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Edited Transcript of HTGM earnings conference call or presentation 6-Aug-19 8:30pm GMT

Q2 2019 HTG Molecular Diagnostics Inc Earnings Call

TUCSON Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of HTG Molecular Diagnostics Inc earnings conference call or presentation Tuesday, August 6, 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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* Alexander David Nowak

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

* David Greaves Delahunt

SVB Leerink LLC, Research Division - Research Analyst

* Jordan Lawrence Abrams

Cantor Fitzgerald & Co., Research Division - Associate

* Yi Chen

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

* Monique Kosse

LifeSci Advisors, LLC - MD

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Presentation

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Operator [1]

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Good afternoon and welcome to HTG Molecular Diagnostics Second Quarter Earnings Conference Call. My name is Amy, and I will be your coordinator for the call today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn it over to Monique Kosse from LifeSci Advisors for a few introductory remarks.

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

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Thank you, Amy. Earlier today, HTG released financial results for the quarter ended June 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 revenues, expected growth in benefits from biopharma programs and collaborations, product development and commercialization activities 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 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 statements.

With that, I would like to turn the call over 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 second quarter conference call. It's a pleasure to be here again today to report on our business results and to provide an update on the progress that we're making in building a precision medicine company that can help improve the care given to cancer patients.

So first, some high-level numbers. We recorded $5.8 million and $9 million of total revenue for the 3 and 6 months ended June 30, 2019, which was on track with our current year guidance. Our revenue during the second quarter continued to be driven by strong performance in our product and product-related services business, which grew 119% over the same quarter in 2018. We recognized product and product-related services revenue, including the sale of RUO profiling products and services as well as the sale of our CE/IVD products in Europe of $4.4 million and $7.1 million for the first 3- and 6-month periods ended June 30, 2019, respectively. This increase primarily reflects the expansion of our menu of RUO assays and the continued success of our expanded commercial team, driving the increasing adoption of our products in the United States and Europe.

We recognized collaborative development services revenue of $1.4 million and $1.9 million for the 3- and 6-month periods ended June 30, 2019, respectively, representing a 52% and 64% decrease over the respective periods in 2018, reflecting the lower development activity in these programs and the decrease in the number of active programs from 3 in 2018 to 2 in 2019. Our collaborative development services revenue will continue to be episodic. However, we believe in the long-term value of these programs. The R&D expenditures related to these programs and the associated collaborative development service revenues are essentially subsidized development expenses for a potential high-value companion diagnostics for HTG. Although we would have liked to have added a new program this year, we remain optimistic and confident that there will be new programs inbound as we continue to grow our biopharma RUO profiling business.

On that subject, our biopharma profile business continues to grow, and we're pleased with its ongoing progress. We now have a dedicated biopharma sales specialist in Europe and have grown our pipeline to 72 active programs at the end of Q2. We expect this pipeline to continue to grow, both in the number of clients and in the number of programs per client, as we finish the rest of 2019.

We believe the planned launch of our autoimmune panel later in the year will also further our biopharma market opportunities going forward. As a reminder, our biopharma RUO profiling programs are the feeder system for future CDx opportunities.

Moving on to our proprietary diagnostic development efforts, specifically our breast program. We continue to make great progress in our new San Carlos, California facility. The development laboratory is now operational, and we started the first phase of this project. Our initial product is expected to be a comprehensive RUO breast gene expression panel, which will be positioned to KOLs and used to define the future HTG IVD products. We will then follow with a series of IVDs that address currently unmet medical needs in diagnostic intervention points within the breast cancer treatment paradigm. We're very excited about how far and how fast we've come in such a short amount of time. And having a facility in the Bay Area has greatly expanded our capabilities, not only through HTG staff, but with working with other technology providers and partners.

In Europe, we continue to work with lead users to drive the adoption of our products throughout the region. We are adding new customers and, slowly but surely, increasing our diagnostic revenues. And with our new biopharma specialist on the ground, we expect to begin building out a strong biopharma franchise just as we've done in the U.S.

Lastly, we continue to bring new assays and capabilities to the market that continue to drive our RUO profiling business. Most recently, we announced the release of our EdgeSeq Reveal Version 1.2.0 analytical software. The new release contains an enhanced functionality, enabling data analysis for the HTG Precision Immuno-Oncology Panel, the Oncology Biomarker Panel and the newly released Mouse mRNA Tumor Response Panel. This updated version of our Reveal software allows customers to analyze and model their data and then present their findings in graphical forms to share their insights gained from their experiments.

