HTG Molecular Diagnostics Inc. (NASDAQ:HTGM)
Q4 2015 Earnings Conference Call
March 24, 2016 4:30 PM ET
Jamar Ismail - WestWicke Partners
Timothy Johnson - President and Chief Executive Officer
Shaun McMeans - Chief Financial Officer, Vice President of Finance and Administration
Kevin Chen - Leerink Partners LLC
Mary Kate Gorman - Canaccord Genuity Inc.
Good day, ladies and gentlemen, and welcome to the Q4 and Year-End 2015 HTG Molecular Diagnostics Earnings 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 be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to introduce your host for today's conference, Mr. Jamar Ismail from WestWicke Partners. Sir, you may begin.
Thank you. Earlier today, HTG released financial results for the quarter and year-ended December 31, 2015. Before we begin the call, let me remind you that the Company's remarks include forward-looking statements within the meaning of federal securities laws, including statements regarding HTG's planned clinical and IVD activities.
Strategic initiatives, including planned menu expansion, market adoption, anticipated FDA interactions and submissions, instrument development and installed based progress, expectations regarding reimbursement, Pharma collaborations and expectations regarding gross margins, operating expenses, and other financial results.
These forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond HTG's control that may cause HTG's actual circumstances, events, or results to differ materially from those projected on today's call. Factors that could cause events or results to differ materially include those risks and uncertainties described from time-to-time in HTG's SEC filings. HTG cautions listeners not to place undue reliance on any forward-looking statements. HTG is providing us information as of the date of this call and HTG undertakes no obligation to update any forward-looking statements.
With that, I would like to turn the call over to TJ Johnson, President and Chief Executive Officer. TJ?
Thank you, Jamar. Good afternoon everybody and thank you for joining us on our fourth quarter and 2015 year-end conference call. On today's call, I will provide an update on key insights on our strategic initiatives as we build towards our long-term goal of the democratization of the NGS-based molecular profiling.
I will then turn the call over to our CFO, Shaun McMeans, for more detail on our Q4 financial results. After that, I will discuss our 2016 priorities and then open up the call for your questions.
Before I review 2015, I would like to discuss the newly signed IVD deal with Thermo Fisher. This deal is similar to the agreement we signed with Illumina in October 2014, and I'm very excited that we now have the ability to develop in-vitro diagnostic tests on the two leading NGS platforms.
Both companies worked very hard to get this agreement in place. Thermo has been fantastic to collaborate with and we look forward to moving into the execution phase of our agreement. Many of our future IVDs are expected to result from our Pharma companion diagnostic pipeline, and we can now offer our Pharma partners the flexibility at the top NGS platforms. We are currently equipping our R&D lab with the full suite of the Thermo Ion instrumentation, including the Ion PGM Dx, the Ion S5 and Ion Chef, and we will be prepared for our future development.
Okay, so let's now discuss 2015. 2015 was an excellent year for HTG as we made significant progress across our key strategic initiatives. As I have previously communicated, we are focused on building a clinically driven diagnostic Company not a research tools Company. While we opportunistically compete in the research market today, we expect the majority of our revenues in the future to be from the clinical market.
The following are some of the key accomplishments that I was very excited about the HTGM story. A key for increasing the adoption rate of our technology is menu expansion. We added breath to our HTG EdgeSeq research use only menu with four new sequencing based panels.
Our mRNA oncology biomarker, the DOBCL cell of origin, the lymphoma and our first immuno-oncology panel. Also instrumental through the clinical strategy is achieving regulatory clearance of our platform. We believe we’ve made significant progress with our HTG EdgeSeq lung fusion panel and we completed our pre-submission meeting with FDA in December of last year. We also increased our instrument installed base to 49 units and our Pharma development programs to 30. A 48% growth in the installed base and a 114% growth in our Pharma programs over year end 2014.
As expected our installed base growth accelerated in the second half of the year. In Q4, we added nine instruments to our installed base. We now have 22 sold units, 5 reagent rentals, 19 in performance evaluation programs, and three in KOL sites. As a reminder, our capital business will continue to be lumpy as we scale up our field resources.
