U.S. Markets closed

Edited Transcript of ROSG earnings conference call or presentation 30-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Rosetta Genomics Ltd Earnings Call

Rehovot Mar 30, 2017 (Thomson StreetEvents) -- Edited Transcript of Rosetta Genomics Ltd earnings conference call or presentation Thursday, March 30, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Ken Berlin

Rosetta Genomics - President, CEO

* Anne Marie Fields

Rosetta Genomics - LHA SVP

* Ron Kalfus

Rosetta Genomics - CFO, CPA

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

Conference Call Participants

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

* Paul Nouri

Noble Equity Funds - Analyst

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

Presentation

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

Anne Marie Fields, Rosetta Genomics - LHA SVP [1]

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

This is Anne Marie Fields with LHA. Thank you, all, for participating in today's call. Joining me from Rosetta Genomics are Ken Berlin, President and Chief Executive Officer and Ron Kalfus, Chief Financial Officer.

Prior to the opening of trading on the US equity markets today, Rosetta filed its Form 20-F with the US Securities and Exchange Commission and issued a press release announcing financial results for the 3 and 12 months ended December 31st, 2016.

If you would like to be placed in the Company's e-mail list to receive future announcements, please call LHA in New York at 212-838-3777 and ask for Carolyn Currin.

Before we begin, I would like to state that some of the information discussed during this call will contain projections or other forward-looking statements regarding future events or the future financial performance of Rosetta Genomics. Including, but not limited to statements regarding the expected timing of products under development, the launch of US commercial operations, product sales and marketing plans, and comments relating to financial information.

I refer you to the documents the Company files from time to time with the SEC. Specifically, its annual report on Form 20-F and all reports filed on Forms 6-F and 6-K. These documents identify important risk factors that could cause actual results to different materially from those contained in projections or forward-looking statements.

During this call, management will refer to non-GAAP financial measures, including gross billing. These measures are not prepared in accordance of generally accepted accounting principles. The reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available in today's press release.

Furthermore, the contents of this conference call contain information that is accurate only as of the date of the live broadcast, March 30th, 2017. Rosetta Genomics undertakes no obligation to revise or update any statement to reflect events or circumstances after the date of this conference call.

And now, I'd like to turn to call over to Ken Berlin.

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

Ken Berlin, Rosetta Genomics - President, CEO [2]

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

Good morning, everyone, and thank you for joining us. Our performance in 2016 provides us with a strong foundation from which to build throughout 2017.

During the first part of 2016, our commercial team was promoting the Company's neurology and solid tumor offerings, as well as our newest assay RosettaGX Reveal, a first of its kind, microRNA classifier for indeterminate thyroid nodules, which was launched in January of 2016.

These efforts resulted in record clinical testing revenues for the Company in the amount of $9.2 million announced earlier today. As the year progressed, however, our traction which revealed the [kind of] increase at an accelerated pace, so we decided to focus more intently on its promotion to further accelerate this growth.

This increased focus led to 2016 reveal revenues of more than $850,000 with gross billings exceeding $2.8 million. Throughout 2017, we will continue to increase our focus on advancing the adoption of Reveal, while maintaining key accounts for our urology and solid tumor lines of business, all while continually assessing the profitability prospects of each of our product lines.

We have a number of initiatives underway to enhance our commercial leverage and put us in a strong position to achieve our 2017 Reveal revenue and unit growth projections. We've also continued to maintain our leadership position in microRNA-based biomarkers, and we're pleased to enter into collaborations with clinical researchers for the development of microRNA biomarkers to predict response to immuno-oncology drugs. Indentifying the right patients is critical for optimizing the use of this new class of therapeutics.

Before I go into a detailed discussion of the business, let me turn the call over to Ron for a review of our financial results. Ron?

