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BG Medicine, Inc (NASDAQ:BGMD)

Q4 2012 Results Earnings Call

March 13, 2013 08:30 ET

Executives

Charles H. Abdalian, Jr. – EVP and CFO

Eric Bouvier - President and CEO

Aram Adourian, Ph.D. – SVP and CSO

Analysts

Jeffrey Elliott - Robert W. Baird

Eric Criscuolo - Mizuho Securities

Operator

Good day ladies and gentlemen, and welcome to the BG Medicine Fourth Quarter 2012 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now turn the call over to your host, Chuck Abdalian. Please go ahead.

Charles H. Abdalian, Jr.

Good morning and thank you for joining us today. I am Chuck Abdalian, BG's Chief Financial Officer. Joining me on the call are my colleagues, Eric Bouvier, President and CEO; Howard Rose, Vice President of Sales and Marketing; and Aram Adourian, Chief Scientific Officer.

Before Eric begins his formal remarks, I have two administrative details, regarding replay information for this call and forward-looking statements to cover with you. Today's call is being recorded and a replay will be available on our website. The information to access the replay is available in our earnings press release, and can also be found on our website.

As a reminder, today's call contains forward-looking statements regarding events that involve risks and other uncertainties. The company's actual results may differ materially from those anticipated by our forward-looking statements. The risks and uncertainties are set forth in the company's 10-K as filed with the SEC, as well as any updates to those risks and uncertainties filed from time to time with the SEC.

I will now turn the call over to Eric.

Eric Bouvier

Thank you, Chuck. Good morning everyone, and first let me welcome you to this call and thank you for your interest once again. We ended 2012 and began 2013 with significant momentum. Our fourth quarter Galectin-3 revenues reached $1 million and grew 60% over Q3, bringing our annual revenue to $2.6 million, a five-fold increase over 2011, which is very encouraging for the first full year of commercialization focus. At the same time, we are able to increase our gross margin quarter-over-quarter up to 70% in Q4, 67% for the full year.

We obtained the CE Mark for CardioSCORE early December, and one month after, our partner bioMérieux obtained a CE Mark for its VIDAS Galectin-3 test and has started the launch.

We completed a $12.8 million public offering in January and entered into a $12 million stock purchase agreement, which we believe will give us runway through 2015. Very shortly, finally, we expect Abbott to launch Galectin-3 in Europe.

We are pleased with the success we had in the first quarter of 2012, in realigning our strategy and commercialization to better drive sales of the Galectin-3 test, as a critical tool in the assessment of heart failure disease.

In 2012, we planted the seed for Galectin-3 growth in 2013. First, by increasing our lab providers from three at the beginning of 2012 to seven at the end of the year. Second, by targeting the hospital readmission market, with our own focused salesforce. And third, by working with our bioMerieux and Abbott Partners on furthering for their European launches.

With these important growth drivers in place, we are now executing on our 2013 plan. For example, we are working with the bioMerieux sales and marketing teams extremely closely, and focusing our effort on Germany, France, Italy, the UK, Poland, Austria, Switzerland and even Chile in South America. Chile is regulated by the CE Mark law. We are leveraging the important CE Mark installed base, which represents the majority of the 27,000 VIDAS clinical systems installed worldwide.

Abbott now; Abbott is close to get the ARCHITECT Galectin-3 test CE Mark. We are in weekly contact with them, to get ready for the launch. We all are very excited with the Abbott launch, as we will very soon have two major in vitro diagnostics manufacturers promoting and selling Galectin-3 in Europe. It will greatly increase the ramp-up of the Galectin-3 test sales in Europe, and the European hospitals and thus, almost exclusively using automated instruments to run their tests.

Our automated partner are a large part of our business model. bioMérieux and Abbott are the beginning of a three years growth of our Galectin-3 test. We anticipate that over the next three years, all four of our partners, bioMérieux, Abbott, Siemens and Alere will have launched their automated version of the Galectin-3 test in Europe and in the US.

In addition to these partners, we are seeing growing momentum in our reference labs. At this point in our commercial highlights, I will turn it over to Howard, our commercial VP, to update you on the exciting progress we are making in US with Galectin-3 through our reference lab sales channel, hospital readmission initiative we started few months ago, and the creation of our sales force. Howard please.

