CombiMatrix Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 7.13 | About: CombiMatrix Corporation (CBMX)

CombiMatrix (NASDAQ:CBMX)

Q2 2013 Earnings Call

August 07, 2013 11:00 am ET

Executives

Matthew Clawson - Partner of Investor Relations Group

Mark D. McDonough - Chief Executive Officer, President, Chief Commercial Officer and Director

Scott R. Burell - Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer

Analysts

Bruce D. Jackson - Lake Street Capital Markets, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the CombiMatrix Corporation 2013 Second Quarter and 6 Month Financial Results Conference Call. As a reminder, today's call is being recorded. [Operator Instructions] It is now my pleasure to turn today's conference over to Mr. Matt Clawson of Allen & Caron. Sir, you may begin.

Matthew Clawson

Thank you, Andrea, and good morning, everyone. Welcome to CombiMatrix Corporation 2013 Second Quarter Results Conference Call. With us this morning are CombiMatrix's President and CEO, Mark McDonough; and the company's Chief Financial Officer, Scott Burell.

Earlier this morning, CombiMatrix distributed a news release that summarized its financial results for the second quarter ended June 30, 2013. If you have not received a copy of the news release or you want to be added to the company's distribution list, please contact our office at (949) 474-4300 and we'll send you a copy or add you to the list.

I've been asked to remind you that today’s presentation and answers to questions in the Q&A portion of the call will include forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to be materially different from those anticipated.

For a list and description of those risks and uncertainties, please see the CombiMatrix’s filings with the Securities and Exchange Commission. CombiMatrix does not assume any obligation to update or revise any financial projections or forward-looking statements made today. Furthermore, this conference call contains some time-sensitive information and is accurate only as of this call today, August 7, 2013. Copies of CombiMatrix SEC filings are available online from the SEC or by clicking on Investor Relations on the company website.

With that, it's now my pleasure to turn the call over to CombiMatrix President and CEO, Mark McDonough. Good morning, Mark.

Mark D. McDonough

Good morning, Matt, and thank you. And thank you, all, for joining us today. It's great to be able to report on what continues to be a very exciting time at the company. In Q2, we had another solid quarter. And then to cap off that commercial progress, we announced the Sequenom partnership on August 1.

We have a lot of things to be very encouraged about right now. First, the recent Sequenom announcement is exceptional news for us in a number of ways. As we noted in that press release, our goal is to become the premier specialty laboratory for chromosomal microarray analysis for prenatal testing. Having a collaborative partner like Sequenom is very rewarding and marks an important step toward achieving that goal.

It is also a validation that our processes, people and science meet the high standards of a large organization. Again, the entire team is thrilled that Sequenom has selected us for this important partnership, and we look forward to making it beneficial for both organizations.

To give you an idea of the potential impact of this arrangement, let me walk you through some of the basic numbers. As of the end of Q2 2013, Sequenom reported that they are currently at an annual run rate of approximately 150,000 NIPT tests. The current clinical literature estimates that between 3% to 5% of these tests will report a positive finding. Each one of those positive results is a candidate to reflect the microarray. Will we get all of these? No. But even with the modest amount of this growing population, it could easily add significantly to our run rate as the relationship moves forward and evolves.

Please note that the commercial ramp from this relationship is expected to start slowly and deliberately to make sure the systems are all set, as the sales teams create new protocols. There's also training to be done at both organizations, but we are encouraged by the commitment of resources from Sequenom. We believe this is a true partnership. We expect revenues from this relationship to begin to ramp at the end of Q4 2013 and into early 2014.

In addition, there are many other important things going on here at CombiMatrix. But first, let me summarize the results of the second quarter. Let's start out with our revenues. Our CFO, Scott Burell, will get into more detail in a minute, but overall, our total revenues of $1.5 million are up 15% over the second quarter of 2012, and up over 20% year-over-year for the first 6 months. Most importantly, however, we once again had record prenatal microarray testing volumes, up 152% over the second quarter in 2012, and 159% year-over-year for the first 6 months.

When we changed our business model last year and made prenatal testing our core testing service, we looked at prenatal testing as the most significant metric and we continue to ramp volumes in this area. Today and going forward, we have continued to evolve our technology and business development efforts to focus more sharply on microarray testing in our specialty, deemphasizing some of the low-value, low-margin tests that we have performed to date. We will be focusing on the microarray testing volumes as a key metric going forward.