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

Ron Kalfus, Rosetta Genomics - CFO, CPA [3]

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

We made significant progress throughout 2016 and I was very pleased to be sharing our financial results with you today. These advances strengthen our position as the leading molecular diagnostic laboratory, advance our strategy to grow revenues and puts us on a path to profitability.

Before I start, let me quickly review how Rosetta recognizes revenues from analyzing patient samples received from private patients or third distributors. We perform testing services in our east coast or our west coast laboratories and revenues are recognized in accordance with GAAP.

Namely, when delivery of test results has occurred or services have been rendered, no further obligation exists on our part, the fee is fixed or determinable and collectability is probable. These diagnostic services are billed to various payers, including Medicare, commercial insurance companies, other direct bill health care institutions such as hospitals, and to individuals.

We report revenues based on the contractual rates or in the case of Medicare, the published fee schedules. In arrangements with patients covered by Medicare, we recognize revenue in an accrual basis, recorded upon delivery of each test performed network provision to the gross billed amount, if applicable.

In arrangements with non-contracted health plans, clients, and private patients in which prior to delivery, the reimbursement rate has not been contractually set, we recognize revenues in an accrual basis to the extent that the fees are fixed or determinable by a sufficient collection history and collectability is assured. Otherwise, we recognize revenue on a cash basis.

Turning now to our financial results, let's start with a review of revenues. During the fourth quarter, clinical testing revenues reflect to the prior year period, with both coming in at $2 million. The fourth quarter 2015 included $1.6 million of license revenues, bringing the total revenues for that quarter to $3.6 million.

Revenue from our urologic cancer testing services in the fourth quarter of 2016 was $1.1 million, compared with $1.2 million in the fourth quarter of 2015, and represented approximately 53% of our clinical testing revenue.

Revenue from our solid tumor testing services in the fourth quarter of 2016 of $404,000 decreased from $726,000 in the fourth quarter of 2015, primarily due to our sales force emphasis on the Reveal introduction. Our solid tumor testing services represented nearly 20% of the total clinical testing revenues for the quarter.

Reveal revenues during the fourth quarter of 2016 were $389,000, up 38% compared with $282,000 in the third quarter of 2016. Reveal revenues represented 19% of clinical testing revenue in the fourth quarter. There were no Reveal revenues in the prior year quarter because the assay was not launched commercially until the first quarter of 2016.

On a non-GAAP basis, gross billing for Reveal during the fourth quarter of 2016 were $1.2 million, compared with $930,000 in the third quarter of 2016, an increase of 34%. Gross billings are the aggregate amounts invoiced to our customers.

Looking at full year results, clinical testing revenues for 2016 increased to $9.2 million, compared with $6.7 million for 2015. On a pro forma basis, as if the PersonalizeDx acquisition occurred on January 1st, 2015, instead of the actual acquisition date of April 13th, 2015, clinical testing revenues for 2016 increased 8%, compared with pro forma clinical testing revenues of $8.6 million for 2015.

As I just mentioned, 2015 revenues also included $1.6 million in licensing revenues, bringing total revenues for 2015 to $8.3 million or $10.2 million on a pro forma basis.

Turning now to expenses, cost of revenues for the fourth quarter of 2016 increased to $2 million, from $1.8 million a year ago. Cost of revenues for 2016 was $7.4 million, compared with $6.3 million for 2015, with the increase primarily due to higher head count at our Philadelphia facility to service the growing Reveal volume, in addition to the timing of procurement of certain lab supplies and reagents.

The gross margin on clinical testing services was 1% for the fourth quarter of 2016, compared to 10% for the same period last year, due to higher of revenues. Gross margin for the 2016 year was 19%, compared to 24% in 2015. Excluding the 2015 licensing revenues and associated cost of revenues, clinical testing gross margin for 2015 was 7%.

The increase in gross margin during 2016 is primarily attributable to cash-basis revenues associated with 2015 samples, as well as a revenue mix favoring higher-margin tests, such as Reveal and HEME FISH, which were not present in 2015. We expect margins will continue to fluctuate from quarter to quarter, as cash-basis revenue continues to be a factor.

