LipoScience's (LPDX) CEO Howard Doran on Q2 2014 Results - Earnings Call Transcript

| About: LipoScience (LPDX)

LipoScience, Inc. (NASDAQ:LPDX)

Q2 2014 Earnings Conference Call

August 12, 2014 4:30 p.m. ET

Executives

Bob Yedid – Vice Chairman, Investor Relations

Howard B. Doran – President and Chief Executive Officer

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

Analysts

Daniel Sollof – Barclays Capital

Operator

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

As a reminder, this conference is being recorded. I’d like to introduce your host for today’s conference Mr. Bob Yedid, sir you may begin.

Bob Yedid

Thank you, Victoria. Good afternoon everyone, this is Bob Yedid, Vice Chairman of Investor Relations and welcome to LipoScience’s second 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 that 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; and 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 B. Doran

Thanks, Bob and welcome to our call today to review our performance for the second quarter of 2014. Today, I’ll focus my remarks on the following topics: first our market strategy and execution plan. Second, our Q2 revenue performance and lastly the impact of the online publication of the HealthCore data and the initial discussions of this real-world study with physicians and payers.

As we discussed on prior calls, management has four core objectives that are fundamental to our strategy and the growth of our business. We want to promote our NMR LipoProfile test in the following ways. First, convey the right message the clinicians about the use of our test to reduce the risk of cardiovascular events by treating higher risk patients to a targeted LDL particle number.

Second, identify the right target that is physicians who will use the test as an important clinical tool for managing certain cardiovascular patient populations specifically type 2 diabetics, patients with metabolic syndrome and patients taking statins. We use prescription data to target our sales effort to physicians who are among the high prescribers of statins and therefore manage large populations of these high risk patients.

Third, engage with the right channel. As we have discussed on prior calls, manage care plans have been more diligent on pushing back on testing to other network labs and more importantly large panels for risk assessment. Typically, panels containing 20 or more tests. We’re comfortable that all current laboratory customers are using our FDA cleared NMR LipoProfile test as intended for patient management and not for risk assessment.

And finally, expand coverage for NMR LipoProfile test by providing compelling data to payers on the clinical utility of our test to reduce cardiovascular events through better patient management and demonstrate net savings to the healthcare system.

Our experience has shown that in territories with the right lab partners and strong payer support such as those in Alabama, North Carolina, Louisiana and Georgia, we’ve seen our direct sales efforts using the right message to the right physician targets have an immediate measurable and sustainable impact in creating physician demand.

Prioritizing these four objectives and executing our business strategy will allow LipoScience to take advantage of the large market opportunity of approximately 60 million test performed annually for cardiovascular patient management. Current our NMR LipoProfile test has market penetration measured in low single digits within the U.S.

Accordingly, we have the opportunity to grow substantially. As we’ll discuss shortly, we now for the first time have strong clinical data that shows that managing patients to a chain for LDL particle goal by using our test will further reduce the risk of cardiovascular events.

Turning to Q2 results, our revenues for Q2 2014 were $9 million or down 32% versus the second quarter of 2013 as a result of our decision to terminate our relationship Health Diagnostic Lab or HDL on March 28. You will recall that we took this definitive action in order to ensure that physicians are able to receive with certainly our FDA cleared test with the strong foundation of clinical data versus an unapproved and unproven test offered by HDL.

Shifting to volumes, we’re pleased to report that while total revenues were down from previous periods, we’re very encouraged that the NMR LipoProfile volumes excluding HDL were up 5% sequentially in Q2 2014 versus the first quarter of 2014. And we’re up 8% in Q2 over the prior year period. Our focus on right message, right target and right channel has and will continue to have a positive impact on our volumes.

In addition to growing unit volumes on a sequential basis, our average selling price also increased approximately 5% in Q2 2014 versus the first quarter of 2014 and was up over 3% in Q2 versus the prior year period. Our improvement in pricing is driven principally by the mix of wholesale customers and reflects the termination of our relationship with HDL.

On June 21, a significant event for LipoScience was the online publication of the HealthCore outcome study measuring the impact of managing patients using the NMR LipoProfile test and the peer-reviewed journal Atherosclerosis. HealthCore is the clinical outcomes research arm of WellPoint health, whose team of physicians, pharmacists and sciences study real-world effeteness and safety of diagnostics tests, drugs, devices, and care management interventions. This data is communicated to clinicians and healthcare decision makers to support evidence based medicine, coverage decisions and overall cost effective healthcare.