Howard Rosen

Thank you, Eric. By achieving $1 million in sales volume in Q4 and experiencing healthy double digit organic growth from our reference lab partners the market is starting to recognize the impact of the Galectin-3 test, as part of their heart failure risk stratification strategies. Our reference lab partner growth is fueled by increasing market adoption, and expansion of the Galectin-3 test on their risk panels, as well as their own organic growth.

Specifically, we experienced a 22% revenue growth comparing Q4 versus Q3, and 420% increase in growth comparing 2012, versus 2011. Needless to say, we are very pleased with the performance of our partners.

Now let's transition to our new commercial strategy. In January, we began transitioning our field clinical team to a direct sales model, and we have had two key account executives in place, targeting at-risk hospitals. Our goal is to have a team of six by June, and I am pleased to report that we are ahead of schedule with four representatives on the team as of March 1. We have been able to attract top talent and high performance from multiple leading diagnostics, pharma and med device companies in the cardiovascular and heart failure segments. In fact, two members on our team help launched BNP several years ago.

The focus of our key account executive team is to target hospitals and healthcare systems that are experiencing challenges with their heart failure readmissions, and are above the 24.7 CMS penalty threshold, or slightly below.

By decreasing heart failure readmissions, these systems can improve their overall AAA measures of: improving quality of care, decreasing cost, and improving patient satisfaction, by decreasing unnecessary readmissions.

We are beginning to gain increased awareness in early stage adoption from several prominent US systems, and I am pleased to report that we have gained several initial orders from new accounts since the beginning of the year, due to our new sales team efforts and partnership and collaboration with our reference lab partners.

Our Galectin-3 test is the only blood test FDA cleared available that can detect elevated levels of Galectin-3 protein, in patients with heart failure, and it has been studied in over 20,000 patients, producing multiple manuscripts. Several of them focused on heart failure readmission risk stratification.

For example, studies in both the United States and in Europe, such as the recently published analysis of the Galectin-3 in the Val-HeFT and COACH trials, highlight the increased heart failure hospital admissions associated with patients with elevated levels of Galectin-3.

This foundational clinical evidence and legitimacy provides a necessary support for my sales teams to drive our commercial strategy with our customers. Additionally, we are starting to learn about early anecdotal clinical evidence regarding the benefits of patients with a low Galectin-3 level. Specifically, we have heard from a prominent emergency department physician, that low Galectin-3 levels may support avoiding unnecessary admissions by sending patients home directly from the emergency department, versus admitting them into the hospital.

In addition, last week I had a chance to visit with a prominent cardiologist in Miami, Florida, to discuss his experience with the Galectin-3 test. He informed me that he and his partners have used the Galectin-3 test, and a third of their patients were found to have elevated levels of Galectin-3. He shared that he considers adjusting the standard up here for such patients as follows; first, he decreases the time he devotes between office visits to closely monitor their heart failure progression. Secondly, he considers adjusting pharmacological treatment, prescribing medication with anti-fibrotic effects. Thirdly, his patients receive thorough lifestyle education to control their diet, and finally, he related to me that today, fewer than 10% of the high Galectin-3 patients, whom he treated accordingly, returned to the hospital within a 30-day window.

This is a real-world example and testimony of how our customers are improving their readmission rates, by impacting patient care to get below the 24.7 CMS penalty threshold.

I am also pleased to report that our customers are in the process of introducing this standard of care, with the Galectin-3 test for other healthcare system, with the aim to decrease their heart failure readmissions by targeting patients with elevated Galectin-3 levels.

Shifting to our CPT code. As previously announced, the Galectin-3 test obtained a new analyte-specific CPT code A2777, in late 2012, for Medicare reimbursement purposes. In addition, we believe several managed care providers representing 75% of the US population are also reimbursing for the Galectin-3 tests. We also believe these managed care providers and Medicare, collectively represent approximately 140 million covered lives.

In closing, our commercial strategy is beginning to gain the early stage tailwinds we expected due to the momentum in the following areas. The introduction and initial impact from our newly formed sales team; continuous momentum from our reference lab partners in the United States; implementation of the Galectin-3 tests on several early adopters in the hospital setting; high insensitivity and demand from our customers looking for additional tools to risk stratify their patients to reduce unplanned readmissions, and finally approvals and automated product launches from our partners outside United States.

Thank you for your attention, now Eric, back to you.

Eric Bouvier

Thank you very much, Howard for those exciting news. I now would like Aram to highlight the growing body of clinical (inaudible) evidence recently published, and as well, regulatory proceedings.

