Interleukin Genetics' (ILIU) CEO Ken Kornman on Q2 2014 Results - Earnings Call Transcript

Aug.13.14 | About: Interleukin Genetics, (ILIU)

Interleukin Genetics, Inc. (OTCQB:ILIU) Q2 2014 Earnings Conference Call August 13, 2014 4:30 PM ET

Executives

Kenneth S. Kornman – Chief Executive Officer, President and Chief Scientific Officer

Eliot M. Lurier – Chief Financial Officer, Treasurer

Analysts

Brian W. Marckx – Zacks Investment Research, Inc.

Operator

Good afternoon, ladies and gentlemen. Welcome to the Interleukin Genetics 2014 Second Quarter Earnings Results Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session at the end of today’s conference. With us today from Interleukin Genetics are Ken Kornman, CEO and Eliot Lurier, CFO. Dr. Kornman will first provide a slide presentation and corporate update. The presentation can be accessed at www.ilgenetics.com.

Then Mr. Lurier will review with financial results for the quarter ended June 30, 2014 followed by other financial highlights. Dr Kornman will provide closing remarks and will then open the line for questions.

Before we begin the call, I would like to remind you that today’s discussion will contain forward-looking statements that involve risks and uncertainties. These risks and uncertainties are outlined in Interleukin’s filings with the Securities and Exchange Commission including the Quarterly Report on Form 10-Q filed earlier today. As such, actual results may differ materially from what is discussed on today’s call.

I would now turn the call over to Dr. Kornman, CEO of Interleukin Genetics. Sir, you may begin.

Kenneth S. Kornman

Thank you. Good afternoon, everyone and thank you all for joining the call today. Interleukin Genetics achieved a number of important milestones so far in 2014, including the commercialization of PerioPredict, a transformative genetic test designed to predict a dental patient’s risk for severe and progressive periodontal disease and thereby their need for Preventive Dental cleanings. The commercial rollout is progressing well and the first insurance policies to cover PerioPredict have now been in place for approximately seven months. We are pleased with progress thus far and I’m enthusiastic about what lies ahead for Interleukin in the coming months and quarters.

And now I’d like to take this opportunity to give a brief slide presentation to discuss some of our recent achievements as well as provide a corporate update. So you’re aware of the forward-looking statements, risks, and certainly I think everyone is familiar with the fact that today personalized medicine has changed oncology. We’re able to tailor drugs now to patient’s susceptibility or treatment response and this allows us to target intervention to those who benefit most. But in many ways the real opportunity of personalized medicine is better health at a lower cost. We’ve personalized prevention of common chronic disease.

PerioPredict is now a part of this current advanced and personalized medicine, just released in the last few weeks. There is an updated report from the Personalized Medicine Coalition entitled to case for personalized medicine. And in this new report they outlined some of the advances that are contributing to the momentum of the whole personalized medicine field and they’ve stayed and shown in the slide. And in 2014 a dental insurance introduced risk-based dental preventive care that incorporates a reimbursed IL-1 genetic test, PerioPredict plus two other risk factors to guide the frequency of care to prevent periodontitis, one of the most common chronic inflammatory diseases.

This relates to our corporate highlights in 2013 and 2014 to date. We have in fact brought personalized medicine to dental care. We’ve launched PerioPredict test to identify risk for periodontal disease progression. And this should deliver better care for patients and lower costs to insurers and employers. There’s a large market opportunity exceeding 170 million U.S. dental plan covered lives. And this translates into large potential testing revenue opportunity.

PerioPredict is fully reimbursed by Renaissance Health Services Corporation, association of eight state Delta Dental companies it’s one of the top five dental insurers in the U.S. And we’re in discussions with additional payers to initiate relationships.

Some of you are aware of the study results that were reported in the Journal of Dental Research, that have the potential to transformed delivery of preventive dental care. It involves more than 80,000 patients years of our data, 5,117 patients followed over 16 years and every report that in patients with no risk factors, two cleanings per year were no better than one. In patients with multiple risk factors, they appeared to need more than two cleanings per year. And about 53% of the population was at heightened disease risk, needing two or more cleanings a year.

