NantHealth, Inc.
Q3 2019 Earnings Call Transcript

Published: 11 Nov 2019

[Operator:]

Good afternoon Ladies and Gentlemen and welcome to the NantHealth 2019 Third Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.I would now like to turn the conference over to your host, Mr. Robert Jaffe, Investor Relations for NantHealth.

[Robert Jaffe:]

Welcome, everyone, and thank you for joining us today to discuss NantHealth's 2019 Third Quarter Financial Results. On the call today are Dr. Patrick Soon Shiong, Chief Executive Officer; Ron Louks, Chief Operating Officer; Bob Petrou, Chief 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 also like to make a 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 third 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?

[Ron Louks:]

Thanks, Robert. Good afternoon, everyone, and welcome to NantHealth's 2019 Third Quarter Financial Results Conference Call.For the 2019 third quarter total revenue was $22.4 million. Our SaaS revenue was $18.3 million a 15% increase over the last year third quarter SaaS revenue of $15.9 million. Our consolidated gross margin significantly improved 63% of total net revenue from 50% in last year's third quarter. Total operating expenses were $20.8 million a decrease of 9% or approximately $2.1 million from $22.9 million in the same period last year. Bob will further discuss our financial results in more detail shortly.Turning briefly to our balance sheet. Our cash position at September 30 grew by more than $2 million from the end of Q2. This increase is a positive development for our business and reflects our efforts to keep a close eye on our costs.Turning to software and service business, in our clinical decision support division we’ve renewed the partnership contract with the leading provider of clinical solutions. The contractor has a three-year term and a minimum estimated total value of $38.4 million.We signed an agreement with Wexford Health Sources one of the nation's largest correctional health care companies which will bring evidence-based standards and value-based oncology care to [indiscernible] patients. We renewed an agreement with a large national health plan for federal employees, retirees and their families that will allow [plan] members to continue to receive streamlined pre-authorization of cancer care.We’ve launched several enhancements to our Eviti platform the new features are designed to provide payers with additional information about care management including the intent use of brand-name drugs and visibility into settings where care is provided. Payers with multiple plans can now permit users to view multiple dashboards which saves time. And our Eviti platform received full accreditation from URAC which is valid through September 1 2022 the accreditation which recognizes those companies abiding by evidence-based standards and value-based care means Eviti continues to meet URAC health utilization management standards.For an NaviNet payers engagement solution we had an NaviNet Authorization attachment application through implementation of one of the nation's largest health insurance organizations. This feature ensures providers receive the right supporting documentation to make more informed and timely decisions. We expanded NaviNet open functionality to provide additional notifications with the authorization application. This enables users to receive information timely and respond quickly to critical requests eliminating potential delays in caring for patients.In addition, our NaviNet all payer product completed the conversion of 3602 provider offices equal to approximately 80% of all fair customers from a legacy pricing model.This will generate more than $1 million of additional annual recurring revenue. And for extensive care product line we introduced VCX3.0 formerly VitalsConX which is designed to reduce patient overstays and facilitate faster decision-making. VCX3.0 accelerates automated vital sign capture and provides easy entry of other customized observations at the point of care.Updates to the product includes streamlined data validation and a touch-based user interface to doctors and vital signs quickly and easily. VCX3.0 now supports smart patient vital sign monitors including GE VC150. We announced new Shuttle cable features to help improve data collection, efficiency and accuracy using a medical-grade serial-to-USB interface cable.We signed a contract with Baxter expanding medical device driver development, this enables Baxter to connect additional devices to electronic medical record EMR systems. And in Q4, at the HIMSS Asia Pacific 2019 meeting, NantHealth led the Interoperability Showcase along with GE Healthcare, AirStrip and iProcedures. Together, the companies showcased how clinicians can spend less time on documentation and more time analyzing data in near real-time to improve patient outcomes.Turning to our sequencing and molecular analysis business. We presented a poster on GPS Cancer at the International