Aram Adourian, Ph.D.

Thank you, Eric. We were pleased to announce earlier this year, the publication in two top tier peer-review journals, as a result of two important studies on the clinical utility of repeat serial Galectin-3 testing for patients with heart failure. In an article published in the journal Circulation Heart Failure, and the European Journal of Heart Failure and together comprising over 3,300 subjects across three independent studies, the assessment of the Galectin-3 levels, using the BGM Galectin-3 assay, demonstrated that patients who experienced increases in their Galectin-3 levels over a period of three months, had nearly double the risk of subsequent unplanned hospital admissions, morbidity, and cardiac mortality, relative to patients who did not experience changes in their Galectin-3 levels over the same time period.

Significantly, this increased risk was found to be independent of and additive to other important risk factors that are routinely assessed by heart failure physicians. Exciting new results have analyses of data from a fourth study conducted at the Massachusetts general hospital, and presented last week at the American College of Cardiology Conference in San Francisco, further collaborated these important findings.

From a clinical perspective, this [body of work] points to the significance of monitoring heart failure patients' Galectin-3 levels over time, for evidence of disease progression and impending risk.

Now I will briefly discuss the status of the USFDA 510-K submission plans of one of our automated Galectin-3 test partners, namely Abbott Diagnostics. As we have reported, Fujirebio Diagnostics, which is developing the Galectin-3 tests for Abbott Diagnostics, is preparing the resubmission of the requisite regulatory 510-K clearing submission documentation to FDA, and projects the submission to occur in the second half of this year.

Towards addressing FDAs original additional information request, and after consultation with FDA, Abbott and Fujirebio have secured access to appropriate blood specimens from a large validation cohort of heart failure patients, that were recruited solely in the United States, with multiple years of follow-up and associated outcome data. The initial Fujirebio Diagnostic submission to FDA involves a similarly large cohort of heart failure patients, but recruited primarily from European sites.

We believe that results of the present validation study and the planned resubmission will meet what is generally perceived as present in the diagnostics industry as the FDA's increasingly stringent requirements for clearances in future diagnostic tests. Back to you, Eric.

Eric Bouvier

Thank you very much, Aram. As you just heard from Howard and Aram, BG Medicine is extremely well positioned to achieve significant success with Galectin-3. The strategy to go direct, to accelerate the commercial ramp-up, is basically the right one. On the other side, our automated partners are thrilled to have Galectin-3 available on their platform, and are pushing out to get the ultimate decision underway, as quickly as possible in the US.

Altogether, with the Galectin-3 franchise, we would be generating a very high product margin, greater than 80% through a mix of direct sales, distribution partnerships and royalties from the automated partners.

As we now turn to our CardioSCORE commercial and regulatory strategy. Our strategic goal for the CardioSCORE test, as we discussed earlier, is to successfully launch it in the US and Europe as soon as we can. Our recently obtained CE Mark, will enable us to market the test in Europe and other countries that recognize the CE Mark. We are currently in active discussions with our partners in Europe, which runs the test and commercialize it. We expect to finalize an agreement soon, and we will be in Europe next week to discuss that event.

At the same time, we are preparing to launch in the US, our sales and marketing strategy for CardioSCORE, launching through our own field force and our own (inaudible).

I will now ask Aram to give you an update regarding the adjudication process.

Aram Adourian, Ph.D.

Thank you, Eric. As we have previously reported, our pivotal validation study for the CardioSCORE test as originally submitted to the FDA. It has approximately 7,000 subject cohort study, with three years of follow-up for cardiovascular events. This study is named the BioImage study. Towards addressing the FDAs additional information request on certain aspects of the BioImage study, in the context of our original CardioSCORE test, 510-K submission, and upon discussing these requests, at an in-person meeting with FDA in November of last year, is Mt. Sinai School of Medicine in New York City, is presently completing the final clinical adjudication of primary events in the BioImage study.

Upon the conclusion of this activity as Mt. Sinai, which will be completed before the end of 2013, we will continue our 510-K strategy that was discussed with FDA, and which focused on the assessments of cardiac and stroke mortality risk in the cohorts.

Concurrently, we also expect that the investigators of the BioImage study will submit the primary manuscript by the end of 2013, on the evaluation of the CardioSCORE test in the BioImage study at the neurological cohorts, to a top tier medical journal for publication.