The plan designed based on these study findings, as we report in the paper, would save approximately $2.2 million in just this test population during the study period. And it would exceed $4.8 billion per year within the nationally insured population.

PerioPredict guides better preventive dental care and at lower cost. It’s a proprietary genetic test it does predict the risk for disease, periodontal disease progression. And most importantly, it addresses a leading component of dental care cost. We’re partnering with payers to maximize market penetration and the potential for major cost-savings impact on dental insurance policies and pricing is clearly there.

The PerioPredict actually, besides offering better health, reduced cost and retained benefits, really has influence in positive ways on all of the stakeholders in the value chain.

Our patients received improved care for high risk conditions, fewer unnecessary visits. Insurers have lower prevention cost, lower overall treatment cost, more competitive insurance policies. The employers get lower premiums, lower productivity loss and the dentists have the potential for more revenue from preventive care for High Risk patients and better informed patient care.

The commercial roll-out, as some of you are aware, was partnered with leaders in the dental insurance industry. There is the potential 8 million covered lives with insurance reimbursement by Renaissance Health Services Corporation, our [collect] (ph) partner, and an additional 50 million covered lives across all deltas.

The new dental plans incorporating PerioPredict test were presented to cooperate customers in 2014 and in 2015. The roll-out began in 2014. And as we knew primarily in January there also was some renewals in July of each year.

The commercial opportunity exists and we are engaged in discussions with multiple parties in each industry sector. There are three primary sectors within the dental insurance marketplace. There are the traditional dental insurance companies such as Delta Dental and the business model for those companies is very similar to what we’re seeing with Delta Dental of Michigan, Indiana and Ohio.

There are also the large health insurance companies such as Kepha and Sigma and others, which have a smaller, but substantial dental insurance business. And for those payers there are multiple studies in the last year and a half that shows significant medical cost savings from effective periodontal treatment. And so, the discussion with those companies involves the fact that purchasers will want to incorporate PerioPredict to assist in reducing future medical costs.

Third group are the dental managed care and U.S. government entities where there are single decision makers for each group and this is where there will be internally driven test utilization through practice guidelines of the organization.

The small penetration of the market can in fact provide substantial revenue, as we go forward. Out of the 170 million individuals with private dental insurance, major percent of those, 120 million covered lives are actually represented by only six entities with Delta Dental nationally leading those six. Interleukin Genetics becomes profitable, if tests from fewer than 1% of Renaissance Health Services Corporation’s covered lives, [sign] (ph) onto these policies. And revenue exceeding $100 million a year if tests from fewer than 8% of Renaissance covered lives or fewer than 0.6% of the top six providers’ covered lives.

Seven months into the introduction, the process is the following. Insurance companies offered new plans that incorporate PerioPredict to their renewals or to new potential policy acceptors. Patients under the new plans see their dentists over a six to nine month period starting with the introduction of the plan. And the dentists are expected to collect the DNA sample, send it to Interleukin. The sample is processed, the test report is sent to dentist and Interleukin reimbursed directly by insurance company.

The uncertainties in this system, is the rate of new policy uptake by companies and the utilization of PerioPredict by dentists in office place. As we’ve reported, Interliuken professional educators are currently covering more than 650 dental offices with patients covered under the new policies. While early in marketing efforts, we can tell you that offices with ten and more patients covered by new risk-based prevention plans used the tests at a high rate.

We also continue to enjoy good sales with our Inherent Health brand of genetic tests, marketed primarily by Amway. Our weight management genetic test is the lead in this offering, and as you’re aware it identifies which diet is most likely to lead to success for weight loss. It’s currently sold in the U.S. and multiple companies in Europe. We do have a portfolio of additional genetic test sold through the same channel in the partnership with Amway.