We also completed the development procedures necessary to introduce 2 of our previously released assays, the HTG EdgeSeq DLBCL Cell of Origin Assay and our Lung Fusions RUO Assay, making them compatible with the Thermo Fisher Ion Torrent S5 platform. This makes these assays more appealing in Europe where Thermo has a larger sequencing footprint. This lets customers work with our assays in a sequencer-agnostic manner, eliminating a potential barrier of adoption.

So in summary, we're executing on our business plan and delivering the results on the elements that we can directly control. Our performance this past quarter reflects strength in our core business, especially the strong revenue surge in RUO profiling. We'll continue to be relentless in driving this business and are very excited about the second half of 2019.

With that, I'd like to turn the call over to Shaun who will review our Q2 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. We are extremely pleased in the growth of our product and product-related services revenue. As John highlighted earlier, total revenue for Q2 was $5.8 million versus $4.9 million in the same period in 2018, led by $4.4 million in product and product-related services revenue compared to $2 million in Q2 2018. The primary driver of this increase was our RUO profiling business, which included increases in instrument and consumables revenue and in services revenue compared to 2018. This shows the strengthening of our base proprietary technology adoption and the extended reach of our RUO profiling product and product services into increasing opportunities for downstream success in diagnostic applications.

As we anticipated, our collaborative development services revenue decreased from the prior year with Q2 revenue at $1.4 million versus $2.9 million in Q2 2018, continuing to reflect lower levels of activity in our PDP programs in 2019. Q2 cost of product and product-related services revenue was $2.5 million versus $1.5 million in Q2 2018 primarily relating to our increased profiling revenue and continuing to reflect lower margins contracted laboratory services for ongoing biopharma customer programs.

Selling, general and administrative expenses decreased slightly in Q2 to $4.7 million from $4.8 million in Q2 2018.

Our research and development expenses increased to $3.3 million in Q2 from $2.8 million in Q2 2018. This additional R&D expense is being primarily driven by the development of our additional proprietary RUO assays and diagnostic products in 2019. This increase of $2.3 million for Q2 compared to $1 million in Q2 2018 is reflected in research and development expense that's unrelated to collaborative development services revenue.

Our operating loss for Q2 was $4.7 million compared to $4.1 million in Q2 2018.

Net loss per share was $0.17 for Q2 compared to $0.14 for Q2 2018. We have -- we currently have approximately 28.7 million shares of common stock outstanding.

We ended Q2 with $21.6 million in cash, cash equivalents and short-term available-for-sale securities. We also have $3.3 million in restricted cash.

The company is providing a revised top line guidance for full year 2019 in the $23 million to $26 million range. We are adjusting the top end of our prior full year guidance to reflect our expectation of lower collaborative service -- development services revenue for the remainder of 2019. We continue to expect our 2019 RUO profiling revenue to grow when compared to the prior year.

I look forward to reporting our Q3 results in November. And 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 think we're off to an excellent start in 2019, and we're continuing to build momentum. We are going to continue to measure our success in 3 ways. First, we'll look to continue to grow our base profiling business and both fund continuing operations as well as to create new PDP opportunities. We believe our Q2 surge in this area validates our strategy and our ability to execute on this strategy.

Second, we're going to look to grow our pharma and PDP pipeline in both the number of customers and the number of projects. Our year-to-date pharma program growth reflects a positive trajectory, and we anticipate this trend will continue.

Finally, we'll look to grow our molecular diagnostic business. The progress that we've made in our breast program, the increased adoption of our technology by European customers and our steady climb in European diagnostic revenue continues to show solid execution against our strategy and expectations.

HTG is positioned to be a leader in RNA diagnostics for precision medicine. This has been another strong quarter in executing our business strategy and building our diagnostic franchise, expanding our RUO profiling business, growing our pharma collaborations and validating our business model. We're energized by these opportunities and look forward to the second half of the year.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Jordan Abrams from Cantor Fitzgerald.

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Jordan Lawrence Abrams, Cantor Fitzgerald & Co., Research Division - Associate [2]

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So last quarter and this quarter, you highlighted expanding RUO activity with academic medical centers in the U.S. and in Europe. Can you provide some color on the types of projects that are coming out of those academic customers and also highlight the traction that you're seeing?

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

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Yes. Thanks, Jordan. This is John. Actually, that growth is coming from 2 areas. One, yes, is the RUO in the academic medical centers as well as in the European medical centers. It's also being driven by the increased of not PDP programs, but the RUO profiling in pharma. But we are having, I would say, above expectations growth in the academic medical centers. And this is driven primarily by people using our products, specifically our Oncology Biomarker Panel and our Precision Immuno-Oncology Panel, as a surrogate for using full RNA-Seq cohorts that may range from 200 to 1,000 samples. And the reason why they're doing that is because they can get a pretty comprehensive RNA-Seq surrogate off of those panels and only use 1 cut of tissue. So we're -- and these are predominantly coming from key opinion leaders as opposed to principal investigators. So we have very modest expectations going into the year, and we're actually very excited by the performance of that line of business for us.