Eric Bouvier

Thank you, Aram. As you saw in the US, our primary goal is to seek FDA 510-K clearance, we are also in the process of evaluating alternative commercialization strategies for the US market, should the FDA 510-K process become more protracted. The [entity] which is one we are evaluating.

I will now turn it over to Chuck, to update us on the financial.

Charles H. Abdalian, Jr.

Thank you, Eric. This morning, I will briefly highlight our operating results and financial position for our fourth quarter and full year 2012. More detailed financial information can be found in this morning's press release.

Starting with the financial highlights, for the fourth quarter ended December 31, 2012, product revenue from the BGM Galectin-3 test was $1 million in the fourth quarter of 2012, compared to $0.3 million last year. 2012 benefitted from a stocking order of approximately $250,000 from an international lab customer.

Product margin was 70% in 2012, up from 60% in 2011, due to an improved sales mix between reference lab providers and distributors. Total revenues, which include both the BGM Galectin-3 test, as well as R&D service revenues, increased to $1.1 million in 2012, compared to $0.4 million in 2011. Net loss in 2012 was $2.9 million, compared to a loss of $4.7 million in 2011. The $1.8 million year-over-year decrease results primarily from an adjustment of accrued R&D expenses. Net loss per share was $0.14 in the fourth quarter of 2012, versus $0.23 in 2011.

Moving from the fourth quarter on to the full year 2012 results, product revenue for the BGM Galectin-3 test was $2.6 million for the full year ended December 2012, compared to $0.5 million in 2011. Revenue growth in 2011 resulted from increased sales to our regional and national laboratory customers. Product margin improved to 67% in 2012 from 62% in 2011. As in the fourth quarter of 2012, margin improvement resulted from a better sales mix between laboratory providers and distributors.

As expected, service revenue from R&D collaborations decreased to $0.2 million in 2012, from $1.2 million in 2011, as our HRP collaboration nears completion. Total revenues for 2012 were $2.8 million compared to $1.6 million in 2011.

For 2012, net loss was $23.8 million compared with $17.6 million in 2011. The $6.2 million year-over-year increase results mostly from an increase in sales and marketing expenses, primarily, due to the market development activities for the Galectin-3 test in the US and European markets, and in part from G&A expenses.

Net loss per share was $1.18 in 2012, versus an even $1 in 2011. Cash used in operations was $21.3 million during 2012, compared to $15 million during 2011.

One note on 2012 operating expenses before moving on to financial position. 2012 included certain expenses that are not expected to reoccur in 2013. These are related to approximately $3.5 million of biomarker discovery and research costs, and approximately $2 million of G&A expenses.

At the end of 2012, we had cash totaling approximately $13.2 million. We supplemented this cash balance in January with $12.8 million from a public offering of 6.9 million shares of common stock, including the full exercise of the overallotment option. The investor syndicate included both insiders and new healthcare investors, and was nicely oversubscribed.

Simultaneously, with the public offering, we entered into a common stock purchase agreement with Aspire Capital Fund. Aspire is committed to purchase, up to $12 million of our common stock, at our option.

That concludes my financial update. I will now turn the call back over to Eric for his conclusion.

Eric Bouvier

Thank you, Chuck. The substantial progress we made in 2012 has positioned us to drive growth in 2013 and beyond. Galectin-3 tests are expected to benefit from leveraging our three business channels; first, the growth of the specialized and regional lab providers from three to seven, and the dynamism of those labs, implementing the tests.

Secondly, our US salesforce targeting Medicare readmission penalties, and finally, the anticipated continued commercial progress of our in vitro diagnostic leading partners, with first bioMérieux and Abbott in Europe.

We also except to launch the CardioSCORE test in Europe during the first half of 2013 through specialty lab partner, at the same time, we want to complete the adjudication of data from the BioImage study. This will then guide our regulatory strategy in the US.

As we continue to build, present and publish the clinical case in favor of CardioSCORE, while preparing to in the field building the market for its use and adoption, we’re now well-positioning to executing on our business model.

Let's take your questions now.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Jeff Elliott from Robert W. Baird. Your line is open.

Jeffrey Elliott - Robert W. Baird

Good morning, and thank you for all the color. I was wondering, can you provide any more color on 2013, your expectations for gross margin OpEx or cash utilizations?

Eric Bouvier

Hello Jeff, Eric speaking. In terms of gross margin, as we are developing our readmission business, of course as I mentioned in my talks, we will increase the gross margin. The gross margin has been 67% for 2012. We cannot give guidance at this stage, but we expect a significant increase of the gross margin, and as well it will come from our partners. I cannot guide you, but I will just let you know, you can expect something significant.

