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Edited Transcript of HTGM earnings conference call or presentation 12-Nov-19 9:30pm GMT

Q3 2019 HTG Molecular Diagnostics Inc Earnings Call

TUCSON Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of HTG Molecular Diagnostics Inc earnings conference call or presentation Tuesday, November 12, 2019 at 9:30:00pm GMT

TEXT version of Transcript


Corporate Participants


* 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


Conference Call Participants


* Max Masucci

Canaccord Genuity Corp., Research Division - Associate

* Puneet Souda

SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst

* Yi Chen

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

* Monique Kosse

LifeSci Advisors, LLC - MD




Operator [1]


Greetings, and welcome to the HTG Molecular Diagnostics Inc. Third Quarter 2019 Earnings Call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the conference over to your host, Monique Kosse, LifeSci Advisors. Please go ahead, ma'am.


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


Thank you, Jerry. Earlier today, HTG released its financial results for the quarter ended September 30, 2019.

Before we begin the call, let me remind you that the company's remarks include forward-looking statements within the meaning of federal security laws, including statements regarding possible additional collaborations with pharma customers; anticipated continued growth in RUO profiling business and related revenue; expected growth in and benefit from pharma programs and collaborations; product development and commercialization activities; revenue expectations for the full year 2019; and projects expected to occur in 2020.

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 statements. 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 turn the call over to John Lubniewski, Chief Executive Officer. John?


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


Thank you, Monique. Good afternoon, everyone, and thank you for joining us on our third quarter conference call. It has been another extremely quarter, and it's a pleasure to be here today to report to you on our business results and provide you an update on the progress we're making on building a precision medicine company.

So first, some high-level numbers. Total revenues this quarter were $5.4 million and $14.4 million during the first 9 months of the year. Breaking it down a little bit, we saw very strong performance from our product and product-related services business, which grew 228% over the third quarter last year.

We see strength and continued market share expansion into the RNA profiling market, which is really driven by biopharma and academic researchers who are using our products to better understand mechanisms of disease, mechanism of action for drugs and of development of molecular subtypes for potential differential treatment.

Biopharma remains our most important market, but we're also seeing growth in the academic market as well. Our European market is contributing and strengthening now that we filled several open sales territories. However, across our RUO profiling business, we have recently had a couple of key projects slip from expected fourth quarter execution into early 2020.

Our profiling business is based on our highly differentiated EdgeSeq technology, which is very sample sparing, improves traditional EdgeSeq workflows, multiplexes into the thousands and enable simplified bioinformatics.

We're leveraging these advantages into a $1.2 billion RNA profiling market, which is projected to grow at double digits. We believe we are demonstrating that HTG can build a substantial business in the segment.

Our collaboration development services felt the impact of lower development activity and a decrease in the number of active precision diagnostic partnership programs, which went from 3 programs in 2018 to 2 in 2019, as we previously indicated. This line of business has been very quiet, reflecting a lack of activity by our partner, QIAGEN, this year.

We have tremendous hope in the partnership with QIAGEN, which had delivered very strong early results, with the signing of 3 new PDP programs with a biopharma in the first 12 months of the partnership. These were customers that HTG had cultivated in our profiling business. We were excited about the combined HTG/QIAGEN solution.

However, QIAGEN failed to deliver a sequencer to support in this partnership, and their commercial organization pivoted to PCR solutions. We lost much of the market momentum we had in 2017 and saw the potential weakness in PDP revenues. As a result, we adjusted our guidance earlier this year.

QIAGEN's recent announcements, including their decision to formally discontinue their clinical sequencing platform, reflected a rapid and premature shift away from our mutual collaboration. With this shift, combined with the other factors I noted earlier, we now expect results to be weaker than previously assumed. We are now revising annual guidance to $19 million to $20 million for full year 2019.

As a result of QIAGEN's lack of performance and what we see as a clear breach of contract by discontinuing GeneReader, we have notified QIAGEN that we're terminating our agreement.

Current contracted work with QIAGEN is expected to continue, but we will now contract all future collaborations directly with biopharma and intend to leverage our preexisting development agreements with Illumina and Thermo.

Having direct control of the collaborations returns HTG to the driver seat. We believe we can act more quickly and be more agile to meet the needs of current and new customers, and it eliminates the middleman, so communications will be streamlined.

We also expect to enjoy better economics because HTG will now recognize the full revenue and margin of these collaborations. In the past, we obviously split revenues and margins with QIAGEN. We hope to retain a good working relationship going forward with QIAGEN, but more likely as a commercial distribution channel versus a development partner.

