NantHealth, Inc.
Q1 2019 Earnings Call Transcript

Published: 11 May 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the NantHealth 2019 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instruction will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to introduce your host for today's conference, Mr. Robert Jaffe, Investor Relations for NantHealth. Mr. Jaffe, you may begin your conference.

[Robert Jaffe:]

Good morning, thank you for joining us today to discuss NantHealth 2019 first quarter financial results. On the call today are Dr. Patrick Soon-Shiong, Chief Executive Officer; Ronald Allen Louks, Chief Operating Officer; Bob Petrou, Interim Financial Officer; and Dr. Sandeep Reddy, our Chief Medical Officer. This call is being broadcast live at www.nanthealth.com. A playback will be available for three months on NantHealth's website. I'd like to make the cautionary statement and remind everyone that all of the information discussed on today's call is covered under the Safe Harbor provisions of the Litigation Reform Act. The Company's discussion today will include forward-looking information reflecting management's current forecast of certain aspects of the Company's future and actual results could differ materially from those stated or implied. In addition, during the course of this call, we may refer to non-GAAP financial measures that are not prepared in accordance with U.S. generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review NantHealth's press release announcing its full 2019 first quarter financial results for the Company's reasons for including those non-GAAP financial measures in its financial results announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in the Company's earnings press release issued earlier today. Today, Ron will provide a brief overview of the quarter and discuss the business lines, followed by Bob, who will discuss the financial results in more detail. We will then open the call for questions. With that said, I will now turn the call over to Ron Louks. Ron?

[Ronald Louks:]

Good afternoon, everyone, and welcome to NantHealth's 2019 first quarter financial results conference call. I'm pleased to report [indiscernible] 2019, compared to first quarter this year with last year, total revenue increased 7% to $23.7 million from $22.3 million. Our SaaS revenue increased 10% to $17.8 million over last year's first quarter was up 3% from the fourth quarter. Both our gross profit and gross margin increased from the same quarter last year, and we lowered SG&A expenses. Bob will discuss our financial results in more detail shortly. Turning to our software and services business, in our Clinical Decision Support Division, we recently signed a substantial Eviti contract with a multi-state health insurance payer. We expect to formally announce the features of this three-year contract shortly. For every product in Q1, we released versions 7.6 and 7.7, which has a number of enhancements. These improvements include features that alert payers when a patient begins treatment before eligibility is determined. The ability for clinical content teams to publish regimens more efficiently and effectively to meet client needs. Features that allow payer medical management groups to customize warnings and deviations for their clinically equivalent programs and superior insights into member eligibility and treatment timeframes. For NaviNet payer engagement solution, in Q1 we implemented a refreshed pricing model for NaviNet AllPayer services, which we expect to further drive growth of our SaaS business in 2019. We enhanced new workflow capabilities within NaviNet's Authorization applications to support submission workflow, and updated the Authorization Appeals application to better support users. In Q1, we upgraded the Claim Status Inquiry tool to provide better visibility of actions taken within NaviNet for non-NaviNet claims, thus increasing the utility of the NaviNet solution beyond current payer partners. Also in Q1, we provided health plans/payers greater efficiency by allowing enhanced customization to Open Claim attachment metadata; this improves automated file retrieval and processing on backend systems used by payers. And for our Connected Care product line; In Q1, we participated in Healthcare Information and Management Systems Society conference in Orlando, Florida. At the conference we exhibited the DeviceConX solution's ability to successfully deliver data from GE Healthcare devices, and showcase the collaborations with Dell Boomi, Baxter and other kidney dialysis treatment solutions. Also in Q1, as previously announced, we significantly increased connectivity license sales, driving improved recurring maintenance revenue on a go-forward basis, and deployed DeviceConX version 5.15 upgrade, with the ability to push OS security patches directly to HBox Connected Care hardware devices. In addition, last month we presented our VitalsConX technology at the American Nursing Informatics Association, ANIA Annual Conference, demonstrating the ease of collecting, inputting and integrating patient's data into electronic health records. Turning to our sequencing and molecular analysis business, 820 total test orders in the first quarter. This included 428 GPS Cancer and 392 Liquids GPS tests. The lower number of total tests with respect to [indiscernible] newly implemented billing policy that will limit the number of tests performed without reimbursement from other health plans or the patient directly. As Patrick shared on the last call, and we will be [indiscernible] the same for several quarters, we believe that GPS test is the best and most viable test. However, [indiscernible] continue with un-reimbursed testing. On science and medical fronts in Q1, scientific teams from NantHealth and NantOmics presented five posters at the American Society of Clinical Oncology Gastrointestinal Cancers Symposium; and two posters at the ASCO's Genitourinary Cancers Symposium. The research presented focused on the significance of RNA expression, in tissue and blood, and individual biomarkers in determining why some patients do not respond to targeted cancer therapies based on the DNA genomic profiling alone. With that, we'll review our business lines. I'll turn the call over to Bob, to discuss our financial results in more detail. Bob?