Reimbursement is also a very important aspect of the adoption of diagnostic tests. And the HTG team has more strategically to improve our reimbursement position. In February and October of 2015, the AMA and CPT had a total committee adopted, HTG initiated administrative actions to add and harmonize language for the three genetic sequencing procedure or GSP, CPT codes as well as specifying the inclusion of RNA in the guidelines for the molecular pathology family of CPT codes.
These administrative actions have added and harmonized the code language to clarify that RNA is included in all of these codes, which means our customers can now access and utilize existing codes for our planned clinical menu. While managing reimbursement as a negative, we see a solid reimbursement foundation and supportive of our business model.
We believe the success of these administrative actions has increased our addressable market to an estimated $4.2 billion in molecular diagnostics. These successes were incredibly important to our plans and while much remains to be done, we are more bullish than ever on reimbursement for our products.
Recently, we held our first Scientific Advisory meeting in lymphoma leukemia and immuno-oncology, blood based cancers such as DLBCL and immuno-oncology in general are the two key focus areas of our future clinical programs. In addition to the IO advisory panel that we released earlier, we are extremely excited and honored to have the following participants on our lymphoma leukemia SAB.
Dr. Borowitz from the Hopkins, Dr. Steve from the Cleveland Clinic, and Dr. Yung from MD Anderson Cancer Center. I look forward to providing you more information on our clinical menu plans as they are currently being positively influenced by our advisors.
Project JANUS, which is our development program for the lower sample throughput clinical market, and this instrument is currently underway. We have completed the concept phase in our rapidly moving through design iterations. With JANUS, we plan to have solutions for the high, medium and lower throughput testing segments. We also see JANUS being synergistic with recent announcements of new sequencers such as Thermo Ion S5 and Illumina MiSeq.
Our plans for JANUS also include chemistry enhancements. We refer to as our V2 Chemistry. With the provisional patent application now filed, V2 is looking very promising and is our gateway to planned expansion in key areas such as DNA mutation analysis, single cell sequencing, and further liquid biopsy biomarker analysis. We have also nearly doubled our manufacturing and product development lab space and completed the in-sourcing of our instrument manufacturing. Our new instruments production line is up and running.
Later in the year, we began the process of expanding our commercial team. We hired our Commercial Vice President for Europe and began the process of building out our initial infrastructure for direct sales into Europe. On the U.S. side, we added sale positions in Q4 and continue to add into this quarter. Although we are still not at full planned headcount, we have a larger team deployed into the U.S.
Additionally, we were successful at strengthening our intellectual property with seven new issued patents across four families with the majority directed to the HTG EdgeSeq Technology. Lastly, we grew our product revenues in Q4 over the prior year quarter by 46%. I want to reiterate that HTG is not a short-term financial story. We absolutely expect to grow that our primary near-term focus is executing against our longer term clinical market plans.
In summary, we're very pleased with the execution against our plans in 2015 and believe our long-term features for HTG is strong, we are very optimistic.
I will now turn the call over to Shaun.
Thanks TJ. Our total revenue comprised almost entirely of products was $1.2 million for the fourth quarter compared to $1.3 million in the fourth quarter of 2014. Product revenues including instruments and consumables increased to $1.2 million in Q4 from $811,000 in Q4 2014. Consumables revenue increased 59% to $990,000 in Q4 from $625,000 in Q4 2014, driven by a demand for our profile balance. Instrument revenue increased to $192,000 in Q4 from $186,000 in Q4 2014.
Service revenue totaled $33,000 in Q4 compared to $100,000 in Q4 2014. Our Q4 gross margin was 34.5% compared to 7.6% in Q4 2014. This margin improvement results from increasing product revenues in corresponding standard gross margins versus our historical service and grant revenues. We are pleased with our gross margin improvement and do expect our product margins to increase as our volumes increase. We leverage our fixed operating cost and cost of goods and improve margins on our Pharma service business.
We intend to opportunistically perform sample processing services this for Pharma collaboration customers, as we believe this will further strengthen our position as the technology of choice for certain of our companion diagnostic programs. As a result, we might see significant service revenue in future periods with gross margins comparable to or current products.
Our operating expenses increased to $5.8 million for Q4 from $3.5 million in Q4 2014. As TJ mentioned, we are focusing or spending on strategic initiatives including R&D to full expansion and sales and marketing to accelerate market adoption. The increase in operating expenses was driven by $1.3 million increase in SG&A costs. Our general and administrative costs have increased primarily in connection with becoming a public Company.
