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LipoScience, Inc. (NASDAQ:LPDX)

Q1 2014 Earnings Conference Call

May 12, 2014 4:30 PM ET

Executives

Bob Yedid – ICR, Inc.

Howard Doran – President and Chief Executive Officer

Lucy G. Martindale – Executive Vice President and Chief Financial Officer

Analysts

Bill R. Quirk – Piper Jaffray & Co

Operator

Good day, ladies and gentlemen, and welcome to the LipoScience Reports First Quarter 2014 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time. (Operator Instructions)

As a reminder, this conference is being recorded. I’d now like to turn the call over to, Mr. Bob Yedid of ICR. Sir, the floor is yours.

Bob Yedid

Thank you, Nicolas. Good afternoon, everyone and welcome to LipoScience’s first quarter 2014 financial results conference call. Before we begin, I will read the following Safe Harbor statement. Statements or comments made on this conference call may be forward-looking statements, and may include, but are not necessarily limited to financial projections, or other statements regarding the company’s plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties.

The company’s actual results may differ materially from those projected or suggested in any forward-looking statements due to a variety of factors, which are discussed in detail in the company’s filings with the Securities and Exchange Commission.

Joining the call today are Howard Doran, President and Chief Executive Officer; Lucy Martindale, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will turn the call back to the operator for your questions.

It is now my pleasure to turn the call over to Howard Duran. Howard?

Howard Doran

Thanks, Bob and welcome to our call today to review our performance for the first quarter of 2014. Today, I’ll confine my remarks to the following topics: our decision to terminate our contract with Health Diagnostic Laboratory, Inc. or HDL, two, test volume trends moving forward, our plan to manage cash and finally, an update on the HealthCore data. all of us at LipoScience are focused on serving our customers, primary care and specialty physicians to treat patients at high risk for cardiovascular disease. This focus on customers led us to our decision to terminate our relationship with HTL.

In mid-March, HDL began offering its own non-FDA cleared test for the measurement of low density lipoprotein particles. While introducing their own LDL-P test to physicians, HDL indicated that they would continue to offer both the NMR LipoProfile test, as well as their own measure of LDL-P, but left it very unclear how clinicians would differentiate, which test they have received.

Subsequently, HDL informed physicians that they would be automatically converted from the LipoScience message to their test, thereby setting up a situation, which in many cases would lead to Health Diagnostic Lab, not the physician, deciding which of the two tests will be performed.

Most physicians, whom we met, are opposed to this effort to substitute an alternative and clinically unproven method. We took this definitive action in order to ensure that physicians are able to differentiate with certainty, which test result they would be receiving to allow them to better manage their patients with the risk of cardiovascular disease.

I want to emphasize that our NMR LipoProfile test is the only FDA cleared and clinically validated test that quantifies the number of low density lipoprotein particles. Data from our NMR LipoProfile test has been featured in hundreds of scientific publications to-date as an established test with clinical validation, as compared to HDL’s clinically unproven non-FDA cleared lab developed test.

The fact that our test is FDA cleared and highly automated is very important to our lab partners and our physician customers. Since the decision to move away from providing testing services to HDL, our sales team has been enabling those physicians who want the NMR LipoProfile test to receive it to one of our other lab partners.

In our experience, this confidence in test results is very important physicians with whom we have met, while HDL accounted for a significant portion of our total revenues over the past few years. we made this difficult decision in order to protect our customers and reputation of our test as a significant advancement in managing cardiovascular disease.

I think it’s very important however, to put this decision in the perspective. Let’s not lose sight of the larger market opportunity. As we’ve said in the past, the high-risk cardiovascular patient populations, such as type 2 diabetics, patients with metabolic syndrome and patients taking statins comprise of at least 60 million patients.

Currently, we routinely test only about 3% of that market. The majority of these patients are treated by physicians who have not routinely adopted our test and this represents an enormous growth opportunity for LipoScience. As we will discuss shortly, we have strong clinical data that shows that managing patients to an LDL-P measurement using our test will further reduce cardiovascular events in a cost effective manner.

