NantHealth, Inc.
Q3 2018 Earnings Call Transcript

Published: 16 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the NantHealth 2018 Third Quarter Financial Results Conference Call. [Operator Instructions]. As a reminder, today's program may be recorded. I would now like to introduce your host for today's program, Robert Jaffe, Investor Relations.

[Robert Jaffe:]

Welcome, everyone, and thank you for joining us today to discuss NantHealth's 2018 third quarter financial results. On the call today are Dr. Patrick Soon-Shiong, Chief Executive Officer; Ron 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 3 months on NantHealth's website. We'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 third quarter financial results for the company's reasons for including those non-GAAP financial measures in its financial results announcement. A 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. This afternoon, 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:]

Thanks, Robert. Good afternoon, everyone, and welcome to NantHealth's 2018 third quarter financial results conference call. I thank all of you for your patience. The reporting of our financial results was slightly delayed due to the impact of Hurricane Michael on our accounting personnel and accounting operations in our offices in Panama City, Florida. I'm pleased to report that all of our staff are safe and our Panama city office is back up and running. Having said that we recognize that the employees and the greater community of Panama City continue to deal with significant personal hardships. Our thoughts and prayers go to all those affected. I want to welcome several new members to the NantHealth family. Bob Petrou has joined the company as our interim CFO. Bob previously held a number of senior finance roles at Blackberry and brings excellent leadership and experience to NantHealth. And as previously announced, we recently brought onboard two senior executives to oversee strategy, business development and global sales. Bob will work to expand our business both in the U.S. and internationally. We are pleased that all 3 of these talented individuals have joined our team. Turning to our top line financials, for the third quarter, revenue increased to $22.3 million from $21.8 million in last year's third quarter. In our Sequencing and Molecular Analysis business, 930 total tests were ordered in the third quarter. This includes 461 GPS cancer and 469 Liquid GPS tests. The number of Liquid GPS tests increased more than 75% from just one quarter ago. Also during the quarter, 31 subjects were enrolled for liquid molecular analysis in clinical studies, sponsored by Nant-affiliated entities under a newly annual subscription program. This brings the cumulative enrollment to 84 subjects in Q3 2018. On science and medical fronts, in September 2018, at the IASLC 19th World Conference on Lung Cancer, NantHealth and NantOmics presented 2 posters and a mini oral presentation titled, "Blood Based Biomarkers." RNA, KRAS and PD-L1, strongly matching with tissue and joint correlation with clinical responses and nonsmall cell, lung cancer patients. With investigational data showing association between clinical response and changes in plasma, cfRNA levels, and the plasma levels of PD-L1 expression, while immunotherapy could be used to monitor clinical responses. In October 2018, at ESMO, the world's second largest cancer symposium, NantHealth along with NantOmics conducted 1 oral presentation and presented 4 papers, including papers demonstrating the promise of Liquid GPS, the company’s blood-based molecular test that provides oncologists with a powerful tool for noninvasive tumor profiling and quantitative monitoring of treatment response. On the GPS front, we expanded our GPS reimbursement contract with a large, national employer in the health care industry to include reimbursement for our Liquid GPS test. Turning to our software and service businesses. In our payer engagement NaviNet division in Q3 we executed a large-scale implementation, of NaviNet Open Authorizations with a key customer, adding more than 40,000 end users, bringing total active number of users to 862,000. In our Clinical Decision Support Eviti division, we released new functionality with the drug-specific justifications, enabling the capture of key data to ensure quicker preauthorization and clinical integrity. We also completed a new statewide implementation with a large existing payer in Kentucky, adding 250,000 covered lives. This implementation followed a similar success in Florida in Q2 for the same national payer. In our Connected Care division, in Q4, we collaborated with B. Braun Australia, GE Healthcare and iProcedures to demonstrate the exchange of data between patient devices and medical records at the HIMSS Interoperability Showcase as part of the Healthcare Information and Management Systems Society, HIMSS, Asia Pacific Conference. With that overview of our business lines, I'll turn the call over to Bob to discuss the financial results in more detail. Bob?