Now let me conclude with a brief report on recent paper published by our colleagues at University of California, San Diego, published in the Journal of the American College of Cardiology. In this report, the authors demonstrate that oxidized phospholipids, a bad type of LDL cholesterol in many cases, is strong predictor of cardiovascular diseases that’s known, it’s been previously reported by these investigators in The New England Journal of Medicine.

The oxidized phospholipid levels in this particular study was in fact only predictive of coronary artery disease in the patients we tested positive for our Heart Health test. Not for patients who tested negative, even though they have high levels of oxidized phospholipids. The Heart Health test combined with elevated oxidized phospholipid levels, were also predictive of individuals with cardiovascular disease, who were at increased risk for a future cardiovascular disease event.

The potential future value of this information is to change clinical actions to better manage cardiovascular disease risk. This may be most appropriately applied to guide use of drugs currently in development by others that directly address the biological mechanisms specifically identified by our test.

As you can see, the opportunities for PerioPredict, our lead commercial program are strong, we remain dedicated to the promise of personalized medicine and it’s potential to increasingly shift healthcare for repair to prevention, to select more optimal preventive and therapeutic approaches, to improve quality of life and to help control the ever increasing cost at healthcare.

With that I’d like to turn the call over to Eliot for an overview of the second quarter results and some financial highlights. Eliot.

Eliot M. Lurier

Thank you, Ken, and good afternoon, everyone. Hopefully you had a chance to review our earnings press release issued this afternoon, as well our quarterly report on Form 10-Q filed with SEC before today’s call. Each of these will be available on the Investor section of our website www.ilgenetics.com.

I’ll now provide an overview of the finical results for the quarter ended June 30, 2014. Revenues for the second quarter were $529,000, compared to $852,000 for the second quarter of 2013. The decline in total revenue over the same period in the prior year is primarily attributable to higher revenues in the 2013 period due to a very successful promotion by our partner, Amway, resulting in a larger volume of test kits process compared to this year. All of the kits within this promotion in both periods are prepaid meaning we received the cash up front.

Our revenue is recognized when a test is processed in our laboratory and a report is issued to the customer. Customers have historically paid in advance for these processing services when a kit is purchased. This prepayment has resided on our balance sheet as deferred revenue until the processing occurs. Then it is then recognized as revenue. Accounting rules have been developed, which allows the recognition of this deferred revenue when there is a remote chance that the test will be returned.

We launched the Inherent Health brand of genetic tests in 2009 and now feel we have adequate history to view the return rate of our genetic tests. As part of our year-end 2013 financial close, we completed the analysis of every test that was processed from 2009 through December 31, 2013, looking at how long on average a test takes to come back for processing.

The majority of the tests come back for processing within the first two years. The analysis led us to recognize this revenue, approximately $213,000 of deferred revenue related to 2009 and 2010 in both the quarter and year ended December 31, 2013. We recognized an additional $64,500 of breakage revenue in the first quarter of 2014 and $92,000 in the second quarter of 2014, which relates to test kits sold in the first and second quarters of 2011.

No breakage revenue was recognized in the first and second quarter of 2013. We will continue to recognize this breakage revenue going forward on a quarterly basis. We will also analyze redemption patterns to make sure our assumptions hold true.

Cost of revenue for the second quarter of 2014 was $362,000 or 68.4% of revenue compared to $496,000 or 58.3% of revenue for the same period in 2013. The increase in cost of revenue as a percentage of revenue in the three months ended June 30, 2014 is primarily attributable to fixed laboratory costs associated with processing a lower volume of genetic tests compared to the same period in 2013.

Deferred cost of revenue related to breakage revenue was $3,700 for the three months ended June 30, 2014. No breakage revenue or costs were recognized in the same period in the prior year.

Research and development expenses for the second quarter of 2014 were $216,000 compared to $188,000 for the second quarter of 2013. The increase in research and development expenses is primarily attributable to increased compensation.