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Jordan Lawrence Abrams, Cantor Fitzgerald & Co., Research Division - Associate [4]

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Great. And then switching over to the MDx business in Europe. You talked about adding a biopharma specialist. Now you have the capability for Ion Torrent. How are conversations going with potential customers or current customers? Can you give us any insight into what you're seeing in your European business?

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

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Yes. So just to kind of make sure we're talking right. The specialist we put on was actually for biopharma. We've always had a U.S.-based team. We never had a dedicated specialist in Europe. We -- with the addition of that, we're expecting that we're going to be able to build up, obviously, not the same size of the U.S., but a nice portfolio of Phase I and Phase II programs in pharma focused on biomarker and translational work.

In regards to the MDx, which I think is the core of the question, we have essentially lead users in all of the big countries that are bringing up our DLBCL and our ALKPlus Assay. So they're -- last year was the year where they had to do the concordant studies. This year, they're starting to bring them up to run clinically as well as to seek reimbursement, and each country is different. Adding the Thermo S5 compatibility was important because, as we started to take these products clinically in Europe, we found that Thermo actually has a bigger footprint than they do in the U.S. where it's predominantly in Illumina under MiSeq installed base in Europe. It's probably at least 50% Thermo when it comes to clinical. So now that, that barrier has been removed, we can move forward with approaching customers with the Thermo equipment.

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Jordan Lawrence Abrams, Cantor Fitzgerald & Co., Research Division - Associate [6]

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Okay. And lastly, so 72 biopharma pipeline projects now. What's the expectation for the end of the year? Or what's the goal?

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

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Yes. Our -- we'd like to see close to 100. And then just to kind of frame that up because it's a number that people don't always understand. We've got a very rigorous way that we score these. And just back of the envelope, if we don't have activity or if the program doesn't continue, we remove it from the list. So for example, just hypothetically, if we walked into the year with 70 programs, we would expect that 35 of those would just naturally attrit out. So in other words, for us to hit 100 programs going forward, we have to re-up 35 of the 70. And then we have to go find and get -- put on to 65 new programs. And that's essentially the task of our pharma team, and that's how those numbers come together.

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Operator [8]

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The next question comes from Alex Nowak at Craig-Hallum.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [9]

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John, since we talked last, we had a failure from one of the indications from PDP Two. Can you just provide investors some more color around what happened here, if it was a failure with your assay, your technology or if it was a failure with the drug partners, the drug? And what are the go-forward steps here with this partner?

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

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Yes. So thanks, Alex. Yes, PDP Two is actually, as mentioned before, it's a big program that cuts across 12 indications. And so the decision not to go forward with our assay was a rescue program where the no-biomarker strategy did not reach its endpoint. They then looked at 3 biomarkers: a DNA; an RNA; and an IHC. The DNA was not predictive. The RNA and the IHC were essentially about the same. And whether or not they -- this client moves forward, we don't know. They're continuing to work on this indication with us, but I think a lot of it has to do with how well is the response rate for this indication versus what their competitors are doing. We'll probably continue to know more on this as the year progresses. However, we anticipate that this assay is now going to be used across the other 11 indications by which it's been validated. And I think -- so this PDP Two, I think, is going to take a couple 3 years for it to play out across all of the indications as they start using it in registration trials, so it's not anything that's going to be a short-term play. I think it's all positive. And eventually, one of them, we would expect, is going to have a positive readout using the RNA as the biomarker.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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Okay. Understood. And then just switching over to PDP Three. That program, that's still ongoing as well. We really don't have any color there. Is there anything you could provide us, what we should be watching for this program, timing? And what's your confidence that this program can turn into a companion diagnostic?

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

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Yes. PDP Three is a different one. It's more narrow. It is -- it's also a combination therapy. It's in 1 of the big 4 tumor types. This is a product that went on pause in the first half because they ran out of sample. And so they ran -- basically, they ran out of the primary sample type. They then asked us to go back and revalidate our assay on a different sample type that they had more of because they're trying to get a big enough end to power the trial with the FDA. That now is back going again. And so we're in the process of generating data for this client. This is a high-priority project for this client. I still expect that we should have some information on this by the end of the year. That's the guidance that we get. Whether my optimism or pessimism, I don't know. Truthfully, they -- we don't get the response data, so we're kind of working in a black box.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

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Okay. Understood. And then when should we expect to see a PDP Four or even a PDP Five? Is this a second half '19 event? Or is this more like a 2020 event at this point?