Research and development expenses for the fourth quarter of 2016 decreased to $818,000 from $1 million for the fourth quarter of 2015. For the full year, research and development expenses increased 7% to $3.2 million from $3 million in 2015, primarily related to post-market studies for Reveal. Sales, marketing, and business development expenses for the fourth quarter of 2016 were $1.5 million, compared with $1.6 million in the prior year period.

2016 sales, marketing, and business development expenses were $6.8 million, compared with $7.4 million in 2015. The 7% decrease for both quarters and the year was primarily attributable to lower marketing, travel, and business development expenses.

General and administrative expenses for the fourth quarter of 2016 remained flat at $2 million for both 2016 and 2015. On an annual basis, general and administrative expenses for 2016 were $7.5 million compared with $7.6 million dollars in 2015.

The operating loss for the fourth quarter of 2016 was $4.3 million, which included $162,000 of non-cash stock-based compensation expense. This compares with an operating loss of $5.1 million for the fourth quarter of 2015, which included $261,000 of non-cash stock-based compensation expense, as well as a gain of $2.2 million on bargain purchase related to the acquisition of PersonalizeDx.

The operating loss for 2016 was $15.7 million, which included $859,000 of non-cash stock-based compensation expense, compared with an operating loss of $15.7 million in 2015, which included $1 million of non-cash stock-based compensation expense, as well as a $155,000 gain on bargain purchase related to the acquisition of PersonalizeDx.

The net loss for the fourth quarter of 2016 was $4.8 million or $2.73 per ordinary share, and $1.8 million weighted average shares outstanding. This compares with a net loss for the fourth quarter of 2015 of $6.7 million, or $4.39 per ordinary share, and $1.5 million weighted average shares outstanding, as adjusted for our recent 12-for-1 reverse stock split.

On a non-GAAP basis, excluding $152,000 of non-cash stock-based compensation expense, as well as $558,000 non-cash expense related to the issuance of debentures and warrants, the net loss for the fourth quarter of 2016 was $4.1 million or $2.32 per ordinary share, and $1.8 million weighted average shares outstanding.

The non-GAAP net loss for the fourth quarter of 2015, excluding the $251,000 of non-cash stock-based compensation expense, as well as the gain of $2.2 million on bargain purchase related to the acquisition of PersonalizeDx, and a $1.6 million non-cash expense related to the reevaluation of warrants was $2.7 million, or $1.73 per ordinary share, and $1.5 million weighted average shares outstanding, as adjusted for the recent 12-for-1 reverse stock split.

The non-GAAP net loss for 2016, excluding $859,000 of non-cash stock-based compensation expense, as well as $558,000 of non-cash expense related to the issuance of debentures was $14.8 million, or $8.50 per ordinary share, and $1.7 million shares outstanding.

For 2015 for the non-GAAP net loss, excluding $1 million of noncash stock-based compensation expense, a $155,000 gain on bargain purchase related to the acquisition of PersonalizeDx, and $1.6 million in expense related to the reevaluation of warrants was $14.9 million, or $11.82 per ordinary share, and $1.3 million weighted average shares outstanding, post reverse-split.

Looking now to the balance sheet, as of December 31st, 2016, we had cash, cash equivalents, restricted cash, and short and long term bank deposits of $6.3 million, and this compares with $13.6 million as of December 31st, 2015.

We used approximately $12.3 million in net cash to fund operations in 2016. We selected approximately $8.8 million in cash from clinical testing services, $1.6 million from a licensing deal signed in December 2015, and $3.3 million of proceeds from the concurrent registered direct and private placement offerings that took place in November 2016. The remaining $1.3 million from the financing were received in February.

We also continue to evaluate the profitability prospects of each of our product offerings and lines of business in order to ensure that our portfolio will allow us to reach profitability within the shortest time frame, such as the recent discontinuation of our [myelin] assays.

