MELA Sciences' (MELA) CEO Rose Crane on Q2 2014 Results - Earnings Call Transcript

|
 |  About: STRATA Skin Sciences, Inc (SSKN)
by: SA Transcripts

MELA Sciences, Inc. (MELA) Q2 2014 Results Earnings Conference Call August 13, 2014 4:30 PM ET

Executives

Michael Wood - LifeSci Advisors

Rose Crane - President and CEO

Bob Cook - Chief Financial Officer

Analysts

Swayampakula Ramakanth - HC Wainwright

Operator

Good day everyone and welcome to the MELA Sciences Second Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. Following the presentation we'll conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone this call is being recorded. I would now like to turn the conference over to Mr. Michael Wood with LifeSci Advisors. Please go ahead sir.

Michael Wood

Thank you. Good afternoon and thank you for joining us. With me on the call today are Rose Crane, President and Chief Executive Officer and Bob Cook Chief Financial Officer of MELA Sciences.

Before we begin, I would like to remind you that management’s comments today may contain certain forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. These statements include, but are not limited to 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 further events or trends that do not relate to historical matter.

These statements are based on the company's current beliefs or expectations and are inherently subject to significant known and unknown uncertainties and changes in circumstances, many of which are beyond the company's control. There can be no assurance that our beliefs or expectations will be achieved. Actual results may differ materially from the company's 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 melasciences.com.

I will now turn the call over to Rose Crane, MELA Sciences’ President and Chief Executive Officer.

Rose Crane

Thanks, Michael. Good afternoon and thank you for joining today’s call. I am pleased to be able to provide a more in-depth overview of our current strategy and also business update. A critical element of our strategy was to improve the company’s finances, so that will have the runway necessary to meet our very important business objectives. We’re very pleased to close the financing last month, totaling $27.3 million which will enable us to do just that. The deal raised approximately $14 million in net proceeds and that can be directed to help us achieve the goals I will discuss with you shortly.

Closing this financing during the summer was an important accomplishment for the team because it allows us to fully concentrate on our business without the distraction and concerns over our ability to reach very important milestones. This financing will carry us until late next year without giving consideration to future revenues from the sales of the MelaFind system.

I’ve really spent a fair amount of time with our dermatologists, our investors and have attended many of the key dermatology conferences. As I’ve discussed in previous calls, we’re very focused on a few key strategies which will drive MelaFind toward becoming the standard of care and the detection of melanoma at its most curable and cost effective stage. The strategies include key opinion leader support, reader study development and publication, roll out of the new user interface, reimbursement and new product development.

We are taking a top down approach because the dermatology community is very tight with the small number of physicians who are very influential. We’ve realigned our efforts on placing MelaFind with key opinion leaders within the medically oriented dermatologists. When these physicians talk about melanoma detection, other physicians listen to them. Currently we have systems at top teaching institutions in the country including Mount Sinai, Northwestern, [Sailor], and the Cleveland Clinic to name a few. Our approach is to have these thought leaders within the institution, share their experience and expertise with MelaFind in peer to peer settings at many of the key medical dermatology conferences.

Additionally and importantly, we have focused on conducting and presenting reader studies to measure the real impact of MelaFind on physician biopsy management. Our medical advisor to the board Dr. Darrell Rigel, Clinical Professor of Dermatology NYU Langone Medical Center is one of the foremost experts in melanoma detection.

He recently led three reader studies within the last five months, all of which will be presented this year. Preliminary results showed statistically significant increases in overall diagnostic accuracy, by the physicians with new MelaFind probability information. Currently, the standard of care for biopsy management is the physicians’ use of their eyes and their expertise without objective metrics or imaging to determine when to biopsy or when not to biopsy.

Our recent studies show that MelaFind is able to increase dermatologists’ accuracy and their day to day biopsy management decision, which directly improved outcome for the patient, for the physician and the healthcare system.

The result of the first of the three reader studies was presented at the American Dermoscopy Meeting in Bar Harford, Maine just this past June. The study was conducted at the January 2014 Winter Clinical Dermatology Conference. At that particular conference, 191 dermatologists reviewed images of 12 lesions in a reader study format. The physicians were then asked if they would biopsy each lesion before and after seeing MelaFind system probability information, then both sets of data were analyzed.

The study measured the impact of the predictive probability information and probability of a lesion being melanoma or melanoma high grade. (Inaudible) dermatologists’ decision to biopsy ambiguous lesion. The biopsy sensitivity of the dermatologists increased from 68% to 89% with the addition of MelaFind probability information; and specificity increased from 39% to 54%.

