MELA Sciences Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 7.13 | About: STRATA Skin (SSKN)

MELA Sciences (MELA) Q2 2013 Earnings Call August 7, 2013 4:30 PM ET

Executives

Robert C. Coradini - Interim Chief Executive Officer, Director, Chairman of Nominating Committee and Member of Compensation Committee

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

David K. Stone - Chairman and Member of Audit Committee

Analysts

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to MELA Sciences Q2 2013 Earnings Call. [Operator Instructions] This presentation includes forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. These statements include but are not limited to our plans, objectives, expectations and intentions and other statements that contain words such as expect, contemplate, anticipate, plans, intends, believes, assumes, predict, and verification of such words or similar expressions that predict or indicate future events or trends or 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 the 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 a difference include whether MelaFind achieves market acceptance or becomes commercially available. Given the uncertainties affecting companies in the medical device industry, such as the company, any or all 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 www.sec.gov and www.melasciences.com.

I'll now like to turn the conference over to your host, Robert Coradini, Interim CEO, MELA Sciences. You may begin.

Robert C. Coradini

Thank you. Good afternoon, and thank you for participating in today's call. This is Bob Coradini, the interim CEO of MELA Sciences. Joining me from MELA Sciences are David Stone, Chairman; and Richard Steinhart, our Chief Financial Officer.

On today's call, I'm going to give a brief overview of our second quarter activities, then turn the call over to Richard for a review of the financials. I will then provide an overview of the restructuring that we announced today and other actions that the leadership team is undertaking towards achieving commercial success of MelaFind, driving meaningful revenue acceleration and managing expenses thoughtfully with a goal to eventually deliver profitability.

Before I begin, I would like to reiterate my previous comments by acknowledging that the board and I are as concerned as our shareholders with our results to date, which have fallen below our expectations. We remain frustrated by the slow pace of system uptake and low utilization rates among dermatology practices with the MelaFind system. We are focusing intensely on addressing expanded systems placement and utilization and on managing the company's resources carefully.

Despite these challenges, the MelaFind technology is fundamentally sound, and we believe it has the potential for great success in the marketplace. With a view towards achieving that success, we are realigning our priorities and operational activities to manage cost and drive growth in a measured but achievable way.

Now to the second quarter results. Second quarter recognized revenues was $144,400 and deferred revenues totaled approximately $434,000 as of June 30. We ended the quarter with signed user agreements for 168 systems, 145 of which were installed with 23 pending installations. The quarter's revenue of $144,400 was basically flat to that of Q1. This was due in part to the company's focus on utilization at the expense of placements, as well as the roll out of a new per lesion pricing model at a lower price point.

Placements were down from the prior quarter because of management's decision to refocus the deal costs on utilization. Utilization was also generally flat from the prior period. The company rolled out a new and untested per lesion pricing model in March, which we believe caused confusion, likely resulting in lost time and productivity during the second quarter.

Although we have some sites use MelaFind over 100x per month, the average was much lower. We are highly focused on increasing the overall level of utilization.

The original pricing model was $50 per patient card, which is historically 5 lesions per session. The new pricing model charges $12.50 per lesion and results in an average revenue of about $25 per patient. Since MelaFind is a cash-pay procedure, it was anticipated that the lower price would drive additional patient volume. However, this did not occur.

We are currently in the process of reassessing our entire pricing and reimbursement strategy. Neither of these reasons for the revenue being flat is acceptable to the board or to me, as interim CEO. We are a growth company, and later, I will describe steps that we are taking to bring growth back into the equation.

Finally, before I turn the call over to Richard, let me conclude my summary of the second quarter with some good news. The month of May, as many of you are aware, is Melanoma Awareness Month. We decided to work with our customers to generate an increase in patient awareness about this growing epidemic.

According to a national survey we commissioned through Harris Interactive, 76% of Americans have never had a skin cancer exam, proving that melanoma detection is a huge untapped market for the company. To spread awareness and emphasize the importance of these exams, we began a PR program that specifically targeted patients. These activities are slowly starting to sprout green shoots of optimism even though it is still too early for it to bear fruit or harvest.