We believe regaining direct control of the customer by leveraging HTG's pharma commercial organization will make significant headway to return this business to growth in 2020, which is a focus for us because developing companion diagnostics through our biopharma collaborations remains one of our 3 growth strategies at HTG.

On that subject, in spite of the slower pace on signing new collaboration agreements under the QIAGEN agreement, our biopharma business continues to grow. We've increased the number of active programs in our pipeline to over 80 at the end of Q3, up from 72 programs last quarter.

And just as important, we've continued to expand the number of biopharma customers. This is a result of our strengthened sales team, targeted commercialization efforts and growing market awareness of the advantages of our HTG solution. We expect this pipeline to continue to grow, both in the number of clients and the number of programs per client throughout the rest of 2019 and into 2020.

We also anticipate the introduction of new panels to help grow the business and expect the launch of our new Autoimmune Panel last month to further strengthen opportunities for biopharma partnerships.

Our model is very synergistic, with many of our biopharma RUO profiling programs helping to feed the pipeline for future biopharma collaboration and CDx opportunities. Our profiling business remains in high gear, and we're optimistic about our growth opportunity in the coming quarters.

Moving on to our proprietary diagnostic development efforts, specifically our breast program. We're pleased to have conducted HTG's first-ever KOL day in breast cancer where we hosted Dr. Adam Brufsky from the University of Pittsburgh Medical Center. We've strategically chosen to start in breast cancer for a multitude of reasons.

First, we believe breast cancer is an area of significant unmet medical need.

Next, it's a market that's already embraced molecular testing for patients and has the highest incidence among all solid tumors.

And finally, there are number of treatments where multiple biomarkers are required and tissue availability is at a premium.

With these broad clinical needs and market dynamics for breast cancer in mind, HTG has identified specific clinical diagnostic intervention points. And we prioritize 4 diagnostic intervention points to guide our development.

This prioritization was informed by extensive market research done by L.E.K. Consulting, as well as by primary research, with breast cancer KOLs conducted by HTG.

The first product that we will build as part of our breast initiative is intended to be a clinical-grade Whole Transcriptome breast panel. We expect this to include as many as 20,000 genes, including the entire breast and cancer transcriptome. We believe HTG is uniquely suited to do this because of our extremely high plex, our very low sample usage and our NGS-based high sensitivity.

We expect then to follow this product with a whole transcriptome RNA panel, all built to a clinical standard. Imagine, taking today what takes 2 weeks or more, uses 10 or more cuts of tissue, needs a highly specialized laboratory and workforce, including a significant investment in bioinformatics, and replacing that with a single test from HTG that can be run in 2 days, using 1 cut of tissue in just about any laboratory, all with simplified bioinformatics.

This initial product would be positioned in our RUO profiling business, where we also plan to use it as our foundation for clinical development as well as to make it available to CLIA labs, researchers and other test developers as the new standard for RNA analysis.

Last, we plan to continue to bring new assays and capabilities to the market to continue to drive our RUO profiling business. As just mentioned, our first product to come from the breast program will be a high-gene content, Whole RNA transcriptome product that we believe will even further drive revenue opportunity for RUO profiling.

This month, we also launched our Autoimmune Panel that targets RA, MS, lupus and other autoimmune conditions. The autoimmune market is larger than oncology, and we believe that this opens up an entire new market for HTG's RUO molecular profiling business.

In summary, we feel we have been performing well in the areas that we can directly control, namely our RUO profiling business and starting to build our own preparatory diagnostics.

Our RUO profiling business has shown consistent quarter-over-quarter and year-over-year growth, and we believe the market opportunity for HTG is significant.

We expect to continue to expand the number of biopharma customers and the number of clinical programs that leverage our HTG technology. In our proprietary diagnostics, we now have a product road map and are making rapid progress to develop our first product.

Lastly, in collaborations where we previously have been working through QIAGEN, we are retaking control and see a clear path where HTG will directly engage and contract with new customers and regain momentum in our collaborations. We look forward to bringing in new business, both in programs and customers, in the coming months.

With that, I'd like to turn the call over to Shaun to review our Q3 financials.


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


Thanks, John. The growth of our product and product-related services revenue was strong again this quarter.

As John highlighted earlier, total revenue for Q3 was $5.4 million versus $4.7 million for the same period in 2018, led by $4.3 million in product and product-related services revenue compared to $1.3 million in Q3 2018.

The primary driver of this increase was our RUO profiling business, which included increases in instrument, consumables and services revenue compared to Q3 2018.