Now sensitivity measures the percent of lesions correctly identify as melanoma, and specificity measures the percentage of lesions correctly identified as not being melanoma. The average percentage of benign lesions selected for biopsy decreased from 61% to 46%. The P-values in all three measurements were statistically significant at P minus 0.001. There was a non-significant change in the percentage of total lesions selected for biopsy.

So the important take home message, physicians identified more melanoma, biopsy fewer benign lesion without increasing the overall number of biopsies. Clearly the use of objective matrix in imaging positively improved overall outcome. Dr. Rigel conducted the second study with 122 residents at the Real World Dermatology Meeting in March 2014.

The third reader study was conducted at the June 2014 American Dermoscopy Meeting with 67 dermatologists. The participants in both studies were asked the same set of questions. The results showed from the first study and showed an improvement in all three measures, sensitivity, specificity and diagnostic accuracy.

Again, the take on message here is that with MelaFind the information accuracy improved for the physician without doing additional biopsy. Top-line results from the third study will be announced in fall and we will continue to conduct reader studies globally throughout the next 12 months.

Importantly all of the reader studies that I just discussed were conducted using the new MelaFind user interface and data. So, to capitalize on this reader study momentum and to continue with product innovation, we are currently rolling out the new user interface which incorporates this probability information.

Through the new interface dermatologists are now able to view the probability of a lesion being melanoma or melanoma high grade. Based on the statistical model, the previously dermatologists were only able to review and view a binary output. This reflects a significant improvement in the continuing evolution of the commercial products.

Our goal is to leverage this recent positive data and the new user interface to drive adoption and engagement of MelaFind. We have recently seen encouraging trends as current users become more comfortable with the new user interface. As we continue to rollout the new interface, our goal is to convert those units currently being rented by the medical dermatologists into purchased units.

The business model is in line with what physicians are comfortable with and moves at the way from the old fee per click model. Additionally, we believe that the reader study data will drive the adoption of new MelaFind user. This reader study data will also be used to support our case to reimbursement by showing three important points with the use of MelaFind; physicians are able to; number one, identify more melanoma at the most curable and cost effective stage, which saves money in the long run; biopsy fewer benign lesions which is an immediate savings to the healthcare system; and importantly the overall biopsy rate does not increase which signifies an improvement in diagnostic accuracy.

We are also moving forward with the reimbursement process, we've taken the first step towards achieving our important goal of our saving Medicare Part B reimbursement for our procedure which is called multi-spectral digital skin lesion analysis or MSDS LA.

In July, 2014 we did submit our application for a CPT code or Current Procedural Terminology. It could be eligible for payment by the centers for Medicare and Medicaid services or CMS. And the Part B is early as 2016. We'll also commence efforts to obtain reimbursement from private insurance companies as the CMS process proceed.

We believe our application makes a compelling argument in favor of receiving the CPT code and for obtaining reimbursement from CMS. It is the AMA CPT editorial panel that ultimately decides whether to accept the new code and we'll refer to a new code to the AMA's Relative Value Scale Update Committee or the RUC Committee. The RUC determines the relative value of physician work within the procedure service and then makes the recommendation to CMS. CMS then establishes the appropriate reimbursement level for the service. Obtaining Medicare reimbursement is critical in order to secure reimburse first time from other private insurer.

In addition to improving MelaFind with the newly validated user interface we’re also spending into new product platform. The platforms will open new markets for us, a critical element of our future success. A patient’s journey through the clinical pathway, many times not only involves the dermatologist which we focus on now, but also the pathologist in the reconstructive surging. We’re currently developing a platform which utilizes the current optical imaging technology combined with new proprietary software for use by pathologists and reconstructive surgeons who are focused on tumor removal. The rational for this direction is two-fold. First we’re able to broaden the company’s target market. And second by introducing this technology at additional points in the clinical pathway, the overall accuracy of detecting, diagnosing and treating melanoma should improve. We are collaborating with physicians in both the U.S. and Europe to develop this platform.

Our goal is to file our 510(k) and CE Mark sometime in 2015. Additionally, I would like to welcome Michael Stuart to our Board of Director is a new Independent Director. Mike is COO and Executive Vice President of PhotoMedex and he is a very seasoned veteran in the dermatology market with special expertise in reimbursement and manufacturing. As we continue to execute against our strategies and make progress I will keep you updated. Now I would like to turn the discussion over to Bob who will review our second quarter financials.

Bob Cook

Thanks very much, Rose. For the three months ended June 30, 2014 we recorded revenues of $0.2 million resulting from our first sales of MelaFind systems since adopting our sales based strategy earlier this year. Total expenses decreased by 2.6 million consisting of 0.7 million in R&D expense and 1.9 million in SG&A, in accordance with our cost reduction program initiated in August of 2013.