Overall, our balance sheet is the best it's been in more than 18 months. We ended the second quarter with $5.7 million in cash, and we are back in compliance with NASDAQ listing requirements. In addition, our cash used in operating activity is lower by $300,000 compared to the second quarter of 2012, and $400,000 compared to the first quarter this year. These are all important accomplishments for us, and we will continue to be judicious in our investment expend going forward.

We announced 2 other events during the quarter that promised to be important to us in terms of extending our business network and creating revenues. First, we expanded our strategic partnership with Pathology Inc. and became their exclusive provider of chromosomal microarray tests for the Products of Conception testing market. Second, we were granted conditional approval from the State of New York to perform miscarriage management testing on patient samples from the state. New York is obviously a huge state, and broader expansion in the northeast region has been an important part of our strategy. This approval allows us to sell directly to customers and to seek new distribution partnerships to leverage our sales force. This is another huge opportunity for us.

Of course, there are certainly difficult challenges ahead, particularly in terms of the reimbursement environment. As we reported in our release, we achieved record cash reimbursement during the second quarter. But those results would have even better and our revenues higher if the reimbursement landscape had not been shifting in the first part of the year. The changes in the reimbursement landscape this year are due to what is referred to as a code shift in reimbursement. This code shift has caused uncertainty in the market, and as a practical matter, has pushed out bill collections. I'll have Scott elaborate on the impacts if this in a few minutes.

The changes in coding are affecting everyone in the diagnostic sector, not just us. But we do feel that we are fortunate in the sense that steep reimbursement cuts have been much more concentrated on oncology and Medicare testing, places with -- where with our business model, we're not as exposed to others or as we used to be.

With that, I'd like to turn the call over to Scott for more detail on our financials. Scott?

Scott R. Burell

Thanks, Mark, and good morning again, everyone. I'd like to begin my comments today with an overview of our operating statement, followed by a discussion our balance sheet and cash flows, before turning the call back over to the operator for questions.

Starting with our operating results. Total revenues for the 3 months ended June 30, 2013, were $1.5 million, comprised of $1.45 million in diagnostic services revenues and $55,000 of royalty revenues. This compares to $1.3 million in total revenues for the second quarter of 2012, comprised of $1.25 million in diagnostic services revenues and $54,000 of royalty revenues, representing an overall increase in total revenues of 15% quarter-over-quarter.

We ran a total of 1,485 billable diagnostic tests in the second quarter, compared to 1,459 tests in the second quarter of 2012. And we billed 125 different customers in the second quarter of 2013 for the tests we performed, a new record for CombiMatrix, compared to 116 customers in the second quarter of 2012, and 119 for the first quarter of this year, which was our previous record.

As previously mentioned by Mark, continued adoption of microarray tests in the prenatal market space, which for purposes of today's discussion, includes both prenatal testing, as well as miscarriage management testing, is driving our overall testing mix towards a significantly higher concentration of microarray tests during the second quarter than in prior periods. We believe this trend will continue in future periods, and as a result, we are now focusing primarily on microarray testing metrics. We billed 1,106 microarray tests during Q2 2013, representing a record quarter for CombiMatrix.

Total microarray tests billed increased by 25% from 888 microarray tests billed during the second quarter of 2012, an increase sequentially by 7% from 1,031 microarray test billed during the first quarter of 2013. With that said, we have another strong quarter in the prenatal side of the business. Second quarter prenatal microarray revenues grew by 152% as compared to Q2 of 2012, and year-to-date, by 159% over the prior year. Strong volume growth drove the overall revenue increase in this market. Whereas declining volumes from oncology sales, as well as lower volumes from certain pediatric markets, resulted in an overall microarray revenue growth rate of 19% in Q2 2013 versus 2012, and year-to-date, by 20% over the prior year.

Although prenatal microarray volumes increased sequentially by 18% from the first quarter of 2013 to the second quarter, prenatal microarray revenues remained virtually unchanged at $835,000 in both periods. The reason for this is that a few of our non-contracted payers have issued noncoverage determinations of the new microarray billing codes, which we fully implemented during the second quarter of 2013.

As is widely known in the molecular diagnostic space, new molecular billing codes published by the American Medical Association became effective in January of this year. The Center for Medicare & Medicaid Services has delayed the pricing of the new codes, and this has resulted in delays by certain payers in updating their internal schedules for the new codes as well. Other payers had accepted the new codes -- that have accepted the new codes are now requiring additional documentation to support the medical necessity of the test performed, which, for those payers, has lengthened the payment review and reimbursement process.