We believe that our current cash position, together with our near-term operations and commercial opportunities should provide sufficient resources to fund the Company's operations into the third quarter of 2017.

Looking now to our 2017 revenue and unit guidance for Reveal, we affirm our expectations for Reveal revenues to be between $4 million and $5 million, and we expect to process between 2,500 and 3,500 Reveal units during the year.

That completes the financial overview. And I will now turn the call back to Ken.

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

Ken Berlin, Rosetta Genomics - President, CEO [4]

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

The refocus of our efforts in resources primarily on Reveal, is demonstrating significant progress. In the fourth quarter of 2016, we achieved our fourth consecutive quarter of sequential growth in Reveal revenues and units as our market share continues to grow in this exciting $350 million to $450 million US market opportunity.

We executed this refocus strategy knowing that in the near-term, a primary emphasis on Reveal would temporarily negatively impact our solid tumor and urology business lines, as our sales people now are mainly calling on pathologists and endocrinologists and other health care professionals involved in the biopsying of thyroid nodules, rather than calling an oncologists and urologists.

Over the long term, we continue to believe that by winning new accounts with our Reveal offering, we will be able to expand a use of our solid tumor and urologic oncology offerings to many of those new customers. Let's turn now to what is driving the progress we are making with Reveal.

First and foremost, Reveal is a clearly differentiated product offering with demonstrated clinical benefit, ease of use, and health economic benefits that we are promoting into a market that is aware of the need for better diagnostics, thanks to the considerable educational and promotional efforts of earlier market entrance.

And our messaging, regarding the convenience and performance advantages of Reveal, is strongly resonating with clinicians within our target audience. Emerging competitive data continue to demonstrate that Reveal outperforms the competition. Specifically, with it's high negative predicted value and relatively high specificity. Two parameters that provide clinicians with confidence to rely on Reveal benign test results, so as to decide to forgo surgery.

We estimate that on average, we are saving payers approximately $6,000 per patient tested with Reveal. That's per patient tested with Reveal, not just for those patients who avoid surgery. We plan to use these data with payers to secure increased reimbursement for Reveal.

In addition to superior performance data, Reveal fits within clinical guidelines supporting the use of molecular diagnostics for indeterminate thyroid cases. And importantly, it can be as an ease of use provides significant advantages.

Remember, Reveal is the only test that allows clinicians to analyze the exact same cells that were used to make the initial indeterminate cytology diagnosis, which avoids the need for additional biopsies and also reduces the risk of sampling error, a common and significant problem with other molecular diagnostic tests.

Further supporting our sales in marketing efforts was a publication in two prestige peer-review journals of clinical and analytical validation data supporting the use of Reveal. In May, our analytical validation study was published in "Cancer Cytopathology," where it was later highlighted again as the cover of the same journal in October.

Our blinded clinical validation study of Reveal was published in October in "Journal of Clinical Pathology." We continue to conduct post marketing studies that build on this body of evidence in support of the clinical utility and health economic benefit of Reveal. And expect to continue to publish and present these data in peer-review journals and it leading endocrinology and thyroid focus medical meetings.

Earlier this year, we retrained our sales force and revamped our Reveal marketing materials. Through these efforts, along with our increased commercial focus on Reveal, we have added more than 50 new Reveal customer accounts during the first quarter of 2017.

And this month, after the entire first quarter of 2017, we achieved our strongest month and quarter of Reveal revenues and units, bolstering our confidence in our 2017 Reveal unit and revenue projections. We also initiated our first international distribution agreement with Rhenim, for the sales and marketing of Reveal in Israel, where Clalit, the largest and oldest health insurance institution in Israel, has indicated it will include Reveal in its Sick Fund.