[Bob Petrou:]

Thank you, Ron, and hello everyone. For the first quarter of 2019, revenue grew approximately $1.5 million or 7% to $23.7 million from $22.3 million reported in the same quarter of the prior year. Sequentially, revenue was up 3.8% in Q1, compared with Q4 of 2018. For the first quarter of 2019, revenue from our largest business category, SaaS, grew approximately 10% to $17.8 million from $15.2 million a year ago. Q1 sequencing and molecular analysis revenue was approximately $814,000; down slightly from $840,000 the same quarter of the prior year. This modest decline was primarily driven by a change in product mix on cash performed and reimbursed, and timing of collections from non-contracted payers. Q1 revenue from our Connected Care products group declined to $3.5 million from $3.9 million in the first quarter of 2018 though up 9.3% sequentially from Q4, 2018. As we have mentioned before, revenue from this line item often varies from quarter-to-quarter due to the timing and completion of Connected Care implementations. Q1 gross profit of $12.4 million or 52% of revenue, increased compared with $11.2 million or [50%] of revenue in the same quarter a year ago. The gross margin improvement from a year ago was primarily due to the changes in product mix as our growth is being spurred by the growing SaaS revenue. Q1 total operating expenses declined 15% to $22.9 million from $26.9 million the prior year first quarter, reflecting our continued cost management efforts. For the first quarter, net loss from continuing operations was $19.8 million or $0.18 per share, which included a non-cash charge of $2.2 million related to losses from our related party equity investment in NantOmics, as well as a $2.5 million unrealized loss due to a change in the fair value of our Bookings Commitment liability. Without these non-cash charges, our net loss from continuing operations would have been $15.1 million at Q1, 2019. On a non-GAAP basis, net loss from continuing operations, which excludes the losses from our related party equity investment and the Bookings Commitment among other things, was $10.7 million or $0.10 per share from $13.5 million or $0.12 per share for the first quarter of last year. Finally, cash and cash equivalents were $12.4 million as of March 31, 2019, compared with $18.3 million at the end of our fourth quarter, representing a net usage of $5.9 million. We continue to manage our cash position and have not drawn on our $100 million line of credit. With that, I will now return the call back over to Robert.

[Robert Jaffe:]

Thanks Bob. Operator, Deedee that completes our prepared remarks. We'd now like to open the call to questions.

[Operator:]

[Operator Instructions] Our first question comes from Brandon Couillard.

[Brandon Couillard:]

Hey, thanks. Good afternoon. A question for Bobby, with respect to the new billing policy for GPS, I'm just curious, how you direct your commercial team in the field to target those areas, where you know you've got a contract or reimbursement for certain patients? And could you give us an update on the number of field reps you have in the field now for GPS?

[Sandeep Reddy:]

Yes. So, thanks for the question, Brandon. So the reality is I think we've been saying this now for several quarters, we're trying to focus on areas where we know we have contracts. Some of the issue, of course is that we can't control the doctors who are ordering the tests. And so we have doctors that order the tests, who have belief in the tests and for whatever reason that Venn diagram doesn't necessarily overlap with some of the places where we have coverage, so we're trying to both expand the ordering pool, but also control that to areas that have better coverage. So that's delicate – that's a delicate crosswalk. We do try to focus the sales people to call on physicians who we have good relationships with, who have high volume of practice. We can't really just direct them to say, please only seek out this insurance plan or this employer that becomes unfair. So I think the truth is that it's not something that's easy to do or doable. And I would welcome any feedback, if you say – if you have a better solution for that, please, I mean we are open to that, because we've not been able to solve that. We think the way that we do it is you just provide the best possible tests and then try to get as much data as possible to increase the number of covered payers.

[Brandon Couillard:]

Any metrics you can share with me as far as the number of field reps you have today?

