MELA Sciences Management Discusses Q4 2012 Results - Earnings Call Transcript

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MELA Sciences (MELA) Q4 2012 Earnings Call March 5, 2013 4:30 PM ET


Joseph V. Gulfo - Chairman, Chief Executive Officer and President

Richard I. Steinhart - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance, Treasurer and Secretary


Greg Chodaczek - First Analysis Securities Corporation, Research Division


Good day, ladies and gentlemen, and welcome to the MELA Sciences 2012 Fourth Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes.

This presentation includes forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. These statements include, but are not limited in -- to: in our plans, objectives, expectations, intentions and other statements that include or contain words such as expects, contemplates, anticipates, plans, intends, believes, assumes, predicts and variations of such words or similar expressions that predict or indicate future events or trends that do not relate to historical matters. These statements are based on our current beliefs or expectations, and are inherently subject to significant known and unknown uncertainties and changes in circumstances, many of which are beyond our control.

There can be no assurance that our beliefs or expectations will be achieved. Actual results may differ materially from our beliefs or expectations due to financial, economic, business, competitive, market, regulatory and political factors or conditions affecting the company and medical device industry in general, as well as more specific risks and uncertainties facing the company, such as those set forth in its reports on Forms 10-Q and 10-K filed with the U.S. Securities and Exchange Commission. Factors that might cause such differences include whether MelaFind achieves market acceptance or becomes commercially viable.

Given the uncertainties affecting companies in the medical device industry, such as the Company, any or all of these forward-looking statements may prove to be incorrect. Therefore, you should not rely on such factors or forward-looking statements.

The company urges you to carefully review and consider the disclosures found in its filings with the SEC, which are available at and at

I would now like to turn the conference over to your host for today, Mr. Joseph Gulfo. Sir, you may begin.

Joseph V. Gulfo

Thank you, Mary. Good afternoon, everyone, and thanks for joining us for MELA Sciences' fourth quarter 2012 conference call. We've now completed our initial 9 months on the market, having begun our controlled and deliberate stage product launch in March of 2012.

I'm pleased to report that the second half of our first year, beginning in October, found us significantly escalating the pace of signing up new dermatology practices and placing systems, consistent with our overall plan.

In particular, we have expanded our geographic reach within our target markets of the U.S. and Germany, and MelaFind is being well received by both key opinion leader and "in the trenches" dermatologists in busy and productive practices. We are gratified to hear about the positive clinical experiences and benefits of using MelaFind from these dermatologists.

As many of you know, MelaFind is our breakthrough noninvasive and objective automated point-of-care system for use when a dermatologist chooses to obtain additional information for a decision to biopsy clinically atypical pigmented skin lesions with one or more clinical or historical characteristics of melanoma.

On today's call, I'm going to give a brief overview of our fourth quarter accomplishments and then turn the call over to Richard Steinhart, our Chief Financial Officer, for a review of the financials, and then open up the call for questions.

I'm thrilled to report that the fourth quarter was our best to date, with recognized revenues of $122,000 and cumulative deferred revenues of approximately $303,000.

We ended the year with 115 signed user agreements, 95 of which were installed and 20 pending installation. We had over 100 dermatologists that -- in which we provided user agreements or we considered highly interested dermatologists that were actively considering acquiring MelaFind. Thus, we saw an increased cadence and intensity of commercial activity in the fourth quarter that has continued into the first quarter.

Significant achievements in the fourth quarter include: One, rolling out medical peer-to-peer videos that explain how best to use MelaFind directly from experienced MelaFind users who are seeing excellent clinical results.

Two, hiring additional territory managers and practice support managers -- we formally called them system operations specialists -- in new regions, including Texas and California and in Germany. At this time, we have 8 territory managers in the U.S. and 4 in Germany, and we have 5 practice support managers in the U.S. and 1 in Germany. We changed the name of this team because they're now focusing on practice-wide adoption of MelaFind as we transition from a placement-focused phase to a usage-focused phase.

Number three, rolling out various tools to promote patient awareness and usage in office literature, posters, tearsheets and other things.

