Response Genetics' CEO Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: Response Genetics, Inc. (RGDX)
by: SA Transcripts

Response Genetics, Inc. (NASDAQ:RGDX)

Q2 2013 Results - Earnings Call Transcript

August 8, 2013 10:00 AM ET

Executives

Thomas Bologna - Chairman and Chief Executive Officer

Kevin Harris - Chief Financial Officer

Analysts

Kevin DeGeeler - Ladenburg Thalman

Operator

Good day everyone and welcome to the Response Genetics second quarter 2013 earnings results conference call. This call is being recorded. With us today from the company are the Chairman and Chief Executive Officer, Mr. Thomas Bologna and Chief Financial Officer, Mr. Kevin Harris. At this time, I would like to turn the call over to Mr. Bologna. Please go ahead, sir.

Thomas Bologna

Thanks. Welcome to our second quarter 2013 conference call. Before highlighting our financial and operational results, Kevin Harris, our CFO, will read our forward-looking statements. I would then review our second quarter 2013 financials, summarize where we are, discuss our plans for the second half of 2013 and then open the call to questions for Kevin and I. Kevin?

Kevin Harris

Thanks, Tom. In addition to the historical information, our second quarter 2013 conference call today contains or may contain among other thing, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements concerning our expectations, strategy, future operations, future recruitment, future financial position, future revenues, projected costs, prospects, and plans and objectives of management.

When used in this call the words expect, anticipate, intend, estimate, plan, may, will, believe and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expected. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to update any forward-looking statements in this conference call to reflect any change with regard thereto, or any change in events, conditions, or circumstances on which any such statement is based. Tom?

Thomas Bologna

Thanks, Kevin. Let me start by saying we are pleased with the progress we are making and expect to see the results of the many changes we have made in the last three quarters, beginning to materialize in the third quarter with the momentum accelerating into the fourth quarter.

More specifically, we expect to see our DX sales increase steady despite the much publicized headwinds that our industry has experienced from the challenging and rapidly changing reimbursement environment.

I will come and [warn] the reimbursement environment as well as where we are building our sales force and marketing organizations. I will also highlight some of the new and exciting initiatives that we are about to launch.

First, let’s focus on our Q2 2013 financial results. Our gross margin came in at 49% for the second quarter or higher than anticipated and over 52% for the six months ended June 30, 2013.

As I recall, I believe in our last quarterly conference call, I noted that we expected our gross margins to be in the mid-40% range, which is consistent with that others in our business. Our second quarter gross margin of 29% compares quite favorably to our second quarter 2012 gross margin of 37%.

Simply put our Q2 2013 gross margin increased by 12 percentage points over the same quarter in the prior year and that was in the phase of an ever challenging reimbursement environment. I believe that level of progress suggests that our relentless pursuit of operational efficiencies and having our cost well under control is producing the results expected.

From my perspective I believe we are heading in the right direction and leveraging our infrastructure quite well.

Let’s now turn to our revenue line. As with the first quarter of this year, our pharma revenue of $ 2.2 million for the second quarter of 2013 was again more than doubled than the second quarter of last year. And even with that significant increase similar to the first quarter of this year, our second quarter 2013 pharma revenue would have been even higher had we not had to push out some work related to companion diagnostics bridging project that we are doing for GSK. More specifically, it would have been higher by approximately $600,000. Nevertheless, we appreciate that our pharma business can be lumpy at times and we expect to realize that revenue later in this year.

Let’s now turn to our second quarter 2013 DX revenue. I am pleased to note that it increased by almost 10% relative to the second quarter of 2012 which we believe is quite good, again especially in this challenging 2013 reimbursement environment. Relative to the first quarter of this year revenue was off slightly approximately 2% as we install new leadership for our field sales organization, subsequently fine tuned our territory alignments and further shifted our selling efforts related to the groundwork for closing large accounts based on new programs that we fully expect to implement in the second half of 2013 which I will highlight shortly.

Let me try to put all this into perspective in a broader sense. In the first half of 2013 we were and I might add still are in a regressive sales and marketing building mode and yet our overall revenue increased by nearly 40% over the first six months of 2012 with our pharma revenue more than doubling that of the first two quarters of 2012 and our DX revenue increasing by 9%. And even with that had the reimbursement environment not been so challenging uncertain, we believe we would have achieved more growth.

