U.S. Markets close in 5 hrs 54 mins

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

Q2 2019 NantHealth Inc Earnings Call

CULVER CITY Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Nanthealth Inc earnings conference call or presentation Thursday, August 8, 2019 at 8:30:00pm 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

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

Conference Call Participants

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

* Brandon Couillard

Jefferies LLC, Research Division - Equity Analyst

* Robert Jaffe

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

Presentation

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

Operator [1]

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

Good afternoon, ladies and gentlemen, and welcome to the NantHealth 2019 Second Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

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

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

Robert Jaffe, [2]

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

Welcome, everyone, and thank you for joining us today to discuss NantHealth's 2019 second 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 like to make a 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 second quarter financial results with 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.

Shortly, 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 will 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 Second Quarter Financial Results Conference Call. The NantHealth team is delivering on our corporate goals to continue to improve our financial performance during this year's second quarter financial results and providing our customers with the highest quality service and support.

Comparing the 2019 second quarter with the second quarter of last year, total revenue increased 17% to $25.7 million from $22 million. The 2019 second quarter represents the fourth consecutive quarter of total revenue growth. Our SaaS revenue increased 13% to $18.3 million. Over last year's second quarter, it was up 3% from the first quarter of 2019.

Our gross margin improved to 62% of total net revenue from 52% in last year's second quarter. We also continue to make progress reducing operating expenses. Bob will further discuss our financial results in more detail shortly.

Turning to our software and services business. In our Clinical Decision Support division, we showcased in mid-June Eviti Connect solution, our evidence-based treatment intelligence and web-based oncology decision support platform at America’s Health Insurance Plans, AHIP, Institute & Expo 2019. Also during Q2, as we previously announced, we signed a substantial Eviti contract with CareSource, a leading nonprofit, multistate health plan. With the signing of this 3-year contract, Eviti Connect's total covered lives exceeds 25 million.

In addition, we released version 7.8 of our Eviti product with an enhancement called Smart Regimen Search, which expedites the entry of treatment plans via intelligent regimen driven drug matches. For our NaviNet payer engagement solution, in Q2 and also at AHIP, we showcased NaviNet Open, our secure, multi-payer platform that lets payers and providers exchange vital administrative and clinical information. We've released a number of enhancements to our NaviNet Open authorization application, which enable our health plans to offer more configuration options. These include reducing the need for manual intervention via phone and fax processes and saving providers time managing their authorization requests, speeding up delivery of care.

Also in Q2, we launched the NaviNet API Gateway, which allows our partners to interact directly with their API in a standard method, reducing the reliance on custom integration methods and enabling payer flexibility for their provider networks.

And for our Connected Care product line, in Q2, we showcased DeviceConX, HBox and VitalsConX to Europe's eHealth decision makers at the 2019 HIMSS and Health 2.0 European Conference where we participated in the first-ever U.S. Pavilion.

In May at Vitalis, the largest e-health event in Scandinavia, we presented our latest connected care solutions and sponsored the Intelligent Hospital Pavilion where we demonstrated our latest DeviceConX 5.15 medical device integration solution.

In Q3, we entered into a memorandum of understanding with ASCOM to provide our Denmark client increased visibility of their device parameters. Our combined capabilities provide clinicians with increased visibility of intelligent alert notifications, driving more informed decisions at the point of care. This benefits our entire customer base by closing digital information gaps and allowing for the best possible decisions throughout the hospital ecosystem.

Turning to our Sequencing and Molecular Analysis business. 136 total tests were ordered in the second quarter. This includes 86 GPS Cancer and 50 Liquid GPS tests. The lower number of total tests was expected and reflects our newly implemented billing policy that will limit the number of tests performed without reimbursement from a covered health plan or the patient directly.

In addition, we have ceased commercial sales of our Liquid GPS test product in favor of performing the study to measure the clinical utility of the AR-V7 analyte. We'll continue this study while also pursuing other strategically aligned clinical studies that support our liquid biopsy platform and that we hope will yield more unique and targeted products for the company in the future.

On the science and medical fronts in Q2, scientific teams from NantHealth and NantOmics presented at both ASCO and AACR, along with collaborators from Virginia Commonwealth University, University of California, San Diego and Duke University.

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 second quarter of 2019, revenue grew approximately $3.7 million or 17% to $25.7 million from $22 million reported in the same quarter of the prior year. Sequentially, revenue was up 8% in Q2 compared with Q1 2019.

Our largest revenue category, SaaS, grew approximately 13% in Q2 to $18.3 million from $16.2 million a year ago. This was mainly driven by organic growth as well as attainment of new customers.

Q2 Sequencing and Molecular Analysis revenue was approximately $491,000, down from $924,000 in the same quarter of the prior year. This decline was primarily driven by lower volumes as we implemented a new billing policy to collect cash upfront for nonreimbursed tests. We expect a continued decline in this revenue category.

Q2 revenue from our Connected Care products grew 72% to $5.6 million from $3.3 million in the same quarter of 2018 and was up 60% sequentially from Q1 2019. As we have mentioned before, revenue from this line item often varies from quarter-to-quarter due to the timing and completion of Connected Care implementations, but a big portion of the increase in Q2 stems from added software licenses recognized in the first half of 2019.

Q2 gross profit of $15.9 million or 62% of revenue increased compared with $11.5 million or 52% of revenue in the same quarter a year ago. The gross margin improvement was primarily due to changes in product mix as our continued growth has been spurred by the growing software-related businesses.