Number four, signing Rpr, our marketing communications agency that is highly experienced and singularly focused on dermatology and skin care.

Number five, receiving Cleveland Clinic's designation of MelaFind as a top 10 medical innovation for 2013 based on its significant clinical impact, higher probability of commercial success and significant human interest.

Number six, MelaFind appearance and discussion on the national TV show The Doctors as well as local news stations by new dermatologists. It was also considered a top 4 medical hope for 2013 by Fox News Channel.

And number seven, completing the simultaneous installation of 7 MelaFind systems in a very large practice with over 20 dermatology care providers, including 10 dermatologists and 11 nurses and physician assistants.

I'd really like to spend quite a bit more time on this last point, describing the experience of this practice.

Rather than provide the practice with 25 uses of MelaFind per system at placement, which would have amounted to 175 uses, we partnered with them on a melanoma detection campaign. We had a 2-week lead time from the point that the contract was signed to when the systems were to be placed. Working with the practice, we seized this opportunity to demonstrate a new model of practice-wide commitment from the start.

Our internal marketing team worked alongside the practice's office staff to create and roll out of specific tactics to drive patients into the practice for this week-long melanoma detection campaign. We trained their entire staff, including the receptionists and personnel responsible for scheduling appointments, on the technical and medical use of MelaFind during week 1, and then we were present to continue training during their practice-wide MelaFind melanoma detection campaign during week 2.

During the 1-week training period and 1-week campaign, 344 lesions underwent full MelaFind analysis. 26% of the lesions were designated as low disorganization by MelaFind versus just 10% on the pivotal trial. 120 lesions were biopsied, including 7 that had a low disorganization reading, all 7 of which were benign.

Of the 113 biopsied lesions with high disorganization output from MelaFind, 1 invasive melanoma, 1 severely dysplastic nevus and 1 atypical melanocytic proliferation were detected. These 3 lesions would qualify as melanoma and pre-melanoma from the pivotal trial.

In addition, 5 moderate dysplastic nevi, 4 of which the histopathologist recommended re-excision, were deducted by MelaFind. The dermatologists reported that several of these lesions, including the invasive melanoma, would not have been biopsied if not for the MelaFind information.

In 1 patient during this campaign with a history of melanoma, MelaFind was used on 8 lesions, for which the dermatologist was "on the fence" with respect to her biopsy decision, MelaFind designated 4 lesions as low disorganization and 4 lesions as high disorganization, including the invasive melanoma and severely dysplastic nevus.

Experience with this practice is the largest series of lesions we have seen outside former clinical studies that we have performed. And we, as well as the dermatologists, were quite excited to see the excellent clinical performance in the real world. This series is being written up by the practice for publication.

With the success of MelaFind introduction at this practice, we changed our approach. We are no longer being passive in the medical conversion process. We now provide 1 to several days of use of MelaFind with our staff on premises for continued intensive training. We also now provide medical, technical and practice integration optimization training from the start.

Since doing this, we have observed several practices with quicker uptake and more significant usage right from the start. We expect that trend to continue as we reinitiate practices at which MelaFind has been installed previously as well as new dermatology practices.

We specifically select dermatology practices who are willing to commit from the start to a practice-wide commitment.

To give a little flavor of what we are experiencing so far in 2013, MelaFind has been demoed and discussed on national news programs such as CBS This Morning, Fox & Friends on the Fox News network; we just completed filming of The View, with a scheduled air date later in March. Additionally, we have seen many local news shows paying particular attention to dermatologists who are adding MelaFind into their practices. Recently, MelaFind was also profiled in the online magazine the Examiner, with a readership of roughly 11 million people.

In addition, our pace of signed user agreements in MelaFind placements has increased steadily since January 1, and we have seen significant amounts of usage at a few practices that have fully rolled out the in-office patient awareness tools that we have provided and have fully integrated MelaFind into their practice. We are seeing -- we are experiencing similar things in Germany as well.

At last look across all customers for whom we have system data, we are seeing an average of roughly 2 MelaFind uses per active day, with an average of 7 active days per month. The most prolific users average closer to 3 uses per active day and average 13 active days per month.