Our research and development expenses were $1.7 million in Q4 compared to $700,000 in Q4 2014. We anticipate further increases to research and development expenses for 2016 with steady expansion of our panels including our ALKPlus panel for plan 2016 PMA, other [Heme] panel development in the latter half of 2016. Enhancements to our core chemistry and our continuing JANUS program development.
Net loss from operations for Q4 was $5.3 million compared to $3.4 million for Q4 2014. Net loss per share was $0.83 for Q4, and $52.49 for Q4 2014. The decrease in loss per share reflects the conversion of the Company's preferred stock and the sale of common stock in our May IPO.
For the year-ended December 31, 2015 revenue totaled $4 million including $3.5 million of product revenues. Net loss from operations for year-ended December 31, 2015 was $18.9 million compared to $12.8 million for the year ended December 31, 2014. On a per share basis, net loss for 2015 was $5.03 compared to a net loss per share of $175 and $0.03 in 2014. We ended 2015 with $34.1 million in cash investments including $3.3 million in cash and equivalents, $28.2 million in short-term available for sale investments and $2.6 million in longer-term available for sale investments.
At this point, I would like to turn the call back to TJ for some closing comments.
Thank you, Shaun. 2016 is off to an exciting start and we have aligned our team around three major objectives. First, accelerate our market adoption, second, submit our P&A to the FDA and achieve CE/IVD marking for our lung fusion ALKPlus product, and third continue to execute our development plan with Project JANUS for 2017 launch.
While we continue to focus our commercialization efforts in the Pharma and translational research market segments, we have turned our product development attention to our clinical product roadmap. With an improved reimbursement picture, we believe now is the time to pivot our development teams towards the clinical market starting with the ALKPlus and JANUS programs. With the assistance of our key opinion leader and scientific advisory network, we have established our next five-year product roadmap.
HTG’s diagnostic menu is expected to develop from three independent, but highly synergistic sources. First, companion diagnostic assays from our late stage Pharma programs also new emerging content from our translational customers, and finally, deploying our HTG's EdgeSeq technology to displace existing markets such as FISH, analysis of [facts sore cells and melio to] chemistry with a multiplexed NGS-based workflow.
We believe the likelihood of developing one or more companion diagnostic products is increasing as our DLBCL in IO panels appear to be extremely competitive due to our small sample input and sensitivity advantages. We also see our technology being adopted by large transitional centers in their assay development programs.
Last but not least we see a $4.2 billion market opportunity in displacing older technology workflows. The majority of our initial assays were focused on blood-based cancers. Ultimately this work further sets the stage for HTG to participate in the emerging liquid biopsy market opportunities.
As a side note by our estimates nearly half of the samples analyzed with the HTG EdgeSeq in 2015 were liquid biopsies. In closing, we are very pleased with our 2015 progress and excited about 2016. The HTG organization is fully focused on executing against our long-term strategy.
I will now open up for your questions.
[Operator Instructions] And our first question comes from the line of Dan Leonard with Leerink Partners. Your line is now open.
Hi, this is actually Kevin Chan in for Dan today. Good afternoon, guys.
Hi, my first question is on the sales funnel. A couple of quarters in, are you seeing anything that suggest seasonality? And what quarters I know you mentioned quarters would still be lumpy, but is there a run rate we can think about?
I don't think we see anything around seasonality at this point nor we actually at a point where we think we've got underlying trends that are kind of giving us an idea around linearity.
And is there any color you can give on the pipeline in quarter one?
No we’re not providing any at this point.
Okay. And I guess you have several ongoing initiatives, you know, kind of long-term drivers. Just wondering about your thoughts on managing the cash burn.
Sure. Well we feel very solid about our cash position as we exited 2015. We are monitoring our cash burn throughout this year, we do expect the cash burn to increase slightly. Although we believe a lot of the increases to the absolute dollar spend will also be offset by our growth in the topline and asset margins. So we feel pretty solid about our position as we enter 2016.