Q2 total operating expenses declined 2% to $24.8 million from $25.3 million the prior year second quarter, reflecting our continued cost management efforts. On a non-GAAP basis, operating expenses declined 15% to $18.5 million from $21.8 million.

For the second quarter, net loss from continuing operations was $14.7 million or $0.13 per share, which improved from $21.8 million or $0.20 per share in the prior year second quarter. On a non-GAAP basis, net loss from continuing operations, which excludes the losses from our related party equity investment of $2.2 million and intangible asset impairment charge of $4 million and a gain from a change in the fair value of the bookings commitment liability of $1 million, among other things, was $4.4 million or $0.04 per share, down from $11.1 million or $0.10 per share for the second quarter of last year. In Q2, we divested our Assisteo product line incurring a loss on the sale of $582,000.

Finally, cash and cash equivalents were $7.1 million at June 30, 2019, compared with $12.4 million at the end of our first quarter, representing a net usage of $5.3 million. We continue to manage our cash position and have not drawn on our $100 million line of credit.

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

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

Robert Jaffe, [5]

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

Thanks, Bob. Operator, we've completed the prepared portion. We're now ready to open up the call to questions. Operator?

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) We now have a question from Brandon Couillard from Jefferies.

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

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

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

Just starting with GPS. I guess I was under the impression that your new approach to trying to collect more cash upfront for those cases where you didn't have reimbursement went into place in prior periods. Can you just tell us when that went into effect? And then perhaps give us an update on your status with the FDA.

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

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

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

This is...

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

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

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

Brandon, this is Bob. Go ahead, Pat.

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

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

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

No, No. It's okay. I think, Bob, I was going to say maybe you go ahead and give them the update, and then I'll talk about the update. Yes.

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

Bob Petrou, NantHealth, Inc. - CFO [6]

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

Sounds good. So the policy went into place the beginning of the Q, so it was April. And so this reflects, I think, that change and as we've stated prior, we expect this going forward. I think the way that I'd like to think about it is that if you compare it Q-over-Q or even compare it to last year, you'll see that actually the revenue number, although it's down, from a percentage basis, is only down slightly compared to the volume of cash.

So the other way to think about that, obviously, is the revenue per test has gone up significantly. And as we said, we expect that. We're not focused necessarily on driving significant revenue from this at this time while we're waiting approval. Once we have approval, we can I think drive that back through the market.

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

Patrick Soon-Shiong, NantHealth, Inc. - Founder, Chairman & CEO [7]

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

And then maybe -- well, let me give you, Brandon, a little bit of the update on FDA status. So we just had another meeting recently with the FDA and we're getting -- I got -- received responses from the FDA. And just to confirm, the test that we're doing is a tumor mutation burden test. So what will be exciting and completely novel about the tests that we have generated, unlike the current tests in the market where the test in the market is just taking a panel of genes and then extrapolating the tumor mutation burden to 20,000 genes based on a 500-plus panel, we are measuring actually the actual tumor mutation burden of the entire 20,000 genes and going backwards to look at the tumor mutation burden of the 500 genes and on top of that, comparing that to tumor normal. So what's exciting about this is it will be probably the most accurate tumor mutation burden test. The FDA so far is very supportive in -- of our filing. They've asked us to provide more information, which we have. And we are hopeful and anticipate us within the next quarter to get good news.

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

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

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

Okay. Then you just touch on any plans you have for financing with about $7 million of cash on the balance sheet. Would you expect to draw down on that $100 million revolver here in the coming months?

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

Patrick Soon-Shiong, NantHealth, Inc. - Founder, Chairman & CEO [9]

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

We've obviously put -- putting the budget together and then Bob can speak to that, Bob Petrou. But I think the -- is that we've not only managed the cash very well. For the first time in the history of the company, the software business is not just cash flow positive but it's profitable. So I think the good news is that we have the $100 million line of credit. So it's not an issue in terms of running and operating the business.

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

Bob Petrou, NantHealth, Inc. - CFO [10]

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

Yes. Yes. It's Bob here. We don't expect to draw on that through this quarter and managing it accordingly through Q4. So expectation in the short term is that we won't draw on those funds for now.

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

Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [11]

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

Any chance you could help us with directionally, perhaps OpEx and cash burn expectations for the back half?

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

Bob Petrou, NantHealth, Inc. - CFO [12]

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

On OpEx, again, we should see some marginal decline more to the divesture of the product line Assisteo that I'd referenced earlier. So there will be a bit of a decline. But again, at the end of the day, we're continuing to manage and invest where it makes sense. So I don't foresee it growing substantially, but I don't foresee it declining. So I think we're somewhere in the realm of where we are now through the latter half of the year.

And on the cash side, again, my expectation is we will have a small cash burn through this quarter, but fairly small in -- through next quarter. We will get to lower levels but again, continue to manage accordingly through the rest of this fiscal year.

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

Operator [13]

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

And there are no further questions at this time. I'll now turn the call over back to our management.

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

Ronald Allen Louks, NantHealth, Inc. - COO & Director [14]

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

Thanks, operator. Thanks, everyone, for joining us today. We look forward to sharing our progress on our next scheduled conference call. Thanks again for joining us today. Have a great weekend.

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

Operator [15]

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

This concludes today's conference call. You may now disconnect. Thank you so much, and have a great day.