NantHealth, Inc.
Q1 2018 Earnings Call Transcript

Published: 9 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the NantHealth 2018 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 instructions for how to participate will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would like to introduce your host for today’s conference, Mr. Robert Jaffe, Investor Relations for NantHealth. Sir, you may begin.

[Robert Jaffe:]

Thank you, operator. Welcome, everyone, and thank you for joining us today to discuss NantHealth's 2018 first quarter financial results. On the call today are Ron Louks, Chief Operating Officer, and Paul Holt, Chief Financial Officer. This call is being broadcast live at www.nanthealth.com, and a playback will be available for three months on NantHealth's website. I would 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 2018 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 Paul, 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 2018 first quarter financial results conference call. I’ll begin with an overview of the quarter. For the quarter, revenue increased 17% to $22.3 million from $19.1 million in last year’s first quarter. And total gross margin grew to 50% of revenue from 40% for last year’s first quarter. Our financial performance in Q1 continued to show improvement as a result of the restructuring plan we implemented in the third quarter of last year. Through these actions we have enhanced efficiencies, reduced costs and substantially narrowed our adjusted operating loss from continuing operations. With regards to our business lines, SaaS revenue in the quarter was $16.2 million, up 9% from the first quarter of last year. GPS revenue grew 65% over the prior year’s first quarter with 677 GPS commercial tests which were ordered in the first quarter up 12% on a sequentially quarterly basis. On the GPS front, we expanded GPS product portfolio to include proprietary blood-based tumor profiling services. Turning to GPS updates on the science and medical fronts, we will be featuring GPS cancer in our new liquid biopsy platform in eleven presentations at next month’s American Society of Clinical Oncology or ASCO Annual Meeting. This high number of presentation is quite an achievement for NantHealth and we are excited and very much look forward to presenting this information to the medical oncology community. In conjunction with the presentations, we will unveil and commence the commercial launch of our new liquid biopsy. A 26 analyte test for circulating-free DNA and RNA extracted from patient blood permits non-invasive detection of expressed biomarkers and monitoring of response to immunotherapies such as Keytruda or Opdivo or resistance to anti-androgens such as Xtandi. During the first quarter, we submitted to the FDA a medical device application for our proprietary circulating-free DNA liquid biopsy platform. We commenced the beta launch of our GPS Ordering and Results Portal which enables ordering physicians to electronically receive GPS results and request molecular tumor board and Medical Affairs consultations and as previously announced, we submitted to the FDA a 510(k) premarket notification application for tumor/normal DNA sequencing and signed several agreements. These included new GPS reimbursement contract with a large national healthcare IT company, a laboratory service agreement with a 20 plus facility hospital system for the availability of GPS Cancer testing to its patient community and a strategic reseller agreement with a partner in the UK for the provision of molecular services for clinical studies and other research initiatives. More recently, in the second quarter, Oncotarget, a peer-reviewed bio-medical journal published the results of the company-sponsored study. The study results demonstrate the significant gains in accuracy by performing tumor/normal DNA and RNA sequencing and the risks associated with high error rates of tumor only sequencing. Turning to our software and services business. In our Payer Engagement NaviNet division, in Q1 we upgraded our industry-leading Document Exchange Solution to include an enhanced document viewer and the ability for payers to tag and categorize documents. Also in the quarter, as previously announced, we signed a three-year renewal contract with a total contract value of approximately $17 million. In our Clinical Decision Support Eviti division, in Q1 we introduced new dual eligibility features, which enables payers to concurrently manage dual membership patients covered under Medicare and Medicaid, and includes drug shortage configuration features that provide improved management of high cost drugs. In our Connected Care division in Q1 we released DeviceConX5.14 MDE, the first MDI solution to adopt the FHIR standard and VitalsConX2.1, with support for offline mode, enabling clinicians to continue nurse rounding when connectivity is lost and to submit data to the EMR once connectivity is restored. In Q2, we completed our first CE Mark submission for the DeviceConX software platform. In summary, we reported a solid first quarter and look forward to many activities and presentations planned for ASCO next month. With that overview of our business lines, I’ll turn the call over to Paul to discuss our financial results in more detail. Paul?

