U.S. Markets closed

Edited Transcript of NH earnings conference call or presentation 7-Nov-19 9:30pm GMT

Q3 2019 NantHealth Inc Earnings Call

CULVER CITY Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Nanthealth Inc earnings conference call or presentation Thursday, November 7, 2019 at 9:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Bob Petrou

NantHealth, Inc. - CFO

* Patrick Soon-Shiong

NantHealth, Inc. - Founder, Chairman & CEO

* Ronald Allen Louks

NantHealth, Inc. - COO & Director

* Sandeep K. Reddy

NantHealth, Inc. - Chief Medical Officer

================================================================================

Conference Call Participants

================================================================================

* Brandon Couillard

Jefferies LLC, Research Division - Equity Analyst

* Charles Rhyee

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Robert Jaffe;Robert Jaffe Co.

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen, and welcome to the NantHealth 2019 Third Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Robert Jaffe, Investor Relations for NantHealth.

--------------------------------------------------------------------------------

Robert Jaffe;Robert Jaffe Co., [2]

--------------------------------------------------------------------------------

Welcome, everyone, and thank you for joining us today to discuss NantHealth's 2009 third quarter financial results. On the call today are Dr. Patrick Soon-Shiong, Chief Executive Officer; Ron Louks, Chief Operating Officer; Bob Petrou, Chief Financial Officer; and Dr. Sandeep Reddy, our Chief Medical Officer. This call is being broadcast live at www.nanthealth.com. A playback will be available for 3 months on NantHealth's website.

I would also like to make the cautionary statement and remind everyone that all of the information discussed on today's call is covered under the safe harbor provisions of the Litigation Reform Act. The company's discussion today will include forward-looking information reflecting management's current forecast of certain aspects of the company's future, and actual results could differ materially from those stated or implied. In addition, during the course of this call, we may refer to non-GAAP financial measures that are not prepared in accordance with U.S. generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies.

Investors are encouraged to review NantHealth's press release announcing its full 2019 third quarter financial results for the company's reasons for including those non-GAAP financial measures in its financial results announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in the company's earnings press release issued earlier today. Today, Ron will provide a brief overview of the quarter and discuss the business lines, followed by Bob, who will discuss the financial results in more detail. We will then open the call for questions.

With that said, I'll now turn the call over to Ron Louks. Ron?

--------------------------------------------------------------------------------

Ronald Allen Louks, NantHealth, Inc. - COO & Director [3]

--------------------------------------------------------------------------------

Thanks, Robert. Good afternoon, everyone, and welcome to NantHealth's 2019 Third Quarter Financial Results Conference Call. For the 2019 third quarter, total revenue was $22.4 million. Our SaaS revenue was $18.3 million, a 15% increase over last year's third quarter SaaS revenue of $15.9 million. Our consolidated gross margin significantly improved to 63% of total net revenue from 50% in last year's third quarter. Total operating expenses were $20.8 million, a decrease of 9% or approximately $2.1 million from $22.9 million in the same period last year.

Bob will further discuss our financial results in more detail shortly.

Turning briefly to our balance sheet. Our cash position at September 30 grew by more than $2 million from the end of Q2. This increase is a positive development for our business and reflects our efforts to keep a close eye on our costs.

Turning to the Software and Service business. In our Clinical Decision Support division, we renewed a partnership contract with a leading provider of clinical solutions. The contract has a 3-year term and a minimum estimated total value of $38.4 million.

We signed an agreement with Wexford Health Sources, one of the nation's largest correctional health care companies, which will bring evidence-based standards and value-based oncology care to Wexford's patients.

We renewed an agreement with a large national health plan for federal employees, retirees and their families that will allow plan members to continue to receive streamlined preauthorization of cancer care.

We launched several enhancements to our Eviti platform. The new features are designed to provide payers with additional information about care management including the intended use of brand name drugs and visibility into settings where care is provided. Payers with multiple plans can now permit their users to view multiple dashboards, which saves time.

And our Eviti platform received full accreditation from URAC, which is valid through September 1, 2022. The accreditation, which recognizes those companies abiding by evidence-based standards and value-based care, means Eviti continues to meet URAC health utilization management standards.