We believe this growth continues to demonstrate strengthening of our base proprietary business, the adoption of our technology and extended reach of our RUO profiling product and product services into increasing opportunities for potential downstream success in diagnostic applications.

As we anticipated, our collaborative development services revenue decreased from the prior year, reporting Q3 revenue of $1.1 million versus $3.4 million in Q3 2018, continuing to reflect lower levels of activity in our PDP programs in 2019.

Q3 cost of product and product-related services revenue was $2.9 million versus $1.2 million in Q3 2018, primarily relating to our increased profiling revenue and reflecting lower margins of contract and laboratory services for our ongoing biopharma customer program.

Selling, general and administrative expenses decreased slightly in Q3 to $4.5 million from $4.7 million in Q3 2018. Our research and development expenses decreased to $2.6 million in Q3 from $3.6 million in Q3 2018.

This decrease in R&D expense is driven by the decrease in collaborative development services revenue in the current year, for which related cost are recorded as Research & Development expenses.

Partially offsetting this decrease is an increase in development costs relating to our proprietary RUO assays and breast diagnostic development program in 2019.

Our operating loss for Q3 was $4.7 million compared to $4.8 million in Q3 2018. Net loss per share was $0.15 for Q3 compared to $0.17 for Q3 2018.

We currently have approximately 58 million shares of common stock outstanding, following an offering of our common stock during the third quarter of 2019, which reached gross proceeds of approximately [$0.25 million].

We ended Q3 with $37.9 million in cash, cash equivalents and short-term available-for-sale securities. We also have $3.3 million in restricted cash. We look forward to announcing our full year results in January.


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


Thank you, Shaun. As mentioned earlier, I believe we're having a very good year in 2019 with respect to the things under our direct control and are continuing to build momentum in our key strategic areas. We will continue to measure our success in 3 ways.

First, we will look to continue to grow our base profiling business to both fund continuing operations, as well as to create new collaboration opportunities.

We believe our performance in Q3 validates our strategy and demonstrates our ability to execute. This is a $1.2 billion market with robust growth, and we believe we're just scratching the surface on the opportunity that it presents to HTG.

Second, we look to continue to grow our pharma pipeline, both in the number of customers and in the number of projects. We added 8 new programs and 2 new biopharmas customers this quarter, and we expect to continue to expand our business in this segment.

And now that we're free of the QIAGEN entanglement, we can contract biopharma directly using our Illumina and Thermo sequencing agreements. We believe that by retaking control of the situation, we can build HTG's market position and revenues in a more sustainable manner.

Finally, we will look to grow our molecular diagnostics business. We've built out a new facility in California and are excited about how far we've come so quickly.

The investment we've made in our breast program and the synergies that those development activities are expected to have and return to our RUO profiling and biopharma business gives us confidence that not only will we establish ourselves in the breast cancer diagnostic market, but we will also develop potentially groundbreaking new RNA RUO profiling products as well.

HTG is positioned to be a leader in RNA diagnostics for precision medicine. This has been another strong quarter in executing our business strategy of building our diagnostic franchise, expanding our RUO profiling business, growing our pharma collaborations and validating our business model.

Yes, we are frustrated by the events within our PDP partnership with QIAGEN, but we've taken steps to get things back on track. We expect to finish the year with strength in our base RUO profiling business, solid progress in building our molecular diagnostics business, and a clean slate to build a new book of collaboration business for biopharma companion diagnostics.

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


Questions and Answers


Operator [1]


(Operator Instructions) The first question is from Mark Massaro, Canaccord Genuity.


Max Masucci, Canaccord Genuity Corp., Research Division - Associate [2]


This is Max for CG on for Mark. So now that QIAGEN is largely out of the picture, can you help us understand some of the challenges you might face when contracting directly with pharma? I guess what sort of resources do you have internally to target those opportunities?

And then, any comment on the difference in economics will be appreciated.


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


Sure, Max. This is John. Thanks for making time for us today. So yes, first of all, regarding the expected challenges. When we first engaged in the QIAGEN agreement, there was -- I believe, there was a claim of 25 master service agreements that were going to be made available to HTG.

Unfortunately, for us, none of those were actually taken advantage of. And so there was no commercial fast pass, if you will, that we got by partnering with QIAGEN. HTG has its own direct sales force that is calling into that space right now.

And in many of these clients, we actually have master service agreements. So we're not anticipating really a significant challenge in regards to contracting, which is probably the biggest pothole, if you will, out there.