The bottom line is this, first, we believe that we are dealing quite well in this rapidly changing investment environment and we let our revenue and gross margin achievement speak for themselves. Secondly, I believe we should think of 2012 as the year we built our operational infrastructure into a cost effective and link group which is producing results we expected. And 2013 as we are building our sales and marketing organizations, with a strong and cost effective selling machine. I will talk more about our pharma DX revenue, but first let me comment on our bottom line results. We are quite pleased with the bottom line especially when we compare to where we were just a year ago. Relative to the second quarter of 2012, our second quarter 2013 operating loss decreased by over $2.7 million or approximately $1.3 million over a twofold decrease. In addition, our first half 2013 operating loss decreased from over $5.8 million in 2012 to approximately $2.1 million, nearly a threefold decrease.

And with that, let's now turn to what we are doing and will continue to do to grow the top line for our pharma and DX businesses. Beginning with pharma as noted in our previous quarterly conference calls, we appreciate on our pharma business relatively lumpy and our goal is to mitigate that characteristics as much as possible. We believe that the best way to accomplish that goal is to continue to support our existing customers very well while also selectively adding new business. I believe we continue to maintain a strong can do working relationship with our largest pharma account GSK, while also providing high service levels to our other customers.

That said, in order to selectively grow as part of our company more aggressively we made a decision to both strengthening our existing fund organization, which we did and to also add a field sales person to focus entirely and bringing a new pharma business. That recruitment process is well underway. We're also pleased to announce that last month we extend our agreement with (inaudible) Pharmaceuticals and expect 2013 (inaudible) revenues close to or possibly in excess of $1 million. In fact, based on the agreement just signed, we should expect at least $650,000 of additional [Tahlequah] revenue in the second half of this year.

Looking beyond our larger existing customers, we're also pleased to begin discussion with a [large] pharma and in fact we recently completed a small project with them. While we're on the topic of large pharma, we also additional work from our largest client, namely GSK. Lets now move on to the DX business and as I noted in our last quarterly conference call, we have entered in to a very exciting phase of DX business for a number of reasons. The most important because we're well along in building our sales and marketing partners.

Let me update you on where we were and where we are today. In the first quarter of 2012, our marketing program was essentially not existed. We begin to drill down of the marketing department in the first quarter of this year. We hired a head of marketing and in the second quarter we added a marketing content manager to help implement several new programs which I will describe in a bit. But perhaps the most immediate need we had was to building infrastructure to better direct and manage our sales force and better understand our customer base.

Unfortunately, until recently we did not have a system in place to provide us with appropriate metrics to understand and direct our people and the business. That began to change when we implemented our state of the art (inaudible) System which I highlighted on previous quarterly calls that went live in February of this year. I am also pleased to announce that in July of this year, we implemented salesforce.com that I might add and I believe we implemented it in record time.

Going forward, we expect to begin implementing several new market initiatives which are well under way including but not limited to introducing a completely new web based portal to enhance the customer experience and a technology marketing program that we believe will be the best in our space. Additionally, we will be introducing several new assets as well as updating our messaging and branding, we expect all this to be again happening in the third quarter. As I noted in our previous calls, we’ve had the full investment marketing sales and that’s exactly what we are doing.

Let’s now shift to our efforts to pursue managed care contracts. Prior to this year, non existent to response genetics, the world of healthcare and laboratory testing is I believe changing at lightning speed and managed care is becoming more important by the day. It’s important for a number of reasons, and its more than just easy quality business, it's also important solidifying our ability to collect payments in a more timely and predictable manner. I believe we have and continuing a good progress and securing contracts with managed care organization.

We probably announced our press releases on signing contracts with (inaudible) and we believe we should expect to see additional contracts we will sign. On [assured] and surely not the least important part of our plan to increase sales is to have what we believe are the best and brightest sales personnel on our services. With that in mind we are in to the process of building what we believe is needed to get the job done. We started the year with nine field sales people and in the second quarter with six new people and made a decision to build out the sales force approximately 25 response genetics account executives supported by a BPO sales who joined the company in late April of this year. Two regional sales (inaudible) plus a third that we are in the process of recruiting and of course our marketing and operations departments.