Association for the Study of Lung Cancer, World Lung meeting in Barcelona. Dr. Hossein Borghaei, of Fox Chase Cancer Center, and authors from NantHealth and NantOmics, presented a poster. The poster concludes NantHealth and NantOmics can use GPS Cancer to identify a unique subset of patients who are likely to be resistant to conventional immune checkpoint inhibitor therapy, using a method that has not previously been well characterized in this clinical setting.And finally we presented a poster at the European Society for Medical Oncology ESMO meeting. NantHealth and NantOmics, together with investigators from Moffitt Cancer Center, presented a poster, entitled “Differential expression of immunoregulatory molecules and highly-associated cancer genes may provide novel insights into strategic trial design for therapeutics.” The poster describes novel associations of immune checkpoint gene expression with cancer related genomic mutations beyond Tumor Mutation Burden (TMB) as a biomarker for immunotherapy response.To sum up we reported a solid quarter spearheaded by continued growth of our SaaS business. Our cash position grew reflecting our efforts to manage cash and watch cost our window to receive final FDA comments for the omics core which filing is our current fourth quarter of 2019 assuming the agency has no additional questions regarding the content of the submission and our teams continue to present an important medical scientific conference around the world.With that overview of 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. As Ron mentioned earlier for the third quarter of 2019 revenue increased slightly to $22.4 million and from $22.3 million the same quarter of the prior year. As a reminder we divested our home health business at the end of 2019 second quarter.Consequently we did not record any revenues for this business in the current year of third quarter. On an apples to apples comparison which excludes revenues from the home health business from last year's third quarter revenues grew 8% to $22.4 million from $20.7 million in third quarter of 2018. For the first nine months of 2019 revenue from all categories excluding home health and sequencing was up over 13% from the comparable period last year.SaaS revenue continued as positive growth trajectory with revenues increasing 15% to $18.3 million from $15.9 million in last year's third quarter.The primary drivers for the improved performance were the addition of key contracts and partners. As previously noted in Q3 we renewed two contracts and signed a new customer combined the contract win and customer renewals solidify more than $40 million in total value.Q3 sequencing and molecular analysis revenue was approximately $276,000 down from $742,000 in the same quarter of the prior year.The FDA is currently reviewing GPS cancers whole exome test under 510 K submission. As we have reference in the past we expect to continue to see a decline in sequencing revenue until we receive FDA clearance and the positive coverage determination from CMS.Q3 revenue from our connected care products declined 6% the $3.8 million from $4 million in the third quarter of 2018. On a year-to-date basis we are up 16% in revenue compared with the same period last year.As we have mentioned before revenue from this line item often vary some quarter to quarter due to the timing of completion of connected care implementations. Q3 gross profit grew to $14 million or 63% of revenue which was a substantial increase compared with $11.1 million or 50% of revenue in the same quarter year ago.The gross margin improvement was primarily due to changes in product mix specifically the continued growth of our software related businesses.Q3 total operating expenses declined 9% to $20.8 million from $22.9 million in the prior third quarter reflecting our continued cost management effort.For the nine-months period total operating expense decreased by $6.7 million year-on-year. For the third quarter net loss from continuing operations was $16.4 million or $0.15 per share a significant improvement from $97.4 million or $0.89 per share in the prior year third quarter.On a non-GAAP basis net loss from continuing operations was $7.4 million or $0.07 per share down from $10.8 million or $0.10 per share for the third quarter of last year. Finally, cash and cash equivalents were $9.3 million at September 30, 2019 compared to a $7.1 million at the end of our second quarter representing an increase in excess of $2 million. This is a significant accomplishment in our continuing efforts to improve our financial performance.We remain focused on prudently managing our cash and we have not drawn on our 100 million line of credit.With that I will now turn the call back over to Robert.

[Robert Jaffe:]

Thanks Bob. Operator we're prepared to open up the line for questions. Please open up the Q&A.

[Operator:]

[Operator Instructions] Your first question comes from line of Brandon Couillard of Jefferies. Your line is open.

