NantHealth, Inc.
Q2 2018 Earnings Call Transcript

Published: 12 Aug 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the NantHealth 2018 Second 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 will follow at that time. [Operator Instructions] As a reminder, this call maybe recorded. I would like to introduce your host for today’s conference, CEO, Dr. Patrick Soon-Shiong. Please go ahead, sir.

[Patrick Soon-Shiong:]

Thank you, and welcome, everyone. I’m opening the call because I just want to give you my view of how we position NantHealth, and I think you’ve all heard the repositioning of the organization so that we focus completely our efforts on the GPS. Also, want to talk a little bit about the fact that GPS is not just a tissue, but also liquid. And the way for us to think about this in the frame of the company is that the gene panel tests, the Foundation Medicine organizations, we believe generation 1 with regard to genetic testing. And then the liquid tests are similarly in that thing. Sloan-Kettering improved this whole analysis platform to generation 2, when they were able to get approval for tumor normal. And we believe GPS cancer, the tumor normal, genome whole genome transcriptomic analysis, now represents what we believe is generation 3. So, you will hear from the team today our continued pursuit of what we believe the most scientifically exciting and valid tests on the market. We had a fantastic showing at ASCO, and you will hear more about how this GPS test will lead us to what we believe is the Holy Grail, which is the new epitope. So, with that, let me then hand over the talk – the rest of the call to Robert Jaffe, who will host the rest of the call together with our team. Robert?

[Robert Jaffe:]

Welcome everyone and thank you for joining us today to discuss NantHealth's 2018 second quarter financial results. On the call today are Dr. Patrick Soon-Shiong, Chief Executive Officer; Ron Louks, Chief Operating Officer, Paul Holt, 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 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 2018 second 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’ll now turn the call over to Ron Louks. Ron?

[Ron Louks:]

Thanks, Robert. Good afternoon, everyone, and welcome to NantHealth 2018 second quarter financial results conference call. I’ll begin with an overview of the quarter. For the second quarter, revenue was 22 million. This compares to 23.5 million in last year’s second quarter, which included approximately 4 million for large completed contract related to device implementation in our Connected Care business. Importantly, revenue for both our GPS molecular analysis and SaaS grew year-over-year. With regard to our business lines, GPS revenue grew 105% over the prior year second quarter. During the second quarter, 908 total tests were ordered, including 642 GPS Cancer and 266 liquid GPS tests. Also, during the quarter, liquid molecular analysis were initiated for 53 patients in co-clinical studies under our new annual pilot subscription program. Turning to GPS updates. At the America's Health Insurance Plans, or AHIP conference, our Chief Medical Officer, Dr. Sandeep Reddy; and Vice President of Sales, Kristin Lee, made presentation on how health plans can navigate to convergence of precision medicine and value-based care. And on the science and medical fronts, our GPS Cancer and new liquid biopsy platform are featured in 11 presentations at the American Society of Clinical Oncology or ASCO Annual Meeting in June. I'd like to highlight a couple of our presentation of ASCO. Along with colleagues of University of California, San Diego, we presented data on next-generation sequencing of paired DNA and RNA analysis in patients with rare cancers. We co-presented data on threefold over estimation of tumor mutation burden, or TMB, using a 248 gene list as a panel to impute TMB. Along with colleagues of City of Hope, we presented findings in health targeting, immune checkpoints to improve clinical trial design across the variety of tumor types. And we co-presented findings on how 17% of DNA next generation sequencing 50-gene panel grains are not expressed in RNA sequencing. On the GPS front, we commercially launched Precision Insights for a web-based application for molecular test ordering and results. This application is the only solution available that blends guidelines-based regiment, information powered by avenue with personalized insights from GPS Cancer. We also initiated liquid molecular analysis for 53 subjects enrolled in core clinical study sponsored by Nant-affiliated entities under our pilot annual subscription program. Turning to our software and services business. In our payer engagement NaviNet division in Q2, we closed the SaaS contract with a major East Coast- based health plan that has more than 3 million members and a network of more than 130 hospitals. This contract is expected to be a significant revenue contributor. In late June, we also launched few products. The first, Provider Initiated Document Exchange, which streamlines and automates the delivery of information between providers and payers. And the second, Authorizations Appeals. As the name implies, it automates the authorizations appeals process. In our Clinical Decision Support Eviti division, we developed and deployed the Precisions Insights portal, which I mentioned a moment ago. The portal is the only solution available to blend guidelines-based regiment information, powered by avenue with personalized insights from GPS Cancer. In May, we successfully launched software release 7.0 with expanded policy guidance information for radiation oncology and drug management of high-cost abuse drugs. This differentiates Eviti from competition on standard of care policy guidelines. In our Connected Care division in Q2, we showcased our portfolio of medical device products at Vitalis, the largest e-health event in Scandinavia. Our MDI product portfolio includes DeviceConX, VitalsConX and HBox. In summary, we reported a solid second quarter, and we are pleased with response from the medical community regarding the data we presented at ASCO. With that overview of our business lines, I'll turn the call over to Paul to discuss our financial results in more details. Paul?