For our NaviNet payer engagement solution, we added NaviNet's Authorization Attachment application to our implementation at one of the nation's largest health insurance organizations. This feature ensures providers receive the right supporting documentation to make more informed and timely decisions. We expanded NaviNet Open functionality to provide additional notifications with the authorization application. This enables users to receive information timely and respond quickly to critical requests, eliminating potential delays in caring for patients.

In addition, our NaviNet's AllPayer product completed the conversion of 3,602 provider offices, equal to approximately 80% of AllPayer customers from the legacy-pricing model. This will generate more than $1 million of additional annual recurring revenue.

And for our extensive care product line, we introduced VCX 3.0, formerly VitalsConX, which is designed to reduce patient overstays and facilitate faster decision-making. VCX 3.0 accelerates automated vital sign capture and provides easy entry of other customized observations at the point of care. Updates to the product include streamlined data validation and a touch-based user interface documenting vital signs quickly and easily. VCX 3.0 now supports smart patient vital sign monitors, including GE VC150.

We announced new Shuttle cable features to help improve data collection, efficiency and accuracy using a medical-grade serial-to-USB interface cable.

We signed a contract with Baxter expanding medical device driver development, this enables Baxter to connect additional devices to electronic medical record, EMR, systems.

And in Q4, at the HIMSS Asia Pacific 2019 meeting, NantHealth led the Interoperability Showcase, along with GE Healthcare, AirStrip and iProcedure. Together, the companies showcased how clinicians can spend less time on documentation and more time analyzing data in the near real-time to improve patient outcomes.

Turning to our sequencing and molecular analysis business. We presented a poster on GPS Cancer at the International Association for the Study of Lung Cancer World Lung meeting in Barcelona. Dr. Hossein Borghaei of Fox Chase Cancer Center and authors from NantHealth and NantOmics, presented a poster. The poster concludes NantHealth and NantOmics can use GPS cancer to identify a unique subset of patients who are likely to be resistant to conventional immune checkpoint inhibitor therapy using a method that has not previously been well characterized in this clinical setting.

And finally, we presented a poster at the European Society of Medical Oncology, ESMO, meeting. NantHealth and NantOmics together with investigators from Moffitt Cancer Center, presented a poster entitled, "Differential Expression of Immunoregulatory Molecules and Highly-Associated Cancer Genes May Provide Novel Insights Into Strategic Trial Design for Therapeutics." The poster describes novel associations of immune checkpoint gene expression with cancer related genomic mutations beyond tumor mutation burden, TMB, as a biomarker for immunotherapy response.

To sum up, we reported a solid quarter, spearheaded by continued growth of our SaaS business. Our cash position grew, reflecting our efforts to manage cash and watch costs, our window to receive final FDA comments for the OMICS CORE, and OMICS filing is our current fourth quarter of 2019, assuming the agency had no additional questions regarding the content of the submission. And our team's continued to present an important medical scientific conference around the world.

With that overview of our business lines, I'll turn the call over to Bob to discuss our financial results in more detail. Bob?

--------------------------------------------------------------------------------

Bob Petrou, NantHealth, Inc. - CFO [4]

--------------------------------------------------------------------------------

Thank you, Ron. As Ron mentioned earlier, for the third quarter of 2019, revenue increased slightly to $22.4 million from $22.3 million in the same quarter of the prior year. As a reminder, we divested our home health business at the end of 2019 second quarter. Consequently, we did not record any revenues for this business in the current year third quarter. On an apples-to-apples comparison, which excludes revenues from the home health business from last year's third quarter, revenues grew 8% to $22.4 million from $20.7 million in the third quarter of 2018.

For the first 9 months of 2019, revenue from all categories, excluding home health and sequencing, was up over 13% from the comparable period last year. SaaS revenue continued its positive growth trajectory with revenues increasing 15% to $18.3 million from $15.9 million in the last year's third quarter. The primary drivers for the improved performance were the addition of key contracts and partners.