[Sandeep Reddy:]

Yes. I don't know if we actually have shared that in the past, but I mean I guess we have two currently in the field that are dedicated to GPS only.

[Brandon Couillard:]

And then one for Bob, on the same topic. Could you just help me understand sort of the mismatch between the sequencing and molecular analysis orders, COGS and revenue? We're seeing COGS trend up, but orders trend a little bit lower, just why the mismatch with those numbers?

[Bob Petrou:]

On the COGS side, you should start seeing a reduction in the overall costs. And in COGS and you saw that with our gross margin going up. So my view and expectation of what we've been looking at is that we will see gross margin at an aggregate level increase and continue to do so as the quantity of tests go down. What was the second part of the question?

[Brandon Couillard:]

It was really just around the sequencing COGS and then the sequencing the GPS orders, it just seems to be a mismatch sort of between those two metrics last few quarters. That’s all.

[Bob Petrou:]

Yes. Again from our perspective, we expect to see an improvement in the gross margin of the overall company as the number of tests go down and we did see that, we went from 50% to 52%, and our expectation is that we will see again, an increase in that in the future. Again within sequencing, we have GPS tests and liquid tests. So there's a mix of what price points between the two products, and ultimately, will drive a bit of variation in what that revenue looks like and what that mix is. And as we referenced before, there's again, inter-related revenues on some of these trials that we do, as well which plays an impact in the revenue mix on that front.

[Brandon Couillard:]

And one more for Bobby, I know it's only been about a month since we last spoke, but any updates to share with respect to your latest conversations with the FDA?

[Sandeep Reddy:]

Yes. Actually, there has been positive developments there. So as you know, we had submitted our 510(k), and we are – I think, reasonably actively engaged with the FDA. We've received feedback. I think this – I would call the feedback reasonably positive, and we actually have follow-up telecom with them later this month to discuss some of the issues that we need to work out. But I think it's moving along at the pace that we would hope and expect.

[Brandon Couillard:]

Very good. Thank you.

[Operator:]

Thank you. Our next question comes from Sean Dodge of Jefferies.

[Sean Dodge:]

Good afternoon. Thanks for taking the questions. Maybe starting with revenue, the SaaS business was up 10% year-on-year in the quarter. With every deal you announce, and then the pricing refresh in NaviNet, you said, we should continue to see growth. But can you put some bookends around what or how we should think about the trajectory of SaaS revenue growth coming over the course of the year maybe kind of as you exit the year?

[Bob Petrou:]

Yes. It's Bob here. Again, I see us being quite bullish on the software and SaaS business. I do expect to see continued growth throughout the rest of the year. And again, we will start seeing some of those benefits of the new contract at the end of Q2, and then through the rest of the year. So from a bookends perspective, again a big challenge to give an exact number, but 5% to 10% is relevant in what we see in front of us right now.

[Sean Dodge:]

Okay. And then so I guess the press release says the Eviti deal expands the total covered lives there to 25 million. What did you have before? I think, how many lives does this Eviti deal add?

[Bob Petrou:]

Just under 23 million previously, so we're 2 plus million or approximately 2 million and change.

[Sean Dodge:]

And then I know, a couple years back, you guys were working with Allscripts to integrate elements of Eviti into the EHR to make it and GPS ordering, more central to the physician workflow. I guess are there other EHR vendors you're working with now or in the places Eviti is currently being used? Are physicians using it like a standalone system? Or is it become more of a – kind of an integrated part of their workflow?

[Sandeep Reddy:]

Sean, it's Bobby Reddy, I'll take some of that. So as far as the Allscripts piece goes, yes, we've integrated pieces of Eviti into that, particularly Eviti Advisor, but also the Connect product, we're working on that. What we hear from the industry is that EHR connectivity is critical. And so, we are trying to work with multiple vendors to do that. We have instances where, because of client demand, we are able to do that. But from a system wide perspective, we've not done that outside of Allscripts at this point, but we are certainly looking at that. And we think it's an important piece of the puzzle there.

[Sean Dodge:]

All right, very good. Thank you.

[Operator:]

Thank you. I would like to now turn the call back to management.

[Bob Petrou:]

Thanks, Deedee. Thank you, everybody for joining us today. We look forward to sharing our progress on our next scheduled conference call. Thank you again for joining us today. Have a good one.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. And everyone have a great day.