[Paul Holt:]

Thank you, Ron, and hello everyone. I like to remind everyone that NantHealth adopted the new revenue recognition guidance in ASC 606 on January 1, 2018. As a result of the adoption of this new standard, our revenue recognized in the second quarter of 2018, was 0.8 [ph] million higher than what we would be a reported under the old revenue recognition standard. The impact of the new revenue standard was primarily in the software and SaaS revenue categories. Our prior year Q2 results are referred on the old revenue recognition standard. Turning to our results. For the second quarter 2018, revenue from continuing operations declined approximately 1.5 million or 6% to 22 million from 23.5 million reported in the same quarter of the prior year. Our prior year quarter included approximately 4 million in revenue, recognized from a large Connected Care implementation, which impacted our year-over-year revenue comparison of both software and maintenance revenue. This resulted in our software and hardware and maintenance revenue categories declining on a year-over-year basis. However, we showed growth in all of the other remaining revenue categories. Our largest revenue category, SaaS revenue grew 9% to 16.2 million from 14.9 million a year ago. Our SaaS revenue streams have been growing every quarter. This year, both on a sequential and a year-over-year basis. Sequencing and molecular analysis revenue grew 105% to 0.9 million from 0.5 million in the year ago quarter. Included in our Q2 results, approximately 150,000 of revenue, related to our new proprietary liquid GPS profiling service, which started in March 2018. A significant portion of liquid GPS revenue was from our new subscription-based pricing model for services delivered to Nant-affiliated sponsored clinical trials. Software and hardware related revenue, which includes software, hardware, and related services from our connected care product group declined to 0.8 million, compared to 3.0 million in the prior year quarter. So, I mentioned before, revenue from this line often varies from quarter-to-quarter, due to the timing and completion of Connected Care implementations. Our prior year quarter included approximately 2.8 million of software and hardware related revenue from this large customer implementation. Gross profit declined by 17% to 11.5 million or 52% of revenue, compared to 13.9 million or 59% of revenue in the same quarter a year ago. The decrease in gross profit was mostly due to lower software and hardware and maintenance revenue, which as I mentioned earlier was driven by the prior year recognition of our large customer implementation. Selling, general and administrative expenses declined to 18.4 million from 19.2 million in the prior year first quarter, reflection of our continued cost containment of post restructuring, which we’ve implemented in the second half of 2017. Research and development expenses declined to 5.9 million from 8.4 million, also driven by reductions tied to our restructuring activities. Net loss from continuing operations declined to 21.8 [ph] from 57.7 million a year ago. Our prior year loss included a $36 million impairment charge related to our investment in NantOmics. On a GAAP basis, net loss from continuing operations was $0.20 per share, compared with $0.48 per share for the prior year quarter. Our non-GAAP loss per share from continuing operations was $0.10, compared to $0.11 a year ago. Finally, I want to announce that NantHealth has secured an additional $100 million line of credit from NantCapital. This line of credit provides additional financial flexibility and further strengthens our balance sheet going forward. With that, I will now turn the call back over to Robert.

[Robert Jaffe:]

Thanks Paul. Operator, we’ve completed the prepared remarks. We’d now like to open the call to questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Charles Rhyee with Cowen & Company. Your line is now open.

[Charles Rhyee:]

Yes. Thanks for taking the questions. Patrick, thanks for joining us on the call today. I just wanted to ask you real quick here, now that we have you, obviously we have restructured the companies since the back half of last year, we are much more focusing on GPS. But I recall, a while back you talked about the need for the connectivity to providers directly to deliver the data so that you can accelerate treatment. Are we still able to achieve this given that we sold some of these assets to Allscripts? And maybe talk about sort of your evolved thinking for the company going forward?

[Robert Jaffe:]

And we are in the main conference.

[Patrick Soon-Shiong:]