Additionally in the second quarter we added the position of directors of strategic accounts to work and close key accounts while also providing additional sales support training that’s needed. Lastly we have also initiated an ongoing field training program complete with the tools that are needed to consistently enhance sales force productivity. Simply put I believe we have come a long way in transitioning thus far from a very scientific driven company to one that is both scientifically and commercially driven to deliver top line growth coupled with operational efficiencies to produce solid and sustainable bottom line results.

I would also like to comment on one other area of our organization that is focused on top line growth, I am referring to our business development activities. We believe strongly that today and tomorrows healthcare environment provides rollup opportunities for companies such as our and that approach coupled with organic growth is what is needed in today’s rapidly changing healthcare environment. That said we are well aware to pursuing opportunities based on the (inaudible) established criteria, logic and feasibility. I would prefer to not comment beyond what I just said, but rather note that we appreciate skill and are moving forward accordingly.

Before opening the calls to questions let me make a few overall comments; first and foremost from our perspective and as I believe I noted on previously quarterly conference call, 2013 is the year of growing the top line RGX business and we believe we are well on our way putting in place what is needed to make that happen and we expect to gain momentum in the second half of this year. Secondly, we view 2012 as the year of the turnaround and 2013 as the year of driving forward growth. In 2012 we wanted to accomplish three key objectives, mainly strengthen our balance sheet which we did, deliver the results GSK expected and needed to move some of their new drugs forward which we believe we did very well and third and certainly not the least build out a strong management team to take response to the growth face, which we believe we also accomplished quite well.

We also believe we are well on our way in implementing what needs to be done to grow our company aggressively and in doing so create ever increasing shareholder value. And with that operator, please open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Kevin DeGeeler from Ladenburg Thalman. Your line is open and you may proceed

Kevin DeGeeler - Ladenburg Thalman

Hey, few more quick questions here first of all just a update from the last call, can you talk a little bit about CMS reimbursement, your CMS sort of caught up from you have been paid for some of the test that were performed in the first quarter that do you think was a bit slower than usual?

Thomas Bologna

Sure Kevin

Kevin Harris

Yeah, sure. As we do for everybody, of course payment have been slower out of CMS, certainly slower than we have experienced in 2012 and slower than we’d like that said, we are actively engaged with Palmetto on a regular basis and kind of working through what I would say that can be technical issues in the changing of the coding structure and getting through what's necessary to get all these collection. So we feel confident that we've done an analysis of our receivables based on communications that we've had and that what we have is collectible and that we'll start seeing a pick up in those collections over the next few months.

Kevin DeGeeler - Ladenburg Thalman

Thanks, terrific. And Tom could you talk a little bit more about the technology for all that you plan to launch here in the third quarter, specifically what are some of the characteristics in general that you think perhaps might have providers in the market aren’t fully tapping in on hand, presumably you are going to try to incorporate into that program?

Thomas Bologna

Sure, I think one of the things that’s really happened over the last year or so, historically at Response, the company has really focused on the oncologists. Over the last 12 months or so, we really started focusing more on the pathologists and of course still maintain a very, very good relationship with the oncologists and what we learned is we really didn’t have the tools that we needed to work with pathologists quite well.

So over the last, I would say, six months or so, we spend quite a bit money putting in a new automated systems that will allow us to establish what we believe is a pretty cool pathology parking program which will allow us to do a TCPC concept and of course communicate that back and forth with them quite nicely also combined with some other initiatives that we have already initiated for the pathology partnering program. So we believe very strongly that we will have a nice competitive program and make it a bit more easy for our sales people going forward.

Kevin DeGeeler - Ladenburg Thalman

When we think about menu expansion, should we think about Response’s remaining focus primarily on the molecular side? Do you think there is a place out there for sequencing days or even [IC]? How do we think about menu expansion in kind of underlying your different niches, particularly as you expand market in the pathologist side?

Thomas Bologna

Yeah, that’s a good question. We are clearly going to expand the portfolio in our existing areas namely lung, colon etcetera but we are also going to be start envelope, we will be (inaudible) but we also beyond that a bit and as far as the technology base, we will also expand both in the FISH areas as well as in RT PCR.