Shifting to volumes, we have looked at our test volume trends so far this quarter. Excluding HDL, we have compared our weekly test volumes so far in Q2 to that of Q1. Thus far this quarter, our weekly volumes are about 5% higher as measured on an apples-to-apples basis. While this is an early trend, we find it encouraging. Our strategy to drive physician offices to use our test is showing some positive early results. This information helped us frame our Q2 2014 guidance that Lucy will be discussing with you all shortly.

As mentioned in last week’s press release, we have already taken actions to reduce our costs and manage our cash. These tough steps should allow us to meet our cash requirements for the next 18 to 24 months. We will continue to allocate our resources to areas that will have the greatest benefit towards increasing physician adoption of our test, thereby growing our revenues. Specifically, we want to emphasize that we do not have any plans to reduce the size of our sales force. We are committed to operate with approximately 60 territories in 2014.

With respect to R&D, our diabetes risk index or DRI remains a high priority and product development continues. Lucy will provide more details on our cost reductions, cash levels, and second quarter guidance shortly.

Now I would like to turn to the ACC meeting held in Washington, in late March. We have a strong portfolio of scientific game of puzzle has always been a strong outcome study. we now have that, which is a great step forward. The most notable event at ACC was a poster presentation of study data for more than 4,000 high risk patients from the HealthCore Research database.

HealthCore is an integrated database of patients from the 14 WellPoint/Anthem Blues plans. The study was conducted with clinical input from Dr. Terry Jacobson, Professor of Medicine at Emory University and Dr. Peter Toth, Director of Preventive Cardiology at CGH Medical Center in Illinois. This study included commercially insured patients who were at a high risk of cardiovascular events, including patients with coronary heart disease, diabetes or those on Statin Therapy. This real-world outcomes data demonstrated an approximate 25% yearly reduction in cardiovascular related events over the three years of the study when patients were at goal for LDL-P, compared to patients who were at goal for LDL-C.

This highly significant finding is a milestone as it supports the clinical benefits of the NMR LipoProfile test. Moreover, once the clinical economics are fully analyzed, we believe this reduction in events will show an overall reduction in costs to the healthcare system. We anticipate these real world health core data findings will be persuasive evidence for clinicians to use our test to manage their patients to an LDL-P target and to reduce cardiovascular events and thereby increase our test volumes overtime.

We are also pleased that the poster presented won the best principal investigator award at the meeting. Even better news is that the HealthCore study has been accepted for publication by Atherosclerosis a peer-reviewed journal. We believe this publication of the data will be influential with payers and physicians and will lead to higher market penetration.

In conclusion, and as I've discussed with many investors, the LipoScience opportunity has many parallels to my prior work experiences. I’m motivated by the challenge of changing an entrenched standard of care and providing a better solution that improves patient outcomes and saves lives.

Clinical evidence indicates that the NMR LipoProfile test is superior to LDL-C in predicting cardiovascular events, especially in discordance patients. Moreover, we believe the publication of the milestone HealthCore data will provide the inflection point that we need to drive both broader, physician adoption and managed care coverage of the NMR LipoProfile test. We are excited by this opportunity to change patient management with our test to cost effectively reduce cardiovascular events and to improve lives one patient at a time.

With that I will turn the call over to Lucy and then we will take your questions. Lucy?

Lucy G. Martindale

Thank you, Howard and good afternoon everyone. I would like to start off by walking everyone through our 2014 first quarter financial results and then provide our outlook for the second quarter of 2014.

During the quarter, unit volumes of the NMR LipoProfile test decreased by 6.5% to 485,000 units, compared to Q1 of 2013. First quarter total revenue was $12 million, down by 11.8%, compared to last year. The decrease in unit volumes was largely attributable to lower test utilization as a result of the adverse winter weather experienced during the first quarter of 2014 and lower volumes during the last two weeks of March from HDL.