Our dermatologist customers are telling us that patients are increasingly presenting to their practices asking about MelaFind and finding dermatologists who have MelaFind from the MelaFinder, our dermatologist locater tool that is found on our website,

We literally just got back from the 71st American Academy of Dermatology meeting, during which a poster on new MelaFind data was presented, and MelaFind data were presented at 10 podium presentations as well. We experienced tremendous traffic at our exhibit, with over 650 dermatologists engaging us to learn more about MelaFind, 350 of which received in-depth demonstrations lasting 10 to 15 minutes on average. Several dermatologists signed use agreements on the spot, and the others obtained additional information to share with their partners and practice managers at home as they seriously consider obtaining MelaFind systems for their practices.

We hosted a separate after-hours off-site MelaFind event, at which over 75 dermatologists and their staffs, along with dermatology and skin care media, attended.

We were able to drive pre- and post-conference coverage in the Miami area through a skin cancer detection effort hosted by one of our customers in Florida.

Additionally during the meeting, there was significant interest in MelaFind for national and local media coverage, with editors and producers meeting with our customers at our booth throughout the meeting and during various other activities. In fact, 3 of the top 5 dermatology trade publications and 3 of the top 10 leading women's health and beauty magazines met with our dermatologist customers at our booth. These trade and women's publications are preparing editorials and articles for the skin cancer awareness campaigns in and around Melanoma Monday in May and throughout the summer months.

We will be aggressively following up with the dermatologists that we engaged at the meeting as well as others with whom we have been having serious conversations over the last few months. There is an urgency with dermatologists to sign up soon so that they are included in the MelaFinder prior to Melanoma Monday, which is May 6, and so that they will benefit from these activities as well as other activities that we are planning throughout the summer.

I'll now turn the call over to Richard Steinhart, our Chief Financial Officer.

Richard I. Steinhart

Good afternoon, and thank you, Joseph. Total invoicing to our customers in the 3 months ended December 31, 2012, was approximately $278,000, of which $122,000 was recognized and $156,000 was deferred, bringing deferred revenue reported as of December 31 to approximately $303,000. This is compared to no revenue for the same period in 2011.

As a reminder about recognized and deferred revenue, as we have discussed in the past, we establish contracts with multiple elements of delivery and must defer a significant portion of our placement fee despite the fact that we generally do receive the entire cash payment on installation. As a result, deferred revenues reflect the timed recognition of the installation fee revenue over the term of the user agreement, which is usually 2 years.

Research and development expenses for the fourth quarter were $1.3 million versus $2 million reported in the same period last year. The decrease in research and development expenses is primarily attributable to the reallocation of certain expenses to properly reflect commercial operations and reduced R&D expenses at our contract manufacturer Askion, which is located in Germany.

Selling, general and administrative expenses were $3.9 million for the fourth quarter of 2012 versus $2.5 million reported in the same period last year. The increase is a result of several factors. First, there was a reallocation of certain expenses from R&D, as we discussed, into selling, general and administration to properly reflect commercial operations. In addition, there have been significant additions to our direct sales force. Finally, there have been increases in our incremental marketing costs and our indirect costs associated with the placement of MelaFind systems into doctors' offices in both the U.S. and in Germany.

Our net loss for the fourth quarter of 2012 was approximately $6.1 million or $0.19 per share versus a reported loss in the fourth quarter of 2011 of $4.5 million or $0.17 per share. For the entire year, the company had a net loss of $22.7 million or $0.74 per share compared with $20.4 million or $0.80 per share in 2011.

As of the end of the fourth quarter, the company had cash and cash equivalents of approximately $7.9 million. We added approximately $23 million in cash and commitments to the balance sheet in 2013 with the use of our at-the-money, or ATM, product; $8.8 million in gross dollars or 4.7 million shares; the equity financing we completed in February of $7.9 million gross on 6.1 million shares.