In terms of cash, Chuck please.

Charles H. Abdalian, Jr.

Jeff, it is - with regards to revenues and burn, it's still rather early in our commercialization to be providing guidance, and I look forward to the day when we are able to do that.

Jeffrey Elliott - Robert W. Baird

Got it. No, I can appreciate that. In the past, you have talked about working with CMS and getting a higher reimbursement rate. I know that will take some time, but I am wondering if you can update us on any update on that regard, and also yeah I think, in the prospectus you had talked about potentially having to renegotiate the royalty with the automated partners, following the issuance of the CPT code. Can you give us an update on that?

Eric Bouvier

Yeah, absolutely Jeff. Regarding the process to get (inaudible) CPT code, we are working with a well-known industry consultant and extremely closely with Abbott and Siemens as well. Those guys you know have huge experience of reimbursement in the US.

The second thing is that now we have the readmission business, we have more data, we have many things to share with CMS that we didn't have last year. I am very confident that we can get (inaudible) CPT code, and plus you know I shared this experience with other people, we face always the same issues, with for example, the [MPO] [ph] tests, and some other tests, and it took them roughly two rounds to get the right CPT code. I am quite confident that you know, we will get there.

Regarding the renegotiation with potential registration with partners, it's much too early. No test has - No Galectin-3 test has been cleared in the Us yet and as we are working at the same time on the CPT code on a short term basis, I don't expect anything to happen.

Jeffrey Elliott - Robert W. Baird

Okay. Thank you very much.

Eric Bouvier

Thank you.

Operator

[Operator Instructions]. Our next question comes from Eric Criscuolo from Mizuho. Your line is open.

Eric Criscuolo - Mizuho Securities

Good morning, just filling in for Peter. Thank you for taking my question. Just on the delayed filing for Galectin-3 expanded indication, can you provide some commentary as to what the FDA was looking for that caused the delay?

Eric Bouvier

Thanks. First of all, this indication has no impact on the revenues today. We look at it as an upside and we are working on plan to resubmit the 510-K. This is not really a top priority, on a short-term basis, and to precisely answer your question, FDA is more and more stringent in terms of sample stability or analyte stability, within a sample, meaning that when you deal with this kind of long term and chronic disease and screening tests, of course they require some real life or real time data, and we are working on some plans now, and we will update you as soon as we can. But as you understand, each unit will have a five to 10 year measurements, and [initial test] [ph] is very new, it's difficult to have real time data.

Eric Criscuolo - Mizuho Securities

Got you. Thank you for that. Then on the CLIA lab update, the buildup of the CLIA lab, can you provide any additional commentary on that?

Eric Bouvier

What we want to do, is to open a CLIA lab, it would be for CardioSCORE first and Galectin-3. If hospitals don't have any access to a lab provider or if they don't have any lab capabilities on-site, we will offer to measure Galectin-3 in our own CLIA lab. The goal is to open it by mid-year, and I don't expect huge cost for us, it’s been already factoring our cash burn procedure and our P&L and we are very excited to go this way.

Eric Criscuolo - Mizuho Securities

Thank you. Just lastly on the Galectin-3 automated test in Europe, how did the CE Mark and the launch affect demand in the region, after it was available?

Eric Bouvier

We are working very actively with our partners. I already mentioned the number of countries we are targeting now. Tomorrow there is another training session with bioMérieux with 15 product managers and believe me, I know this industry pretty well, to put together 15 product managers from different countries in the same room for one day is something for them. And I can see a huge motivation, plus Abbott is coming on-board and it’s better to have two competitors, rather than only one. Now it's getting pretty good and of course we don't have any numbers yet, but I look forward to having those numbers very soon, the next week or so.

Eric Criscuolo - Mizuho Securities

Thank you very much.

Operator

I am currently showing no further questions at this time. I will now turn the call back over to management for closing remarks.

Eric Bouvier

Thank you very much. As you understand we are well positioned now to execute on our plan. We are all extremely excited by the Galectin-3 business prospect. Galectin-3 is extremely useful from a clinical standpoint, and now we have more and more objective evidence and scientific evidence about that. On CardioSCORE, I am very excited to launch the product in Europe and in US this year.

Thank you very much for your attention, and have a good day.

Operator

Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.

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