A few of our PR activities include: one, articles and editorials about MelaFind in magazines, including Self, Prevention, Redbook and Allure; two, Condé Nast Corporation hosted MelaFind at the Self magazine skin cancer screening, with 2 of our key opinion leader customers on-site to use MelaFind on every of their eligible patients; three, a multi-month targeted patient campaign on WebMD, which is the #1 source for people seeking out healthcare and wellness information.

We have seen a significant increase in traffic to our dermatologists locater tool on MelaFind as a result of this campaign. As we review our progress and success in PR activities, we will evaluate future plans to deliver more emphasis in social media. I would like to turn the call over to Richard for a review of the financials, and then I will provide comments on our strategic initiatives and perspectives going forward. Richard?

Richard I. Steinhart

Good afternoon, and thank you, Bob. Total invoicing to our customers for the 3 months ending June 30, 2013, was approximately $192,500, resulting in $144,400 of net revenue being recognized and approximately $434,000 in deferred revenue reported as of June 30. This is compared to $146,500 in invoicing, $75,760 of recognized revenue and $87,980 of deferred revenue in the same period in 2012. 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 time, recognition of the installation fee revenue over the term of the user agreement, which is usually 2 years.

Correspondingly, the cost of revenue for the second quarter 2013 was $1.4 million compared to $372,000 in the same period 2012. The current quarter represents a full 3 months of commercial activity, including 3 months of depreciation for all 140-plus MelaFind systems installed in the field. Cost of revenue is made up of the direct cost associated with the placement of MelaFind systems in the doctor's office, the cost of consumables, technical support costs and depreciation expense for the MelaFind systems placed with the customer, which does remain the property of the company.

During the quarter, we recognized a charge of $250,000 for inventory obsolescence, resulting from recent system enhancements that eliminated the need to use the individual patient exam cards, as we shifted to the electronic per lesion model.

Research and development expenses for the second quarter were $1.1 million versus $1.7 million reported in the same period last year. The decrease in research and development expenses is primarily attributable to the redeployment of certain R&D staff and associated cost to support commercial operation and reduced research and development expenses at our contract manufacturer, Askion, in Germany.

Selling, general and administrative expenses were $4.7 million in the second quarter 2013 versus $3.5 million reported in the same period last year. The increase is the result of increased marketing and sales expenses in both the U.S. and Germany. For example, company-wide, we had 28 people in marketing and sales during the second quarter of 2013 versus 14 people in the same function in the same period in 2012. The overwhelming majority of our sales and marketing staff are field-based sales and practice support personnel.

Our net loss for the second quarter 2013 was approximately $7.4 million or a loss of $0.17 per share versus the reported loss in the second quarter of 2012 of $5.54 million or a loss of $0.18 per share. At the end of the second quarter of 2013, the company's cash and cash equivalents were $15.2 -- were approximately $15.2 million.

I will now turn the call back to Bob, who will provide greater detail on our strategic initiatives that are underway, and then we will open it up for questions. Bob?

Robert C. Coradini

Thank you, Richard. We have several initiatives underway aimed at both driving the commercial success of MelaFind and rightsizing our cost structure so that we can become a profitable and sustainable business over time.

To date, we announced the restructuring to align our spending in structure commensurate with our stage of commercialization. We have eliminated a number of positions across the company, reducing our workforce by roughly 25%. As difficult as it was to say goodbye to some of our colleagues, we believe this was the prudent thing to do to preserve cash and to better match our spending with the realities of revenue generation.

We recently outlined our development strategy and associated activities, which include improvements in 3 primary areas: one, operational focus; two, marketing and commercial execution; and three, financial discipline.

I would like to provide an update on each of these objectives. On the operational front, many of the operational improvements that we are undertaking fall under the restructuring that I just highlighted. That said, we are focused on reducing the cost to manufacture and deploy systems, while also improving the user experience.

The 2 design improvements we are working on are: one, the system self test that must be done at the start of the day whenever a system is used; and two, the card designed to allow for maximum flexibility in offices that generally are already pressed for space.

