Rockwell Medical's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 9.13 | About: Response Genetics, (RGDX)

Rockwell Medical, Inc. (NASDAQ:RGDX)

Q3 2013 Earnings Conference Call

November 5, 2013 04:15 PM ET

Executives

Thomas Bologna - Chairman and CEO

Kevin Harris - CFO

Analysts

Operator

Good day everyone and welcome to the Response Genetics Third 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

Welcome to our third 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 third quarter 2013 financials, provide insight into key third quarter activities and then open the call to questions for Kevin and I. In this call I will try to provide insight based on a series of questions that I as a fellow investor of Response Genetics will like to have addressed. Kevin?

Kevin Harris

In addition to the historical information, our third 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 not pleased with our third quarter financial results for one reason. Sales fell short of our expectations. However we are optimistic since we believe momentum will build in the fourth quarter of this year and throughout 2014 for two main reasons.

First sessions received for processing in October were the highest we’ve had in 2013. And secondly, despite the bump in the road that we hit in Q3, our nine months performance year-over-year is very strong, more on that later. So let’s get to the heart of the Q3 results.

First, we sincerely inspected all the changes that we have made over the prior two quarter and last year for that matter to begin to materialize in Q3. Obviously that did not happen from a financial point of view for very simple reason. Relative to the second quarter our expected increase in DX sales did not materialize.

DX sales decreased by approximately $565,000 relative to Q2 2013 and $482,000 relative to Q3 2012, and our pharma sales decreased by approximately $657,000 relative to Q2 2013 and $829,000 relative to Q3 2012. The decrease in pharma sales was expected appreciating that it’s a lumpy business. In the second quarter of this year as well as the third quarter of last year we had one time $500,000 pharma milestone payment from GSK.

Factoring in or adjusting for those payments our Q3 pharma business revenue would have decreased by approximately 7% relative to Q2 2013 pharma sales of $2.2 million and 14% relative to Q3 2012 pharma sales of $2.4 million which we believe will fall well within the characteristics of a lumpy business. I will comment more on our pharma business later. But right now I will like to focus on our DX business because quite frankly we are not going to make excuses.

In no uncertain terms we are disappointed in the financials and in hindsight we should have anticipated at least the possibility of such results, based on where we are in broadening our [core] point focus. That said I believe our below the line expenses were managed well, and those results speak for themselves.

Total below the line expenses were essentially unchanged from the second quarter of this year and the third quarter of last year. The reason for the disappointing financials is simple. They were adversely affected by disappointing sales that negatively impacted our gross margin and that loss dropped to the bottomline.

So let’s cut to the chase and start with what happened to our DX business in Q3. Did we take our eye off the ball so to speak? Were we preoccupied with other matters? Were we so much into the detail that lost sight of the big picture? This is what we believe happened.

First in hindsight, I believe we were intensely preoccupied with other matters. We consumed a good deal of internal management time with the path work asset acquisition. While I sincerely believe it was a great deal; the one that will payback very-very nicely; it took time from our focus on the day-to-day monitoring of sales and marketing programs. I will talk more about the path work deal later.

Secondly, we implemented salesforce.com in record time and in that transition we had an unanticipated lag in transferring data from our [Lymph] system that went live in mid-Q1 of this year to salesforce.com. Frankly we should have been paying more attention to the detailed metrics that were not transferred in a timely manner and in not doing so we were not aware of some subtle and not so obvious occurrences that were happening which leads me to our next point.

I believe our shift to focusing on and placing much more emphasis on potentially larger accounts at the expense of detailing our base of relatively small accounts took a bigger toll on our business than anticipated. So what do I mean by that?

Historically Response Genetics called on, for the most part oncologist, at the expense of calling our pathologist and hospitals for a number of valid reasons based on historical market dynamics. I did not think anyone will question that our market place has changed quickly and dramatically over the last couple of years and we have aggressively shifted our focus accordingly.

Some in our space would view it as a challenge, while I view it as unique opportunity, appreciating that it require rapid and to size a short term change that put more risk to immediate short term execution with the trade-off being appreciative gains in the subsequent three or four quarters.

Much of our historical business came from many small oncology accounts as we did not have the tools needed to clone the larger pathology groups and hospitals. We began changing that mix early in this year as we shifted our core point mix to what we believe and still believe is a better balance of oncology, pathology and hospital business. The timing and logic for that change was based on our ability to pursue those larger accounts and at such time that we had the wherewithal and needed to close the larger accounts.

