Organovo Holdings, Inc.
Q2 2016 Earnings Call Transcript

Published: 10 Nov 2015

[Operator:]

Good day and welcome to the Organovo Holdings Fiscal Second Quarter 2016 Earnings Conference Call. All participants will be in 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 Steve Kunszabo, Head of Investor Relations. Please go ahead.

[Steve Kunszabo:]

Good morning and thank you for joining us. I'd like to welcome you to our fiscal second quarter 2016 earnings call. Joining me on the call this afternoon are CEO, Keith Murphy and our CFO, Barry Michaels. Today's call will begin with a discussion of the 2016 fiscal second quarter results followed by Q&A. I trust you've had an opportunity to review this afternoon's earnings release, which is available on the Investor Relations section of Organovo's website. Before I turn things over to Keith, I'd like to caution all participants that our call this morning may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical fact, and include statements about our future expectations, plans and prospects. Such forward-looking statements are based upon our current beliefs and expectations and are subject to risks which could cause actual results to differ from the forward-looking statements. Such risks are more fully discussed in our filings with the Securities and Exchange Commission. Our remarks today should be considered in light of such risk. Any forward-looking statements represent our views only as of today and while we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations or views change. During the call, we'll also be referring to certain supplemental financial measures. These supplemental financial measures are not prepared in accordance with generally accepted accounting principles. Please refer to today's earnings release for definition of these supplemental financial measures. With that, let me turn things over to Keith.

[Keith Murphy:]