[Bob Petrou:]

Thank you, Ron, and hello, everyone. I'd like to remind everyone that NantHealth adopted the new revenue recognition guidance in ASC 606 on January 1, 2018. As a result of adoption of this new standard, our revenue recognized in the third quarter of 2018 was $250,000 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. Our prior year Q3 results are reported under the old revenue recognition standard. Turning to our results. For the third quarter of 2018, revenue grew approximately $500,000 or 2.4% to $22.3 million from $21.8 million reported in the same quarter of the prior year. Compared to the previous quarter, we saw a growth of 1.1% and for the 9-month period, revenue grew 3.5% compared with the prior year period. For the third quarter of 2018, our largest revenue category, SaaS revenue, grew 4.8% to $15.9 million from $15.2 million a year ago. Our SaaS business showed continued revenue growth this year, driven by an increase in covered lives and customer adoption of our new product features. Q3 Sequencing and Molecular Analysis revenue declined 28% to $0.7 million from $1 million in the prior year same quarter. The decrease was primarily driven by a change in product mix on tests performed and reimbursed as we transition a part of our Sequencing and Molecular Analysis business to the GPS Liquid tests to accommodate for growing segment of the market. For the 9-month period, however, sequencing and molecular analysis revenue grew 26% to $2.5 million from $2 million in the prior year. Our third quarter and year-to-date results included approximately $250,000 and $445,000 of revenue, respectively, related to our new proprietary Liquid GPS molecular analysis service, which went live in March of 2018. A significant portion of the Liquid GPS revenue was from our subscription-based pricing model for services delivered to NANT-affiliated sponsored clinical trials, which has continued to grow since the beginning of the year. Software and hardware related revenue, which includes software, hardware and related services from our Connected Care product group, declined to $4 million compared to $4.2 million in the prior year quarter. As we have mentioned before, revenue from this line item often varies from quarter-to-quarter due to timing and completion of Connected Care implementations. Gross profit grew by 7.6%, just over $11.1 million or 50% of revenue compared to $10.3 million or 47% of revenue in the same quarter a year ago. The gross margin improvement from the year ago was primarily due to the increase in contribution from SaaS to our overall revenue mix as well as ongoing efficiencies in operations. Total operating expenses declined 15% to $22.9 million from $26.3 million in the prior year third quarter, reflecting our continued cost management effort. For the third quarter, net loss from continuing operations was $97.4 million or $0.89 per share, which included a noncash charge of $83.3 million related to an impairment to our equity investment and NantOmics. Without the onetime noncash charge, our net loss would have been $17 million, and for comparison last year's third quarter net loss from continuing operations was $23 million or $0.20 per share. On a non-GAAP basis, our net loss from continuing operations, which excludes the impairment charge among other things, significantly improved to $10.8 million or $0.10 per share from $14.9 million or $0.13 per share for the third quarter of last year. Finally, cash and cash equivalents were $22.8 million at the end of the third quarter compared with $29.4 million at the end of the second quarter, representing a net usage of $6.6 million. We continue to manage our cash position to ensure proper liquidity for the coming quarters. As announced last quarter, NantHealth secured an additional $100 million line of credit from NantCapital, which has not drawn on as of yet. With that, I will now turn the call back to Robert.

[Robert Jaffe:]

Thanks, Bob. Before we open the call to questions, Dr. Soon-Shiong has a few comments he'd like to make.