In addition, I'm pleased to report that just this afternoon, we received a letter from Hercules Technology Growth Capital informing us that their investment committee has formally approved the $10 million debt financing facility that was outlined in their February 5 term sheet to us that we have previously announced. This financing remains contingent on the satisfactory completion of loan documents. We anticipate receiving $6 million on the formal closing, with $4 million upon the successful completion of certain sales and revenue targets.

Also of note, we retired the ATM registration, having raised $14.4 million of the $20 million available to the company under this program.

Finally, it's important to note that we continue to be focused on expense control despite significant ramp-up and expansion activities. We continue to balance the need to invest in building our market opportunity and revenue growth with a keen focus on controlling cash expenditures.

I'd now like to turn the call back to Joseph for concluding remarks, and then we'll open it up for questions.

Joseph V. Gulfo

Thanks, Richard. We're pleased to report the many achievements we have reached in the fourth quarter.

Our goal in the first 12 months of the launch was to turn a company into a business, and I believe we achieved that goal in just the first 9 months that we were on the market in 2012.

We did many critical things in 2012: One, we engaged many practices in the U.S. and Germany and trained over 300 dermatology caregivers in proper clinical usage of MelaFind. Two, we sought to understand how best to optimize MelaFind integration into the practices. Number three, we strengthened the medical affairs team and developed new messaging for the clinical support of MelaFind. Number four, we drove demand and efforts to sign in place a critical mass of dermatologists in order to have a firm foundation to drive our business as we begin now to focus on system usage. Number five, we established a leading commercialization team comprised of sales, marketing, customer and technical support with the proper leadership in place to achieve our goals. Number six, we optimized the number of territory managers and practice support managers in the field. Number seven, we provided a reliable quality supply of MelaFind systems. Number eight, we implemented critical business capabilities, such as CRM and ERP, which helps us streamline processes and improve efficiencies. Number nine, we produced additional clinical data demonstrating the performance and medical utility of MelaFind. Ten, we witnessed real-world positive clinical and practical experiences with MelaFind. Eleven, we worked on customized marketing programs with some customers to drive the utilization at an accelerated pace. Twelve, we initiated a relationship with a new agency of record, Rpr marketing Communications, who continue to focus on building patient and MelaFind brand awareness as a key tactic in driving system usage. And finally, we commissioned a new survey that reinforced the lack of skin cancer awareness amongst Americans.

We're continuing these activities and these trends in the current quarter, building on our accomplishments as planned. We look forward to finishing our first full year on the market strong and beginning Phase II of our launch with a focus on system usage and patient mobilization with a more robust base of customers.

With respect to what you can expect over the next 12 months, we envision revenues increasing in a choppy but generally upward-sloping fashion and expect to see recognized revenue of $250,000 per month up to as high as $500,000 per month somewhere late in the second half of the year. Our monthly revenue run rate is primarily dependent on 2 factors: one, the cadence at which we continue to place new systems, but to a much greater effect, utilization rates of systems in the field.

We are balancing our investments to continue to broaden our footprint and increase our installed base while also educating, training and working with our clinician customers to seamlessly integrate MelaFind into their practices and drive usage.

We're also pleased that in February, we announced the combination of equity financings and the signing of a venture debt commitment, which, assuming all requisite milestones are achieved, brought the pro forma cash balance to roughly $30 million.

In conclusion, we're confident in our people, the power of our strategic plan, our product, and we continue to execute with passion and purpose.

I'll now open up the call for questions.

Question-and-Answer Session


[Operator Instructions] And our first question comes from Mark Turner [ph] from Morgan Stanley.

Unknown Analyst

I just have a question. With the last few conference calls that we've had and the number of signed agreements slowly inching towards that 100 mark, and now we're slightly past it, why would the comments come that you want to change from a placement phase to a management phase?

