good ROI for a private enterprise, but we'll pick up those targets and then what we will do is we will use this new medicinal chemistry platform that we fill to design small molecule libraries and run screens. Then in addition to looking for hits on the compounds that generate hits, we will then do the full transcriptomic profiling to look at gene expression, to look at methylation, to look at miRNA expression, to better understand the biology of what is actually happening from a mechanism standpoint of that drug-to-target interaction. And then take that and continue to do that in the hit-the-lead process to really develop a compound or compounds that are patentable first of all, and then also show potency and minimal off-target effects. And again, we can do that by looking at transcriptomic data. Our exit -- so the other end of the business, most likely would be to get something to a pre-IND state for licensing to many of our current customers. We reserve the right obviously to it take something all the way into the clinic, but for the sake of our current planning assumptions, we are going to keep the definition of the business unit as just a pure drug discovery business unit, not a drug development business unit.

[Alex Nowak:]

That's great. Thanks, John and Shaun for the update.

[John Lubniewski:]

Okay. Thank you, Alex.

[Operator:]

Ladies and gentlemen, we've reached the end of today's question-and-answer session. I would like to turn the call back over to Mr. John Lubniewski, for closing remarks.

[John Lubniewski:]

Thank you. I really would like to thank everyone for joining us today. It's been a great quarter. I think we got another great quarter coming at us. I, again want to thank the employees here at HTG for the tremendous work and the self-sacrifice they continue to make and the loyalty that they continue to show for this company. Additionally, I also want to thank our Board. They've been fantastic, especially as we've put together our strategies around expanding our technology and scope of business. And I especially want to thank our shareholders for their continued support. We really look forward to updating you again next quarter on our progress and in our next earnings call. Thank you very much for joining us today.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.