Organovo Holdings, Inc.
Q4 2015 Earnings Call Transcript

Published: 9 Jun 2015

[Operator:]

Good afternoon and welcome to the Organovo Holdings Conference Call for the Fourth Quarter and Fiscal Year Ended March 31, 2015. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference call over to Mr. Barry Michaels, the Chief Financial Officer of Organovo Holdings. Mr. Michaels, the floor is your sir.

[Barry Michaels:]

Good afternoon, everyone and thank you for joining us for the Organovo Holdings conference call for the fourth quarter and fiscal year ended March 31, 2015. With me today is Keith Murphy, Organovo’s President and Chief Executive Officer. Before we begin the substance of today’s call I would like to make a brief introductory comments. Earlier this afternoon we issued a press release which outlines the topics we planned to discuss today. If anyone has not seen a copy of this press release it is available on our corporate website at www.organovo.com. It is also available on the SEC website. Additionally, I would like to remind our listeners that this conference call is open to the public and that a replay of our discussion will be available for 30 days at the end of phone number listed on our press release. During this call we will discuss some factors and matters that are likely to influence our business going forward. Any matters discussed today that are not historical facts particularly comments regarding our future plans, objectives and expected future performance constitute forward-looking statements. These forward-looking statements are subject to risks and uncertainties which could cause our actual results to differ materially from those suggested by our forward-looking statements. The factors that could cause our actual future results to differ materially from current expectations are identified and described in more detail in our filings with the SEC including our Annual Report on Form 10-K which we filed today with the SEC. We encourage all of our listeners to review our SEC filings including our Annual Report on Form 10-K. As a result of these risks and uncertainties you should not place undue reliance on these forward-looking statements, which speak only as of the date of this conference call. We undertake no obligation to revise or update these forward-looking statements to reflect events or circumstances after the date hereof. This conference call will also include a discussion of the Company's total contract bookings for its first commercial product the exVive3D Human Liver Tissue. Total contract bookings represents the total value of contracts the Company has entered into for research services related to its exVive3D Human Liver Tissue during the applicable reporting period. Where contracts involve research relating to additional tissue types, only that portion of the total contract applicable to exVive Human Liver Tissue is included. The Company's contracts typically require the Company to provide services over a four to six-month period, though they may in some cases require services over a longer timeframe. In addition, the Company's customers may opt out of having the Company perform all of the services contemplated by the contract or otherwise terminate the contract early. As a result, the revenues represented by any contract included in the total contract bookings maybe recognized by the Company over several quarters as the Company completes the research services required by the contract, or not at all, if the customer elects to opt out or otherwise terminate the contract early. Total contract bookings is an operational measure that should be considered in addition to the Company's results prepared in accordance with U.S. generally accepted accounting principles that is commonly known as GAAP. This operational measure should not be considered as a substitute for, or superior to, GAAP results. The Company believes total contract bookings is a relevant and useful operational measure for the Company and its investors because it provides information regarding the Company's commercialization efforts and customer uptake of the Company's liver tissue product. With that said it’s my pleasure to turn over the call to Mr. Murphy for some introductory comments.

[Keith Murphy:]

Thank you, Barry. Good afternoon and thank you all for joining us today. As Organovo has entered a commercial mode following a launch of our exVive3D Human Liver Tissue, we are eager to keep investors updated on our progress moving forward. Today, we are happy to report the first picture of our commercial results following our launch of the product in November and provide other helpful information about the state of the business. I will make some general comments and then Barry will walk through the results in detail. As we have stated before the liver launch has gone very much to our expectations and we are happy to give you a clear picture of its progress now. Total contract bookings are approximately $2 million to date and Barry will provide more detail on that number. The number represents what we consider to be robust uptick thus far and is of course just a start of our efforts. We have guided that we expect this tissue to grow into the tens of millions in annual revenue and that it has $100 million plus revenue potential and the results to date support our conviction on these points. We have built what we consider to be a strong commercial funnel of customer opportunities that continues to grow and we are advancing current prospects with expectations to continue to grow our top line revenue from the liver tissue business. We have a diverse set of customers who have contracted to utilize the exVive3D Liver including top 25 global Pharma companies, additional public pharmaceutical companies from small cap to large cap and private venture-backed companies. The Company has had multiple customers sign a second contract, so we are seeing repeat business for the liver tissue. The pharmaceutical business is of course global and our services model has allowed us to already sign liver service contracts with customers in the United States, Europe and Asia. I am pleased to report on all these aspects of our customer diversity including both customer size and geographic diversity which demonstrates what we believe to be a broad applicability of our liver tissue in preclinical research for pharmaceutical companies. I’ll now turn the call back over to Barry for a fuller review of these financial results.