It was in this timeframe or early Q1 in building momentum through Q3 that we began to strengthen our sales force leadership, establish our marketing department and was also the time that we made many changes in sales force itself. That said, in late Q2 and in Q3 we began dramatically shifting our mix of cost of the high volume potential accounts because we were far along in handing our sites and necessary tools needed to competitively close such accounts.

Namely we plan to introduce our state of the art and what we believe to be one of the best if not the best TCP systems in the marketplace which for the first time would allow us to effectively compete for the larger pathology and hospital accounts along with a series of new tests that would further broaden our offerings to oncologists, pathologists and hospitals.

I should also note that these plans were our top priorities and the entire company focused on them. And I am pleased to say they were accomplished, namely we introduced our TCP system in an aggressive measure and delivered manner in Q3 and introduce new assays as well in Q3. What we did not anticipate was a level or intensity of coordinated effort it took to go after new and larger accounts with such relentless focus while also detailing and maintaining our existing DX account base that is largely made up of small accounts.

As we accelerated our core point mix and focused on the larger accounts we began to win for the first time relatively good size new accounts that we did not have before. However we also began to appreciate that we were not defending our existing business and at times losing accounts but going back in and recapturing them.

The net off all of this activity as we enter a very dynamic and what I will call a transforming of shift in our customer base. I am pleased to know however we believe for the lack of a better expression that we bottomed out in this transition in July, that is our August sales were better than July and our September sales were better than August. And as I mentioned in the beginning of this call, October or the fourth or the first month of Q4 was our best month in 2013 for the number of the sessions received from processing.

With that perspective let's not turn to the big question. Namely where are we in ramping up DX sales and who should we expect in the next few quarters and beyond. We expect to see our Dx sales increase steadily and I believe we are quarter or maybe two behind where we thought we would be at this time. I will go so far to say based on our experience in Q3 we are very encouraged in our ability to compete for the larger accounts in the marketplace.

I believe it is reasonable to suggest that beginning late in Q3 for the first time within the last two or more years we have added what was needed to close large accounts and quite frankly we are doing just that.

Without going into specifics for obvious reasons I can tell you that we have closed some sizable accounts in Q3 and early Q4 and every week we are getting better making those closes in a more efficient and timely manner.

Today we are closing accounts that are orders of magnitude larger than our historical business. As we continue down this path I believe our business will become more larger sizable and equally important, more predictable and manageable. And as previously noted October of this year was our best month ever in 2013 for sessions received for processes.

Let's now turn to our financials. Our gross margin is not where we expect it to be in Q3 and that reason is simple as well. I believe we have a highly efficient cost structure that we put in place over the last 18 plus months, however with a lower than expected volume our gross margin dropped to 33%. We expect it will rebound nicely as we build momentum in closing in ever number of larger accounts plus I believe we are very good at constantly squeezing out more cost and operating efficiencies, therefore I believe we should see our gross margin rebound accordingly.

It's also important to note as I alluded at the beginning of this call that our results for the nine months ended September 30, 2013 are ahead of 2012. Total revenues are up, losses are significantly lower and our gross margin for the nine months is well above the mid 40% range.

Let's now turn our attention to what I would call key activities that incurred in the third quarter. I am going to comment and what I would classify as strategic accomplishments that we believe will yield favorable results within the next few quarters.

First we acquired the assets of Pathwork Diagnostics which I believe was once in a lifetime opportunity. We purchased for approximately $1.2 all the assets related to a highly proprietary test that in 2012 had nearly $6 million in sales. In other words we bought these assets for a 0.2 times multiple of sales and that price also included the receivables.

Over $61 million have previously been invested in Pathwork Diagnostics and we bought what we believe is a great test built on a solid and stable technology basis. We acquired all of the following, Medicare-Reimbursed and highly complementary content for our growing portfolio of solid to our differentiated oncology test; the only FDA cleared product for testing cancer of unknown primary; the most published and extensively validated molecular test of its kind. And I might add that a key publication comparing our test of IHC was published just four months ago or in July of this year.

That paper published in the American Journal of Surgical Pathology indicated that our test was significantly more accurate than IHC when used to identify the primary site of metastatic tumors with best performance observed in patients that were fully differentiated or consisted of undifferentiated carcinomas or required more than five immunal chemistry stains to make diagnostics.

We acquired a product that has the highest accuracy rate relative to competitive test. And lastly a test built on a technology base that provides an IVD or invitro diagnostics like business model to pursue international opportunities. China will be one of the first non-U.S. markets that we will pursue.

I am also pleased to note that we are well on our way in expanding our Los Angeles operation to facilitate this new offering which we are branding response DX tissue or origin test. We expect to begin marketing it in the first quarter of 2014.