[Patrick Soon-Shiong:]

Well, thank you, all. I think everybody, as you've seen, we have now a new executive team observe the company's strategy. And I think you've seen -- you heard the last remark about net capitals confidence in the company. I thought what I'd do is make a few remarks within the confines of this call to reflect on how I believe where NantHealth is. It's very similar to how I believe what Abraxane or Nab-paclitaxel was in the year 2001 to 2005. I think philosophically, we need to understand that NantHealth in essence is a company trying to approach the disease of cancer, using technology of both the cloud and Connected Care to get to the point of not only precision medicine, but artificial intelligence. That's a big mouthful and difficult for people to really understand. I recognize the concept -- conceptual challenge when you bring this to the street. Because you look really at earnings, you look at software, you look at GPS, you look at Device Connect, you look at Eviti and you think of this as one disconnected business line. It's nothing bad at all. So I thought I would take a few minutes, philosophically, to just share, again, what I presented many years ago as we took -- when we took this company public. It's very much unlike -- not unlike Abraxane which is Nab-paclitaxel, which was approved in 2005 and -- with the company going public in 2001. Sadly, it's now taken 13 years or so for the world to actually realize the value of Abraxane Nab-paclitaxel because just recently New England Journal of Medicine published the combination of Nab-paclitaxel and checkpoints for triple negative breast cancer as well as for squamous cell and for lung cancer. And it takes that period of time before people really understand what we're trying to achieve in the world of cancer. So let me reflect a little bit and connect the dots, if I may, within this world of NantHealth. On the one hand, it was very important to establish a test that didn't exist and still does not exist as it relates from the perspective of reimbursement. But while reimbursement is important, it was more important for us, as an organization to get to the molecular -- what I call, molecular truth of the cancer, of understanding the entire DNA, RNA and transcriptome and combining tissue of the tumor with tissue of the normal to do this analysis, which we call GPS Cancer. Only until Sloan-Kettering got disapproved to people really now beginning to realize that in fact that is the only way to get the truth with regard to the molecular instructions of what to do with the cancer, that is GPS Cancer. As you see, I'm proud to say, that while it's been slow for adoption, because it's a complex test, we have now hit 700 physicians ordering this. Unfortunately, reimbursement still is the challenge. And we've decided, as an organization, that despite the fact we've been providing this test without the reimbursement, it's really not a sustainable thing to do. And we're now going to be adapting a policy in which we will address this issue of reimbursement very aggressively. But we've also lead the way with regard to not only measuring the tissue, we've led the way, we believe, with regard to measuring the cancer molecules in the blood and that's GPS Cancer Liquid, which has now hit 245 physicians ordering it as close -- as of the last quarter. But that test was but a test, it was a tool towards getting what we call the deep information about a single patient, which then led us to Device Connect, which we needed for us to interconnect the patient's activity whether the patient is at home or whether the patient is at hospital, whether the patient is in clinic. And I'm proud to say we now have 40,000 medical devices with $15 billion transactions a year, with 380 hospitals globally connected onto this software system. That's an enormous amount of data, which we have yet to now tap, to integrate and coordinate that with -- which is basically vital sign data, blood pressure data, temperature data in real time. We needed to connect that with a decision from which then the doctor can make a decision in cancer. And we developed an entity called Eviti. I'm proud to say we now have 5,300 oncology practices covering 23 million lives in 50 states. This is one, I believe, the largest, most comprehensive platform of integrating decision support, a drug, a molecular profile with every approved and even drugs in clinical trials, so that the patient and doctor could be the most informed at real time in real time care. But having said that, we will live in this world of fee-for-service and insurance coverage, which meant that it's of no use for the patient to be offered an opportunity that couldn't be covered, and that's why we integrated NaviNet. And now we have this system where we have 50 Health Net partners, we've 2,000 hospitals in 50 states, we've 860,000 active user accounts, with 50 million transactions a month, covering 57 million covered lives. If we add the Eviti lives, the Device Connects lives and the NaviNet lives, we're covering 100 million lives in this country. So now we're poised as an organization to integrate all this enormous amount of work and scale, so that we can give the best answer to the patient at his point of care. So I hope, philosophically, shareholders out there understand the mission of this organization. And I want to congratulate this new executive team and strategy, in this trying environment of pushing forward with this mission. And that's why I wanted to express my confidence in why NantCapital stepped up. So with that, I'll hand it back to you.