In addition, to a decline in unit volumes for the first quarter, the change in average selling price or ASP of the NMR LipoProfile test drove our overall revenue performance lower. The ASP decreased by 5.4% in the first quarter, compared to last year and it’s flat sequentially to the fourth quarter. The majority of the change in ASP is attributable to lower contracted pricing with certain labs, partners and the remaining changes as a result of the continuing channel mix.

Gross margin in the first quarter of 2014 was 78.2% compared to 79.1% in the prior year period, which was in line with our expectations. Gross profit was $9.4 million for the first quarter of 2014, compared to $10.8 million in the prior year, a decrease of 12.7% and primary a result of the decreased revenues.

Sales and marketing expenses for the first quarter of 2014 were $5.1 million, down 23.4% as compared to $6.7 million in the prior year quarter. Sales and marketing expenses as a percent of revenues were 42.5% in the first quarter of 2014, compared to 48.9% in2013. The majority of the reduction in cost was related to lower staff related cost and lower marketing expenses.

Research and development expenses during the first quarter of 2014 were $2.6 million, a decrease of 18.3%, compared to $3.1 million in the prior year period. Research and development expenses were 21.3% of revenue for the first quarter of 2014, compared to 23% of revenues in 2013. And the decrease is primarily due to lower contract research services and lower consulting cost during the quarter.

General and administrative expenses for the first quarter of 2014 were $3.3 million, which included $0.4 million severance provision in connection with the workforce reduction that was completed in January. General and administrative expenses were $3.3 million for the first quarter of 2013. And for the first quarter of 2014, general and administrative expenses as a percent of revenue were 27.9% compared to 24.3% of revenue last year.

For the first quarter of 2014 we incurred a net loss of $2 million, compared to a net loss of $2.8 million last year. We ended the quarter with a cash balance of $45 million and total debt of $15.8 million. Cash used during the quarter was $4.5 million.

From a cash flow perspective, we spent approximately $1.8 million on capital expenditures and we use $2.8 million in cash from operations during the first quarter of 2014. Approximately $1 million of the cash used from operations represented annual expenses, typically paid during the first quarter of each year. And the capital expenditures of $1.8 million were in line with our expectations and we expect our total capital expenditures for the year to be in the range of $6 million to $7 million.

On March 28, 2014, we announced the termination of our contract with HDL, a customer that represented 29% of our revenues in the first quarter of 2014. Earlier in the call Howard discussed the steps that we’re taking to convert this business to current lab partners and to grow testing volumes with new physicians. Operationally, we’ve examined our cost structure and our staffing requirement as a result of lower volumes and revenues over the short term.

As announced last week, on May 5, we completed a staffing reduction. These decisions were difficult but there were the right ones to make in order to preserve our capital while we work through the transition of our business to lab partners who offer the NMR LipoProfile test. We’ve reduced our operating expenses on an annual basis by approximately $9 million. This includes a workforce reduction of staff members and vacancies that are not being refilled across the business, totaling 32 positions. The cost reductions of staff related expenses, as well as external expenditures in consulting contract services and marketing. Our current year operating expenses, excluding any provision for severance will be roughly in line with our 2012 operating expenses, as a result of these changes.

Turning to guidance for the second quarter of 2014, we expect revenues to be between $8.7 million and $9.1 million, and volume levels to be between 335,000 and 350,000 tests. Included in the revenue guidance, is approximately $250,000 in residual HDL revenues. We forecast our total cash use for the second quarter to be between $5 million and $6 million and of that amount; approximately $2 million is for capital expenditures. The actions that we have taken this year in reducing our operating expense base will preserve capital and allow us to meet our cash requirements for the next 18 to 24 months.

And with that I would like to turn the call back to Howard for closing remarks.

Howard Doran

Thanks Lucy. To summarize, despite our near-term challenges, I believe LipoScience has the opportunity to change the standard of care by which physicians can mange patients risk of cardiovascular disease. Clinical evidence indicates that measurement of LDL particle by our test is superior to the measurement of LDL cholesterol in predicting cardiovascular events, especially, in discordant patients.

