MELA Sciences Inc. (NASDAQ:MELA)
Q1 2014 Earnings Conference Call
May 13, 2014 4:30 PM ET
David Collins – IR
Rose Crane – President and CEO
Bob Cook – CFO
Jared Cohen – JM Cohen & Company
Good day, ladies and gentlemen, thank you for standing by. And welcome to the MELA Sciences First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a presentation followed by question-and-answer session. (Operator Instructions).
I would now like to hand the conference over to your first speaker today, Mr. David Collins. Thank you. And please go ahead.
Before we begin, we must remind you that management’s comments today may include 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 expects, contemplates, anticipates, plan, intend, believes, assumes, predicts, and variations of such words or similar expressions that predict or indicate future events or trends or that do not relate to historical matter.
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.
Factors that might cause such a difference include whether MelaFind achieves market acceptance or becomes commercially viable. Given the uncertainties affecting companies in the medical device industry, any or all of the company’s forward-looking statements may prove to be incorrect. Therefore, you should not rely on any such factors or forward-looking statements.
In addition, more specific risks and uncertainties facing the company, are set forth in the company’s reports on Forms 10-Q and 10-K filed with the SEC. MELA Sciences urges you to carefully review and consider the disclosures found in its SEC filings, which are available at www.sec.gov and www.mealsciences.com.
I will now turn the call over to Rose Crane, MELA Sciences’ President and Chief Executive Officer.
Thanks, David. Well, good afternoon and thank you for joining today’s call. I am here today with Bob Cook, who joined MELA Sciences in April as our CFO.
It’s been really great to have Bob on the team. He’s hit the ground running and he brings with him a wealth of experience from his 20 plus years of Senior Finance and management leadership in the healthcare industry, including a substantial experience in publicly traded companies. Bob will be reviewing the financials later on in our call.
So, as previously discussed MELA Sciences is focused on key strategies in 2014. The strategies are designed to drive MelaFind toward becoming a standard of care in the detection of melanoma by providing physicians with the unique and proprietary imaging and data analytics, ultimately helping them to make better decisions.
Today, I would like to report our progress with these key strategies. In the fourth quarter call, I had said that we were focused on introducing the MelaFind system in some of the key institutions, where our leading dermatologists treat high risk patients.
I’m happy to report that we have now placed MelaFind Systems at several institutions including most recently Baylor, Stanford University and Ohio State University. The idea is to provide their specialist in dermatology with hands-on access to the system so that they can then become comfortable with this operation, the data it provides and most importantly learn to incorporate it into their diagnostic regimen.
We’re also continuing to focus our efforts on clinical trials, in order to build our base of research and data to further illustrate the value of MelaFind.
During quarter one, Dr. Darrell Rigel, one of the top dermatology specialist in melanoma, facilitated a predicted probability study with 191 dermatologists to assess their ability to diagnose melanoma with and without the use of MelaFind. The study reported a statistically significant outcome, concluding that physicians are truly more accurate when they use MelaFind.
Three performance measures showed improvement. One, the ability to detect melanoma, two, the ability to rule-out melanoma and three overall diagnostic accuracy. The important takeaway is the use of MelaFind, significantly improve these performance measures but improve without having to do more biopsies. Put simply, the doctor’s batting average improved. This is the first of three such studies that Dr. Rigel will conduct over the next few months.
Additionally, our Post Approval Study or PAS for MelaFind is now on track. As we’ve signed up our sixth and final site with Dr. Joel Cohen in Colorado. He joins out other sites, including Dr. Armand Cognetta in Tallahassee, Dr. Timothy Wang at Johns Hopkins, Dr. Arthur Sober in Mass General, Dr. Robert Nossa in Verona, New Jersey and Dr. Meg Gerstenblith at Case Western University Hospital.
As many of you are aware, this study was required by the FDA to report on the safety and effectiveness of the MelaFind system in a real world setting. The study will continue to enroll until 78 patients with melanoma or high grade lesion are approved.
We expect that about 720 patients will be required to meet this target. We have approved approximately 115 patients with 183 lesions to date.