Joseph V. Gulfo

Well, we always planned on a 2-phased launch, right? So Phase I was really focusing on the razor, if you will, that we have a razor-razorblade model. And focusing on the razor meant a few things. One, getting the right messaging about it down, learning about perceptions of the dermatologist given the messaging and adjusting, learning exactly how to communicate with the customers and place them effectively and have them understood by the whole practice. So that really was Phase I, again, focusing on the razor. Phase II, to really drive the business is, once we had a good meaningful base, now focus on MelaFind being used more, right? So we'll always want to put more and more systems out, but the real driver of the business and what's really critical to turning a business into a successful business is showing that the systems -- each system in place is being used more and more, because that's really what drives the success of the product in catching melanoma so that it doesn't kill 1 American an hour, in making it a successful use of the doctor's time from a practice perspective and making our business successful. So the usage really satisfies all of the goals we wanted to achieve when we set out: change this disease and build a successful business.


Our next question comes from Greg Chodaczek from First Analysis.

Greg Chodaczek - First Analysis Securities Corporation, Research Division

Just a couple of quickies. Joseph, can you go through those statistics or metrics again about the average user compared to the so-called power user, days per month and numbers per day? Can you go through those again for me, please?

Joseph V. Gulfo

Yes. So what we're able to do because we get data from the systems, right, HIPA-compliant, we don't see user -- patient identification, things like that, but we get to see use data from the systems. So the last data we had from as many system as we had showed -- for which we had these kind of data on, that we saw an average of roughly 2 MelaFind uses per active day. And across the whole body that we had information on, an average of 7 active days per month. The most prolific users averaged more like 3 a day -- averaged 3 a day, rather, and they had twice the number of days, 13 active days per month. Okay, so those are the numbers that I mentioned. And we had a couple of -- more than a couple, a few examples of people using it quite a bit, so I expect those anecdotes to grow and grow and then be reflected in the actual "numbers" as we proceed.

Greg Chodaczek - First Analysis Securities Corporation, Research Division

And are you seeing that once a placement is done that these numbers are growing and will continue to grow, or do you think these are numbers that you think will be there for a while?

Joseph V. Gulfo

I don't think we have enough data yet. I mean, we really only started really expanding in October, quite honestly, that's when we really planned our -- internally, that's when we really blow it out, that's when we hired the bolus of territory managers. I just don't have enough data yet on that. I do know this: when practices begin to use all the tools that we've rolled out, we see an impact immediately, okay? So I don't think, Greg, just by them having it and experiencing it, it would organically happen, or it wouldn't happen as quickly as we clearly want it to happen. I really do see a dramatic difference in people that -- in dermatologist practices that employ the patient outreach and tools that we give them. And I have a very interesting anecdote about that. So we were at that practice that I highlighted, where we placed 7 in 1 shot and really did this shock-and-awe initiation approach, which is the new model. And that requires identifying practices that are ready for the practice-wide commitment, not just trying to spray as many out there as possible. And I went down there, many of us went down, and they had a TV crew there. And I remember going into an exam room and I put up the poster, I put up the in-office poster with the lesions and educating patients on it, because I thought it would be a good backdrop for the news shot. So low and behold, they do their -- everything I talked about, we went back down to visit them and review their data with them with the whole practice and say, "Hey, look what you got here." And then we started -- now once they saw medically what it did, and we then started talking, okay, how do they really impact their patient? How do they really, really make this happen? So then, we just started talking to them about these tools we provided, and one of the doctors spoke up, and she said, "You know, that will work, because I run 2 exam rooms simultaneously." And the exam room where the MelaFind poster is up that by the way, I put up, right, for the TV shoot, she said, "The exam room, when patients are in that, they ask for MelaFind. In the exam room that there isn't a poster, they don't ask for MelaFind." So it's a very, very funny story, but dramatic in that, yes, once you start doing these kind of things, patients ask for it, and we've seen that now in other practices that right off the bat started putting the posters up or the tearsheets or the other tactics that our commercial team is rolling out. So I really think that's the driver. But we couldn't get that without the medical. I'm still -- I'm so focused on medically this working and people seeing it. I just don't want to go in there and be talking about business, right?

Greg Chodaczek - First Analysis Securities Corporation, Research Division

Right. And another question, and I'm not sure if you have enough data yet, but once a doctor or dermatologist uses this and could have missed a melanoma and was, I don't know want to say saved by the MelaFind, but the MelaFind helped make that decision to biopsy or vice versa, do you see usage going up? And I know on one of the morning shows, you had a very famous dermatologist from New York City talk about how she wouldn't have -- or was going to biopsy something but did not because MelaFind said it was low, and for this dermatologist to admit that is quite a piece of information. But is there a ta-dah! moment for these dermatologists once they have it in their hands?