We recorded a net operating loss of $4.3 million compared with the $7 million loss for the 2013 period a 39% improvement. We reported a net profit of approximately $0.6 million or $0.12 per fully diluted common share compared with a net loss of approximately 7.4 million or $1.72 per common share for the comparable three month period ended June 30, 2013.

The net income for the period primarily is a result of a $4.9 million benefit from a change in the fair value of our outstanding liability for warrants accounted for as derivatives. We reported a net loss of $7.4 million or $1.46 per fully diluted common share for the six months ended June 30, 2014 compared with a net loss of $13.9 million or $3.38 per fully diluted common share for the comparable period of 2013, a 48% improvement.

Six months 2014 results were impacted by the $5 million benefit from a change in the fair value of our outstanding liability for warrants accounted for as derivatives partially offset by $3.4 million in liquidated damages from the 2014 financing.

Sales in the second quarter were partially offset by lower placement revenue. Total operating expenses of $7.1 million fell 38% from 2013 and our net operating loss improved to $9 million from $13 million in 2013, a $4.5 million or 33% decline. The improvement in our net operating loss is more reflective of our operating activities and resulted from our cash conservation and cost reduction activities.

Net cash used in operations during the six months ended June 30 was approximately $11 million, which includes $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 half of 2014 would have been only $7.6 million, almost 40% lower than the comparable period of 2013.

On a monthly basis, adjusted cash used in operations averaged $1.27 million during the first half of the year, which we believe can be further reduced throughout the balance of 2014. The company’s cash balance at June 30, 2014 was $4.2 million compared with $3.8 million at December 31, 2013.

As Rose mentioned at the beginning of our presentation, we raised net proceeds of approximately $14 million in July that will fund our operations until late next year without considering further sales increases of our MelaFind units. We are continuing to assess the effects of our previously announced cost reduction plan and we’ll reduce various costs as necessary and appropriate.

At this time, I would like to open the call up for questions. Operator?

Question-And-Answer Session

Operator

(Operator Instructions). We’ll take our first question Swayampakula Ramakanth, HC Wainwright.

Swayampakula Ramakanth - HC Wainwright

Hi Bob. This is RK from HC Wainwright. Good afternoon.

Bob Cook

Hi, RK.

Swayampakula Ramakanth - HC Wainwright

Can you help me split the $225,000 in revenues into the number of converts from rental units and new product [units]?

Bob Cook

There are three things going on in the revenue number. There is the sale of new units, there is the conversions of old units, and there is still the remaining pieces of the legacy business which is the rental units.

So, we’re not at the point yet where we're talking numbers, numbers of units because quite frankly the numbers are quite modest. But I would say that I think we did have a conversion in that quarter and some new sales. And as far as where we are currently, I think that the amount has been accelerating. So, I would expect that in the third quarter, we’ll be able to put more clarity on that. But at this point, I think it’s best just to think of that number as primarily a small number of sales with the remaining pieces of that legacy place that revenue.

Swayampakula Ramakanth - HC Wainwright

And then this is one more a question for Rose. It's actually great to see Dr. Rigel do all those reader studies and put out analyses as well. What I’m trying to understand is since you have started and obviously that’s the large [PR] campaign I would think for stabilize, what kind of interest has been generated in the community and how are you managing that and how are you also managing in terms of neutralizing that [PR] to the maximum that you can.

Rose Crane

Yes. So what’s happened at the conference is when the physicians sit in the studies and actually do the reader studies themselves, it’s really generated a lot of buzz and some good lead. So the sales reps are following up in there. Our goal obviously is to get this data, each one is presented as an abstract and/or a poster and then to publish the data and then this is the data that the sales reps will start to carry out to the physicians. Because the wonderful thing is it incorporates our new user interface and we just rolled that out. So, all of this is so new, it’s really even though the first reader trial was conducted in January, we just rolled out the results. And the new user interface is in about 60% of our account. So those things combined we’ll continue -- we’re managing it by the reps following up with the physicians and then that is the data that will become the bases of our story moving forward for both the general dermatologists and for reimbursement.

Swayampakula Ramakanth - HC Wainwright

Thank you. And in a general way, I know it’s quite early in the both of the market strategy that you’ve initiated. But in your thinking how long does it normally take between identifying the leads booking, get the physician and getting the sale done, what is the clinical lag time, I am sure it varies from physician-to-physician and practice-to-practice, but in general what -- you as management think is achievable among the (inaudible) with the physician before we get the sale done?