Having the largest Sick Fund cover Reveal should enhance commercialization and market adoption in Israel. Unlike other competing assays, Reveal does not require fresh tissue. These simple logistics make it ideally suited for international distribution agreements like this one, and we will continue to pursue this strategy in order to make Reveal available to patients around the globe.

Now, for a few words about our other diagnostic product offerings. Our urology and solid tumor portfolio testing services including our best in class FISH and microRNA-based testing, provide clinicians with important information to help guide treatment decisions. The urology segment represented just over 50% of our clinical testing revenue in the fourth quarter of 2016, while the solid tumor segment represented 20% of our clinical testing revenue in the same quarter.

Our FISH testing services are best in class, with a highly competitive success rate in obtaining informative results in 98% of cases and a turnaround time of only 3 to 4 days. Our FISH technology is used for the early detection of genomic changes, which may detect cancer, measure the potential aggressiveness of the disease and identify if patients are likely to respond to specific targeted therapies.

In mid 2016, we expanded our FISH testing services with the launch of HEME FISH, a portfolio of disease-specific, diagnostic, prognostic and predicted test panels for various hematologic malignancies. As Ron reported, this high margin product provided over $250,000 in revenue in the second half of 2016 and is expected to be a solid and growing contributor to our revenue base.

Let me turn now to a brief overview of our R&D efforts. We are working on a second generation version of Reveal in an effort to improve among other things, its positive predictive value to ensure the right patients are getting the right treatment for thyroid cancer.

In addition, we recently made progress on a number of important corporate initiatives that further validate our leadership position in microRNA biomarkers. For example, we entered into a research collaboration to indentify microRNA-based biomarkers to predict treatment response to Opdivo, a leading immuno-oncology drug. This work builds upon earlier clinical research we conducted with other large pharmaceutical companies that demonstrated the potential of microRNAs as predicted bio markers in immuno-oncology.

Furthermore, through our collaboration with another academic institution in Israel, we have generated some preliminary data that suggests microRNAs can be better predictors of response to immuno-oncology drugs, than other biomarkers currently being utilized to predict response.

We plan to build on this preliminary work over the coming months, and look forward to entering into additional collaborations in the immuno-oncology biomarker arena in 2017.

So in closing, our timing and path to profitability will become clear over the coming quarters, as we have selected a pathway focused on Reveal and its significant growth prospects that we are confident will help us achieve our sales growth and profitability objectives.

We look forward to 2017 being the year of continued growth and value creation, as we build upon the initial commercial success of Reveal to increase revenue, continue to maintain key accounts in our oncology and solid tumor businesses and advance collaborations with partners to apply our microRNA expertise to bring truly personalized medicine to patients and physicians.

With that, Operator, we're ready to take questions.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions).

Paul Nouri with Noble Equity Funds.

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

Paul Nouri, Noble Equity Funds - Analyst [2]

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

What do you think your cash burn will be in the coming quarters this year?

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

Ron Kalfus, Rosetta Genomics - CFO, CPA [3]

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

I think it'll be fairly consistent with 2016, Paul. So in 2016, it was approximately $1 million a month.

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

Paul Nouri, Noble Equity Funds - Analyst [4]

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

And for the thyroid test, I see that you know, you're picking up a lot of accounts. And there's a pretty big difference between the amount that you would bill, let's say and the amount that you can actually count as revenue. That being said, are you running a fair amount of tests that you're actually not getting reimbursed on, or not getting reimbursed much on?

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

Ken Berlin, Rosetta Genomics - President, CEO [5]

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

It's a very good question. So as is typical of high value diagnostics, oftentimes, there's a lag between when you run your test, bill for it and get paid. What we've actually seen with Reveal in contrast to our Cancer Origin assay which we launched several years ago, we've actually seen payment in a more quick ramp, than we did previously.

Having said that, there's still a lag so a lot of times, we'll bill and it'll take on average 5, 6 months to get paid from commercial payers. We have other payers who pay us very quickly and very regularly at a high clip. So it's a real mix between certain payers who pay us quickly and regularly and other payers who take a bit longer to pay.