Also importantly, we are now advancing our technology. We recently launched our new user interface or UI for MelaFind in both Germany and in the U.S. The new UI was launched in the U.S. at the 2014 Annual AAD Conference in March. This new interface allows dermatologists to have a more interactive discussion with patients and includes the data shown in the above referenced predictive probability study. The commercial roll-out is currently in process.
Another of our very important strategies is to begin the process needed for insurance, reimbursement for MelaFind, which can be a significant driver for future demand of our system.
We will be submitting our application to the EMEA or the American Medical Association, for a new CPT code in July of this year. Submission of the CPT code will then start the clock for what we hope to be an approval of a new CPT code for MelaFind.
As I have stated in the past, this is the first step in a long process. Once secured, we will then have to work with major insurance companies to obtain reimbursement. The three reader trials that I previously referred to, will be part of the dossier for reimbursement and will help to support the economic story for MelaFind. And I will continue to update you as we move along this timeline.
The final strategy that I would like to discuss today is the focus of our resources to improve our financial position. Our goal is to manage resources tightly and direct them to areas for future growth, including those that I have mentioned, clinical trials, technology enhancement, KOL support and a focus on reimbursement.
We have redirected a very small sales force to the areas of high incidents of melanoma and/or where our key institutions reside.
Additionally, we have most of the sales models discussed previously. We have secured third party medical leasing companies who will help physicians to finance the system. And our reps are now in discussion with physicians regarding the new model.
As you will see, no revenue from sales of the MelaFind system were recorded during the first quarter, but any sales contracts that were signed during that quarter will be recorded in the second quarter.
Again, let me say I will continue to update you on our progress, against some milestones within our key strategies. I believe that at this time, focus is critically important to our success.
Now, at this point, I would like to turn the discussion over to Bob Cook, who will review our first quarter 2014 financials. Bob?
Thank you very much Rose. Let me say at the outset that I am delighted to be a member of the MELA team. While there is much to do, I’m very impressed with the results Rose has already achieved in only a few months as the company’s CEO, and I am looking forward to working with her and supporting her efforts to achieve the success we believe MELA can be.
Now, for the financial review. For the three months ended March 31, 2014, the company reported a net loss of approximately $8 million or $0.16 per common share, compared with a net loss of approximately $6.5 million or $0.17 per common share for the comparable three-month period ended March 31, 2013.
Included in the net loss for the 2014 three-month period, where liquidated damages of approximately $3.4 million incurred and paid in connection with the filing and effectiveness of the company’s registration statement to register the common stock underlying the preferred stock and common stock purchase warrants that were issued in connection with the company’s financing that was completed in February of this year.
The company’s first quarter 2014 operating expenses declined more than 29% compared with the first quarter of 2013 to $3.9 million from $5.5 million. Significant declines were recorded in selling, general and administrative expenses as a result of the company’s ongoing expense reduction program.
A decline in research and development expense was also recorded in the first quarter of 2014 compared with the first quarter of 2013, as a result of a reduction in management overhead and the reclassification of certain expenses out of R&D.
On a consistent basis, our R&D expense in the first quarter of 2014, exceeded our R&D spending in the fourth quarter of last year, and we anticipate that research and development spending will increase modestly over the balance of the year, as we continue to invest in MelaFind’s future applications and new product development. Further actions are anticipated during the year that may further reduce our quarterly rate of SG&A expense.
Net revenues and cost of sales were adversely affected during the first quarter of this year by the company’s change in business strategy from our rental based revenue model to a sales based revenue model.
No revenue from sales of the MelaFind system were recorded during the first quarter, however sales contracts signed during the first quarter have been completed. We believe that once we obtain the CPT code and reimbursement approval from the centers for Medicare and Medicaid services, and major healthcare insurers that revenues from the MelaFind system could increase significantly.
Net cash used in operations was approximately $7.1 million for the three months ended March 31 of this year. Net cash used in operations includes the $3.4 million in liquidated damages that were paid to investors in the February 2014 financing.
Without the inclusion of this transaction related expense, our net cash used in operations during the first quarter would have been only $3.7 million, about 40% lower than the first quarter of 2013.