[Barry Michaels:]

Thank you, Keith. While we’ll comment on the Company's financial results for the fiscal year ended March 31, 2015 it is not my intention to replace a full financial disclosure enclosed in the Company's Annual Report on Form 10-K filed with the SEC earlier today. I encourage all shareholders to refer to that document for additional information. Allow me to first address our financial condition in terms of liquidity and capital resources. At the close of our fiscal year the Company had cash and cash equivalents of $50.1 million and an accumulated deficit of $122.3 million, with negative cash flows from operation of $19.6 million for the year. This compares favorably with last year's cash and cash equivalents balance of $48.2 million although as expected negative cash flow from operations increased over last year's value of $15.6 million as we invested in additional plant, equipment and staff to meet the anticipated needs of commercialization. Total current assets of $51.3 million and current liabilities of $4.8 million resulted in working capital of $46.5 million versus prior year total current assets of $49.2 million and current liabilities of $1.9 million which resulted in working capital of $47.3 million. Net cash used in investing activities was approximately $1.5 million and 300,000 for the years ended March 31, 2015 and 2014 respectively. The majority of net cash used in investing activities to date has been for the purchase of laboratory equipment, particularly noting that the Company launched its first commercial product and expanded its research capabilities in fiscal 2015. Net cash provided by financing activities was approximately $23.1 million and $48.4 million for the years ended March 31, 2015 and 2014, respectively primarily reflecting our secondary public offering in August 2013 and utilization of a portion of our aftermarket financing in fiscal 2015. More specifically during the year ended March 31, 2015, the Company raised net proceeds of approximately $22.3 million through the sale of 3.2 million shares of its common stock through at-the-market offerings raising approximately or additionally raising approximately 400,000 from the exercise of warrants and 400,000 from stock options exercises during the year ended March 31, 2015. Essentially we have no debt and our capital structure includes as of June 1, 2015 approximately 81.6 million shares of common stock issued an outstanding and fully diluted shares of approximately 92.7 million shares including approximately 1.1 million warrant shares in the stock option pool of approximately 10 million shares of which 2.9 million shares were yet to be issued as of that date. Let me now move to commenting on revenue. The Company previously commented that revenues in the quarter ended December 31, 2014 and the fiscal year ended March 31, 2015 were expected to come primarily from research services associated with the pre-launch or pre-release availability of its exVive3D Human Liver Tissue. The Company expects commercial revenue from its post-launch activities to be primarily recognized beginning with the quarter ending June 30, 2015. Additional future revenues are expected to come from collaborative partnerships and please note that the Company continues in its development of a 3D bioprinted kidney tissue that has the potential to significantly improve researchers’ ability to study kidney function in an in vitro model. The kidney tissue remains on track for a mid-2016 that’s calendar year release and we believe the pricing and profitability of that product and service will command a premium given anticipated demand and zero competitive or zero competitors I should say in vitro products or services. Additionally, the Company continues to advance simple bioprinted tissues for the potential direct treatment of patients, which are currently at the preclinical research phase. Revenues of 600,000 for the year ended March 31, 2015 increased approximately 200,000 or 50% of revenues of 400,000 for the year ended March 31 2014. That increase reflects the recognition of $300,000 in commercial revenues since the Company's product launch in November 