It was really interesting with the company if we look at where we were maybe 12 months or 18 months ago, we were striping RT PCR, we’ve now expanded into FISH, we are looking at some other technologies, we will also be moving at some point in time with the next gen sequencing but quite honestly, with this reimbursement environment looking rather careful to make sure that the areas we expand into are reimbursable and make good logical sense.

I mean the world quite honestly we believe it changed pretty dramatically in January of this year. And we feel we are just well positioned and frankly we anticipated some of things that would happen and again a lot of these we expect to be materializing in second half of this year. So we are pretty jazzed up about what's going on.

Kevin DeGeeler - Ladenburg Thalman

Okay. Got it, that very helpful, maybe just wanted two more quick for housekeeping, you mentioned sort of pilot program you are doing with a large pharma, just more generally when we think about business development on the pharma side, should we anticipate future relationships most likely sort of being, sort of [bail] sort of contracts where you do some work and then you do a little more work or what you are hearing from clients either you are going to be preferred partner where you are doing meaningful work, or you are not going to go to a next level?

Thomas Bologna

That’s a good question. Our business model is pretty unique in the sense that we manage both the pharma business and the Dx business. And the way I view the pharma business, it’s like one very, very large client. So I chose my words carefully to say selectively, I know some copies go on and get a hold on a pharma account that’s not our strategy.

The way we work is I like to have a handful of pharma accounts and we just do a lot of high quality work for them and we are their preferred vendor. I mean that’s what we do with GSK and good I mean good examples, last year we shifted a lot of resources over the things we could have been doing on the Dx, satisfy the needs of GSK and when I say, we are into the process now for securing another GSK type account and I really can’t elaborate further that we done some work for this particular company.

But again, these things take time. It takes time you need to build a level of trust and understanding, but we are pretty close. You know on the search levels, we provide our pretty extra ordinaries to these companies. So we like to be what we recall their preferred account. I think a little bit it is certainly like a shopping center where we have one anchor and now we are looking for another resource to use a metaphor a bit.

Kevin DeGeeler - Ladenburg Thalman

And may be one last one from me. On the managed care contracting side, obviously, an important attribute as we move forward to kind of get that visibility but we think when going under contract seeing some downward pressure on reimbursement and exchange for their visibility on getting paid. How should we think about, generally metrics with regard to, in the current environment which already has reimbursement head winds, you are finding up may be even slightly larger step down in reimbursement levels just how do we think about the impact the two potentially offsetting forces?

Thomas Bologna

Correct me if I am wrong Kevin, we really don’t see that as a problem. I mean, the way we manage these accounts, we understand them quite well. We know what they are looking for. We always been competitive even when we are out of network, we weren’t afraid to give them what they really needed. So I think the real key reason for getting into these contracts is like I said in my opening remarks, it's just it makes the billing process a lot more easy and efficient I mean it's just much, much easier, especially with the…

Kevin Harris

Yeah. Being in out of network allowed in the pricing that we experienced is already factored in a kind of contractualization analysis and we’ve to factor in as an outer network lab that’s got a lot of situations, peers are going to have or patients are going to have a larger deductible on a network benefit. And so we have to factor in the collectability of that into our overall revenue. So as we get in contract, even if there are a few outline players that will acquire some sort of discount, we will more than make up for that in a fact that we're going to collect the 100% of what we've build versus having to look at it as an analysis of when do I think I'm going to collect overtime, based on all of the various types of policies that people can have within these plans

Operator

Thank you. (Operator Instructions)

Thomas Bologna

Okay. Thank you. Since there are no more questions let me close the call with a brief summary. In the last six months of 2013, we expect to see the growth we have been building towards in our Dx business begin to materialize even further and gain momentum.

In 2012, we met the goals we told you about in previous quarterly conference calls, namely building our balance sheet, providing quality service to our top customer GSK and by building the strong management team, we need to take Response for the next level.

I believe we kept our commitment to our investors. We now attend to increase shareholder value by aggressively pursuing growth for the remainder of 2013 and beyond. And with that, I really like to sincerely thank you all for listening and of course for your continued interest in our company. Thanks again.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.

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