Thanks Steve and good afternoon everyone. I'll start by highlighting that we affirmed our fiscal 2016 and our long-range outlook. Total revenue gained 502% year-over-year with the primary contribution coming service work related to our exVive3D Human Liver Tissue. I'll also point out that our net cash utilization during the second of $9.1 million is consistent with the guidance that we gave in early September. As is always the case, Barry will give you a more detailed review of these financial results. My focus will be on the progress we've made against our key initiatives, including growth in the preclinical safety market, development of our kidney tissue program, building our business development and sales organization and the evolution of the therapeutic space. Before I jump in on these topics, I want to take a step back today. I'd like to outline who we are when you consider the big picture, really describing the pillars that support our long-term growth profile. First, we participate in attractive and growing markets with critical unmet needs. When you consider the development cost and timelines for pharmaceutical discovery, about a decade and $1 billion to develop a single drug, it's clear that pharma is a great customer with significant resources. Major gaps exist in providing powerful predictive data to these customers. We'll help bridge those gaps, when you consider what we can give our pharma customers and partners in terms of toxicity, efficacy and the disease modelling. Similarly, when you observe the constant supply challenges that exist in transplant medicine, it's evident that we have the long-term potential to transform therapeutic applications by creating tissue replacement products for surgical implantation. Second, we benefit from a favorable competitive environment and a first mover advantage. This is a dynamic space that is changing rapidly with companies working on interesting solutions. No one is really doing what we do. Re-creating 100% cellular tissue that reproduces native tissue function. There are steroid models, and micropattern cultures and cell constructs with scaffolds in the market today, but none of them have demonstrated the ability to re-create the key aspects of in vivo form and function in the same way as Organovo bioprinted tissue. Third, we're a technology leader with a robust IP portfolio. Our NovoGen bioprinting process delivers a superior solution, and we continue to make significant engineering enhancements to advance that platform. Our IP portfolio includes 20 exclusive patents globally and more than 80 patent applications pending. These patent filings don't just relate to our bioprinting technology, but also cover uses in drug discovery and in tissue constructs. As an example of our success here, we recently received a foundational U.S. patent on our 3D bioprinter. We'll continue to build out our IP portfolio and we believe it gives us a strong position to defend our products and services. Finally, we believe all this provides us with a high leverage platform that allows us to attack multiple revenue streams across the preclinical safety, efficacy modelling and therapeutic markets. So, moving on to our progress in key areas, in the preclinical safety market as we noted last quarter, we continue to grow customer adoption of the exVive3D Human Liver Tissue. Although we began contracting for liver service in November 2014, it's worth emphasizing that given the long revenue recognition cycle, the fiscal second quarter that we're reporting on today represents only our second full period of true commercial results. As these are complex high content solution sales and can sometimes stretch over a period of months with different milestones, it's important to evaluate our growth trajectory over several quarters. We remain pleased with our early customer profile in the liver business. Our customers span globe, including U.S., Europe and Asia and we continue to penetrate the top 25 global pharmaceutical companies, including a new customer from that top 25 tier in recent weeks. We're also seeing good penetration with smaller enterprises and private venture backed companies. Most importantly, a number of our customers have signed repeat contracts which we believe validates the applicability and significance of our liver tissue in preclinical research. A key element of driving customer penetration, as will be the case with all of our business lines, is continuing to expand the data set that stands behind our products and services. We've given three recent examples of scientific results that strengthen the credibility of our solutions, including recent positive data from The Hamner Institutes for Health Sciences. In short, Hamner is a leading research institution for the study of drug induced liver toxicity and its scientists recently presented a first round of studies showing that low dose chronic exposure to methotrexate, a common drug used to treat moderate rheumatoid arthritis and other indications, leads to a fibrogenic response in our exVive3D Human Liver Tissue. This study is a critical source of validation as in vitro fibrosis [indiscernible] are an unmet need in the market and we believe our customers are taking notice. These results generated by Organovo and high quality third-party research institutions continue to support our view that the exVive3D program is a powerful system that offers significant insight into liver toxicity issues, but we intend to do more. To that end, we're investing significantly in developing additional proof sets that build credibility for our services and allow us to move past early adopters and penetrate the next big group of customers. Stay tuned for news on this front, as we move through our fiscal year. Turning to kidney tissue development. We hit the functional validation of stone for our kidney tissue ahead of schedule in October and remain on track to initiate contracting for the service in the third calendar quarter of 2016. Throughout this development timeline we've also worked diligently to publish this work by our researchers and conference presentations and peer-reviewed journals. As I've shared before, we believe the kidney space is a big one for us. With an addressable market of over $2 billion, and roughly 6,500 annual programs that require toxicity testing, we're well-positioned to capitalize on this potential $100 million plus annual revenue opportunity. The lack of existing alternatives, particularly effective 2D cell models and in vivo models, it's even more [indiscernible] in the liver business and we forecast pricing to be superior to the liver tissue. Ongoing discussions with our toxicology customers suggest there is strong demand for our kidney tissue and we'll also take our learnings from the liver commercial launch to drive early success. The first kidney tissue slated for the third calendar quarter of 2016 will be proximal tubule tissue, but we expect to offer fuller kidney tissue at a later generation. Before I wrap up with a quick update on our partnerships and therapeutic segment, let's spend a couple of minutes on how our business development and sales organizations have evolved in recent months. As we shared on our last earnings call, we recently welcomed Paul Gallant as the General Manager of our commercial in vitro tissue services business. Paul has a proven track record of growing businesses were he's had direct P&L management and is now responsible for this unit's sales, marketing, R&D and operations groups. Unified under Paul's leadership, we've these functions to optimize commercial execution. I'd also like to note that we've meaningfully expanded our sales footprint in recent months now have dedicated sales directors across the U.S. and in Europe driving these high content services with pharmaceutical customers. Ultimately, our focus is to become strong partners with these customers which among other things, we anticipate will lead to bigger long-term deals. Moving now to a quick update on our partnerships and therapeutics business, our partnership with L'Oreal continues to move ahead and we're excited to have signed a second stage contract with them earlier this year. The new agreement considers a few primary sources of revenue, including being a commercial supplier for bioprinted skin tissue, co-marketing our skin model other to beauty and cosmetics companies and royalty and licensing payments from cosmetic products tested and marketed using our tissue. As for our Maersk relationship, we continue to work on both the toxicology and custom tissue disease modelling parts of that agreement. We hope to provide more detailed information as the deal progresses. Finally, we continue to see great promise for our therapeutic tissue products where the potential exists to revolutionize therapeutic applications and materially improve patient outcomes. We're still in the early days and we're seeing solid results in animal models in the multiple tissue types that we're evaluating. We continue to aim for an investigational new drug or IND submission with the FDA in the next 3 to 4 years and expect to share preliminary data from animal models in the next 12 to 24 months. In closing, I'm proud of the important steps we've taken as I reflect on the first half of fiscal 2016. Our liver business is growing, our kidney products has achieved important milestones and our entire organization is aligning in a way that optimizes our commercial execution. Our investment thesis and our long-term profile are intact and we're working each day to change the shape of medical research and practice. We have to continue to do the blocking and tackling that gets us there, and are excited about the months and years ahead. With that, I'll turn it over to Barry for a more detailed financial review.