[Paul Holt:]

Thank you, Ron and hello, everyone. Before I begin wan to note that we’ve made a change in our presentation of revenue and cost of revenue on our financial statements beginning this quarter coinciding with our adoption of the new revenue recognition guidance which we adopted on January 1, 2018. We’ve moved all professional and services revenue related to our Connected Care software and hardware solutions from what we previously referred to as other services to the software and hardware related revenue line. We also renamed other services to Home Healthcare Services in recognition of the fact that the remaining revenue in that line consists solely of Home Healthcare Services. We believe this grouping better represents the breakdown of revenue across our product lines. For the first quarter of 2018, revenue from continuing operations increased by approximately $3.2 million or 17% to $22.3 million from $19.1 million reported in the same quarter of the prior year. Revenue grew in every category of our business, but was primarily driven by growth in software-related revenue including SaaS. I would point out also that as a result of the adoption of this new revenue standard which I just mentioned, our revenue which we recognized this quarter was $0.5 million higher than what we would have reported under the old revenue recognition standard. The impact of the new revenue standard was primarily in the software and SaaS revenue categories and that’s evenly split between software and SaaS. Our prior year’s Q1 results are reported under the old revenue recognition standard. SaaS revenue which includes our NaviNet and Eviti solutions grew by 9% to $16.2 million compared to $14.8 million a year ago. We’ve grown our SaaS revenue streams, not only on a year-over-year basis, but also sequentially for the last five quarters and we believe we have every opportunity to continue that trend moving forward. Software and hardware related revenue which includes software, hardware and related services from our connected care product group, also known as DeviceConX, more than doubled to $1.5 million compared to $0.6 million in the prior year quarter. As I mentioned before, revenue from this line often varies from quarter-to-quarter due to the timing and completion of connect care implementations. Sequencing and molecular analysis revenue grew 65% to $0.8 million versus $0.5 million a year ago. Included in our Q1 results, with approximately $48,000 of revenue related to our new proprietary blood-based tumor profiling services, which we began marketing in March of 2018. Gross profit grew 48% this quarter to $11.2 million, which represents 50% of revenue compared to $7.6 million or 40% of revenue in the same quarter a year ago. The increase in gross profit was mostly driven by higher software and SaaS revenues as well as lower cost including amortization of developed technologies and personnel-related expenses related to our restructuring which we implemented in the third quarter of last year. Selling, general and administrative expenses increased to $20.7 million from $17.4 million in the prior year first quarter. As a result, primarily of a $3.6 million increase in stock compensation expense compared to the prior year. Stock compensation expense increase was partially offset by lower expenses resulting from the restructuring plan which we implemented and announced in the third quarter of last year. Research and development expenses declined to $5.2 million from $8.9 million, driven in part by reallocation of internal resources between cost of revenue and R&D. Our net loss from continuing operations, declined to $22 million from $28.1 million a year ago. This improvement was driven by a combination of cost savings related to our restructuring plan which we mentioned earlier, as well as increased revenue this quarter compared to a year ago. On a GAAP basis, net loss from continuing operations is $0.20 per share compared to $0.23 per share a year ago. Our non-GAAP loss per share from continuing operations narrowed to $0.12 from $0.15 a year ago. And turning to the balance sheet. At March 31, 2018, our cash was $46.4 million compared to $61.7 million at the end of the preceding quarter. I would note that during the quarter we paid approximately $5 million in an earn out payment related to our acquisition of NaviNet. Now with that, I’ll now turn the call back over to Robert.

[Robert Jaffe:]

Thanks, Paul. Operator, we’ve completed the prepared portion of the script. Please open up the call to questions.

[Operator:]

[Operator Instructions] Our first question comes from Charles Rhyee with Cowen. Your line is now open.

[Charles Rhyee:]

Yes. Thanks guys. Hey, just maybe I missed it a little bit earlier. Can you give us a status on the submission of the GPS for the coverage decision, sort of where we stand with that?

[Sandeep Reddy:]

Hey Charles, this is Bobby Reddy. We have submitted for FDA approval on the both – actually the liquid and the solid GPS tests. The GPS test solid tissue has been reviewed by the FDA. We are in constructive dialogue with them ongoing. We receive back comments and submitted back our replies and we are very pleased about the process.