We are looking forward to the publication of the milestone HealthCore data results, which demonstrating a meaningful reduction in cardiovascular events and the completion of updated clinical economics analysis which should indicate a net cost savings for the healthcare system. The publication and updated health economics should be powerful tools to drive managed care coverage and to increase physician acceptance of our test. We look forward to continuing to communicate LipoScience’s progress to our investors.

With that, Lucy and I will like to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Bill Quirk with Piper Jaffary. Your line is now open, please proceed.

Bill R. Quirk – Piper Jaffray & Co

Hi, thanks. Good afternoon, everybody. The first question for me, I guess is, I take a look at the guidance for second quarter, and I am recognizing that HDL is about 30 revenue. It looks like you pretty much reduced your guidance for the entirety of HDL, despite the fact, Lucy I think you mentioned, you expect $100,000 from them and underlying business is up 5% quarter-to-date. And of course everyone plan in place try to transition some of that business from HDL directly to LipoScience. So, can you talk us little bit, I guess maybe extrapolate on the guidance I guess it just seems little conservative in light of I guess some of the – some other things are going on, thanks.

Howard Doran

Yes. Bill, this is Howard. I think and I might be redundant to the comment is we have completely stripped the volumes to give you a baseline on where we are and we talk a little bit about this on last quarter more about how do we differentiate kind of the in-network versus out network, which is how we are discussing then. But what we’ve tried to give is, what our baseline was coming into this quarter compared to last, if we completely stripped out the HDL volumes.

I think the 5% growth that we are talking about is that will be a pretty good indication of the clinicians that we’ve gone out into the field and we brought those customers back and are using our test through alternate channels at the point. Obviously, I expect that was numbers to continue to grow, but in the first handful of weeks out there in a very competitive marketplace that’s where we are today.

Bill R. Quirk – Piper Jaffray & Co

Okay, understood. And then Lucy, just a quick question on the CapEx spending in the second quarter $2 million, can you just elaborate on that. Is that more of Vantera systems?

Lucy Martindale

It’s largely dominated Bill by our total number of components for Vantera. Yes.

Bill R. Quirk – Piper Jaffray & Co

Okay, got it. And then, lastly for me, and then I realize and maybe gone a bit of a length here, but since you published, I should say, since the WellPoint data was presented at ACC, I assume that you probably been affording as to a number that payers any kind of early feedback, I recognize probably more power for once it get published. But, just curious is that how change the dialog in all other payers, thanks.

Howard Doran

Yes. Bill, this is Howard again. Absolutely the data they do find quite compelling, but you already hit the nail on the head there are like this sounds straight. We like what we are hearing. Let us know and then get published. So, as you know on the last call, we had submitted and we are anxiously awaiting for acceptance and we are thrilled to have that now. But, it was kind of a wait-and-see. So, we certainly expect HealthCore should be available online some time in the next probably six weeks to eight weeks. And then in full publication that in front certainly on the latter part of the year, but very exciting, but it has been a wait-and-see type attitude from the payer.

Bill R. Quirk – Piper Jaffray & Co

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Matthew Taylor with Barclays. Your line is now open. Please proceed.

Unidentified Analyst

Hey, thanks very much guys. it’s actually Dan in for Matt. I want to first ask a question. so given the announcement earliest month, how does that change the metrics you’re currently in the sales force, I mean if I heard you correctly, you’re comfortable, I think with the sixth year territory like right now, just kind of curious about how even the reductions have to take place, what’s the message to kind of keep the sales force focused.

Howard Doran

Well, Dan, thanks, I think if you go back to really what we talked about last quarter, I would suggest you that our strategy is not dramatically changed. we have shared on last quarter’s call that there were some headwinds that were occurring in the marketplace, pushback to managed care in two fronts, the whole out of network lab, as well as the screening panels that were becoming more prevalent in the marketplace.