On a monthly basis, cash used in operations averaged $1.23 million during the first quarter, which we believe can be further reduced throughout the balance of the year.
In connection with the February 2014 financing, the company granted registration rights with respect to the shares of common stock, underlying the Series A preferred stock and the warrants pursuant to the terms of the registration rights agreement.
The investors in this financing were entitled to receive liquidated damages upon the occurrence of a number of events relating to filing effectiveness and maintaining an effective registration statement, covering the shares, underlying the preferred stock and the warrants.
The company did not meet the very strict filing and effectiveness requirements that were set forth in the contract. And as a result, paid liquidated damages to the investors in the aggregate amount of approximately $3.4 million.
The company’s cash balance at March 31, 2014 was $8.1 million compared with $3.8 million at the end of last year. We believe that our existing cash on hand and the actions that we have taken will support the company’s operations into the fourth quarter of this year.
We continue to assess the effects of our previously announced cost reduction plan and will reduce various costs as necessary. We will need additional capital during the upcoming months which may take the form of equity, equity linked or debt financing.
In addition, we anticipate that funds will be required to support further advances in our technology and to support clinical trials. The timing and amount of any additional funding we may seek will be affected by numerous factors, many of which are not under our control.
Let me now turn it back to Rose for her closing comments.
So, thanks Bob. And in closing, I continue to be really excited by our technology and what we can achieve in the ongoing effort to help to detect melanoma. What we are doing is truly vital to the health of thousands. A person dies every hour from melanoma, 16 people are diagnosed every hour and 75% of all skin cancer deaths are from melanoma.
If caught early and treated, melanoma is curable. And MELA Sciences is dedicated to that cause. Thanks very much for your attention.
Operator, please open the lines for questions.
(Operator Instructions). Your first question comes from the line of Jared Cohen of JM Cohen & Company. Jared, please ask your question.
Jared Cohen – JM Cohen & Company
Yes, it’s Jared. To start, two questions. One, on your balance sheet, I noticed – I haven’t noticed it before the warranty reserve, was $8 million this past quarter. And the prior quarter, it was about $3 million. What exactly does that represent, does that represent the systems that are out in dermatologist practices or?
Jared, this is Bob Cook. No, what it actually represents is the liability that the company incurred in issuing the warrants related to that financing. The warrants that were issued in the February financing were – are being treated as a liability because they didn’t meet the particular guidelines that are required, so it really doesn’t have anything to do with the business and just with that.
Jared Cohen – JM Cohen & Company
Okay, okay. And second question, how helpful will the paper you printout or whatever you want to call it last week in terms of the predictability of what the MelaFind does in terms of marketing in the future do you think?
Yes, Jared. And so, Dr. Rigel did that at the Winter Clinical with 200 physicians and I was there. And the reason that we’re really well with the physicians and the data is very powerful is because, the story as physicians use their eyes to look at lesions.
And when they go through this reader trial study, right there in the audience they have a response pad in front of them. They look at a lesion they then look at lesion with a dermatoscope and then they decide whether to biopsy or not. And then they get the MelaFind data and decide whether to biopsy or not.
And what happens is they miss melanomas and they actually do biopsy benign lesions. And so they themselves see that they miss it, it’s extremely powerful to the people who the physicians are taking the tests.
And the data really points to the fact that in the end it’s a really good strong story because we improve their batting average and they don’t do more biopsies. So, we can talk about it from an actual – this is what happened when physicians do it and we can talk about it from the health economic point of view which says you don’t do more biopsies, but you certainly – you take out less healthy tissue and you miss less melanomas and they’re less costly when caught early.
Jared Cohen – JM Cohen & Company
Right. So, there won’t be anymore, because I noticed some dermatologists have used the argument that it’s been too expensive relative to doing a biopsy or so forth. So they won’t have that argument anymore?
So that’s why we did these reader trials. We wanted to point out the fact that what really happens to improve their accuracy exactly Jared.
Jared Cohen – JM Cohen & Company
Okay. All right, thank you very much.
There are no further questions at this time. Please continue.
So, well with no further questions and I really like to thank everybody for listening. And look forward to reporting our progress as we move through the year. Thank you very much.
Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.