On the issue of the system self test, I recently returned from visiting Askion, our partner in Germany, which is responsible for the design, test and assembly of our hand-held detectors. They are a leader in optics engineering and are working diligently to making the calibration process and self test an integrated part of the handset. We are also making progress on our wireless billing system, which allows us to gain more information and insight as to how our customers are using the MelaFind system.

Also, on the operational front, we have turned our attention to system reliability and performance to optimize our customers' experience. I have made this a priority of the R&D team and anticipate improvements in the weeks and months ahead.

On the marketing and commercial front, in light of information we have learned during the commercialization phase, we are developing a plausible and strategic plan to achieve long-term commercial success for MelaFind that includes this clear and compelling pricing formula linked to a straightforward value proposition for dermatologists.

However, price alone makes no sense if viewed by itself. Rather, price is a function of perceived value. As a result, we at MELA Sciences need to do a better job establishing and building the value proposition for dermatologists and patients alike. We are taking steps in both areas.

We are starting to establish a more formalized key opinion leader group, as well as the user advisory board. We are also stepping up the pace of publication and submission of scientific data. You will soon begin to see more posted in medical journal articles.

We recently held a symposium during the 8th World Congress of Melanoma held in Hamburg, Germany, which I personally attended. We had about 100 attendees, many of whom are considered the top thought leaders in this field. After the presentations by Drs. Hauschild and [ph] Bloom, there was a widely open discussion. While physicians were mixed and concerns were raised about specificity, one thing was clear: MelaFind is objective. The data is the data, with a sensitivity of 98.3% based on the pivotal trials used to get FDA approval. MelaFind is a tool that provides additional information and when used properly in the hands of trained dermatologists, both doctor and patient alike find it useful. So it should come as no surprise that many KOLs, or key opinion leaders, who do not yet have the system approached our booth after the symposium, seeking demos and more information, as well as a number requesting an on-site visit by the team.

And just this past weekend, in New York City, we had the Summer AAD, the academy -- The American Academy of Dermatologists meeting, where we engaged in discussions with a number of key U.S. dermatologists, some using the system and many who aren't yet.

Dermatologists, with whom we spoke, were eager to learn more about MelaFind and how it might fit into their practice. During our call a few weeks ago, I said that we would be reassessing our publication and PR approach to get information about MelaFind out succinctly and to target the dermatologists, their staff and their patients.

The dermatologists in this month's issue of Practical Dermatology, the clinical update piece is Clinical Insights written by Drs. King, Day, Nestor and Rigel. It outlines the pros and pitfalls in using MelaFind appropriately and correctly.

The weekend of July 19, we saw the emergence of a number of new stories of MelaFind, including a prominent article in The New York Times, as well as the CBS morning news report, with dermatologist Dr. Elizabeth Hale from New York University School of Medicine. And while the headlines were mixed, the articles and reports was fairly balanced, ending on positive notes in both cases.

In the case of The New York Times, Dr. Tsao, Associate Professor at Harvard Medical School and Director of the Melanoma and Pigmented Lesion Center at Mass General said, MelaFind both captures images and analyzes the likelihood of melanoma. That extra intelligence, its accuracy notwithstanding, is bound to change doctors' interactions with patients.

Dr. Tsao's clinic is participating in a post-marketing study of MelaFind financed by MELA Sciences. And he said he and his colleagues were thinking hard about how to develop a role to such new devices in informing physicians and patients. "Until now, you trusted the doctor to make the decision". Dr. Tsao said, "Now you got a three-way interaction. It's a brand new paradigm."

In the case of CBS News, Dr. Hale said, "I do mole checks several times every day in my practice. But at some point, I might use MelaFind because the technology is impressive."

After this, there were other articles that we've been highlighting MELA Sciences, including Dr. Bailin from the Cleveland Clinic, both online at cleveland.com, as well as in the newspaper. We were even featured in the August issue of Oprah's magazine, O, as well as online at oprah.com.