2014, partially offset by $100,000 decrease in collaborative revenue due to the completion of one of the Company's larger collaborative agreements during the year ended March 31, 2014. As I comment on operating and other expenses please remember that the primary driver of anticipated growth and our cash based operating expenses is people, individuals within the manufacturing sales and support functions necessary to support our commercial operations. Operating expenses increased approximately $9.9 million, or 47%, from $21 million for the year ended March 31, 2014 to $30.9 million for the year ended March 31, 2015. Of this increase, approximately $5 million was related to increasing selling, general and administrative expense, while the other $4.9 million related to increased investment in research and development expense. Those increases were attributed to the Company's continued implementation of its business plan, including hiring additional staff members to support its research and development initiatives, incremental investments associated with commercialization project initiatives, expenses related to operating as a publicly traded corporation, expansion to a larger facility, and increased stock compensation expenses relative to employees and certain consulting services. More specifically, research and development expense increased by 61%, from approximately $8 million for the year ended March 31, 2014 to approximately $12.9 million for the year ended March 31, 2015, as the Company significantly increased its research staff to support its obligations under certain collaborative research agreements and grants, and to expand product development efforts in preparation for commercial revenues. Full-time research and development staffing increased from 32 full-time employees as of March 31, 2014 to 54 full-time employees as of March 31, 2015. In addition to the incremental payroll, benefits and stock-based compensation resulting from increased staffing levels, the Company increased its facility space to accommodate its growing research staff, and increased its spending on lab equipment and supplies in proportion to its increased research activities. Selling, general and administrative expenses increased approximately 38%, from $13 million for the year ended March 31, 2014 to approximately $18 million for the year ended March 31, 2015. Increased staffing expenses of approximately $1 million was due to the headcount increases from 13 full-time employees as of March 31, 2014 to 21 full-time employees as of March 31, 2015, to provide strategic infrastructure in developing collaborative relationships and preparing for commercialization of products and services, and to address the additional compliance requirements of operating as a publicly traded corporation. Stock-based compensation costs also increased approximately $1.7 million due to additional grants to employees and consultants. In addition, due to the Company's overall growth and transition into the commercial phase during the year ended March 31, 2015, fees for legal services, investor outreach, marketing, insurance and consulting increased over the previous year. Finally, facility costs increased due to the expansion of the Company's facility during the latter part of the year ended March 31, 2014. Other income was approximately $200,000 for the year ended March 31, 2015, and consisted primarily of interest income and a gain related to the revaluation of warrant derivative liability. This gain was caused by a declining stock price during the period that decreased the value of the derivative liability. For the year ended March 31, 2014, other expense consisted primarily of a $5.1 million loss related to the revaluation of warrant derivative liabilities due to rising stock prices during the period that caused an increase in the value of the derivative liability. In addition, the majority of the underlying warrants to which the derivative relates were exercised or converted to equity instruments during fiscal 2014, significantly lessening the impact of subsequent changes in the Company's stock price. I will now look to Keith to discuss these results a bit more.