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

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Good question. Thanks for that one. We -- obviously, we have optics on the pre-PDP progress. I'm fairly bullish that we will see 1 to 2 programs early in 2020.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15]

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Okay. Got it. And then just 2 more real quick. When do you expect you'll launch the Breast Cancer Program into the clinical market? And when do you think you're going to share some more detail about the rest of that internal menu that you're developing?

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

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Another great question. So we would expect to have the RUO version, the bigger panel out early next year on that. Depending upon how quickly we can access the clinical cohorts for validation of the clinical product, we'll kind of index when that product -- I still think it's a late 2020, early 2021. We do expect to be able to put on an Analyst/Investor Day on breast. We're trying to line up some dates right now for that in early October. And we -- you should hear more from us on that within the next couple of weeks. And then at that meeting, we will be able to provide more detail.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [17]

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Got it. That's good to hear. And then just one for Shaun here, just want to keep you here. Have you used the ATM at all this quarter? And what are your plans for that facility going forward?

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

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We have not tapped our ATM yet, but we are not ruling out utilizing it in Q3.

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Operator [19]

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The next question comes from Puneet Souda at SVB Leerink.

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

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This is Dave on for Puneet. Wanted to get your expectation on additional biopharma programs you could register into the PDP stage. And any color around your longer-term expectations there?

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

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Yes. Thanks, Dave. As kind of mentioned, we have visibility as our -- as these pharma programs that, we have 72 of these, are kind of moving to the pipe and are watching what our partners are doing. As I mentioned, I would have expected we would have had one new one this year. Real disappointed that we didn't get there. That being said, I have great optimism that early next year, we'll have 1, if not 2 new ones. In addition to that, we've got 2 of our -- 2 top 5 biopharma that are currently doing a very in-depth study on our technology platform that could potentially graduate us to the same level of platform technology that we have established with PDP Two with that client. And that could really open up a lot of potential trials to us.

So we're -- this is a grind-it-out. It's nice because the business continues to grow, as I mentioned, over 100% this quarter. We still think that this is, long term, a 50-plus percent growth business for us in RUO profiling. And eventually, they graduate into the PDP programs. So it kind of keeps the business going, builds us in as platform technology. And over time, it'll give us these premium diagnostics, which are companions. And then simultaneous to that, obviously, things that are completely in our control will start generating proprietary diagnostics coming out of our San Carlos facility.

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David Greaves Delahunt, SVB Leerink LLC, Research Division - Research Analyst [22]

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Great. And then was hoping you could add any additional color on the conversion rate of these projects into the PDP programs.

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

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Yes. It's a bit -- well, right now, unfortunately, we're 0 for 2, on PDP readouts. Statistically, 50% move forward. So we're -- we've lost 2 coin tosses so far. But it's -- we're executing the plan. We're adding new customers. I think our reputation in the industry, the number of publications we have just continues to grow. I think we're viewed as a leader in gene expression profiling, especially from tissue. And I think that's eventually -- while we're continuing to grow our business at a nice clip, eventually, we'll get one of these home runs.

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Operator [24]

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(Operator Instructions) The next question comes from Yi Chen at H.C. Wainwright.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [25]

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How should we look at the operating expenses during -- for the remainder of 2019?

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Shaun D. McMeans, HTG Molecular Diagnostics, Inc. - Senior VP of Finance & Administration, CFO, Secretary and Treasurer [26]

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I think the operating expenses, Yi, should be essentially patterned after what you've seen in the first half of the year. We certainly see our R&D expense tracking where you saw it increase in Q2. And SG&A, in general, I think, as we pursue more opportunities on the pharma -- in our pharma pipeline, we see some increases in marketing and selling, but I think first half is a good indication.

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John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [27]

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Yes. In the first half, as I mentioned, we basically outfitted the San Carlos lab. So there were some, I would say, I'm call them onetime expenses associated with that. We'll probably still spend that same level of spending. They just may move to services and supplies. But I would not look to see us any step-change increase in expenses.

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Operator [28]

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There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

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John L. Lubniewski, HTG Molecular Diagnostics, Inc. - President, CEO & Director [29]

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First of all, I just like to thank everyone for joining us today, especially for the questions. Also in particular, I'd really like to thank the employees here at HTG for their tremendous work that they put in again this quarter, especially our VERI/O lab. They -- that was tremendous work from the employee base. Initially, I'd like to thank our Board and our shareholders for their continued support, and we look forward to updating you again in our next earnings call in November. Thank you.

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Operator [30]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.