The study demonstrates the significant reduction of cardiovascular risk among high risk patients attaining a low LDL particle versus a low LDL cholesterol measure. The data is compelling demonstrating an approximate 25% yearly reduction in the relative risk of cardiovascular events for each of the three year studied when patients achieve the low LDL particle number compared to patients who achieve similarly low LDL cholesterol.

This improvement in outcomes is achieved because our test identifies high risk patients that require additional management or additional drug therapies. The study evaluate a cardiovascular events among over 4,000 patients who have had high risk of having an event including patients coronary heart disease, type 2 diabetics or those on statin therapy. These high risk patients were commercially insured patients whose outcomes were derived from the HealthCore database representing more than 43 million insured patients and WellPoint’s Blue Cross Blue Shield plans in the United States.

The approximate 25% reduction of the relative risk of cardiovascular events from the use of the NMR LipoProfile tests to manage is dramatic when put into context with other preventative interventions. As you’re probably aware over the past 30 years statin drugs have been the most potent and widely used medications in reducing cardiovascular risks.

Broadly numerous definitive statin trails have shown a 25% to 40% cardiovascular relative risk reduction. More recently in the largest med analysis of statin therapy to-date published last year in the European journal of preventative cardiologist or cardiology, statins were found to reduce the relative risk of coronary events by 31%.

In contrast using the NMR LipoProfile test to manage patients to an LDL particle goal has the potential to reduce the relative risk of cardiovascular events and incremental 25%. That’s on top of the benefit from statin therapy. The good news here is the NMR LipoProfile test is completely consistent with what health systems and payers are looking for the ability to use a relatively low cost diagnostic test to improve patient outcomes. Specifically, by reducing the number of high cost events like heart attacks or stroke and lower healthcare costs. The HealthCore study is the exciting gain changing data that we believe is important to increase adoption by physicians and increase coverage by payers.

We anticipate the full magnitude of this outcome study will be broadly understood in the marketplace over the next several quarters as LipoScience continues to communicate the data to physicians and payers. We believe this is an important inflexion point for the adoption of NMR LipoProfile test and our company.

From a marketing perspective, we were pleased to have the study available in late June. Our reps were trained at the end of June and in early July. The reps today are hitting the ground with the study in hand initially to higher market penetration of the NMR LipoProfile test overtime. We’ve been informed that the printed version of the HealthCore study will be available in Atherosclerosis later this month.

In addition, we’ve been back out to our payers who are in wait and see mode until the HealthCore study was published. Initial feedback has been positive. We understand fully that managed care plans follow a process in evaluating diagnostic tests and new study data. And a policy changes at the payers will take some time, however, we believe that HealthCore data will be very well received as we make our way through the process with payers starting in the third quarter.

Turning to our operations, in early May we took some tough actions to reduce our costs and manage our cash. Our objective is to allocate our cash to the most effective uses including sales and marketing and research and development. We’ll continue to allocate our resources to areas that will have the greatest benefit towards increasing physician adoption of our test and develop new test offerings.

Sales and marketing is a priority as we discussed before we’ll operate with approximately 60 territories in 2014. With respect to R&D our spending will be focused on our diabetes risk index test or DRI and also enhancements to the Vantera Analyzer software. In conclusion, we are encouraged that we have been able to grow our unit volumes when excluding the impact of the HDL termination.

Overtime, we believe the publication of the milestone HealthCore data will provide an important inflection point that will 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.

Now Lucy will provide more details on our Q2 results, cash levels and third quarter guidance 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 second quarter financial results and then provide our outlook for the third quarter of 2014.

Revenue was $9 million for the second quarter and at the upper end of our guidance range. It was down 25% sequentially compared to $12 million in the first quarter of 2014 and 32% year-on-year compared to $13.3 million in the second quarter of 2013. During the quarter unit volumes of the NMR LipoProfile test decreased by 29% sequentially and 35% year-on-year to approximately 346,000 units compared to 485,000 units in the first quarter of 2014 and 529,000 in Q2 of 2013. The decreases in revenue and unit volumes were attributable to the termination of our contract with HDL during the quarter.