And at that time, we discussed that there were eight plans that it come out pushing back against those two behaviors, that number in the quarter has gone up to 13 plans now that have probably come – roughly come out and told their clinicians of this activity. so our focus has been on two things, making sure that we have right message for the clinicians, we’re targeting the right patents for patient management and we’re sending it to the right channel, which is the right laboratory.

So that really is unchanged are we out finding for the tests through the – our prior channel of HDL? Sure, we are. but the biggest opportunity for us as an organization is continuing to focus on non-users and giving them the reasons why to come over in. that’s why we’re so excited about the HealthCore data. we really do think it’s an inflection point where we can give those who have said no today, a reason to say yes, tomorrow and it’s by having hard evidence to show that if you manage your high risk patents to an LDL-P target versus LDL-C that there’s tremendous advantages from a lower incidence of cardiovascular disease.

And if doctors get the same experiences as HealthCore, it will be 25%. So that’s what we’re really excited about, I mean what I’m telling our sales organization is, hey, are we thrilled at the volume runaway? No, of course, not, but we’re spending a portion of our time in aggressively keeping that business, but we’re still spending the majority of our time, we need new users and those who have not chosen to use our test yet and we’re spending a quite bit of time there, but we’re doing a little of both right now.

Unidentified Analyst

Thanks for that and that’s helpful. and then again, I want to follow up on the ACC and the milestone HealthCore data, that obviously a positive for you guys, but curiously, I mean anther you actually have an outcome out there. when do you think actually could meaningful show up in your in terms of increased penetrations, because I think the market is – maybe you touched on the 3% of the patients right now. like over what timeframe, do you thin we can actually see that increase and also, is there another piece of data that we’re waiting out to kind of complete the story here.

Howard Doran

Yes. so one is, I would say, the physicians are kind of just like the payer right now. we’re having some top line discussions, just based of the headlines of our prior press release saying that this data was on the way, but the physicians tend to be skeptical as well. and once we have the paper published, I think there will be much more amenable to having those discussions in making patient management decisions differently as a result thereof. So I think it’s important obviously, to get that published and offer them as quickly as possible, just as we have the payer doing that the same thing kind wait-and-see type attitude.

Lucy G. Martindale

Next piece of data.

Howard Doran

The next piece of data – I’m sorry thank you Lucy is, we are already working on in additional announces looking at the outcomes from the cost effect of the standpoint. We should have that wrapped up this quarter internally and then we’ll be working through the same channel to get back data published in a peer-reviewed journal.

So I think from a physician standpoint, the outcomes is the most important today. But in the future having more economic data that share the payer will be equally as important. But I think the clinician wants to see the outcomes that I think the payer will be more interested in economics, but we’ll be spending some time getting that across the finish line again, hopefully by the end of this year, but there is a lot of other data mining that we’ll be doing from this data side, it’s very powerful and it will really feel a wave of additional publications over time where we can maximize the power of the information that we now have.

Unidentified Analyst

Great, that’s helpful. and just one last follow-up if I could for Lucy, I mean in the 2Q guidance, you did talk about on the – again, the expectations revenue as well volumes, just if I quickly look at just kind of the math, does that imply kind of a more stable pricing environment than we’ve seen or what I’m missing something there?

Lucy G. Martindale

Yes. Dan, we would not expect any additional erosion in our ASP as you know. We’ve had erosion over the past several quarters, multiple quarters, a lot of that has been flushed through now and we don’t expect any additional erosion in Q2.

Unidentified Analyst

Thank you very much, guys. I appreciate it.

Lucy G. Martindale

Yes.

Operator

Thank you. And with that I’m not showing any further questions in the queue. I would like to turn the call back over to speakers for any closing remarks.

Howard Doran

Yes. I would like to say thank you for everybody for participating on today’s call, and we continue to look forward to updating in the future and on our next call. Everyone have a great evening. take care.

Operator

Ladies and gentlemen, this does conclude the program and you may now disconnect. Have a great day everyone.

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