[Keith Murphy:]

Thank you, Barry. We are pleased with the initial success of our exVive3D Human Liver Tissues with total bookings at approximately $2 million level. We have often described the long sales cycles in this space, which continues to be the case. Our average time from contract to contract has been and will remain four to five months or more. Despite the long sales cycle we are very happy to be able to provide this positive picture based on our pre-launch activity than the roughly six months of sales activity after the full initiation of contracting in liver in November 2014 despite the holiday season following within that timeframe. Investors should also recall that we have guided that time from booking of a contract to recognizing revenue will remain on the order of two quarters for the average contract with larger specialized contracts potentially taking longer. To drive our commercial progress even faster, we continue to strengthen the dataset demonstrating the value of the exVive3D Human Liver Tissue in potentially predicting drug toxicity issues. Recent data shows the exVive3D Liver clearly demonstrated the toxicity of another drug missed during preclinical studies, troglitazone, which was marketed as Rezulin and caused acute liver failure in 100s of patients. The drug had a clear toxic response in the exVive3D Liver Tissue at seven days, which along with other additional data is driving the potential for our commercial penetration to accelerate. This data was presented at the Experimental Biology meeting in Boston on April 1, 2015. To grow the commercial business over the long-term, we need to expand our offerings and we are on track to offer an exVive3D kidney tissue by September 2016. This would be a tissue reproducing the architecture and function of a portion of the kidney proximal tubule. The first data from the kidney tissue was released on April 1 of this year and showed both excellent architecture and clear function of the kidney proximal tubular epithelial cells. We are very positive on the potential for this product and we remain on track to hit our timelines for it. Feedback received during our customer discussions with existing and potential liver tissue customers confirms that there is a tremendous demand for a kidney tissue to be offered. We have also demonstrated continued partnering success with two recently signed partnerships that I would like to mention. We described the deal with Merck that constitutes both their commercial use of our exVive3D Liver Tissue for toxicology and involves the development of multiple disease models over multiple years using Organovo’s bioprinting expertise. The disease models are distinct from the toxicology business, so Merck is engaging with us in both major areas of our in vitro capabilities. When we enter into an agreement with the large partner, we strive to get the tissue development work fully funded and to own rights to the utilization of the final tissue that results. We anticipate that if we can show the value of bioprinted tissues in these disease areas, a later stage contract can be pursed that would encompass royalty and milestone payments for drivers advanced to human trials using the learnings from such tissues. Our L'Oreal agreement is the later stage contract like this. You will recall that our first work in prototyping 3D skin models with L'Oreal began in late 2013. The recent deal contains final development, validation and then commercial used phases. We anticipate being the exclusive supplier to L'Oreal of the skin model developed under this deal for future use provided the targets that validation phase are met. That would provide us with a revenue stream from the supply of those tissues. We also have the potential under the deal to access a specified royalty revenue stream for consumer products containing active compound identified through the use of the developed skin model. Furthermore, there is a market among a wider set of cosmetic companies for skin substitutes for toxicology and other testing and L'Oreal is already active selling its current skin substitutes in that market. L'Oreal and Organovo will together can choose to use the skin model developed in those markets and potentially sharing the revenue streams, those specific terms have not been disclosed. Finally, Organovo expects to have these early to leverage the use of the developed skin model and partnering to develop dermatology drugs and for direct use of the tissue to treat wounds or other diseases of the skin. Together, these deals represent the type of partnering that Organovo can continue to achieve as we move forward and we have an active discussion pipeline with a number of other companies very interested in 3D bioprinting. We do expect additional agreements to be signed over time though it is not possible for us to get exact timelines due to the nature of the discussions and negotiations. With that we want to thank you for your time today and for your interest in Organovo. And Barry and I would be pleased to answer your questions at this time.

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question we have comes from Jose Haresco of JMP Securities. Please go ahead.

[Jose Haresco:]

Hey guys, good afternoon.

[Keith Murphy:]

Hey, Jose, how are you doing?

[Jose Haresco:]

Good. Would you be able to share with us how many customers you have on contract and how many of those are under the second contract?

[Keith Murphy:]

We haven’t disclosed the specific contract numbers Jose, I think we may choose to do that over time, it’s early days on this. So I think we are trying to give people the bottom line or top – I should say top line results on this to make sure you have a good sense of that. Over time I think that’s what’s going to really matter to folks.

[Jose Haresco:]

Okay, directionally should we assume or think that number will grow over the course of the next 12 months or is it fair to keep that fairly steady even on an annual basis should we think of that as a growth trend or it’s just too early to tell?

[Keith Murphy:]

Directionally, we absolutely think there is going to be a growth trend. I think the only thing we would say is we can’t guarantee it’s going to be linear quarter-to-quarter or it might be a little choppy depending upon the nature of individual contracts. There is just a lot of ways that people can engage and timing and size of the specific contracts may matter, we may get a large contract early on and it takes longer to replace that work, but I think directionally judging over multiple quarters and in over course of from now to next year we definitely expect there to be an increasing trend.

[Jose Haresco:]

Okay, great. Lastly on the expense side should we take this most current quarter and keep that pretty steady or should we assume sequential growth for next [four] [ph] quarter – next [four] [ph] quarters you saying?

[Keith Murphy:]

Yes, we’ve been pretty consistent in guiding that we expect to be at about $25 million per year in the near-term for our net burn.

[Jose Haresco:]

Okay, got it. Thank you very much. Congratulations on the progress.

[Operator:]

[Operator Instructions] Next we have Michael Kay of Kay Associates.

[Michael Kay:]

Yes, good afternoon gentlemen. Could you indicate the competitive advantage Organovo has versus other companies that do similar types of work? In other words what makes your company competitively advantageous compared to some of the competition?