As previously noted, in Q3, we renewed 2 contracts and signed a new customer. Combined, the contract win and customer renewals solidified more than $40 million in total value. Q3 Sequencing and Molecular Analysis revenue was approximately $276,000, down from $742,000 in the same quarter of the prior year. The FDA is currently reviewing GPS Cancer's whole exome test under a 510(k) submission. As we have referenced in the past, we expect to continue to see a decline in sequencing revenue until we receive FDA clearance and a positive coverage determination from CMS.

Q3 revenue from our Connected Care products declined 6% to $3.8 million from $4 million in the third quarter of 2018. On a year-to-date basis, we are up 16% in revenue compared with the same period last year. As we have mentioned before, revenue from this line item often varies from quarter-to-quarter due to the timing of completion of connected care implementations.

Q3 gross profit grew to $14 million or 63% of revenue, which was a substantial increase compared with $11.1 million or 50% of revenue in the same quarter a year ago. The gross margin improvement was primarily due to changes in product mix, specifically the continued growth of our software-related businesses.

Q3 total operating expenses declined 9% to $20.8 million from $22.9 million in the prior year third quarter, reflecting our continued cost management effort. For the 9-month period, total operating expense decreased by $6.7 million year-on-year.

For the third quarter, net loss from continuing operations was $16.4 million or $0.15 per share, a significant improvement from $97.4 million or $0.89 per share in the prior year third quarter. On a non-GAAP basis, net loss from continuing operations was $7.4 million or $0.07 per share, down from $10.8 million or $0.10 per share for the third quarter of last year.

Finally, cash and cash equivalents were $9.3 million at September 30, 2019, compared with $7.1 million at the end of our second quarter, representing an increase in excess of $2 million. This is a significant accomplishment in our continuing efforts to improve our financial performance. We remain focused on prudently managing our cash, and we have not drawn on our $100 million line of credit.

With that, I will now turn the call back over to Robert.

--------------------------------------------------------------------------------

Robert Jaffe;Robert Jaffe Co., [5]

--------------------------------------------------------------------------------

Thanks, Bob. Operator, we're prepared to open up the line for questions. Please form the queue.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Brandon Couillard of Jefferies.

--------------------------------------------------------------------------------

Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

Patrick, any updates you can share with us in terms of the nature of your dialogue with FDA, any back and forth or additional questions that they might have been asking and your level of, I guess, confidence or visibility on kind of a Q4 decision from them?

--------------------------------------------------------------------------------

Patrick Soon-Shiong, NantHealth, Inc. - Founder, Chairman & CEO [3]

--------------------------------------------------------------------------------

Brandon, this is Patrick. Yes, yes. Look, I think we've been in constant dialogue with them and very recently as well. So I think I'm pretty confident we're getting close. When you say 4Q decision, 4Q this year, are you talking about the GPS approval, I suppose, right? The 510(k)?

--------------------------------------------------------------------------------

Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [4]

--------------------------------------------------------------------------------

Yes, that's right. I think that's what you alluded to in prepared remarks, is it...

--------------------------------------------------------------------------------

Patrick Soon-Shiong, NantHealth, Inc. - Founder, Chairman & CEO [5]

--------------------------------------------------------------------------------

I think we'll -- yes, shortly, I mean, I don't have any reason to believe we're not on track.

--------------------------------------------------------------------------------

Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [6]

--------------------------------------------------------------------------------

Okay. And maybe, Bob, could you share the number of GPS test orders in the period?

--------------------------------------------------------------------------------

Bob Petrou, NantHealth, Inc. - CFO [7]

--------------------------------------------------------------------------------

From a test perspective, we are sub-50 within this quarter.

--------------------------------------------------------------------------------

Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [8]

--------------------------------------------------------------------------------

Okay. And do you have the operating cash flow figure for the third quarter as well? It'd be useful.

--------------------------------------------------------------------------------

Bob Petrou, NantHealth, Inc. - CFO [9]

--------------------------------------------------------------------------------

Well, again, from an overall cash perspective, we grew the cash position. Our cash flow grew. And then from an operating cash flow perspective, again, I'll need to dig that up, but overall, we continue to grow our cash from where we were previously within this quarter.

--------------------------------------------------------------------------------

Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [10]

--------------------------------------------------------------------------------

Okay. OpEx has certainly been trending lower year-to-date and again in the third quarter. How much more room do you sort of see to pare back expenses and kind of is this getting right?