As Howard mentioned earlier our quarterly unit volumes of the NMR LipoProfile test excluding HDL was up 5% sequentially and 8% year-on -year. Our average selling price of the NMR LipoProfile test partially offset the decrease we experienced in unit volumes. Our ASP in the second quarter increased 5% sequentially compared to first quarter of 2014 and 3% year-on-year compared with the same period last year. And the change in ASP was principally driven by the change and mix of wholesale customers and reflects the termination of our relationship with HDL.

Gross margin in Q2 2014 was 73% compared to 80% in the prior year period and gross profit was $6.7 million for the second quarter of 2014, compared to $10.7 million in the prior year, a decrease of 38%. The decrease in gross margin this quarter was primarily driven by lower revenues.

Operating expenses were reduced during the quarter as a result of lower revenues and our efforts to reduce cost and streamline our operations which we announced in early May. However, these cost reductions do not completely offset the decrease in revenue during the period resulting in the lower gross margin.

Sales and marketing expenses for Q2 2014 were $5 million, down 27% as compared $6.8 million in the prior year quarter. And sales and marketing expenses were 55% of revenues for the second quarter of 2014 compared to 51% of revenues in Q2 of 2013. The majority of the reduction in cost was related to lower staff related cost and lower marketing expenses.

Research and development expenses during Q2 of 2014 were $2.1 million, a 34% decrease compared to $3.1 million in the prior year period. The decrease is primarily due to lower staff related cost, lower contract research services and lower consulting cost during the quarter. Research and development expenses as a percentage of revenues remained relatively consistent at about 23% for the second quarter of 2014 in the same period last year.

General and administrative expenses for Q2 of 2014 were $3.2 million which included a $1 million severance provision in connection with the workforce reduction completed in May. G&A expenses were $2.8 million in Q2 of 2013. For the second quarter of 2014 G&A expenses as a percent of revenues were 35% compared to 21% of revenue last year. Excluding the $1 million severance provision recorded during the quarter G&A expenses as a percent of revenue for the quarter was 24% which was just slightly higher than last year.

Other expense was $400,000 in Q2 primarily driven by interest expense on our outstanding debt. For the second quarter of 2014, we incurred a net loss of $4.1 million compared to a net loss of $2.4 million last year. Approximately $1 million of the quarter’s net loss was charges related to the severance provision recorded during the quarter in connection with the reduction in staffing levels,

And we ended the quarter with a cash balance of $42.8 million and total debt of $15.8 million. Cash used during the quarter was $2.7 million which was lower than projected. From a cash flow perspective we used $800,000 in cash from operations and we spent approximately $1.6 million on capital expenditures during the second quarter of 2014. Our capital investments in the second quarter were slightly more favorable than our previous guidance due to timing of these expenditures. And for 2014 we continue to expect our total capital expenditures to be in the range of $6 million to $7 million.

Turning to guidance for the third quarter of 2014, we expect revenues to be between $8.5 million and $9 million and volume levels to be between 320,000 and 340,000 tests. We expect gross margin to be in the low limit 70 range and we also expect our operating expenses to be between $10.2 million to $10.5 million for the quarter. Additionally, we forecast our total cash use for the third quarter to be approximately $5 million and of that amount currently $2 million is for capital spending.

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

Howard B. 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. The HealthCore study provides important clinical evidence that risk of cardiovascular events has reduced meaningfully in high risk patients. The measurement of LDL particle using the NMR LipoProfile test gives physicians the information they need, which they have not had previously to optimize the patient’s drug therapy and care to reduce the incidents of cardiovascular events and stroke.

In addition to the HealthCore clinical publication we plan on publishing updated health economics information based in par on the HealthCore study in the near future. Both the clinical and health economics data should be powerful tools to increased physician usage of our test and to broaden managed care coverage.

We look forward to continuing to communicate LipoScience progress to our investors with that Lucy and I would like to take your questions. Operator?

Question-and-Answer Session

Operator

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

Unidentified Analyst

Hi good afternoon everybody, it’s actually [Dave Claire] in for Bill. First one from me, I was just hoping if you give us an update on the competitive environments since HDL launched their tests and then I know that there’s another company out there that’s been making some noise on their LDLP Athrotech, just curious if you run into either one of those players?

Howard B. Doran

Yes Dave. In regards to competition obviously HDL has taken a different direction and we’ve talked about how that has affected our volumes. But as far as being out in the field with the rest of our core laboratories we have been pleased with our performance, we’ve not had any competitive situations occur within that framework of those laboratories and frankly here your second question is it’s a comparative that we do not really come across with great frequency in the field. From an HDL perspective there are the most common and what we do in that situation is, we are talking to clinicians about the advantages that we believe that we have. One is, most importantly the FDA clearance that we have that they do not and more importantly they weighted the evidence with over 375 published articles to-date but now more importantly with HealthCore, we are the only company that can go out and talk about the relative risk reduction in an outcomes based trials. So, we think we are very well placed with that message to work with our existing competition in potential ones in the future.