[Barry Michaels:]

Thanks Keith, and good afternoon, everyone. I'll get started by outlining our key financial metrics for the fiscal second quarter and then summarize the full year and long range financial targets, we affirmed today. I'll wrap up my thoughts by briefly reviewing our balance sheet and liquidity profile. Organovo reported fiscal second-quarter total revenue of $0.3 million, which was up 502% from last year's comparable quarter and flat on a sequential basis. Total revenue benefited from a $0.2 million increase in products and services revenue. From an operating viewpoint, we generated products and services revenue of $0.2 million versus zero in the year ago period. Products and services revenue was driven largely by customer contracts for our exVive3D Human Liver Tissue research services. As Keith noted, we're seeing steady gains across the board in the commercial toxicology business as our liver product continues to gain traction. In addition, we reached the functional validation target for our kidney tissue about two months earlier than we forecast and we continue to believe that the pricing and profitability for this solution will merit a premium over competitive in vitro products and services. I'd also like to briefly underscore the importance of our recent licensing agreement with UniQuest. The main technology transfer and commercialization arm of the University of Queensland in Australia. We struck an exclusive worldwide agreement with UniQuest to license intellectual-property covering an in vitro model of human kidney that can be used in a wide array of applications, including toxicology and drug discovery. From a commercial perspective, we believe this deal puts Organovo at the forefront of cutting-edge technology regarding kidney research and while we don't plan to use this work in our proximal kidney product that's slated for release next year, we intend to partner with Professor Melissa Little, the lead inventor of this IP to further develop the technology for next-gen efforts including kidney disease modelling, medical nephrotoxicity, screening and discovery of compounds which may improve renal function for patients with genetic kidney disease. It's a great example of continuing to fortify our technology platform as we pursue multiple revenue streams. Turning now to collaborations and grants, which produced revenue of $0.1 million driven primarily by our existing collaborations with leading academic institutions and research funded by grants from key partners such as Michael J. Fox Foundation and the National Cancer Institute. I'll focus next on operating expenses and would again emphasize that the core driver in the forecast growth of our cash operating expenses for the foreseeable future is the people we bring on board to grow our commercial operations and support the manufacturing, sales and administrative functions. To that end, we reached a significant milestone in October, having welcomed our 100th colleague to the Organovo team. We recorded $6.8 million in selling, general and administrative expenses during the fiscal second quarter, a 19% increase from the prior year period, primarily resulting from higher employee related costs, that is, salaries, recruiting and benefits and a settlement of our legal matter with Spencer Trask Ventures. Higher staff expenses are directly tied to providing strategic infrastructure in developing collaborative relationships and the ongoing commercialization of our products and services. It is also worth noting that the disposition of the legal claim for $150,000 is a nonrecurring expense and should not be considered in our future SG&A run rate. Lastly, I'd point out that approximately $2.2 million of our SG&A cost during the quarter related to non-cash share-based compensation expense. Research and development expenses were $4.7 million, a 47% year-over-year increase, largely due to higher employee related costs, again, that’s salaries and benefits and lab supplies. We increased our research staff to support product development and sales activity that aligned with ongoing commercialization of our products and services as well as in meeting our obligations under existing collaborative research agreements. Moving now to our fiscal 2016 and long-range financial guidance which we affirmed this afternoon. We forecast total revenue recognized of $1.2 million to $1.4 million during fiscal 2016, from previously reported contract bookings for our exVive3D Human Liver Tissue. On a same basis for the full year fiscal 2016, we expect net cash utilization of between $32 million and $36 million. Our net cash utilization of $9.1 million during the second quarter is consistent with this outlook. As for our long-range outlook, we expect our liver tissue product and service will continue into the tens of millions in annual revenue as it penetrates the toxicology market, with $100 million plus revenue potential as part of a $1 billion addressable market end and initiation of commercial contracting for our kidney tissue product in the calendar third quarter of 2016. Finally, I'll review our balance sheet and liquidity position. At the end of the fiscal second quarter, we had cash and cash equivalents balance of approximately $76.9 million. As a result of our equity follow on offering in June, this compares favorably to our cash balance in the year ago period of $50.1 million. However, our negative cash flow from operations again increased from the prior year quarter as we continue to invest in additional plant, equipment and people in connection with the ramp in our liver business, development of our kidney tissue product and collaborative agreements. Taking all this together, including our net cash utilization rate we're squarely focused on executing the business plan and capitalizing on revenue opportunities. As for the follow-on offering we completed in June, we're putting those proceeds to good use. Specifically, we're investing to accelerate generation of validating liver tissue data in our kidney development timeline while also continuing to work in therapeutic tissue segment, and as Keith noted, we've also expanded our commercial team to drive sales of our products and research services. In wrapping up my thoughts, I share Keith's view that we're meeting our key financial and operating targets and making strong progress against our strategic objectives. We're poised to penetrate the next set of customers as we build our scientific proof set and expand our business development and sales efforts, and continue to leverage our technology platform across the preclinical safety, efficacy and therapeutic markets to maximize the breadth of our revenue profile. We look forward to updating you on our progress again in February. With that I'll turn things back to the operator for the Q&A portion of this afternoon's call.