Due to the combination of these disruptions, we felt it most prudent and accurate to lower our net expected revenue from certain payers for microarray test billed during the second quarter, thereby resulting in essentially flat prenatal microarray revenues from Q1 to Q2 despite higher microarray volumes. Our billing staff is proactively identifying and working closely with these payers to minimize disruptions to claims processing. Also, our medical team continues to provide the overwhelming clinical data supporting microarray as superior to traditional testing methodologies to those payers that have issued noncoverage decisions at this point.

Despite these challenges, and as reported in today's release, we achieved record cash collections of $1.5 million during the second quarter, thanks in part to the diligent efforts of our billing and collections team. Year-to-date, 2013 total microarray volumes increased by 19% from 1,804 billable microarray tests performed in 2012, to 2,137 billable microarray tests so far in 2013. However, microarray revenues have increased by 20% to $2.8 million in 2013 from $2.3 million in 2012, due primarily to our market shift to prenatal array testing while deemphasizing oncology array testing, which is reimbursed at significantly lower rates than our prenatal microarray business.

As the trend towards greater concentration of prenatal microarray testing continues, we expect our overall average revenue per test to also increase, resulting in higher average revenue per test billed and improved operating margins in future periods.

Operating expenses for the 3 months ending June 30, 2013, were $3 million, versus $3.3 million in the comparable 2012 period, representing a decrease of 9%. The decrease was driven primarily by cost reductions executed in May and June of 2012, where we reduced headcount across all functional areas of the company, as well as related operational costs and expenses. Year-to-date, operating expenses of $6.2 million were lower than the comparable 2012 period by $731,000, or 10%, primarily due, again, to lower headcount and cost-reduction efforts for the past 6 months of 2013 compared to 2012.

Our net loss decreased to $121,000 and $169,000 for the 3 and 6 months ended June 30, 2013, respectively, versus $2 million and $4.4 million in the comparable 2012 periods. The decreases were partially driven by higher revenues and lower operating expenses previously discussed, but were primarily due to the noncash warrant derivative gains incurred as a result of mark-to-market derivative accounting for the warrants issued in our fourth quarter Series A Preferred Stock financing.

Under generally accepted accounting principles, the warrants issued to the investors of the Series A financing were recorded as derivative liabilities at fair value, with changes in fair value recorded as nonoperating gains or charges in our consolidated income statement each reporting period. Due primarily to certain warrant exercises during the first and second quarters of 2013, the value of the derivative warrant liabilities decreased by $1.4 million and $3.3 million during the second quarter and 6 months ended June 30, 2013, respectively, resulting in the corresponding gains for both 2013 periods.

It is likely that we could recognize substantial noncash charges or gains in future periods, depending on a variety of factors, including the changes in fair value, whether future anti-dilution adjustments occur, or whether the warrants are ultimately exercised for common stock, and thereby, eliminating the derivative liabilities altogether.

As previously reported in June of 2013, our shareholders approved the sale of a Series C convertible preferred stock and warrants to purchase common stock to 2 institutional investors in a private placement transaction. Closing this transaction in the second quarter resulted in noncash deemed dividends totaling $1.2 million, resulting in overall net loss to common stock of $1.3 million for the 3 months ended June 30, 2013, versus $2 million in the comparable 2012 period. Combined with similar activity in the first quarter from Series B and A dividends, our 2013 year-to-date net loss to common stockholders was $2.1 million versus $4.4 million in 2012.

Now turning to our balance sheet and cash flows. We ended June 30, 2013, with $5.7 million in cash compared to $2.4 million as of December 31, 2012. Our net cash flows used in operations were $1.2 million and $2.8 million for the 3 and 6 months ended June 30, 2013, compared to $1.5 million and $3.1 million in the comparable 2012 periods. Higher revenues, record cash reimbursement and cost-reduction efforts have all contributed to the overall improvement and cash burn for all periods presented.

Adding to our cash balances during the second quarter was the execution of the combined $2.4 million Series C financing, as well as $1.4 million from the exercise of certain Series A warrants during the period.

Combined with our first quarter financing activities and warrant exercises, we have received cash proceeds from Series B and C financings and warrant exercises totaling $6.4 million net of offering-related costs paid through June 30, 2013. As a result of these financing activities and improved operating cash burn, we now project having sufficient cash resources to last us into the third quarter of 2014.