On the flip side, we are a smaller company. We're much more nimble. We have our own legal counsel. So we do more work very quickly, very efficiently. And quite frankly, I would expect that our new deals are actually going to be able to proceed a bit more quickly, just simply because we're smaller and more agile. So we're looking forward to regaining control of that customer franchise.


Max Masucci, Canaccord Genuity Corp., Research Division - Associate [4]


Great. And then moving on to the autoimmune panel. So you will be launching the panel as a kit or a service. Can you just talk about commercialization strategy?

And then also at a high level, when you look at your portfolio, just any success you're having in cross selling your different panels?


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


Yes. Again, great questions. So on autoimmune, it actually launched just a couple of weeks ago, went on market. It was actually, it came to us through pharma customers. They actually came and said, hey, we'd like you to build an Autoimmune Panel. And they actually gave us the gene.

So our initial target market for that is actually going to be biopharma in regards to commercialization, just like what we do with oncology.

The most efficient way to do this is just to search the trials on clinicaltrials.gov, so our commercialization organization is doing that. And they're working back into the -- in many cases, new contacts for us because of the autoimmune disease teams are usually different than the oncology disease teams.

But then, we're also taking this product into academia. So we've actually, the first sale of it actually went into academia. So we're expecting this market to be -- this product to be used both in pure autoimmune, but then also to be used in oncology.

And a good example is our 2 highest-selling panels right now are the Oncology Biomarker Panel and our Precision Immuno-Oncology Panel, and one of them looks at cancer biology, the other one looks at immune system. Frequently, customers buy them both and run them both at the same time, so they can understand what's going on, especially with immunotherapies.

We expect that the Autoimmune Panel will also be combined with those 2 products because they're going to look to also see are we tipping patients into an autoimmune condition as a result of perturbing the immune system with immunotherapies. So we are expecting some cross-selling and bundling.


Max Masucci, Canaccord Genuity Corp., Research Division - Associate [6]


Great. That is helpful. And then I guess one more for Shaun. Can you just help us understand how you'll be prioritizing your spending now that you strengthened the balance sheet, if there's any more willingness to spend? And I guess just directionally, how we should be thinking about the pacing of spend or OpEx in 2020.


Shaun D. McMeans, HTG Molecular Diagnostics, Inc. - Senior VP of Finance & Administration, CFO, Secretary and Treasurer [7]


I think OpEx is going to look a lot like it is today. Our -- we see our burn in the following 4 quarters to be at that $5-million mark. So we certainly feel we have an increased spending in San Carlos in 2020. But for 2019, we'll probably round out the year very similar to what you've seen in Q3.


Operator [8]


(Operator Instructions) The next question is from Puneet Souda, Leerink Partners.


Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [9]


My first question is look, when I think about HTG Molecular, the focus shifted a few years ago to the PDP programs under TJ at that time. And you have a base of stable RUO business, which continues to do well here. Breast came in later and then clearly exciting, given the team that you've assembled here in the Bay Area.

I wanted to understand, given where you stand now and after QIAGEN, how important or how strategic are the PDP programs for you and your commitment there, so longer term?

And if you could describe how many of those 8 new programs were added prior to the QIAGEN termination or were some of them added afterwards? Just help me understand how important is this.

Obviously, breast is something clearly a long-term positive for you. It brings more control back to -- in your hands and essentially helps you establish the long-term outlook at the company. But just help me understand what -- how should we think about the PDP longer term?


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


Thanks, Puneet, for making the time for us today. So yes, so the company has always had 3 growth pillars in regards to how we're building out really the revenue streams.

The foundation has always been the RUO profiling business. If there's any surprise, I think over the last couple of years, it's just how big and how robust that market is and how well suited our value proposition actually fits into that. And you're seeing that in the results that we continue to be able to put up.

That then led to the PDPs. And again, the PDPs are kind of shots on goal for a killer app and companion diagnostic. They remain one of our growth strategies and will. I don't think they will be the only thing. I don't think we count on building our revenue stream through companion diagnostics.

The advantage of the new economics are we would expect our margins to essentially double in that space. And then our revenues per program will probably be going up 60% or 70% per program. So we think it remains a very viable growth engine for us. We'd like to see it return to historical levels of that $8 million to $12 million per year.

And then as you called out, yes, breast is a bit of a longer play. But hopefully, what you can see though is the very first milestone product for breast is actually going to serve our pharma and our profiling business in the Whole Transcriptome RNA product. We try not to have any wasted parts, if you will, to our strategy, so that everything kind of works synergistically with one another.

And then your last one, just to make sure that I'm clear. So the 8 new programs, those are all preclinical or Phase I/Phase II programs. They are not IUO programs, like we would have contracted in the previous PDP.