Selling, general and administrative expenses for the second quarter of 2014 were $1.5 million compared to $1.6 million for the second quarter of 2013. The decrease is primarily attributable to these decreased expenses related to marketing activities for our PerioPredict periodontal test, decreased consulting and professional expenses and lower sales commissions paid to Amway Global as part of our Merchant Network and Channel Partner Agreement, partially offset by increased compensation expenses.

Net loss for the second quarter of 2014 was $1.6 million or $0.01 per basic and diluted common share, compared to $1.8 million or $0.02 per basic and diluted common share for the same period in 2013.

As of June 30, 2014, we had cash and cash equivalents of $4.2 million. Deferred revenue as of June 30, 2014 was $3.2 million compared to $3.8 million at December 31, 2013, representing genetic tests sold and not yet processed. Ken?

Kenneth S. Kornman

Thank you, Eliot. Here at Interleukin, we do believe that the future of healthcare is personalization, prediction and prevention and we’re very proud of our very progress thus far. We are confident that PerioPredict will be a successful example of the benefits of personalized medicine.

We thank you all for joining us on today’s call. And now for any questions Eliot and I’ll be happy to address them at this time.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of [Peter Wilson] (ph). Your line is open.

Unidentified Analyst

Ken and Eliot how are you?

Kenneth S. Kornman

Thank you. Good, Peter.

Eliot M. Lurier

Hi, Peter.

Unidentified Analyst

Number one, I appreciate the – and I’m sure the rest of the shareholders appreciate the presentation; was very helpful. Just a couple of questions I have. I guess, I just got my notice – reminded to come in tomorrow my dental cleaning and it’s not the most exciting thing that I’ve faced during the week, but I have to go. But I guess the question that I have is, when I go on the Internet, I really don’t see anything from the press, there is no buzz about PreioPredict.

I would be one of the happiest patients to find out that I only have to make one trip a year to visit my dentist. What’s the response that we’re getting from the patients themselves in terms of having an opportunity to take this test? And that’s my first question. The second one is, what’s are the positives that these six to nine months that you’ve learned and what are the big surprises that you’ve learned, as well that impacted the ability to keep get this rolled out a lot faster?

Kenneth S. Kornman

Yes, thank you. So are we doing that have some feedback from the patients. And we are able to get that primarily because of our dental hygiene educators are in the field, who interact with the some of the offices. And by and large the patients have been very receptive to this, we’ve had very few who have expressed concern about any issue related to genetic testing, much of fewer than I think anyone would have predicted just a few years ago. And so the general response at the patient level is very positive. They view their dentist as being leading edge by offering this, and we’re continuing to try to capture more patient level information and expect that will gradually be done by the employer groups.

Your second question, I think is a key one. There are really a lot of learnings during this first phase. The first is, as we indicated, these policies are being offered – there are being offered to the large employer groups and they are offered in such a way that there is, as discussed in terms of value chain, there is some incentive in terms of the employer group saving some money for better care. This is not easy to transform healthcare, not at the medical level and not at the dental level. And so, with the large employer groups there is a [notion] (ph) and I think it is a slower process than we would have predicted and that the insurance companies would have predicted, in spite of what we’re experiencing as great interest by the companies. I think its early adopter type of phenomenon.

The other thing that we’ve seen that I think was a pleasant surprise was, as we mentioned in the slides that in spite of this being new and with the benefit of our education process, the dental offices that have 10 or more patients covered by the policy, which we think is actually a pretty low threshold, these officers really have adopted the technology and they are using the test at a good rate.

So that’s kind of where we are. We think it’s been – this experience in the dental office, which is proving very positive, the policy is being offered and are adjusting with our partner to how do we get through this initial period of helping educate the employers and firms of the real value and grab the early adaptors. And, as we’ve indicated – our discussion with the other payers to broaden the exposure to this test.