[Operator:]

[Operator Instructions] Our first question comes from Brandon Couillard of Jefferies. Please go ahead.

[Brandon Couillard:]

Keith, on the kidney tissue project, in terms of the slightly earlier functional validation milestone, what exactly were the contributing factors to the faster clearance and any chance that that could forward the timeline all the anticipated launch and walk us through sort of what the next steps are between now and I guess, formal commercialization?

[Keith Murphy:]

Yeah. Thanks Brandon. I'm happy to do that. So, the factors that go into achieving this a little bit faster are really that our team was able to demonstrate what we needed to see from a scientific perspective to consider this validated a little bit earlier. When we do this kind of thing, there are some risk and timeline risk that you need to take additional experiment steps and do more iterations to get something to that point, and of course, there's always a risk and it's a reasonably substantial risk for something this early that you wouldn't be able to reach that point. So far, I'm happy to report that all the bioprinted tissue that we moved forward have had, I would say surprisingly good results, meaning we've always had positive outcomes as we've developed new tissues, but there's always a risk that something we're developing won't pan out as expected. So here, I would say that the timeline benefit is from the fact that it panned out as expected, which is rewarding when you're thinking back on the year, starting up Organovo and hoping we could get things to this point, seeing it happen again and again tissue after tissue is very rewarding, and it happened with fewer iterations than we planned into the timeline, I think is the key. So we were able to see the results with iteration of cell sourcing and bioprinting that allowed us to be a bit earlier in the timeline. Now moving forward and looking into next year, you asked also, and I think this is an important aspect, does this translate into a faster initiation of commercial contracting? So right now we're tracking to September 2016. Could that be pulled earlier? There's a chance that it could. We're not committing to that today. We constantly look at things like that and I would say, one of the things we're really focused on doing is putting together the biggest and broadest data set possible for that timeframe. So, it's possible that we would actually prefer to spend an additional couple of months of really developing more data and you might think of this earlier time point hit here in October rather than December for today's milestone as giving us the chance to have more data at the time of initiating contracting which gives us a chance to penetrate the market a little bit faster when we do launch, but for now, we're holding to the intended September 2016 lunch timeframe.

[Brandon Couillard:]

I'm not sure if Paul is there, but a question on the expanded sales force footprint. Could you give us an update on exactly how many reps are in the field promoting the liver tissue and could you give us a sense of how you think about the productivity per rep sort of at scale, let's say once the product's sort of well seated in the market, after about a year or so, I suppose?

[Keith Murphy:]

Yeah, and so we're -- as we stated, we've expanded the commercial team recently. We've expanded with our first rep in Europe for example and we have coverage across the U.S. as well. The total commercial team size is at 7 at this point, and that includes not only reps but technical services folks and these folks are very important to support the reps and provide additional insight to customers on the technology. This is a highly consultative sale. So we need to provide multiple layers of interaction and the R&D team is important in that interaction as well to build out a work plan, but having the size is definitely an increase for us and we're able to push deeper and faster into the market penetration, I think, because of this. It will grow over time. So, we're not done at this point. We do still have some current growth planned and then of course linear growth as we see sales uptick and orders uptick we'll continue to grow to meet that. It's hard to give an exact number in our field for revenue per rep. We have, out of the 7, 4 are reps right now, and there are numbers used as rules of thumb in the space, but we don't know yet how representative those would be of our product. It just remains to be seen a little bit, but people have used numbers of the $1.5 million revenue per rep per year plus or $500,000 on that number. So, it could be higher, could be lower in our space and we'll just have to give you more color when we know.

[Brandon Couillard:]

Then last one for Barry, could you give us an update on anticipated CapEx needs for the year?

[Barry Michaels:]

Yeah, so in terms of CapEx, Brandon, I think as you may recall, much of our CapEx was spent building out the manufacturing and services space that we brought on board, almost a year ago, right, but building those out to meet our anticipated demand for this. Those were put in place early summer and that really represents a lion's share of our CapEx for this fiscal year. So what -- I guess what I'm saying is what you've seen to date is pretty much what you're going to see for the full year.

[Operator:]

Our next our next question comes from Caroline Corner of Cantor Fitzgerald. Please go ahead.

[Caroline Corner:]

Thank you for providing all of the updates today. Just have a question, kind of following up a question with the sales force reps and productivity. You've previously given us that number, the $1.2 million to $1.4 million for the 2016 fiscal year outlook in terms of revenue recognized from previous bookings. Can you just give us some qualitative detail on how the sales effort is going at that $1.2 million to $1.4 million number, you've been -- you talked about back in June and here we are, a couple of quarters later, can you just give us some qualitative information or examples of how the sales effort is going as far as getting new contracts signed in addition to those already recognized within those bookings that make up the guidance?

[Barry Michaels:]

Yeah, absolutely. So, we do continue to grow into this market and so the $1.2 million to $1.4 million that you're citing is as we said today, we do reinforce that guidance, but remember that's the $1.2 million to $1.4 million of the $2 million number we gave earlier. So any contracts that were signed subsequent to that $2 million that can be recognized by March 31, 2016 can be added on top of that, but in terms of that number just to give you some color, if you look at the $1.2 million to $1.4 million guidance which we're standing by and you look at the first half of the year, the previous quarter and this quarter, you'll see that we do expect our revenues -- book revenues to be growing in the second half of year to make up the gap to hit that $1.2 million to $1.4 million. So we do expect to show increasing revenue as a partial demonstration of the ability to grow into this market, and then I think over time you're going to see the impact of these new sales team members as well. So, recall that we're saying that some of these folks are just coming on board very recently and so, remember their efforts as they pan out in the current quarter ending in December, you're going to see book revenue from them no sooner than next June just because of the cycle time to complete the work and then book that revenue. So, it just takes time for these new folks to have impact, but one of the reasons and I think something that you can read into the fact that we are expanding this team is that we are seeing our ability to grow this market and we wouldn't be investing in new sales team members if we weren't starting to max out the capacity of the current ones and we didn't think they could be productive getting in front of new customers and with their ability to tell the technical story. Most of these folks are PhDs. Their ability to tell the story, get in front of those customers and be persistent to get orders, we do expect with these new team members to continue to grow that and continue to grow our revenues in this space.

[Caroline Corner:]

Okay, and then, also the SG&A line on the income statement has gone up by $2 million sequentially. You've been adding sales people and building out your team and building out your effort. Can you maybe provide a little bit more granularity as to why that number's gone up $2 million quarter over quarter when the revenues have been flat?

[Keith Murphy:]

Yeah sure. I think you've got remember that in the P&L there with the SG&A, some of that is non-cash, stock compensation and things like that. So, even hiring people leads to charges, because we're giving them stock option plans. So just our rate of growth of the team alone, even though they -- the new salaries have only had a short time to have an impact, there are impacts from things like these non-cash. I would also -- I don't know if Barry has color to give you on that but that would be one thing I would draw your attention to Caroline.

[Barry Michaels:]

Yeah, we were trying to pull up a specific number here to give it, but we have -- in our annual cycle of when we award options, we do that on an annual basis, except for new hires and so on and so the timing of that is such that as we've expanded our overall employee base, which has basically doubled over the last year in approximate numbers and so on, those annual grants that we're giving they do have the costs associated with them and so on were just granted in this last quarter.

[Operator:]

[Operator Instruction] Our next question comes from Ted Tenthoff of Piper Jaffray. Please go ahead.

[Benjamin Adler:]

This is actually Ben in for Ted. Thanks for taking the question. I had a quick question on, I guess, you mentioned before, this is a very consultative process, so how long does it take your sales reps to sort of close the sale and do you think it's getting shorter as companies see their peers signing on with you?

[Keith Murphy:]

Yeah, that's a very good question. I wouldn't say that it's gotten shorter because there's an excessive amount of peer referencing yet Ben, and the reason for that is just because we're still in the early days of market penetration. I definitely predict that if we're successful in getting to the adoption levels we want that that's an exponentially increasing thing. So, it's early days and I think when people see others starting to use it, it is the influential, but we're not yet at a critical mass where it's broadly influential to peer referencing. I would say that what is much more influential and we're starting to see uptick because of is the data that we talked about. So, to be very specific, the fibrosis data that we talked about from the Hamner Institute, that's only been out for about three months now, we're seeing that to be a powerful mover in the market. So, it's a wakeup call for some customers who didn't really have enough data previously to convince them but this data since it's so unique, this fibrosis model, there's just nothing that's able to be achieved before that compares to this, is proving quite influential with folks who are trying to get their heads around why our model is superior. They can see the fibrosis pattern in the tissue and we show them microscope images. They can see from the gene expression profiles that the data that's being generated in fibrosis in this model looks like what you would expect it to be in the human and that really drives some acceptance. So, I think that's really what's driving a little bit more acceptance. Timelines, because you asked about the number -- let's talk about it, the number of months for people to do it. What we've said in the past is that, it's four to six months from the time we start a conversation with someone to when they'll sign a contract. I don't think we'll change that yet. I think we're sticking right around in that range. Some people are quicker. Some people are slower, but that's a good median, is around five months plus or minus, and then remember, after that there's a four to five month timeline for an average normal size contract to be completed. With some larger contracts, it could take quite a bit longer to complete multiple stages.

[Operator:]

This concludes our question and answer session. I would now like to turn the conference back over to Keith Murphy, CEO for any closing remarks.

[Keith Murphy:]

Thank you very much. I'd like to thank everyone. Thank Steve Kunszabo and Barry Michaels for their participation in the call and our preparations today. I want to thank all of the investors for joining us and thank analysts for the questions. Please feel free to reach out to us for any additional questions as they come up and we look forward to the February call and engaging with you more. Thank you, take care.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.