Additionally as I previously noted we introduced our TCPC testing services. We began the aggressive ramp up of our TCPC program in late September. Early in the quarter we initiated what we call the soft launch to less than a handful of accounts.

Lastly late in Q3 we also introduced four new tests namely MET by FISH, cKit mutation by sequencing, UGT1A1 by sequencing and HER2 mutation by sequencing. The introduction of our HER2 test is particularly interesting as with the introduction of ROS1 we believe that HER2 mutation test represents yet another example where we were the first commercial lab to offer this therapy selection marker within months of finding its relevance to lung key answer.

Before talking about Q4 and early 2014 expectations I would like to briefly comment on our pharma business. While our pharma business was down it was in line with our expectations. As I noted in previous calls it’s a lumpy business. Also as I may have noted on previous quarterly conference calls our plans to selectively grow our pharma business and we are moving forward accordingly. I am pleased to note that in mid-October we hired sales executive who will focus entirely on new pharma sales by working closely with our business development and R&D departments. I am also pleased to note that we are gaining more work from the second large pharma account and we and we are also well along to pursuing it’s a potentially exciting and CI work.

So let’s now turn to Q4 and the first quarter of 2014, what should we expect. First, we expect to gain additional large DX accounts while also getting a better handle on our existing smaller account base. We now have the tools namely TCPC to pursue larger accounts and today we have better appreciation for the infrastructure needed to win and service those accounts while also maintaining our smaller accounts. We expect to introduce additional new test before the end of the year.

As previously noted we also expect to launch our Response Dx Tissue of Origin test in the first quarter of 2014. It would not surprise us if those sales ramp nicely based on what we have learned to-date regarding the former Pathwork test and the interest we have received from accounts that previously ordered the test.

And last but not least we expect to receive our license to sell in New York State in early 2014 based on questions that we have received from New York State regarding our submissions to-date.

I would also like to make a brief comment on reimbursement, needless to say I do not know anyone in our space that is not unhappy with the reimbursement [indiscernible] for clinical testing. Based on what we have experienced and our on standing of the market dynamics, we believe at least from molecular test we have seen the bottom. In fact for some of our tests such as EGFR prices increased a bit for what was initially announced earlier in this early.

In 2014 the market expects to see additional tests subject to reimbursement scrutiny. In our case we expect those tests will essentially be limited to our FISH testing while we believe our competitors will be more greatly impacted based on their testing menu. That said we believe our strong track record of managing cost and facing a difficult reimbursement environment in 2013 speaks for itself. Right now our focus is on volume, knowing what test to offer, appreciating what is and is not reimbursed and what the introduction of our FDA cleared Medicare reimburse Tissue of Origin test. We expect to have the volume and product mix to deliver and improve financials.

I am also pleased that we continue to make good progress in signing up managed care accounts for a number of reasons. Namely it makes the selling process easier, improves the patient’s financial experience and quite frankly is simplified and facilitates our collection process. We started 2013 with no managed care contracts and today we have announced nine such contracts that collectively service over 98 million lives.

So to summarize I will quote Q3 a transformative quarter. It was transformative in that we launched a relatively complex program namely TCPC that was unlike anything that the company is ever will offer in terms of complexity. It was the quarter where for the first time we could be truly competitive I pursing larger accounts. It was transformative in that we are now offering series of programs designed specifically for the pathologist. It was transformative in that we made what we hope will be the first of several acquisitions. It was in the way symbolic in that with all that is going on in our company in our space we are also expanding our facility footprint as we begin to build out for our new Tissue of Origin test and literally converted office space to lab space.

From my perspective the bottom line is this; responses undergoing quite a transformation over the last 18 months. That said financial you still hit a bump in the road in Q3 but strategically I believe we are on the right path. And as a fellow investor I can appreciate that at times this business can be frustrating but we will continue to focus on execution coupled with what we believe is a well thought out and can do strategy which we expect will result in enhanced shareholder value.

And with that operator please open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Thomas Bologna

Since there are no questions let me close the call with a brief summary. In Q4 of this year in 2014 we expect to see the growth we are building towards in our DX business began to gain momentum. In 2012 and 2013 year-to-date we made many changes in the company strategic or otherwise and we believe 2014 will be a key year where we expect those many changes and accomplishments materialize into growth and financial results we have been pushing so hard to achieve.

And with that I’d like to thank all of you for listening and for your continuing interest in our company. Thanks a lot.

Operator

Ladies and gentlemen, thank you for your participation in today’s call. This does conclude the program, and you may all disconnect. Have a great rest of your day.

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