Hi, Charles, and everybody on the call I just realized, I have been talking to myself for the last five minutes. I somehow, technically, we got disconnected from the entire call. And Charles I don't know if you can hear me, but I am trying to answer your question. The question was, to all of you maybe still remember the question, since we have sold Harris and the some of our systems is the connectivity we spoke about with regard to the synergies still there. So, the answer, and I'm going to repeat this. If somebody you have heard some of the answers, somebody got disconnected, I apologize, was that when we looked at the business many years ago, we were looking at connectivity at a macro level, meaning connecting hospital systems to hospital systems, countries to countries, and that’s where both Harris and the systems that we were dealing with. Both signs and medicine has evolved where it’s not population-based, but it is actually individual- personalized, precision-based. So, we evolved – have evolved the business, so that we can actually reach out to individuals. And some of you may not have noticed, but at ASCO, we revealed and released the most sophisticated level of Eviti in which we've now integrated a molecular precision finding of the patient, all the way down into the treatment profile. So, we’ve been patient and also evolved with the size as science has evolved into the world of immunotherapy. And I think, our patience has paid off, because I think people didn’t understand the basis of why we went all the way to whole genome sequencing, exome sequencing, and tied that to transcriptomic analysis, the RNA sequencing. And that has been the struggle because our science was too complex at the level of targeted therapy because we were looking down the line towards not only the immuno, but looking towards absolute precision medicine at the molecular basis. So, if you look at the evolution of genomics, it started like with foundation, medicine and gene panel. And again, not to be discouraging in any way, while that was an important initial step, what it missed was to look at first just a gene panel, but more importantly what it missed was to compare a gene panel to the general population at large or, call it, reference genome. The danger of that is the failure of the recognition that you are your tumor that in fact, it is your genome that is mutated, not the reference genome. And sadly, the consequence of comparing this to a reference genome is that what you call a mutation is actually a normal variation of yourself called a snip. So, therefore, in advertently, the result of a panel looking at a reference genome could cause the doctor to inadvertently prescribe the drug for which the impact is no mutation. And we presented this data in the paper called Oncotarget that showed in fact the results could be 90% false positive, and even if you did the filtration, over 40% false positive. So that gene panel has evolved to the next generation, as I said in the beginning of the call, where Sloan-Kettering got approval to do tumor normal. And that’s exactly what we’ve been doing with tumor normal analysis of the whole genome transcriptomic analysis, and that's GPS Cancer. Why that is important is because this is the only way in which we can then find not only the accuracy of the mutation, but also now the accuracy of fusion proteins and things like MSI-High and things like neoepitope. These terms MSI-High, mutations, fusion proteins are only now coming to bear in terms of its significance in the treatment of the treatment of the patient. And that treatment of the patient is where we’re evolving into the next generation Eviti, it is where we are involving into the connectivity at the patient level. So, I hope that answers your question. I apologize for the break in the technology where some of you may have heard some of the answers, and some of you may not. But I'm really, really [indiscernible] – I’m really confident that we’re now in the right path. It’s still going to take us a little while to focus not just the industry, but the reimbursement community and the physicians on this whole new world of tumor normal transcriptomic analysis. And now that we've evolved it into liquid tumors, and we believe we're the only real liquid tumor that now can measure in the blood, the immune system and GPS liquid, as you said we’ve also launched at ASCO.

[Charles Rhyee:]

Patrick, can I ask you about – so Foundation is acquired by Roche. How does that affect – how do you see the industry evolving here with that company being now integrated within a large Pharma company?

[Patrick Soon-Shiong:]

Well, I think – I can't speak to Roche's motivations for acquiring a foundation other than it a really drives towards the Herceptin and Rituxan, et cetera, but I think from our perspective, what we are interested in is to be agnostic to any Pharma Company, and to provide the physician and the patient the best information possible to ensure the best treatment possible regardless of which pharmacy the company makes the drug.

[Charles Rhyee:]

Okay. Just one last accounting question. The 100 million line of credit, is that just going to show up – is that the line of – is it drawn down at all currently? I didn't get a chance to look at the balance sheet, I apologize, but as it does, does it – is it just a simply showed as debt, given that the entity is separate from the entire. Can you talk about the accounting treatment, given its part of sort of the Nant family?

[Patrick Soon-Shiong:]

Let me talk about the philosophy of Nant, Chris, and I’ll ask Paul to talk about the accounting treatment. First of all, it has not been drawn down at all. At this point, we have cash on hand. And the good news is the company's revenue line is growing and we feel, but I wanted to ensure both from the company's perspective, as well as the streets perspective that we have confidence, real confidence in this organization, real confidence in the science, real confidence in the product. We need to work our way through the reimbursement, and I wanted to ensure that you’re willing to invest in the company as we work our way through the investment. As relates to how it's accounted for in the accounting, Paul do you want to address that?

[Paul Holt:]

Sure. Hi, Charles. As Patrick said, nothing has been drawn on it. So, there is nothing on our balance sheet to reflect, but the line is more than a year. So, in terms of maturities. So, in the event that we are drawn, initially, that wouldn't show up until up, but long term. But there's nothing to account for. We haven't drawn on it.

[Charles Rhyee:]

Okay, great. I'll stop there. Thank you.

[Operator:]

I'm not showing any further questions. I would now like to turn the call back to Robert Jaffe for any further remarks.

[Robert Jaffe:]

Thanks, operator. And thank you all for joining us today. We enjoyed sharing our progress and we look forward to our next scheduled call in just a few months. Thank you all for joining.

[Operator:]

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