These are parts of the metrics that we published for the number of active retrospective trials that we're partnering with. And what was substantial was again, yes, 8 new ones in the quarter and 2 new customers for the quarter. And we're expecting again to continue to drive that business as well.

So HTG has always been kind of anchored in 3 key strategies ever since we took the company public and it was actually TJ's original strategy of profiling PDP and proprietary diagnostics.


Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [11]


Got it. That's very helpful. If I could touch on the comprehensive breast assay. Clearly, an innovative product in the market that you want to introduce here. Help me understand the regulatory path and ultimately your expectation for this. Is this something that you expect to file a PMA for?

Ultimately, it should be sort of an [LCB] for it first. What's the time line on this? Could you elaborate sort of the next steps for the assay? And when should we see sort of early data from this product and from the studies that you're doing to build-out this product?


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


Yes. Another really good question. So still a little early in regards to the product road map, but I'll give you what I know right now. So the first milestone, the key milestone product for this, is going to be this Whole breast Transcriptome panel that we built essentially to an IVD standard.

I mean we're basically going out, building it in a way that it will mimic RNA-Seq data but do it more reproduc-ibly, with greater sensibility and far less assay failure rate.

And then once that panel is built, then we can layer on claims to that product and it almost becomes an RNA version of the Foundation One assay. It's probably a good way to put it, given the pedigree of the people working on it, that make some sense for why it came that way.

And one of the major advantages of that is today, if you're doing RNA, every platform is different. You have no ability to share or compare data. By taking a little extra time and which is why this is the first full transcriptome product, we're not expecting until midyear 2021, that really will be built to an IVD standard. And then all we need to do is to layer on the clinical claims because the design history file will be IVD quality.

And then, depending upon what those claims are, that will dictate whether it's a 510(k) or a PMA. If it's drug-linked, it's likely to be a PMA. If it's -- falls under the breast classifiers, FDA has historically given those Class 2 status.

But as I mentioned in the call, we also anticipate making this panel available for other CLIA labs and other test developers. And in that particular case, we'd make it available as a component for them to build an LVT in a CLIA environment.

So we actually see a lot of reuse off a common panel, proprietary diagnostics as well as LVT raw materials.


Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [13]


Okay. Got it. And then if I could ask on the project developed for breast, what your expectations for R&D here in sort of the near term and then for the next year? If you can elaborate on that, that will be very helpful.


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


Yes. So we opened the lab in April, I believe, this year and was fully functional just in July. It seems like it's forever, but it's only been a couple of months. So we've already got a couple of sequencers out there.

We're doing a lot in the Bay, and those of you that are in the Bay know this, there's a network that lets us engage more almost on a rental basis than having to organically build the team.

So we have a core that I'm just completely delighted with. And then they've had the capacity to partner in for our bioinformatics support, our probe designs, our cloud computing infrastructure. All of that is being partnered at really almost a lightning rate.

And so we probably can, at maturity, have about 20 people up in that facility. We're expecting to double, if not triple, the R&D investment in 2020 versus '19. But then as Shaun was mentioning, we have managed the P&L so that we do not expect that additional investment in R&D to trigger an increase in burn. So we're being very mindful of our cash position.


Operator [15]


We have a question from Yi Chen from H.C. Wainwright.


Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [16]


I don't know if at this point, if you could give any -- give us any color on the potential revenue mix in 2020.


John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [17]


I'll defer to Shaun for that one.


Shaun D. McMeans, HTG Molecular Diagnostics, Inc. - Senior VP of Finance & Administration, CFO, Secretary and Treasurer [18]


I think you can look at 2020 as extension of '19 as far as RUO profiling growth, similar patterns of growth. We'll layer in collaborative development services revenue as contracted.

We're being very cautious, given John's earlier statements that, that business has been historically lumpy. But right now, the expectations for 2020 are not set. We don't expect to provide any guidance on 2020 until at least January, until we have a clear picture of post QIAGEN and just 2020 in general.


Operator [19]


We have reached the end of the question-and-answer session. And I would like to turn the call back over to management for closing remarks.


John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [20]


Yes. Thank you. Well, first of all, I'd like to thank everyone who took the time for joining us today. But in particular, I'd really like to thank the employees here at HTG, in Europe, in Tucson and in San Carlos, for their tremendous work and dedication that they put into building this company.

Additionally, I'd like to thank our Board and also our shareholders for their continued support. We can't build this company without your help.

So thank you for the time, and we look forward to updating you again on our next earnings call.


Operator [21]


This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a good evening.