Unidentified Analyst

Okay and then you mentioned some health economic data that we should be looking for, when should we expect that?

Howard B. Doran

Yes, we are working on a couple of manuscripts now that we hope to have submitted by year-end through the review process and published hopefully in the first half of next year.

Unidentified Analyst

Okay. And then a couple of quick ones for Lucy, so just given that there were a million in severance charges in 2Q, I’m curious why operating expenses wouldn’t be down sequentially and then what is your guidance assume in terms of like ex HDL volume growth for the third quarter?

Lucy G. Martindale

Okay. So on the operating expenses, yes our Q2 expenses were low, with lower than we expected we had some cost savings and some programs that we had had cut back on. We do expect in Q3 that some of – will have a little bit additional program spending that we didn’t have in Q2, particularly the sales and marketing and in the R&D areas. So that’s the primary reason why we are getting guidance of operating expenses in that 10.2 to 10.5 for the quarter.

With respect to our guidance, so we have no revenues in our Q3 guidance for HDL and Q2 I think, when I gave guidance last quarter I said that our, we expected approximately a quarter of a million dollars of HDL revenues in Q2, actually came in little bit higher and about a $100,000 higher than that. So and there is none in my Q3 guidance of 8.5 to 9.

With respect to, if you look at the volume range that we gave 320 to 340 that would, if you take HDL out of prior year we will be looking at 5% to 10% increase over prior year.

Howard B. Doran

Yes, I think the other way to look at that in addition is from our guidance range again if you strip out HDL volumes from Q2 that would be at the low-end of that range. So all incremental sales above that low-end of the range would actually be growth quarter-over-quarter and as Lucy pointed out if you look at the year-over-year 5% to 10% increase over our test volumes of our non HDL business in 2013.

Unidentified Analyst

Okay. Thank you.

Lucy G. Martindale

Thanks Dave.

Operator

Thank you. I will now like to turn the call back to Lucy Martindale for one clarification.

Lucy G. Martindale

Yes, before we turn to additional questions I just wanted to clarify statement that I have made, I indicated that cash used during the quarter was $2.7 million that was a mistake, cash used during the quarter was $2.4 million, so just wanted to clarify that for the record. Back to you operator.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Daniel Sollof of Barclays. Your line is now open.

Daniel Sollof – Barclays Capital

Hi, thanks very much. Good afternoon Howard and Lucy. First, the question on utilization, in the last quarter you mentioned on weather a little bit and just want to follow up on that. To what degree you think there was any benefit of research from – at this quarter, is that really non-issues you look at this quarter?

Howard B. Doran

Moving forward in the Q3 or this past quarter?

Daniel Sollof – Barclays Capital

Well, I mean kind of both. Really just over with this quarter, do you think there is any research into this quarter specifically when would obviously going forward as well?

Howard B. Doran

Well, I think, what I would say is, there is still a couple of things that are occurring out in the marketplace that we’ve talked kind of that really causing that to have it, it’s the high volume of tests where they’re getting hit with incredibly large bills in returns. So that really probably the more driving of those two, in the past we may have said it conversely, but I really think it’s really these risks that are the key problem. And we had 13 plans in Q2 that had published policies that were going out to clinicians describing this behavior. Four more came out in Q3 and what they do is just they cause confusion with the clinician, they’re being brought to task they get concerned, they get nervous and what they do is, many times they stop and it requires a re-education process in our part to get them back on a move forward basis.

And we’ve been talking about that for a couple of quarters. Something new this quarter that came out and this is actually as of June 25, the OIG came out with revised guidance on process and handling fees and some labs have been using that as part of their marketing to clinicians, most larger lab quest for example don’t do that but process and handling fees is something that is fairly common in the lab industry. And OIG guidance came out with much stronger language putting on record that they felt that there was tremendous risk with that practice on an ongoing basis.