All of these can easily be found on our website, melafind.com. In our prior call, we shared that we recognized that favorable insurance reimbursement could have a significant impact on MelaFind's adoption. We intend to more actively focus on the issues relating to obtaining medical coverage, identifying appropriate coding and establishing adequate payment. To that end, we have began dialogue with experts in the space to gain their guidance and perspectives as to the best way to approach this.

This will take time and effort, but we are committed to pursuing this avenue. We want MelaFind to be a vital tool in the fight against melanoma and do not want patients or dermatologists to be discouraged from using it due to costs.

Several weeks ago, I shared that we will ultimately be focusing on improving commercial execution. We are looking to build, enhance and improve our relationships with the dermatology community. We are prioritizing our target list of dermatologists and their practices based on their geographic location and the proper level of support our reps and field specialists can provide.

This philosophy has guided the restructuring and as of today, we have realigned our field-based organization accordingly. The goal is to have our field-based salespeople spend more time with dermatologists in their practices. We have also created a new strategic account role here in the U.S. and staffed this with the person who has helped place systems in Germany. The knowledge bought from the other side of the Atlantic should greatly benefit us here in the U.S.

In conjunction, we are evaluating strategies to optimize selling and supporting functions to the regions within the U.S. and Germany and elsewhere. We are evaluating distributors for regions where we have no current coverage, where they could be more effective driving top-line growth.

And on the financial discipline front, we spent the better part of July assessing the team, its skills and required work that is needed to get done to turn the company around and to do so in a cost-effective way.

As I have mentioned, we executed our restructuring this week, which reduced our work costs by roughly 25%. We have also instituted salary reductions across many of the remaining roles and departments and balanced that with stock option awards to those affected. We intended to align the team to drive overall success. The company directors also agree, effective as to the third quarter, to take a portion of their director compensation in the form of stock options, further demonstrating their commitment to the success of the company.

Working with our partner, Askion, in Germany, we adjusted production schedules down considerably going forward so as to minimize the investment in parts and inventory. One of our key vendors, Askion, believes in this company and has agreed in principal to accept stock in MELA Sciences in exchange for certain payables that MELA Sciences owes to them in an effort to reduce our cash burn. We are proud to have Askion as an investor in MELA Sciences.

The bottom line is that we expect these actions to considerably cut our monthly operating burn rate from a bit over $2 million per month to approximately $1.2 million per month when fully implemented.

Going forward, we expect to realize growth in the back half of the year, which will be both modest and achievable. Despite the heavy lifting that needs to be done, we are more enthusiastic about MelaFind than ever before. There is nothing here that cannot be managed. MelaFind works when used according to its indicated label for use. The technology is robust and the cost improvements are clear.

We continue to receive feedback from customers that validates the importance of MelaFind and its success in their practices. Remember, MelaFind is the only FDA-approved optical diagnostic device for melanoma detection. There is no other device out there that does what we do and is FDA-approved.

I remain confident that MelaFind can and will become a standard of care for dermatologists in their fight against melanoma. You continue to have my commitment, as well as that of the team, that we are all working together towards this goal. With that, we will now take a few of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Josh Jennings from Cowen and Company.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Just to start off, some of your last commentary, Rob, was just about your enthusiasm going forward. And I know a lot of this call was based on laying out strategic initiatives, et cetera. But in terms of enthusiasm about the long-term utilization, adoption trends, that can be generated. Can you give us any sort of -- anything more to sink our teeth into what's driving enthusiasm and this optimism on the heels of 2 quarters in a row sequential installation declines and no uptick in utilization?

David K. Stone

Joshua, thank you for your question. It's David Stone, Chairman of MELA Sciences. You're correct, we have not yet shown an uptick in overall utilization as not being reflected in the financial results. But what we see in the field are very encouraging, individual instances of how doctors can adopt MelaFind, use them on a larger number of patients in a short amount of time and get results that are satisfying them and satisfying their patients. So the problem that we're wrestling with is how to reproduce those results day-to-day, week-to-week across all of the systems we have in the field. We have synchronized optimism. To give you a little more concrete example, as part of the melanoma awareness month, we worked with some of our customers to offer free melanoma exams for a short period of time and in that period, we saw a tremendous volume of patients move to those practices. Doctors and their staffs [indiscernible] together. [indiscernible] about units. So I think that's the approximation of what you would see if we had actually [indiscernible] the product, so this basic view of [indiscernible]. That tells us that the issue is not with an ability to use and examine and incorporate it into their practice [indiscernible] our pricing reimbursement strategy were perfectly in line.