Joseph V. Gulfo

Yes, but I don't -- I can't quantitate it. You're asking for quantitation, and I can't do that yet. But let me just tell you that another couple of things have happened this weekend. So we had 2 dermatologists -- again, in the early days, we focused on the key opinion leaders, and I knew every customer, right, in the first few handfuls, right? And then it got to a point where the commercialization team took over and did it the right way. And we had -- it was incredibly gratifying this weekend. Two dermatologists came to the booth, and I never met them before. One from -- I don't think I should say, but one from the middle of the country said -- he went over and thanked us for giving him a MelaFind -- he paid for it, by the way, but his words were "giving," and he said, "I found 6 melanomas I wouldn't have found without this." And then another one came from the Northeast, again, someone I never met before and said a similar thing, that he's now found 2 melanomas, 1 on the face, he wouldn't have found without MelaFind. And I will tell you, not hearing that from people we know, hearing that from strangers that I didn't -- I had no hand in teaching about the product or whatnot, was just an incredible thing. So we'll report back on the kind of usage from those doctors. It would make sense that we would see that.

Greg Chodaczek - First Analysis Securities Corporation, Research Division

Okay. And then last one, I know I take up too much time already. But based on your statistics that you said earlier about the average dermatologist having -- using the 7 days a month, do you think that's typical for a product inside a dermatologist's office that they use it for specific days and don't use it for other days? Can you explain real quick on scheduling at a dermatologist's office and what you've seen that they only do skin exams on certain days and BOTOX on other days? Can you explain that real quick? And then I'll hang up.

Joseph V. Gulfo

Yes. I understand the question, and I don't understand that exactly. So some of them work in different locations different days of the year -- different days of the month, and that could help. And maybe they're in the other location and MelaFind is only in one practice. That could be part of it. But your point doesn't follow very well with then why the most prolific one is 13. So I don't have a good handle on that yet. I think we have a certain glimpse. But I don't want to make any decisions or change any tactics or plans until we've really effected the proper launch. And we haven't yet, right? We haven't yet gotten all of the practices using all the tools. So let's wait to see what happens when they do use it. And then, you're right, we may see something structural that only on days they're doing skin exams is that or something else only when they're in the office with MelaFind are we seeing that, and then we'll be able to optimize that situation, but I don't have enough data yet.


[Operator Instructions] Our next question comes from Jeremy Hellman from Avenue T Fund -- actually, it looks like we have no further questions at this time. I'd like to turn the conference back to Mr. Joseph Gulfo for closing remarks.

Joseph V. Gulfo

Okay, and thank you. I want to share one other story with you that happened at the very end of yesterday when we left the AAD meeting. A dermatologist from New York that we don't know came to the booth and said, on her flight down, one of the flight attendants could tell she was a dermatologist and discussed with her, her recent experience where she spotted something on her body and she presented to a dermatologist in Florida and asked about it, and the dermatologist said he or she was not concerned about it, and the word that the patient used was "dismissed": "They dismissed me." And then she didn't like it. She went to a second dermatologist who also dismissed it. She went to a third dermatologist with MelaFind. The dermatologist used MelaFind, came back high reading, biopsied the lesion, and it was a melanoma. And the flight attendant said to this dermatologist, I will now only go to a -- she called it a "MelaFind dermatologist," and I just can't say how gratified we are when we hear of these stories and how confident we are in what we have here. We have a product that is right now affecting people's lives. There is a buzz about it. There were -- is a real buzz about it at this meeting, and we're going to let that buzz really infect others and really drive the product. And that, I think is the absolute best way to proceed, and it's certainly the most noble way to proceed with an important medical product. And we're seeing the effects of our controlled, deliberate, medical first 2-phase launch strategy rolling out before us, and we're just so completely gratified by it. So we thank you for all of your support, and we look forward to continued success. So thank you.


Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.

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