[Charles Rhyee:]

Any sense in the liquid biopsy is a separate submission. So these aren’t tied together, right? You began discussion on GPS first.

[Sandeep Reddy:]

That is correct. They are separate submissions.

[Charles Rhyee:]

Okay. Just a question on the number of sequences ordered. We are starting to get a little traction here, step-by-step here. Any sort of incremental commentary you can provide in terms of sort of the education sessions that you are still providing for physicians ordering physicians sort of the ordering velocity that you guys had talked about in the past, any kind of additional commentary there we can get?

[Sandeep Reddy:]

Well, I mean, that you are exactly right. We are continuing to see sequential Q-over-Q growth in orders. We have the publication as we referenced earlier that suggests the significant improvement in value by doing both tumor normal sequencing. We pair that with others in the space who are moving there, particularly Memorial Sloan Kettering. We are excited about the fact that they also have FDA approval for tumor normal sequencing product. So what we see, I think is, we are arriving at the right time that the market is mature enough. Clinicians are understanding this. So, it’s becoming a little easier. The educational objectives are becoming easier. So, we are happy and we are seeing, I think that positive trend.

[Charles Rhyee:]

Okay. And last question for me. We used to talk about large employer customers with some - wellness, not only a wellness program but also is going to – you are going launch cheap, they are going to pay for GPS. Any update there? I know there was delays trying to get it tied to all other payers. Just curious with where we are all with that and thanks.

[Paul Holt:]

Yes, hey, Charles. This is Paul. I think we are still early stages with that. I think it’s going to take a little bit of time before we really get that – we can report back on material impacts on things. But I think it’s – the answer to that’s ongoing.

[Charles Rhyee:]

Can I ask that, at this point, what is kind of holding things up? Even it’s, we are obviously kind of pushing onto kind of a no man’s land here on the status of this. Before my understanding was, you were tied to coverage and events will cross which seems fine. And then, decision was made let’s tie it to all the parents, so that was obviously I guess, united and if I was correct in the numbering, we have the curve the benefit into those plans as well. But at this point I would think that, that – I don’t know how much more difficult that is from a systems process, but just curious what is sort of the hang up at this point you think?

[Paul Holt:]

Charles, let me just clarify. Are you asking about Bank of America, specifically?

[Charles Rhyee:]

Yes, yes.

[Paul Holt:]

Okay, sorry, sorry. All right. With BOA, I mean, the issue there is that, we have to work with their carrier and we are trying to work through - it’s always difficult working with private insurance carriers as everyone knows. And so, we are working through that, working through the details trying to move forward getting contracting done.

[Charles Rhyee:]

I just – my question is, if Bank of America has said they will pay for it, and I would thought that that would be more of a quoting issue just into the benefit versus – but what you make it sound like, you have to still go through those plans, Medical Review Boards?

[Paul Holt:]

Yes, that’s right. I mean, I think that they want to understand it. We want them to understand it. We would like them to adopt it broadly for their other clients as well. And so, we look it as an opportunity to educate them and bring them up to speed on the value differentiation, right. Why GPS? Why NantHealth molecular infomatic services would be superior? We are happy to actually be engaged in that constructive dialogue.

[Charles Rhyee:]

Okay. That’s helpful. Thanks a lot guys.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Brandon Couillard with Jefferies. Your line is now open.

[Brandon Couillard:]

Hey, good afternoon. Ron or Paul, maybe I missed this. But, can you just help us understand where Patrick is? And why he is not on the call tonight?

[Ron Louks:]

He had a prior commitment today.

[Brandon Couillard:]

Sorry, he could join us. Okay, I guess, Bobby, with respect to the liquid biopsy test, can you just help me understand the FDA device submission component? Just help me understand why you need to get that device cleared and was that built internally and just help us a little more color with what’s proprietary about it?

[Sandeep Reddy:]

Yes, so, it’s not necessarily the device. It’s the assay in total, it’s not really that we are doing a separate device per se. We would like to pursue across all diagnostic platforms that we use and FDA approval strategy. I think that’s – let’s be honest. Foundation Medicine has shown that’s a good path to take. We know that that’s a path to lead to reimbursement and hence we are doing that across all of our platforms.