--------------------------------------------------------------------------------

Bob Petrou, NantHealth, Inc. - CFO [11]

--------------------------------------------------------------------------------

I really don't envision significant more change in that line. We -- as we've kind of referenced before, we want to continue to grow the business. We'll invest where it makes the most sense. So I anticipate that to probably start growing marginally in the next year or so, but not such that it's out of control and beyond our means. We're obviously going to take everything into consideration when we make those investment decisions, but I don't foresee it declining drastically more but staying flat to growing through the next year.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from the line of Charles Rhyee of Cowen.

--------------------------------------------------------------------------------

Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [13]

--------------------------------------------------------------------------------

Just maybe following up there. The cash balance improving for the quarter. Can you tell us what drove the increase? Because if I -- obviously, we are lowering expenses, our gross margin is improving, but still we're running a net loss at operating income and, certainly, at pretax income. Can you give some sense there?

--------------------------------------------------------------------------------

Bob Petrou, NantHealth, Inc. - CFO [14]

--------------------------------------------------------------------------------

Yes, it's really a subset of the continued effort from the entire organization and the management team. We've been focused on this for some time throughout this year. We've improved our DSO. We've continued to manage the expenses and the outflows as expenses stabilize, but really, it's a subset of everyone getting on board from a company perspective and ensuring that they understand that cash is an important part of our business. And we set goals internally, and we've improved various processes and cash and collections, DSO, et cetera, that have driven that net increase through this quarter.

--------------------------------------------------------------------------------

Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [15]

--------------------------------------------------------------------------------

So it sounds like what you're saying, it's an improvement in working capital here kind of on the -- basically, an operating cash flow improvement that's driving most of it?

--------------------------------------------------------------------------------

Bob Petrou, NantHealth, Inc. - CFO [16]

--------------------------------------------------------------------------------

Yes. Yes. I agree.

--------------------------------------------------------------------------------

Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [17]

--------------------------------------------------------------------------------

Okay. Is that -- is there more room you think on working capital to drive further at this point? Or are you...

--------------------------------------------------------------------------------

Bob Petrou, NantHealth, Inc. - CFO [18]

--------------------------------------------------------------------------------

It's going to be a challenge. Again, various quarters, we have various onetime outlays, i.e. interest payments, et cetera, in certain quarters that caused this to fluctuate throughout various quarters within -- in the year. So there's some puts and takes and ups and downs, but we are yes, trying to continue to improve that working capital. I think there's a little bit more opportunity within the organization to do that, but it's not going to be droves and droves of significant improvement.

--------------------------------------------------------------------------------

Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [19]

--------------------------------------------------------------------------------

Great. And then following on Brandon's question about the -- if you get a positive response from the agency, can you just remind us, again, at this point, what is the commercial strategy post that? How are we looking to sort of reengage in the commercial market?

--------------------------------------------------------------------------------

Sandeep K. Reddy, NantHealth, Inc. - Chief Medical Officer [20]

--------------------------------------------------------------------------------

Charles, this is Bobby Reddy. I think we don't want to put the -- to be honest, I just don't want to put the cart before the horse on this so that we'll -- I think we'll address some of that in more detail if and when we have a clear determination from the agency. But the reality is that we know coverage, coverage is great, coverage is important. Reimbursement is a secondary issue after that, that follows on. I think we can learn a little bit from what happened with Myriad earlier this week. In terms of -- we don't want to mislead anyone with guidance around what the potential reimbursement or strategy would be until we have that in hand. But suffice to say, coverage is the first and most critical step. And then we'll ensure that we have further reimbursement. I think we're in a little bit better position than others because we do have some existing contracts around reimbursement that gives us a bit more favorable position.

--------------------------------------------------------------------------------

Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [21]

--------------------------------------------------------------------------------

Okay. That's helpful. And then the -- in Eviti, the contracts that you kind of -- the partnership you announced along with the renewals, you talked about contract value at $38 million and change. How much of that is -- the renewals, is there incremental revenue coming from the renewals? Or is that just -- it maintains sort of the revenue base here? Like how much of the $38 million is incremental?