Finally, we ended June 30, 2013, with $8.6 million in total assets, $1.7 million of current and long-term liabilities, excluding the warrant derivative liability of $1.2 million, and positive stockholders' equity of $5.7 million. As reported in today's release, by achieving $5.7 million of positive stockholders equity as of June 30, we believe that we have now satisfied the NASDAQ listing requirement for minimum stockholders equity, and we expect to officially regain compliance with this listing requirement after filing our upcoming 10-Q for the second quarter of 2013.

In addition, as a result of the appointment of Robert Hoffman to the company's Board of Directors, NASDAQ notified us on July 22 that we had regained compliance with the requirement to have a majority of independent directors, thereby resolving this listing issue as well.

And before going back over to the operator, I would like to turn the call back over to Mark for some additional comments.

Mark D. McDonough

Thank you, Scott. As mentioned earlier, we all feel very good about our recent accomplishments and where we stand right now. We just had another good, solid quarter of progress and growth where we grew our core testing volumes by triple digits. And we follow up the quarter with the Sequenom partnership announcement that we believe is a significant milestone for us. We feel quite optimistic about where we stand now and our prospects for the rest of the year in 2014. CombiMatrix is in a great spot and we intend to drive value for all its shareholders.

Now I'd like to turn the call back over to the operator for questions. Andrea?

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Bruce Jackson with Capital Markets.

Bruce D. Jackson - Lake Street Capital Markets, LLC, Research Division

So with the Sequenom agreement that you've got in place right now, how does the transfer pricing work?

Mark D. McDonough

So basically, how the process is going to work is they're going to reflex tests to us and we're going to handle the billing. And then, we will pay them a fair market value for the processing fee per marketing and handling specimen.

Bruce D. Jackson - Lake Street Capital Markets, LLC, Research Division

Okay. Are they going to -- is their sales force going to be actively marketing your tests, and are you providing them with any marketing support?

Mark D. McDonough

Yes. So we believe they have, I think, most recent is 88 people in the field, which is a significant enhancement for our team. And we'll be doing training of their folks at their -- at a meeting they're going to have here in a couple of months. And their team is actually coming into a meeting we're having next week to train us on their approach and their tests and detail as well. So there's going to be mutual training and co-marketing of the requisitions and the kits, which we think is an important milestone for us.

Bruce D. Jackson - Lake Street Capital Markets, LLC, Research Division

Okay, great. Then, in terms of the reimbursement and the covered lives, where do you stand right now, just overall, in terms of the number of insurance carriers that are reimbursing you for the tests?

Mark D. McDonough

Yes, so from our recent announcement, Scott, we're about 60,000 covered lives.

Scott R. Burell

I think it was 60 million.

Mark D. McDonough

Or 60 million, yes. 60 million covered lives, so 20% of the population of the United States.

Bruce D. Jackson - Lake Street Capital Markets, LLC, Research Division

And then you -- I assume that you're going after some of the people who are not reimbursing the tests right now and get -- trying to get some better decisions out of them?

Mark D. McDonough

Exactly.

Scott R. Burell

Yes, indeed. Well, there's a full-court press on that and it's not just with CombiMatrix, as you're aware of, Bruce. It's an industry-wide issue that people are dealing with right now. But we are -- we do feel fortunate at this point, primarily as a result of exiting oncology last year. On the Medicare side of the space, we're aware of companies getting hit really hard, not just with noncoverage determinations of certain codes, but also just with vast reductions in pricing of additional testing. And as you know, we've exited that. So we have little to no-Medicare exposure currently. The tests certainly, on the pediatric side, are standard of care, there's very strong data supporting the microarray tests for prenatal and miscarriage management. So we're -- I think long term, the prospects are good for good reimbursement, but we're all kind of dealing with these challenges right now.

Mark D. McDonough

And just to expound upon that, just a detail, though, because we did talk about our 150k shortfall, is we are addressing, payer by payer, those that are -- what's the word? Giving us a hard time with noncoverage decisions and putting together clinical dossiers for them so that we can tick them off one by one. So reimbursement is a huge part, as Scott mentioned, of the second half of the year 2014 strategy.

Operator

[Operator Instructions] And gentlemen, it appears we have no further questions today. With that, I'd like to turn the call back over to management for any final or closing remarks.

Mark D. McDonough

We appreciate everyone's time and interest today, and thank you for joining us on the call.

Operator

And with that, once again, ladies and gentlemen, that does conclude today's call. Thank you for your participation and have a great day.

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