So that's the reason for the big gap between what we call gross billings and what we can book in revenues based on the revenue recognition rules that Ron explained earlier. And typically, over time, that gap narrows because you get into network, which we are working insidiously to do by filing with the various payers, or dossier.

And as well as just more experience with the payers as they learn more about the test. But so far, we're pretty pleased with how reimbursement has panned out for Reveal. It's actually exceeded our expectations.

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

Paul Nouri, Noble Equity Funds - Analyst [6]

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

And are you able to piggy back at all off of the tests that are similar in the market that seem to be increasingly covered by insurance companies?

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

Ken Berlin, Rosetta Genomics - President, CEO [7]

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

Yes, well there are actually two reasons why we've done better with Reveal than perhaps our previous offering. What is that, right? So the earlier entrance in the market have demonstrated the value proposition, particularly the value of avoiding unnecessary surgeries, which we believe our test saves on average $6,000 per patient tested because of the surgery avoidance in those cases where we find those true benigns.

So we are definitely piggy backing on those who came before us, because payers understand the value propositions, pretty easy to understand. If I can avoid unnecessary surgeries, I can save money. So that's the first thing. The second thing is, this is not the first product we've launched that's a high value test, right?

So we benefit from having certain arrangements in place like preferred provider organization agreements that allow us to get paid pretty quickly. We laid that groundwork several years ago with our Cancer Origin test. So we're benefitting from having been there before with these payers and with these agreements.

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

Paul Nouri, Noble Equity Funds - Analyst [8]

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

And the new accounts that you're taking on, do you have any idea what the proportion is of competitive wins versus they just are starting to use this test?

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

Ken Berlin, Rosetta Genomics - President, CEO [9]

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

So that's another very interesting question, right? So if you step back and you look at the market, right, so the market is estimated to be on annual basis, 100 to 150,000 cases a year. And we'll use the low end number, 100,000 because the math is easier to do that, right?

The market is penetrated, probably to the tune of 33%, right? So they're about, on average, we estimate when you look at all of the molecular testing players in this space, 33,000 tests were probably run last year. And so therefore, you'd say there's a lot of untapped market.

But having said that, for us, the low hanging fruit are those docs who've already been sold on the need to avoid unnecessary surgeries, in other words, a high negative predicted value test. And that's who we are targeting, primarily. So by and large, I would say north of 80% of our new customers are coming from competitors. There's a little bit that's coming from that large portion of the market that's untapped.

But I would say, again, an 80-plus % of the new accounts we're bringing onboard are accounts that were using a different molecular test so therefore, competitive conversions.

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

Paul Nouri, Noble Equity Funds - Analyst [10]

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

And last question, any chance that you guys are considering teaming up with one of the larger clinical labs to help distribute your test?

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

Ken Berlin, Rosetta Genomics - President, CEO [11]

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

So we are looking at various ways to increase our region frequency. And by that, I mean we have a great message with our convenience and performance advantages and we know when get in front of docs and message that, we are successful by and large at competitive conversion in a lot of cases. So we are looking at various alternatives to expand our ability to get that message out.

Including partnering with other labs, so some of our lab customers happen to have their own sales forces. So in certain cases, we will train their sales forces to get our message out so that amplifies our region frequency and gets our message out there. So that's one way we're amplifying our message.

And we are looking at other way to amplify messaging, including talking to the larger labs who have some interest in this space, who could help us get the message out more widely than we currently can.

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

Operator [12]

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

That was all the questions we have today.

Let me now turn the call back over to Mr. Berlin for final closing remarks.

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

Ken Berlin, Rosetta Genomics - President, CEO [13]

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

Thank you for joining us on today's call.

We appreciate your interest in and support of Rosetta Genomics and look forward to reporting our progress throughout the balance of the year. Have a good day.