[Brandon Couillard:]

Okay. And sticking with that upcoming commercial launch, how do you expect to position it with the current sales force alongside the core tissue test? And would you expect to add any feet on the street resources in support of that commercial launch?

[Sandeep Reddy:]

Well, I can’t speak to, sort of the commercial parts of it, but what I will say is that, it is perfectly positioned to be adjunctive, right. We see this as being well differentiated in the space. So we know that Gardens and Foundation Medicine and many others are out there in the liquid biopsy space, but they are offering a DNA-only test. This is a DNA with more importantly a cfRNA component that’s very unique and marries very well to what the tissue test is bringing. We are uniquely positioned to look at markers like PDL1 or other immune therapy markers in the blood. We are positioned to look at ARB7 in the blood in a way that, for example, Genomic Health can’t. So we see this is being adjunctive, synergistic. I think that our existing sales force absolutely can be used to drive that and with even in the first part of this year when we weren’t really commercializing it, we were seeing uptake by clinicians.

[Brandon Couillard:]

And then, if you could share with us the targeted ASP, you hope to capture from the liquid test?

[Ron Louks:]

At ASCO, we’ll announce that.

[Robert Jaffe:]

Did you catch that, Brandon?

[Brandon Couillard:]

Yes, at ASCO, okay. I guess, last one, Paul, do you happen to have the number of ordering docs for GPS in the first quarter total number?

[Paul Holt:]

So we’ve talked about that, as to, is that a metric that we want to continue to be providing. And I think, we are – we decided it going forward and that wouldn’t be something that we would be putting out, so.

[Brandon Couillard:]

Maybe, I’ll ask it a different way, Bobby, is there any metrics or commentary you can share with us about some of the – perhaps reorder rate trends that you are seeing amongst the doc base that have ordered at least one test so far?

[Sandeep Reddy:]

Yes, sure. I mean, I think, going back to what Paul said, I mean, I think it’s just misleading to think about the number of ordering docs, right? I mean, you have new docs coming into the field, people retiring, all kinds of other factors. At the end of the day, we like the fact that the total cumulative order trend continues to go up Q-over-Q, month-over-month, that to me is a best indicator of positive growth. We – I also think really strongly, we want to focus more on DEPS in terms of the relationships we have with ordering physicians as opposed to breadth. So we are not trying to find every doctor, everywhere to order the test. We want doctors who understand it to reorder and we are seeing that.

[Brandon Couillard:]

Okay, thank you.

[Operator:]

Thank you. And our next question comes from Richard Close with Canaccord Genuity. Your line is now open.

[Richard Close:]

Yes, thanks for the question. I was wondering if you could just let us know what the count in terms of how many payers are reimbursing for the test? And I apologize if I miss that earlier.

[Ron Louks:]

Let me get this straight, Richard. You are asking the number of contracted payers or the number of payers that have been paying for the test? Whether they are contracted in?

[Richard Close:]

Yes, I mean, as it stands now, how many insurance companies are reimbursing for the test? And has that changed at all over the last quarter?

[Ron Louks:]

Yes, so we – I’ll just put it this way. We added two in the last quarter.

[Richard Close:]

You’ve added two insurance companies that are paying and can you name who those two are? Or is that the health IT company and the lab company that you are talking about here?

[Ron Louks:]

Yes, we have – these are not paying. These are contracted and it’s not – and yes, first of all, I can’t get into the – necessarily into the names, specifically. But, we plan on – if we have a significant or material event like a large contracted payer, rest assured we will be announcing that.

[Richard Close:]

And then, is there anything happening with cancer treatment centers of America? Are they ordering tests or?

[Ron Louks:]

Yes, so they – so, Rich, they order tests. We don’t sort of treat them differently than any other ordering group or any other ordering physicians. So we’ve seen orders come in from the various different CTCA hospitals and clinicians. That’s all I can say on that.

[Richard Close:]

Okay, great. Thank you.

[Operator:]

Thank you and I am showing no further questions in the queue at this time. I would like to turn the call back over to management for any closing remarks.

[Robert Jaffe:]

Thanks, Jimmy. We look forward to sharing our progress on our next scheduled conference call. Thank you again all for joining us today.

[Operator:]

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