[Brandon Couillard:]

Hey thanks good afternoon. Patrick any updates you can share with us in terms of the nature of your dialogue with FDA? Any back and forth or additional questions that they might have been asking and your level of I guess confidence visibility on kind of 4Q decision from them?

[Patrick Soon Shiong:]

Brandon this is Patrick. Yes I think we've been in constant dialogue with them and veryrecently as well. So I think I'm pretty confident we're going to get in close. When you say 4Q decision, 4Q this year are you talking about the GPS approval I suppose right [indiscernible] 510k?

[Brandon Couillard:]

Yes. That's right. I think that's what you alluded to in prepared remarks.

[Patrick Soon Shiong:]

Yes. I think we will, yes shortly I mean I don't have any reason to believe we are not on track.

[Brandon Couillard:]

Okay, maybe Bob could you share the number of GPS test orders in the period?

[Bob Petrou:]

From a test perspective we are sub 50 within this quarter.

[Brandon Couillard:]

Okay. And do you have the operating cash flow figure for the third quarter as well? Useful.

[Bob Petrou:]

Well, again from an overall cash perspective we grew the cash position. Our cash flow grew and then from an operating cash flow perspective again I'll need to pick that up but overall we continue to grow our cash from where we were previously within this quarter.

[Brandon Couillard:]

Okay. OpEx is absolutely been trending lower year-to-date and again in the third quarter. How much more room you sort of see to pare back expenses and you're kind of [indiscernible].

[Bob Petrou:]

I really significant more changing in that line. As we've kind of referenced before we want to continue to grow the business. We will invest where it makes most sense. So I anticipate that to probably start growing marginally in the next year or so but not such that it's out of control and beyond our means. We're obviously going to take everything into consideration. We'll make those investment decisions but I don't foresee it declining drastically more but staying stay flat growing through the next year.

[Brandon Couillard:]

All right. Thank you.

[Operator:]

[Operator Instructions] Your next question comes from line of Charles Rhyee of Cowen. Your line is open.

[Charles Rhyee:]

Yes. Hey thanks for taking the question. Just may be following up there the cash balance improving for the quarter. Can you tell us where what drove the increase because if I obviously we are lowering expense, gross margins improving but still we're running a net loss at operating income and certainly a pre-tax income.

[Patrick Soon Shiong:]

Yes. It's really a subset of the continued efforts from the entire organization and the management team. We've been focused on this for some time throughout this year we've improved our DSO. We've continued to manage the expenses and the outflows asexpenses stabilize but really it's a subset of everyone get on board from a company perspective and ensuring that they understand cash is important part of our business and we set goals internally and we've improved various processes and cash and collections DSO, etc. that have driven that increase through this quarter.

[Charles Rhyee:]

So it sounds like what you're saying it's an improvement of working capital here kind of on the base basically in operating cash flow improvement that's driving most of it.

[Patrick Soon Shiong:]

Yes.

[Charles Rhyee:]

Okay. Is there more room you think on in working capital to drive further at this point or --

[Patrick Soon Shiong:]

It's going to be a challenge again various quarters we have various one-time outlays, the interest payments, etc. in certain quarters that that caused us to fluctuate throughout various quarters within in the year. So there's some puts and takes and ups and downs but we are, yes trying to continue to improve that working capital. I think there's a little bit more opportunity within the organization do that but it's not going to be droves and droves of significant improvement.

[Charles Rhyee:]

Great. And then following on Brandon's question about if you get a positive response from the agency, can you just remind us again at this point what is the commercial strategy post that how are we looking to sort of re-engage in the commercial market?