[Robert Jaffe:]

Operator, Jonathan, this is Robert. We're ready to open the call to questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Brandon Couillard from Jefferies.

[Brandon Couillard:]

Glad all your people in Panama City are okay. We know -- lots of friend down in the Panhandle, so it's good to hear. Patrick, with respect to GPS, what about the strategy now that you've brought in some new team members, will it change with respect to the commercial model? Or where you prioritized your resources to support that launch? And secondly, with respect to reimbursement, will that have any effect on orders from what sounds like a closer monitoring of doing tests where reimbursement exists, is what I interpret it.

[Patrick Soon-Shiong:]

So Brandon first off, thank you for that comment. Yes, and our people are, thank goodness, safe in Panama City. I appreciate that comment. With regard to GPS, look, I think, much as I tried -- we try the scientists to convince the regulatory world that it's best to measure 20,000 genes than 400 genes. We had to try [indiscernible], that's fine we'll measure 400 genes. And that's the test that we're putting in now because that's what they're reimbursing. I feel that's an inferior test and that -- it kills me that we have to actually launch an inferior test just so we can get reimbursement, but that's life. Having said that, those -- we're waiting for that process to go through the regulatory process of getting that approved. And then getting that 461 GPS Cancer test and then we have a 469 Liquid GPS test going through. And obviously, we will support whatever is needed to get that test on the market. But that was never and still is never the purpose of that test. The purpose of that test is to help the cancer patient identify, what I call, the new antigen or tumor-associated antigens to define what treatment can actually affect the outcome for that patient. So the test was actually a drug. And it's more than the test, it's a drug. I keep on saying that GPS Cancer is an ability for us to print the molecule today in its genomic sequence and deliver it in whatever vector that is available, whether it'd be the peptide itself, whether it'd be adenovirus, whether it'd be an NK cell, whether it'd be CAR T-cell. So I think, sadly, difficult as it may be, it's hard to get people to see ahead of the perk, of why we were doing this test and continue. So we committed to going along because we have to, with flow of an inferior test, to match what we believe is not a complete test in the market, so that we can get reimbursed. But we're not going to walk away from our commitment to build this test to be the drug that will saves lives.

[Brandon Couillard:]

Okay, one more, Patrick, with respect to the new, large, national employer you signed in the third quarter, would you just sort of give us some perspective on the nature of your dialogue with some of these larger, self-insured employers? And any chance you could update us on the total number of covered lives that you have reimbursement contracts in place for?

[Patrick Soon-Shiong:]

Yes. Sorry, I think I called you Charles, when you're Brandon. Who's on the line now? I'm not sure who is -- Brandon?

[Brandon Couillard:]

Yes, it's Brandon. That's all right.

[Patrick Soon-Shiong:]

So let me ask Ron or Bobby to respond to that question.

[Sandeep Reddy:]

So Brandon, this is Bobby. We don't actually think about it in terms of covered lives. We kind of have discussed this in the past that we're aiming for everyone, ultimately, to be a covered life. That's why we've submitted for regulatory approval to the FDA. As Patrick mentioned, we are in a process there, looking at a predicate device from Memorial, that's a smaller panel and if that's what we need, that's what we need. And so we are moving down a pathway where everyone ultimately is a covered life.

[Brandon Couillard:]

Okay. I guess, last one for Bob. In terms of the GPS revenues, could you give us some specifics about how many of those are tied to Nant-related trials? And just to be sure, were those trial-related orders included in the total GPS order figure?

[Bob Petrou:]

From a revenue perspective, there was included about $250,000 of the total was incorporated into that figure that we reported on. From the overall test perspective, there was -- they -- they're not included in the overall test that we are reporting on.

[Operator:]

Our next question comes from line of Charles Rhyee from Cowen.