Unidentified Analyst

Okay. And just looking at one question, the Internet issue. When you go on the Internet and you Google PerioPredict, there is no mention of it other than the press release that you guys put out eventually. I may have missed one or two, but you would think that the negative comments, positive comments, some comments to let the patients, the potential patients, I guess, and potential customers, say, hey, to the dentist, why are we doing this, especially a very interesting stat that you had on your slide, if I got it right, 52% of the people will need more of them through cleanings.

Kenneth S. Kornman

Right. Two or more, yes.

Unidentified Analyst

Two or more, which should be a real incentive for the dentists, I would think – I don’t know.

Kenneth S. Kornman

It’s a good point, Peter, and keep in mind that for a new product like this, you can pursue the market from two basic directions. One is you can try to drive that in healthcare from the patient level and all day long and evening we see on television the massive advertisements for new drugs. We feel like we’re actually fortunate to have the opportunity to drive adoption through the insurance coverage of this new technology, which should bring into coverage and into test use of large numbers of people overtime.

The pushing from the patient level does have a roll, but our intent is to build the base of covered policies for these tests, make the dentist aware, bringing the dental community into this through the discussions that we’re currently having. And they would recognition broadly across the country at the Internet level and through other media, when we’ve ceded various geographies through coverage with the plans.

So our real focus at this time is getting payers to offer the plans, to encourage employers to accept the plans and to get more covered lives. And we do think that will bring much more discussion into this.

Unidentified Analyst

I understand, and the dentist I don’t see any buzz among their literature or their lines of communication. And obviously I don’t have the same lines that you guys do, but is there a buzz being developed amongst the dentists that, hey, this new opportunity is coming down the road and we got to get with the program?

Kenneth S. Kornman

No, the dentist – this is, as you might imagine, this is very new.

Unidentified Analyst

Yes.

Kenneth S. Kornman

And it’s new in multiple dimensions. First of all, it is new technology, dentist do not routinely take samples for DNA analysis, they don’t routinely do diagnostic test and so this represents new technology for them. And we’re training the local dentists who have patients covered by this. The other dentists really are not exposed to accepting presentations, I will give a lot of them to large groups and the dental community also takes giving a variety of large number of presentations to other people.

Unidentified Analyst

Okay, thanks a lot.

Kenneth S. Kornman

Okay. Thanks a lot.

Unidentified Analyst

You keep extending this work, fine.

Kenneth S. Kornman

Appreciate it.

Unidentified Analyst

Fine.

Operator

(Operator instructions) And we’ve just received another question from the line of Brian Marckx from Zacks Investment Research. Your line is open.

Brian W. Marckx – Zacks Investment Research, Inc.

Hi, guys. Kenneth, curious as to the cost savings message is potentially very compelling. Is that message delivered to the payers or the corporate employer or is it kind of a dual thing, I guess?

Kenneth S. Kornman

Yes, it’s a good point, Brian. So, there are really a couple of messages. So certainly that went in terms of potential for cost savings. It’s part of a conversation that we engage in with new payers with whom we’re talking. And certainly for Renaissance, it’s part of the discussion with the employer groups to which they are discussing these new policies.

I should also mention that there is another dimension to this that we get asked about and have discussed in various venues and that is that this is a very strong part of the overall wellness program for many companies and so they may be focused on a variety of things of which cost is only of them in terms of the benefits here.

Brian W. Marckx – Zacks Investment Research, Inc.

Okay. And then, on the dentist level, can you talk about kind of the dynamics of how the dentists perceive this? Is this accepted as something that they willingly accept? Or is this something – is there a potential push back from the dentist because this means that potentially there is fewer dental visits. Kind of how does that dynamic work in the whole system I guess?

Kenneth S. Kornman

So, as we indicated from the beginning of this process, this is a new message for the dentists. It’s all of our patients – dentists then with [high genes] (ph) have been trained for the last 40 years based on toothpaste commercials primarily to see the dentist twice a year, although dentist have longed down and the evidence indicate that there is no scientific basis for twice a year for everyone. Some people need more, some people need less.