--------------------------------------------------------------------------------

Bob Petrou, NantHealth, Inc. - CFO [22]

--------------------------------------------------------------------------------

Very little would be incremental. Although, with this renewal, we drove opportunities as the business grows and, as we gain further coverage, that we do have further opportunity, but from that one, in particular, it is a flat view from where we are today.

--------------------------------------------------------------------------------

Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [23]

--------------------------------------------------------------------------------

Okay. So then the growth that we're seeing right now in the SaaS line. Is that just from the -- I guess, maybe just characterize what the existing backlog then look like in terms of new implementations sort of as we kind of build out our models the rest of the year into next?

--------------------------------------------------------------------------------

Bob Petrou, NantHealth, Inc. - CFO [24]

--------------------------------------------------------------------------------

So we implemented, I think we referenced this previously late last year, a significant partnership with a customer last year. We're bringing on some of these new customers that we identified. This year, we've got significant pipeline for other Eviti contracts coming through the end of this year and into next year. So we're very bullish on where that business and the SaaS side of the things are growing. Again, there definitely are several other new pipeline opportunities that we feel bullish on and will materialize in the next 6 to 9 months.

--------------------------------------------------------------------------------

Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [25]

--------------------------------------------------------------------------------

That's great. Because we've seen revenue growth in SaaS tick up sequentially in terms of growth rates. Sort of what -- how are you thinking about what the sustainable growth rate of this division should be given what the market looks like for Eviti in particular?

--------------------------------------------------------------------------------

Bob Petrou, NantHealth, Inc. - CFO [26]

--------------------------------------------------------------------------------

To be conservative, we're 15% to 20% annualized growth over the next couple years is a general view of where we would anticipate Eviti going for the next couple years. We are bullish and do see opportunity beyond that. But from a general conservative view, it's definitely in that 15% to 20-ish percent type range.

--------------------------------------------------------------------------------

Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [27]

--------------------------------------------------------------------------------

Okay. Great. And I think, Ron, last quarter, you said you expect to end the year cash positive a couple million dollars. Obviously, with the increase this quarter, would you revise? Are you thinking that kind of view a little bit better now for the year-end?

--------------------------------------------------------------------------------

Bob Petrou, NantHealth, Inc. - CFO [28]

--------------------------------------------------------------------------------

Yes. But again, I think we are believing and feeling confident that we will and as we had referenced before. Again, it's probably in the $4 million to $5 million range versus the $1 million to $2 million that we had referenced earlier. So again, we anticipate staying cash -- having cash throughout this year.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Your next question comes from the line of Brandon Couillard of Jefferies.

--------------------------------------------------------------------------------

Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [30]

--------------------------------------------------------------------------------

Patrick, just a high-level question for you, understanding GPS is -- hasn't quite played out as you kind of -- we kind of hoped for a few years back. I mean, is there a scenario in which you just double down and focus on the software business and deemphasize GPS for the time being given what -- you seem to be having a good hand in terms of the software business. Is there a scenario which you might pivot your focus of Nant to just being software-oriented?

--------------------------------------------------------------------------------

Patrick Soon-Shiong, NantHealth, Inc. - Founder, Chairman & CEO [31]

--------------------------------------------------------------------------------

Yes. Look, I think it's a good question, Brandon, because clearly, The Street gets very confused when you have 2 different businesses. And the GPS may be a very, very different business. And we really are very seriously looking at that. The software business, as you could see, the team has not only done an amazing job. And as we build this in towards a more of a SaaS-type business, it has a very different valuation from The Street's perspective. So yes, we're contemplating that. And I think that could be a good strategy as we evolve that. And this is something we'll do. And even with the GPS, if it got approved, there's still a long hoe to row (sic) [row to hoe] because of the reimbursement and other issues. And so we will think through a strategy that makes sense to rationalize a company into merely the software business.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

I am showing no further questions at this time. I would like to turn the conference back to the presenters.

--------------------------------------------------------------------------------

Robert Jaffe;Robert Jaffe Co., [33]

--------------------------------------------------------------------------------

Thanks, Ian. Thank you all for joining us today. We look forward to giving you an update on our next call. Have a great weekend. Thanks, everyone.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may now disconnect.