[Bob Petrou:]

Hey Charles this is Bobby Petrou, I think we don't want to put the, to be honest I just want to put the cart before the horse on this so that I think we will address some of that in more detail if and when we have a clear determination from the agency but the reality is that we know coverage is great. Coverage is important. Reimbursement is a secondary issue after that that follows on. I think we can learn a little bit from what happened with Myriad earlier this week in terms of -- we don't want to mislead anyone with guidance around what the potential reimbursement or strategy would be until we have that in hand but suffice to say coverage is the first most critical step and then we will ensure that we have further reimbursement. I think we're a little bit better position than others because we do have some existing contracts around reimbursement that gives us a bit more favorable position.

[Charles Rhyee:]

Okay. That's helpful and then the Eviti the contracts, the partnership you announced along with the renewals you talked about contract value at $38 million and change. How much that is a the renewals is there incremental revenue coming from the renewals or is that just in maintains or the revenue base year like how much of the 38 is incremental?

[Patrick Soon Shiong:]

Very little would be incremental though with this renewal we drove opportunities as the business grows and as we gain further coverage that we do have further opportunity but from that one in particular it is a flat view from where we are today.

[Charles Rhyee:]

Okay. So that the growth that we're seeing right now in the SaaS line is that just from I guess maybe just characterize what's that existing backlog then looks like in terms of new implementations in a sort as we kind of build out our models the rest of the year and the next?

[Patrick Soon Shiong:]

So we implemented I think we references previously late last year a significant partnership with a customer last year. We bringing on some of these new customers that we identified this year. We've got significant pipeline for other Eviti contracts coming through the end of this year and into next year. So we're very bullish on where that business n the SaaS side of the things are growing. Again there definitely are several other new pipeline opportunities that we feel bullish on and will materialize in the next six to nine months.

[Charles Rhyee:]

That's great because we've seen revenue growth in SaaS tick up sequentially in terms of growth rates sort of how do you think about what the sustainable growth rate of this of division should be given what the market looks like for Eviti in particular?

[Patrick Soon Shiong:]

To be conservative we are 15% to 20% annualized growth over the next couple of years is a general view of where we would anticipate Eviti going for the next couple of years. We are bullish and do see opportunity beyond that but from a general conservative view it's definitely in that 15 to 20-ish type range.

[Charles Rhyee:]

Okay. Great and I think Ron last quarter you said you expect to end the year cash positive a couple million dollars. Obviously with the increase this quarter would you revise or are you thinking that kind of view a little bit better now for the year end?

[Ron Louks:]

Yes.

[Patrick Soon Shiong:]

Again I think we are believing and feeling confident that we will end as we had referenced before. Again it's probably in the 4 million to 5 million range versus the 1million to 2 million that we had referenced earlier. So again we anticipate [stand] cash, having cash throughout this year.

[Charles Rhyee:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Brandon Couillard of Jeffries. Your line is open.

[Brandon Couillard:]

Hey thanks. Patrick just a high-level question for you understanding GPS hasn't quite played out as you kind of we kind of hoped a few years back and these are scenario in which you just double down and focus on the software business and de-emphasize GPS for the time being given but you seem to be having a good hand in terms of the software business? Is there scenario which you might pivot your focus of Nat to just being in software oriented?

[Patrick Soon Shiong:]

Yes, look I think that's a good question Brendon because clearly street gets very confused when you have two different businesses and the GPS may be a very-very different business and we really are very seriously looking at the software business as you could see the team has done an amazing job and as we build this in towards a more of a SaaS type business it has a very different valuation from the streets perspective.So yes we contemplating that I think that could be a good strategy as we evolve that and this is something we'll do and even with the GPS you got to approve this tool along how to [indiscernible] because of the reimbursement and other issues and so we will think through a strategy that makes sense to rationalize our company into merely the software business.

[Brandon Couillard:]

Thank you.

[Operator:]

I am showing no further questions at this time. I would like to turn the conference back to the presenters.

[Ron Louks:]

Thanks again. Thank you all for joining us today. we look forward to giving you an update on our next call. Have a great weekend. Thanks everyone.

[Operator:]

Ladies and gentlemen this concludes today's conference. Thank you for your participation. Have a wonderful day. You may now disconnect.