And so, I think the dentists are aware of that. They recognize it. Their obviously is in some people concern because they don’t know how this may translate in terms of their own patients coming into the office for cleanings and any impact on their office revenues. So that discussion does take place at the same time. As I mentioned, we’re looking at the data from offices that have patients currently covered. And the message is pretty clear that as long as they have above a certain threshold, it’s rather low threshold of patients covered by the new policy, they’ve adopted the system and they are running the tests and that’s before the betterment of their patients and in order to provide a good care seems to be happening.

Brian W. Marckx – Zacks Investment Research, Inc.

Okay, good. And that’s the way – as far as I’m concerned that healthcare should go. In terms of utilization, you talked about utilization in the presentation. Do you have sort of an expected estimate in terms of the percentage of utilization of the patients that would be covered under the plan, how often are that they would use the test I guess?

Kenneth S. Kornman

So we don’t know that. We have projections, we have models, we have a variety of things. All we can look at is very small group, early first six months type of results and I think the most important and compelling message there is, again, for the offices that have certain numbers of patients covered, those patients are getting testing for the offices that have one or two patients covered in spite of our communication and communication from the payer and there is other information. They may not even recognize they have patients covered under this new policy until the patient comes in and a variety of things. So it does appear to be a good utilization in the offices that have patients with reasonable numbers.

Brian W. Marckx – Zacks Investment Research, Inc.

Okay. And in terms of metrics, I know you guys are probably maybe not willing to share metrics based on competitive reasons or other reasons. But is there any metrics that you are comfortable sharing relative to kind of the number of plans or enrollment or anything that you can talk about relative to the rollout of PerioPredict and the plans that are covering them?

Kenneth S. Kornman

It’s pretty much as we’ve said previously that right now we have a one payer offering these policies. So we’re not providing any covered life information. It’s a competitive industry and that represents competitive information and that represents comparative information. We are fortunately in discussions with multiple payers in each of three sectors we mentioned for and hopefully we’ll obtained additional partners down the road. Once that happens we’ll be able to talk more, we hope about covered lives of us, it will not be identifiable to any specific payer at that time.

Brian W. Marckx – Zacks Investment Research, Inc.

Sure, okay, understood. The last one was activity came out with guidance on, I’m sure as you know additional regulation of LDTs. What is your interpretation of the guidance relative to potential, my guess, additional regulation of your task and specifically to [PSP] (ph)?

Kenneth S. Kornman

Yes so the FDA has had this draft guidance for little over to two years. It was just in the last couple of weeks, they announced to Congress that they would be submitting the draft, to them within the next 60 days. And they provided a preliminary version of what they planned to submit. And that’s really only minor changes from what we saw even a few years ago. So this is something that we’ve expected would happened for actually many years, we’ve had multiple discussions with the FDA, they’re comfortable with us, we are comfortable with them.

Most importantly, the key to their new guidance, is that they will risk stratify the test for review. And so you are talking about, for example, comparing the genetic test for breast cancer and Alzheimer’s disease, with a genetic test for guiding dental preventive care. And so as you start looking at those in terms of what’s high risk and what’s not, I think, we’re pretty comfortable that our early dental test is not going to fall into the high risk category, there are in fact hundreds to thousands of tests that will.

And we are most likely not one of those, we’re where we always expected that the FDA would take a more active role in reviewing these tests. We’ve been prepared for that, we think we have substantial data, but we actually welcome the FDA’s participation in this process.

Brian W. Marckx – Zacks Investment Research, Inc.

Okay, perfect. Thanks guys and I appreciate it.

Operator

Thank you very much, and that is all the time that we had for questions today. I’d like to turn the call back over to the speakers for closing remarks.

Kenneth S. Kornman

Well, thank you very much again for participating. We appreciate the thoughtful questions, and we look forward to speaking with you again in the near future. Thank you.

Operator

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

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