Robert C. Coradini

And, Josh, if I could add a few comments to what David just shared. I was over, as I mentioned, at the 8th World Congress of Melanoma in Hamburg. And I would suggest that maybe you check with some of these physicians who were there and -- especially seeing the thought leaders in Germany coming to the booth afterwards -- the dialogue that we were having with them and their interest in the technology. At the end of the day, this is a tool. It's a good tool. It's a powerful tool. It's the first time that a patient can actually see what the doctor sees and thinks. And it allows you to see below the skin. It allows you to see and make a decision. And the -- in the hands of the right doctors using it the right way, as David said, we are very encouraged.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Okay. And on the reimbursement front, just in terms of your initial thrust here. Can you just talk about your confidence level that reimbursement is achievable in any timelines in terms of when that can come into play? And I have one follow-up.

Robert C. Coradini

Sure. Let me share a little bit on reimbursement. Now reimbursement is a funny thing. It can cut both ways. And speaking with a number of experts and doctors, the question is at what level can we get a reimbursement that is fair, adequate and supports the proper use of the technology for the patient's benefit. And a couple of things. There are requirements to have peer-reviewed publications. We have a number of them already. We're sorting through the various forms of whether we have enough authors and different patient population pools. All the things that the American Medical Association does when they do the coding. On top of that, we need to look at really what is the right value proposition and pricing of this unit out there. And so there are some steps we can take well before reimbursement comes out either with the insurance companies directly or in a closed system, like the Kaiser or whatever to go in. Now we have not had any conversations with Kaiser at my level, so I'm not saying that. But in past practices, we will start that conversations with those networks. And remember, I spent over 24 years in the medical device industry and there's a right way to do things and get technology adopted and out there and involved. And in Germany, on the other hand, we've actually had some reimbursement and it's very well in some other cases. And actually there, they're actually reimbursing some cases for the reports that they get because it is additional information that the clinicians base a medical decision on.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

And just a last question for me. Just an update on the post-marketing approval study -- post-marketing study. Can you talk about the design, number of patients that you need and what the endpoints are? And just -- what is the bar you need to clear and what is the update you want to see? And is there any risks to not reaching that bar?

Robert C. Coradini

Josh, without going into all the details, suffice to say, post-marketing approval studies is very standard with any new drug, any new devise from the FDA. So what they've asked for us to do is no different. Basically, they want to make sure that the claim that you have gotten from the FDA, because remember, this is a PMA device. This is not a 510(k) devise. This is PMA. So we have an approved claim from the FDA that are claims indeed withstanding the test of time. And so that's why they do a post-approval study. The exact numbers, I'll be frank, I do not have that offhand. So I can tell you this, our enrollment rates has been slow. We're supposed to have -- we have 5 sites in our PMA study, but the enrollment rates have been slow. And we're in the process of reassessing it and bringing in some outside expertise to help us in that process.

David K. Stone

This is David Stone. Allow me tell you where we have approved [indiscernible] where we ask the shareholders to provide performances for all of that in a field [indiscernible]. So we're thinking to reproduce [indiscernible]. Our feeling is this is the right -- well, it certainly has the potential to inform as well better and [indiscernible] doctors [indiscernible].

Operator

We have no more questions in queue. I'll turn the call over to Robert Coradini, interim CEO of MELA Sciences, for closing remarks.

Robert C. Coradini

Thank you. In closing, let me first start by thanking those of you who joined us on this call today. Just know that my team and I remain excited about MelaFind and the value it can offer dermatologists, their patients and our shareholders. We look forward to updating you on our progress. Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference. You may now disconnect. Everyone, have a great day.

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