Rose Crane

Yes. Because we move to the sales model, our capital equipment sale, it does take a good six to nine months it really does, because what the doctor is getting used to the new user interface and then working with the equipment we do get some trial time for them to use that and then they have to get the approval, if it’s a bigger than a one man practice. So, it’s a typically capital equipment life cycle, sales cycle.

Swayampakula Ramakanth - HC Wainwright

And the time that you record your sale is when the sale is completed or when the -- in the period is up?

Rose Crane

We recorded at the time to submit, some of these physicians are we’re using leasing companies so as soon as we get the sale we record this.

Bob Cook

Yes and regardless of how the sale is recorded whether it’s being done through a leasing company or not we’ll record the sale upon the basically on the delivery of the unit, I mean there is some accounting stuff that goes off but basically once the unit is delivered that is sale.

Rose Crane

And so RK, as I think about this the user interface was rolled out in April, started to be rolled out in April and the reader trial data even through done in January was recently shown so all of this and the new business model is purely rolled out in about March, all of this fairly new to the market. We have three things going on at once, all of which are very positive, but which will take time.

Swayampakula Ramakanth - HC Wainwright

Okay. One last question what are the potential catalysts that we have in this system can we look for, from either management in the next 6 to 12 months?

Rose Crane

Over the next 6 to 12 months we will continued to do reader trials to get them published to move along the CPT process although that probably will be another 12 to 18 months the reimbursement process that’s when we know more and continue to move units into teaching institutions and discuss collaborations that we have on the new products.

Swayampakula Ramakanth - HC Wainwright

Okay, thank you.

Bob Cook

Thanks RK.

Operator

(Operator Instructions). We will take our next question from George Griffith a private investor.

Unidentified Analyst

Yes hi, thanks for taking my call. Just a question about reimbursement and what you expect that to do and to change in terms of the market adoption?

Rose Crane

Yes. So right now as you know it is a lot of pocket and so as the doctor looks at the return on investment, depending if you're on the upper East side of New York City, you can get out a pocket payment pretty easily or in West Coast higher economic areas.

Once reimbursement comes its easier for physicians to use the equipment and because they are getting reimbursement for the patient and the patient doesn't have to pay out of pocket.

So at that point, our assumption is that there will be a higher penetration and higher uptake. But in the meantime, we are as physicians as we get a good installed user base and its physicians they're using different economic models across the United States.

We will be sharing those models and ideas with other physicians so they can understand how to more easily get patients involved with MelaFind.

Unidentified Analyst

So what would you say is the biggest barrier, obstacle that the sales reps are getting now in there within the sale cycle? Is it reimbursement or is it…

Rose Crane

It is reimbursement, it really is. And I would tell you before the big issue was that we were because of the user interface we had, we were getting, which was just a binary output high or low, there were a lot of physicians were complaining that there were a lot of high being called and then they would biopsy benign lesions. This has fundamentally changed with the user interface and with the reader trials to show what the news or interface has done.

So between the number of highs that we were getting and reimbursement those were the two big obstacles. One again we've just taken care of but it will take time to roll this out, get the data out, get physicians to see the new data, to use the new user interface.

Unidentified Analyst

And just the business model going from kind of a rental to sell it all changed that kind of perspective on reimbursement, right? Because it's more of a capital equipment buy and not a trying to pay per click. I am just trying to because I know the strategy is going to change but we wouldn't do reimbursement be less of a concern if they are just basically purchasing the machine for its value proposition and not worrying about essentially the cost they would be losing on the per use?

Rose Crane

So, that's a great question. I’d say yes and a no, because once they purchase it, they don't worry about having to pay every time they use it. So they’ll use that more often. What they want to do is the math to get them. They need to have the right amount of patients to figure out how to get return on that capital investment.

Unidentified Analyst

Yes. I could appreciate that. And that actually brings me to my last question, it’s just around the new model, are you able to elaborate a little bit more in terms of the pricing structure of this new strategy?

Rose Crane

Yes.

Unidentified Analyst

What the selling units were?

Rose Crane

Yes. We haven't disclosed that yet. Let’s just call it kind of somewhere in the middle of the laser prices and they can – they run all the way from as low as 20,000 all way up to 100,000 so it's not outside the realm of what dermatologists have seen.

Unidentified Analyst

Okay. Thank you for taking my questions.

Bob Cook

Sir, thank you.

Operator

As with no further questions in the queue, I'd like to turn the call back over to Rose Crane for any additional or closing remarks.

Rose Crane

I'd like to thank everyone for joining the call and I do look forward to reporting on the progress as we move forward with our strategy here at MelaFind. Thank you very much.

Operator

This does conclude today's conference. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!