So basically, most labs have now taken a physician that they will no longer provide those and they have sent letters out to the clinicians in the latter part of June, early part of July and they have also included that OIG warning. And again, that is something that short term is causing a little bit of concern and uncertainty and kind of some clinicians have stopped because they’re trying to understand what this all means, but long-term I think it really levels the blank field because physicians are, now looking for the test that they truly want to order through the right channel and on a move forward basis I just think it takes some of that competitive nature from one lab over the other off the table because it’s no longer consideration.

So as much as both of those are kind of headwind short term, I think the fact that we’re really talking about patient management and how to flip patients or proper targets for our tests, help us defend against the risk assessment message and I think now all labs are in equal plan field now that process and handling fields have gone away. So, they have caused short term concern, I think it’s a long-term benefit to both of that it’s kind of out in the air now and are able to address it properly with our clinicians. And then, the last thing I would say is, listen Q3 is always a little softer than others but it’s really I think the first two or kind of the driving forces. So, I really think that we’re in a great place to having this confusion lifted and look forward on a move forward basis that would start growing our business quarter-over-quarter from a volume perspective.

Daniel Sollof – Barclays Capital

Thank you. Just another one on volumes, in taking account of everything you said and then of course, if you consider the health through additionally cost benefit, when you think about all these things, do you think about going forward, convince that I guess 60 is the right number to target for, sorry 60 is the right sales force number that you stuck with are you know might we seen increase to that or is it too early just talking about the change from that 60?

Howard B. Doran

No, I don’t think. I think it’s a good question. I think what we said before as we’re committed to 60 this year and as we track to kind of our internal plan which in our primary goal number 1 is to not have to go out and raise more cash. We said in the last call that we are comfortable over the next 18 to 24 months with the plan that we have in place here internally. We are marching towards that if we started exceeding that plan that would give us the opportunity to look at our spend little differently and one of the first place is obviously I will look as to other markets that we should be out in the field working on. But as our spend level that we went through these tough decisions earlier this year, we want to make sure that we see the increased revenue above our plan before we start to thinking about expansion in the field. So, for 2014 I would just make the overall assumption that we are going to stick to the 60.

Daniel Sollof – Barclays Capital

Understand and then just two more quick follow-ups like the first on cash you mentioned that less than you expected, you called out from pieces are important from the sales and marketing as well as in R&D, what I’m just trying to figure out is, are there more cost to take out and what I’m really get it, how much incremental flexibility do you have now versus maybe three months ago, given a quarter time of expectations and obviously some cost kind of just wanted see there more cost can take out, how do you feel about your cash position now relative whatever three months ago?

Lucy G. Martindale

Dan, in terms of cost, we taken, we’ve made some really tough decisions as Howard said this year and we really feel like we’ve looked at each of our functional areas and I’ve got ourselves down to kind of the critical mass that we need to support the business. So, I don’t believe, when I talk about operating expenses this quarter of 10.2 to 10.5 I don’t look in the near term and think about our internal plan that there is really a lot of opportunity to reduce that further, so that kind of our base level in terms of our overall operating expenses.

In terms of our cash, again we are tracking slightly above, the plan, our internal plan, Howard mentioned, we talked about a plan that gets us into the end of ’15 into’16 without having to go out back out for additional cash, additional capital, we are on track for that and we are slightly ahead of it. So I think at this point we feel good.

Daniel Sollof – Barclays Capital

And then, I guess last one from me is on pricing, you did mention last quarter that we really kind of past below decline, you did see a nice step up this quarter this quarter obviously some of that passing out of HDL. So, just what you are thinking about going forward, so until I guess HDL allows, that mean year-over-year we should continue to see pricing increases or is it more just think of it flat going forward? Thanks.

Howard B. Doran

Yes, I think you said it correctly as the majority of that AUP advantage was solely that they were our largest customer with a lower end price. So, you should not expect that to continue to go upwards. And the fact that we have zero revenue, this will be the first quarter zero revenue contribution from them. I think you should, you will see stabilization at this point.

Daniel Sollof – Barclays Capital

Alright guys. Thanks for all the color:

Lucy G. Martindale

Thanks you Dan.

Operator

Thank you and at this time I’m showing no further participants in the queue. I would like to turn the call back over to management for any closing remarks.

Howard B. Doran

I would like to thank you all for participating on today’s call, we look forward to updating you on our next investor call in three months. Everyone have a good evening. Take care.

Lucy G. Martindale

Thank you.

Operator

Ladies and gentlemen, thank you for your participation on today’s conference, this concludes the program, you may now disconnect. Everyone have a great day.

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