[Charles Rhyee:]

Patrick, so maybe I can just ask you. If we are submitting a more of a 400-gene panel test instead of what you would prefer to submit, can you talk about sort of how the revenue model changes here? Because if I'm not mistaken, you have certain contracts with employers for GPS Cancer itself. Does that change what you're delivering to your existing clients? And then of the tests performed in the quarter, were any of those the lower number test?

[Sandeep Reddy:]

So Charles, this is Bobby Reddy. I think that with those existing contracts, we have the capability, obviously, to honor them and can continue to perform the GPS service as defined under those contracts. What we're talking about is what's submitted and is under current discussion with the FDA, waiting for clearance for that device. So that will be a...

[Charles Rhyee:]

For GPS cancer -- so we're still waiting for coverage decision on GPS cancer, is that correct?

[Patrick Soon-Shiong:]

Yes. And what you define as GPS Cancer now will be this 461 panel, which is basically the way we're doing it, which is -- we're using tumor-normal instead of measuring 20,000 genes, we would be submitting a report on 461 genes.

[Charles Rhyee:]

And that's what's going in front of CMS right now?

[Patrick Soon-Shiong:]

Yes. Believe it or not, that's what they want.

[Charles Rhyee:]

Okay, I see. Sort of what you're saying, in your discussions with them, they came back and said, we don't want to see 20,000, we just want to see 461?

[Patrick Soon-Shiong:]

Basically.

[Sandeep Reddy:]

Yes. Our discussions were with the FDA and there's a predicate device. And so we have to model what we submit to follow the previous device and so that's what we have done. We still have the underlying capability to do everything. And I think that's important. As Patrick mentioned, ultimately, that's where we think the true answers are going to come from. So we want to retain that ability, but we also want to remain competitive in this difficult reimbursement environment.

[Charles Rhyee:]

Okay. Can we talk about the charge in NantOmics. Can you give us a little bit more details, what's happening there? Because I know that NantOmics serves the biopharma industry separately. So that's not sort of pacing for Nant holders. Can you talk about what's going on in that side of business that is -- what's leading to this -- kind of this writeoff here?

[Patrick Soon-Shiong:]

Well, I think, obviously, NantOmics was dependent upon the revenue stream and reimbursements through NantHealth, right? And the revenue stream is dependent on the FDA reimbursing and Medicare reimbursing, so it's a sort of vicious little circle here. So having said that, NantOmics has it's own separate path as it relates to drug development and it's developing things like the new epitope antigen, et cetera, which is just revenue depleting, it's not revenue generating, it's a R&D development house. So I suppose from the auditor's perspective, they had to -- just have to look at it from a black-and-white. And that's what's the analysis, and we needed to go ahead with whatever they felt was the current state of -- phase of GPS Cancer. But NantOmics has more than GPS Cancer. As a diagnostic it has -- that's a drug.

[Unidentified Company Representative:]

Sorry, just to expand on that. We have a small stake in that part of the business and therefore, again, we have to value that asset. And our valuation took us down the path of reducing the value of that asset on our balance sheet.

[Charles Rhyee:]

Okay. So -- but nothing else going on separate from just the way the valuation related to NantHealth -- expect -- expectation of NantHealth into NantOmics is impacting it.

[Unidentified Company Representative:]

That's correct. Correct.

[Charles Rhyee:]

Okay. All right. Okay, great. So then just coming back then to the FDA because you've now modeled your submission on the predicate device. Can you give us a sense on timing then? I would assume that, that would kind of speed up the timing.

[Patrick Soon-Shiong:]

Yes. I think -- and Bobby can speak more to this. I think it's hard for us to predict from the timing of the FDA. But we clearly think mid-2019, we would probably have a firm answer one way or the other.

[Operator:]

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Robert Jaffe for any further remarks.

[Robert Jaffe:]

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

[Operator:]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect.