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Edited Transcript of HTGM earnings conference call or presentation 9-May-19 8:30pm GMT

Q1 2019 HTG Molecular Diagnostics Inc Earnings Call

TUCSON Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of HTG Molecular Diagnostics Inc earnings conference call or presentation Thursday, May 9, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John L. Lubniewski

HTG Molecular Diagnostics, Inc. - President, CEO & Director

* Shaun D. McMeans

HTG Molecular Diagnostics, Inc. - Senior VP of Finance & Administration, CFO, Secretary and Treasurer

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Conference Call Participants

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* David Greaves Delahunt

SVB Leerink LLC, Research Division - Research Analyst

* Jordan Lawrence Abrams

Cantor Fitzgerald & Co., Research Division - Associate

* William Patrick Fafinski

Craig-Hallum Capital Group LLC, Research Division - Research Analyst

* Monique Kosse

LifeSci Advisors, LLC - MD

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Presentation

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Operator [1]

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Good day, and welcome to the HTG Molecular Diagnostics, Inc. First Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Monique Kosse. Please go ahead, ma'am.

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Monique Kosse, LifeSci Advisors, LLC - MD [2]

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Thank you, Dory. Earlier today, HTG released financial results for the quarter ended March 31, 2019.

Before we begin the call, let me remind you that the company's remarks include forward-looking statements within the meaning of federal securities laws, including potential go-forward decisions by PDP customers, recent product launch expected instrument placements in Europe, expansion of the company's relationship with Illumina, product development efforts, possible additional collaborations with pharma customers and revenue expectations for the full year 2019.

These forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond HTG's control that may cause HTG's actual circumstances, events or results to differ materially from those projected on today's call. Factors that could cause events or results to differ materially include those risks and uncertainties described from time-to-time in HTG's SEC filings.

HTG cautions listeners not to place undue reliance on any forward-looking statement. HTG is providing this information as of the date of this call, and HTG undertakes no obligation to update any forward-looking statement.

With that, I would like to now turn over the call to John Lubniewski, Chief Executive Officer. John?

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John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [3]

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Thank you, Monique. Good afternoon, everyone, and thank you for joining us on our first quarter conference call. I'm pleased to be here today on my first call as CEO of HTG.

I'm passionate about building a company that helps us improve the lives of patients, creates a challenging and exciting work environment for employees and provides a strong economic return for investors. Even though there has been a change in the CEO position, our company mission remains the same, to enable precision medicine at the local level. It's been a very smooth transition as TJ and I continue to work closely on key business strategies. I'm pleased with the progress we continue to make as we move forward in our goal of advancing that precision medicine.

We finished the first quarter with $3.2 million of revenue, which was above what we had guided on our last earnings call. As a company, we've made tremendous strides this quarter in the areas that we can control our profiling business, which was up 54% compared to last year. Revenues during the quarter, however, were impacted by the pause in our 2 active PDP programs, which continued as our clients evaluated results. As we previously communicated, we're awaiting go-forward decisions and expect news on 1 or both of these programs soon and plan to update investors once we have decisions from these partners.

While we await the decisions on our PDP programs Two and Three, we're pleased to see continued growth in our profiling business driven primarily by our increased biopharma project pipeline, which now sits at total -- 70 total programs in Europe and United States and the expansion of our activity in the academic medical centers also in the United States and Europe.

Setting the stage for continued growth in this segment, we recently announced the launch of a new HTG EdgeSeq Mouse mRNA Tumor Response Panel. This panel measures over 1,600 mouse mRNA targets in 1 extraction-free assay and is designed for use in mouse oncology models to help identify and quantify expression of genes and gene pathways in a variety of sample types, including formalin-fixed paraffin-embedded tissue.

We expect the newly launched mouse mRNA panel to continue to help drive our growth and believe it's a logical adjunct to our HTG Seq human-based tissue panels already in early-stage pharma activity. Commercialization of our CE/IVD products in Europe continues with steady progress. While relatively nascent, first quarter revenues was $189,000 versus $46,000, an increase of almost 300% over first quarter last year. We're seeing interest from a broad range of potential clients and are very excited about the capital sale of an EdgeSeq instrument to one of our early adopter diagnostic laboratories in Germany during the quarter. This laboratory specifically noted the low sample requirements and the ease of implementation of our workflow as the 2 key reasons for adopting the EdgeSeq technology in test menu. They plan to offer our HTG DLBCL and ALKplus CE/IVD tests for patients and we look forward to working with them to help them grow. We're expecting additional instrument placements in Europe during 2019 as we continue to grow our diagnostic business in this very important geography.

Earlier this month, we announced the expansion of our IVD text development and component supply agreement with Illumina. Under the amended agreement, HTG can now submit development plans to Illumina in the fields of autoimmune, cardiovascular and fibrosis disorders and diseases, adding to our ability to submit oncology development plans. We're excited about the possibility of expanding our work with Illumina as we expected to further position HTG to develop new RNA-based diagnostics in these additional disease areas.

Next, I want to highlight the tremendous work that our team has done to successfully open our San Carlos, California development facility on April 1. Our key technical and business staff are now on board and have moved into this new facility and are beginning their early-stage work for HTG's comprehensive breast assay, our flagship MDx project.

Our mission in San Carlos is to develop FDA-approved clinically relevant test kits using HTG's unique EdgeSeq technology capability that provides clinicians with actionable clinical information to enable a more precise and timely treatment plan for cancer patients. This team is expected to develop diagnostic assays that are unique to HTG, but complement our emerging companion diagnostic portfolio. We expect to be able to share our initial product roadmap for this initiative by late summer.

Finally, during the quarter, we successfully completed our recertification audit with our ISO registrar who has recommended continuing certification for ISO 13485:2016. Maintaining a strong and compliant quality system remains a foundation for our business strategy. In the long run, we believe that building high-quality products and being a good corporate citizen from a compliance standpoint will be market differentiators for HTG.

In summary, we had a very productive first quarter and Q2 is off to a very solid start. We remain very excited about 2019 and beyond.

With that, I'd like to turn the call over to Shaun for a review of our Q1 financials.

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Shaun D. McMeans, HTG Molecular Diagnostics, Inc. - Senior VP of Finance & Administration, CFO, Secretary and Treasurer [4]

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Thanks, John. As John mentioned, total revenue for Q1 2019 was $3.2 million versus $4.2 million in Q1 2018. Our Q1 profiling revenues increased by approximately $900,000 or 54% to $2.7 million versus $1.7 million in Q1 2018, building on the strong profiling growth we reported in 2018.

We're very pleased to report our profiling revenue growth in Q1 2019, which continues to reflect the growth in our recurring base business of products and product-related services and the potential downstream opportunities and future diagnostic assays. As expected, the collaboration development services revenue decreased in Q1 2019. We reported $0.5 million in Q1 2019 collaboration revenue versus $2.4 million in Q1 2018 primarily reflecting the pause in PDP activity mentioned previously.

Our cost of product and product-related services revenue was $2 million (sic) $2.7 million in Q1 2019 compared to $1.1 million (sic) $1.7 million in Q1 2018, reflecting the increase in our profiling revenue. Our profiling margins for the first quarter of 2019 were impacted by revenue associated with lower margin, subcontracted laboratory services for an ongoing pharma customer program.

Selling, general and administrative expenses decreased approximately 22% to $4.4 million in Q1 2019 compared to $5.7 million in Q1 2018. This decrease is mainly attributable to a decrease in stock-based compensation costs in Q1 2019 versus Q1 2018.

New product-related research and development expenses unrelated to our collaborative development programs amounted to $1.6 million for Q1 2019 compared to $1 million in Q1 2018. Our increase in non- PDP R&D spending reflects increased activity developing additional profiling menu, such as our new mouse mRNA and autoimmune panels, and the initial activity from our California-based breast assay development team.

PDP R&D reflects a lower level of activity in Q1 2019 versus Q1 2018, as we await news from our PDP customers. As we have spoken to in prior calls, PDP R&D spending can vary significantly from one period to the next due to the timing of key program milestones and development activities, generally tracking changes in PDP revenue.

Our operating loss for Q1 2019 was $5.3 million compared to $5.2 million in Q1 2018. Our operating cash burn for Q1 2019 was approximately $6.1 million and reflects variable and other compensation payouts, which were accrued for in 2018 and paid in Q1 2019.

Net loss per share was $0.19 for Q1 2019 and $0.22 for Q1 2018. The reduction in our year-over-year loss per share reflects additional shares of common stock issued from our stock compensation program. We currently have approximately 28.6 million shares of common stock outstanding. We ended Q4 with $25 million in cash, cash equivalents and short-term available-for-sale securities. The company is continuing to provide top line guidance for full year 2019 in the $23 million to $28 million range.

We continue to expect our 2019 RUO profiling revenues to grow at 40% or more over the prior year and continue to model a wide range of potential PDP revenues based on our clients' timing and go-forward decisions. I appreciate the tremendous efforts of our team and look forward to reporting our Q2 results in August.

At this point, I would like to turn the call back to John for closing comments.

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John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [5]

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Thank you, Shaun. As mentioned earlier, I believe we are off to an excellent start to 2019. We're going to continue to measure our success in 3 ways: First, our ability to grow our base profiling business greater than 40% year-over-year to help fund continuing operations as well as to create new PDP opportunities.

Next, growing our pharma and PDP pipeline in both numbers of customers and numbers of projects. And last, growing our molecular diagnostic business, whether it be with a positive PDP readout, continuing to grow our European diagnostic business or by achieving key project milestones in our newly initiated breast program. We continue to see tremendous opportunity at HTG.

In the last quarter, we've added significant organizational capability, expanded our potential markets and demonstrated strong execution against our plan. We believe we're setting the company up for significant revenue growth in the coming years.

In summary, I believe HTG to be very well positioned to help drive precision medicine by developing advanced RNA-based NGS diagnostics that help us get the right therapy to the right patient. We're excited about what this means to patients, to investors and to our employees.

With that, I'd like to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Alex Nowak with Craig-Hallum Capital Group.

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William Patrick Fafinski, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [2]

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This is actually Will on for Alex today. Just a couple of quick ones for you. To confirm, I guess, first, the time lines for the readouts of both PDP programs have shifted a little bit the last couple of quarters. The team said on the last call the next 1 to 2 quarters just kind of what we should be expecting. Just trying to get a sense of you guys' current expectations?

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John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [3]

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Thanks Will, this is John. Obviously, trying to predict when pharma is going to move is challenging at least. We are in contact with them just about every single week, if not multiple times a week. We're still expecting, as I indicated in the script, that we will have some news on both of these programs, again, within probably 1 to 2 quarters, if not sooner.

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William Patrick Fafinski, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [4]

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Perfect. That's very helpful. And then John, just a concern out there about, ok, PDP Two says it's a go and wants to move forward, just what does that mean for HTG? Maybe if you could just lay out the pathway here from a go decision to getting your test FDA approved, getting into the sales channel and into the end lab customers, if you could just lay that out that would be helpful as well?

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John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [5]

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So with a go decision, essentially there will be a registration trial, clinical data set that would then be generated, that essentially is the clinical module associated with the PMA. We would then submit that PMA. It would go in with the drug for -- most likely for a co-approval. That process, depending upon whether it's expedited or traditional, could be 4 months, it could be 12 months. Simultaneous to that, we'll be working with our PDP partner QIAGEN to essentially ensure that we've got adequate market access in all of the countries that PDP client number 2 would look to commercialize upon getting approval for that therapy. So that body of work would be happening simultaneous to the clinical submission for the PMA. And so probably, somewhere between 6 and 12 months from now, we would expect to start breaking that test up, for actual patient testing upon approval of the drug.

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William Patrick Fafinski, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [6]

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Perfect. And then just 1 more to wrap it up. You said previously, you have a plan to get 1 to 2 new PDPs per year. I know it's a toss. There's limited visibility there, but do you reiterate that goal for 2019?

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John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [7]

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We do. I think we've got visibility on at least 1 that we're hoping, probably very late in the year, and obviously we've got our sales team out and we're working with a variety of different clients, 2 would be our objective.

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Operator [8]

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And our next question comes from Jordan Abrams with Cantor Fitzgerald.

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Jordan Lawrence Abrams, Cantor Fitzgerald & Co., Research Division - Associate [9]

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Just confirming, early stage projects in the quarter, what was the number there?

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John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [10]

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70.

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Jordan Lawrence Abrams, Cantor Fitzgerald & Co., Research Division - Associate [11]

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Last -- on the last call, it was about 80. I'm curious why the step-down?

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John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [12]

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Some of the programs timed out. We have a set of rules by which we count them. And if the product, if the project had to be on pause for more than 12 months, we actually time it out. Our goal still remains targeting 120 to exit the year.

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Jordan Lawrence Abrams, Cantor Fitzgerald & Co., Research Division - Associate [13]

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Okay. That's helpful. And then also during the quarter, and you mentioned it during the script that you extended the agreement with Illumina and you're calling it -- in the past, you called out autoimmune and you expect something this year, but you also mentioned cardiovascular and fibrosis. It would be helpful to have a little bit of color on maybe where in those markets you might be targeting? Or what you at least see as attractive?

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John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [14]

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Yes, I mean as previously mentioned -- so first of all thanks for calling that out Jordan. To us, the part about the Illumina expansion is exciting because those are very big markets. Autoimmune, we've already discussed a little bit in the last call. Cardiovascular, we actually have had collaborators and we're working in areas like transplant, for example, in cardiology and what's exciting is some of these applications are actually a liquid biopsy sample type. Again, our technology works beyond just FFPE, we work with plasma and serum. And as our customers are pulling us into these new markets, that's where we will be developing new panels to move into various different indications.

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Jordan Lawrence Abrams, Cantor Fitzgerald & Co., Research Division - Associate [15]

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Great. And just lastly, product revenue came in higher than your guide. I mean what's your level of confidence that the strength from the RUO business and the MDx business can continue, and what's driving that level of confidence?

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John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [16]

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Thanks again for that question. I mean we remain very bullish from the last time we talked. We think we're 40% to 50% growth on our core profiling business this year and then quite frankly, in the out years as well. What's driving that is a need to molecularly profile in the drug space and now, increasingly we have a very nice quarter in the academic space. And we've got a very good solution for gene expression profiling for RNA. So that's what kind of drove the overage there and why we remain very consistent with our guidance for the year. The variable is obviously the PDP.

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Operator [17]

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(Operator Instructions) We'll take our next question from Puneet Souda with SVB Leerink.

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David Greaves Delahunt, SVB Leerink LLC, Research Division - Research Analyst [18]

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This is Dave Delahunt on for Puneet. I was wondering if you could add any more color around the strength of the pharma product funnel that you're seeing?

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John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [19]

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Yes. We added 1 new customer for the quarter, Dave. That to me is a big metric, which is why we track both the number of programs and the number of new customers. I think we're teed up to kind of start growing that again. Again as indicated by TJ in a previous call, we had not a lot of sales presence in the field until about 9 months ago, when we added 5 sales territories and we are now starting to see the effects of that commercial investment by starting to bring in some new programs.

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David Greaves Delahunt, SVB Leerink LLC, Research Division - Research Analyst [20]

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Great. And 1 more. If you could talk about your expectation for contribution from PDP Two and Three in the full year guide, sorry, if I missed this in the script.

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John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [21]

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Yes, right now, we have limited visibility on where those programs are going. We have had dialogue with PDP Two in the last couple of days. We're hoping we're going to be able to have some color there soon so that we can even financially plan for it. PDP Three is still a program that is with the highest levels of management of that company and we have not heard a direction on where they are going with that.

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Operator [22]

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(Operator Instructions) And it appears there are no further questions in the queue at this time. I would like to turn the call back to management for any additional remarks.

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John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [23]

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Well, thank you. I'd like to thank everyone for joining us today. In particular, I'd like to thank our team and employees here at HTG for the tremendous work that they've put in this quarter and previously. Additionally, I'd also like to thank our Board and our shareholders for their continued support. And we look forward to updating you again on our next earnings call. Thank you.

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Operator [24]

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This does conclude today's call. Thank you for your participation. You may now disconnect.