[Keith Murphy:]

Thank you for the question Michael. Yes, I’m happy to address that. So one of the thing you emphasize - you can think about competition in a number of ways. If you want to think broadly about bioprinting technologies and you’ll hear about number of other bioprinting technologies out there, our competitive advantage is that we make 100% cellular functional human tissues, so we build tissues out of cells and when you look at some of the images in our scientific publications you'll see that it really does look like a native tissue, the density of cells in that tissue, the fact that there are regions of different architecture with different cells in different positions that replicates some of the basic features of native tissue and we strive to replicate native tissue as accurately as possible, so that we can get the best reproduction of native function. And when I say that that's an important area of differentiation for us the fact that we’re 100% cellular I compare to the vast majority of bioprinting technologies that you’ll hear about which really involve the three-dimensional printing and location of a gel material with a percentage of cells inside that gel. So if you look at some of the images of those technologies what you’ll see is that the bulk of the space is taken up by a gel material with some cells placed inside that gel and what they are doing is 3D printing a gel and then there are some cells inside that. So we clearly think that 3D bioprinting, but it doesn't necessarily achieve the goal of making a tissue. So we very much believe that the reason we get to functional tissues in the end is that we are creating something that is 100% cellular and have the ability to put specific cells in specific positions. Now, if I could comment a little further and then define competition in the realm of our first product area which is liver tissue for use in toxicology. The advantage we have there derives from the same overall scientific advantage, but I can compare it more directly to what’s used today. So the far bulk or the great number of 95% plus of the market is using liver cells plated in two dimensions on a petri dish type of surface and our advantage there over that is that those liver cells simply don't perform like a liver. So the fact that we make something in three dimensions with multiple cell types not simply the main cell type of liver and it has architecture that starts to replicate the liver structure is why we get superior results and we get superior results to other technologies that are newer as well that take a step into three dimensions but don't achieve the level of architecture that we have, the number of different cell types and the level of reproduction of liver function that we've achieved as evidenced by the data we’re showing such as the data I mentioned today on troglitazone, such as the data we announced in the middle of last year working with Roche, where we’ve now shown multiple drugs to have been demonstrated to have a liver toxicity issue. And when those drugs simply weren’t seen in liver cells on a dish models and ratmodels when they were being advanced to the clinic and both of those drugs have late stage or even marketed failures. That’s the kind of thing we think we can predict better than those previous technologies and even recent attempts to be better technologies and we really feel we have a very strong competitive advantage. If you like any color on any of that I’d happy to go into it in more detail.

[Michael Kay:]

Well, now you have is – I’m very, very impressed, this was a very detailed substantive response. And how do you market it? Do you have a sales force, in other words how do the companies that would be interested in utilizing your technology know about it?

[Keith Murphy:]

Yes, thank you very much. That’s a great question. We do it through multiple channels but the main answer is that we have a sales force who’s actively marketing this to pharmaceutical customers today. The channels that they use include conferences, where we will attend conferences and seek to interact with the customers. We do channel based marketing through social media and even e-mail of course when we have identified contracts and some of them – I am sorry, contacts, and some of them come to us of course through our website as well, people who are seeking information who have seen something about the company or what we’re doing. So we have a very active sales force, the commercial organization has reached three people now and will be continuing to grow part of the description Barry had where we have growing expense of course we are going to have additional sales team members coming on board. The other point I would make is that we get synergistic effects with our business development efforts, we are very active in discussing with Pharma Companies the potential to use various -- to use bioprinting in various disease models, so you could imagine a lung fibrosis drug being generated in a lung tissue that we build with bioprinting for example or being screened for and a tissue that we build with bioprinting. We’re active in those kinds of discussions with Pharma and those discussions tend to have an effect and an impact on us getting additional liver business as well. So a scientist who works in toxicology who may be interested in the liver will find out the Organovo is coming on site to discuss things with their lung fibrosis drug team and will ask to discuss things with us as well for potential liver use. So there's a lot of different ways that we end up interfacing and they all yield additional customer opportunities for us. Thanks for the questions, I appreciate that.

[Operator:]

Well at this time, we will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

[Barry Michaels:]

Okay, we thank everyone for their interest in Organovo for investors for their investment in the corporation and so on. And this concludes our conference call. We thank you for your time.

[Keith Murphy:]

Thank you everyone.

[Operator:]

Thank you sir and to the rest of the management team for your time also today. The conference call is now concluded. At this time, you may disconnect your lines. Again, we thank you for your participation. Take care and have a great day.