Great. And my final question, was there any feedback on the IO panel that you can give us? From…
Yes, sure. In 2015 our mRNA panel was by far and away our largest selling product. It will continue to be a major revenue contribution for us in 2016 although we fully believe the IO panel, which really wasn’t material to us in 2015, will be in 2016. We’ve had a number of clients who have already evaluated the panel, feedback have been very good. We are very excited about 2016 as it relates to the IO opportunity. Predominately in Pharma but we are also seeing interest in the translational centers.
Great. That's really helpful. Thank you very much.
Thank you. And our next question comes from the line of Mary Kate Gorman with Canaccord Genuity. Your line is now open.
Mary Kate Gorman
Hi, first congratulations on Thermo Fisher deal.
Thanks, Mary Kate.
Mary Kate Gorman
So I was actually hoping if you could spend some time maybe running through some of the particulars as to how maybe this deal is similar to or different from the existing deal that you guys have with Illumina.
Sure. It has more similarities; they are not. Those agreements really give us the ability to build these IVDs in the RNA diagnostic space. The fields are very similar and very broad. The Illumina agreement was for two assays, the Thermo agreement is for five, so we have a larger bandwidth at this point in time, but very similar agreements for us. We feel very good about those. Obviously, we're already underway with our first assay under the Illumina agreement with the ALKPlus and we look forward to getting started with an IVD utilizing the Thermal platform in the foreseeable future.
Mary Kate Gorman
Great. And are there any specific areas of tests, like lung or et cetera that you can elaborate on? Or is it -- is it still pretty broad at this point?
Yes we have Mary Kate, we have very broad rights within the agreement. It's highly likely that the first two areas of focus for us as we fine tune our next IVD will be in the area of lymphoma or immuno-oncology. We expect that this could likely be driven by our Pharma companion diagnostic deals. So as we get closer to a Phase III program with one of our Pharma clients. It's really important for us to be able to have the optionality of building of IVDs on either the Illumina or the Thermo program based on our Pharma clients preferences. So I would say that our initial view is that we’ll likely be doing something with the Thermo PGM Dx platform in the whole area of lymphoma leukemia or immuno-oncology.
Mary Kate Gorman
Great. So it's not fair to say that you see this having a positive impact on your ability to win new customers? Like, can you give any comment as to how you might expect this to impact numbers in 2016 or 2017 even?
Yes. I don't really think we've expect a whole lot of impact into specifically from this in our numbers for 2016 I think what an agreement like this does for us, is it’s further validation, organizations such as Thermo is willing to enter into this type of agreement with HTG.
So I think from a customer perspective, it should provide our customers further validation on the current state and potential state of the HTG solution. I think it's also very important for our Pharma clients who are looking to include HTG in their Phase III trials that they recognize that we have deployed ability of those IVDs with either of the major NGS platform companies.
Obviously, as I mentioned in my remarks we’re pivoting our development efforts, not 100%, but highly away from building more RUO products into clinical products. So we really felt it was important to increase the bandwidth in a number of options that we had for assays on the various sequencing platforms.
So I think this was a really, really important strategic move for us. I think it will give us a short-term validation boost with customers and then as we start to deploy our clinical menu over the next one to three years. We will start to see the benefit as it flows to the topline.
Mary Kate Gorman
And maybe I missed this, but did you say if you added new Pharma partners in Q4?
We did. We grew 27 to 30.
Mary Kate Gorman
We are seeing a fairly consistent growth in new programs quarter-over-quarter. We are really excited, very keen about the depth and breadth that we're getting with our Pharma clients on the clinical side. I am very proud of my team. They're doing a bang-up job on that end.
Mary Kate Gorman
And then I guess just one more. Are you guys planning on exhibiting at the AACR Conference next month? And if so, is there anything we should be looking out for?
We will be. We will be at AACR. We’ll also be at ASCO and a number of others. We will be presenting posters and abstracts at each of these meetings. These will be driven by our customers. I think that's an important additional inflection point for our Company that we now have added the HTG EdgeSeq Technology on the market for about 18 months and we're starting to see the initial wave of customer driven presentations and customer driven data, whether it's posters, abstracts or publications. So you'll see us at all of the major tradeshows this year and you can also hit our website Mary Kate and we list out each of the tradeshows that we're at and what our activities are planned to be.
Mary Kate Gorman
Excellent, well, thank you for taking my questions. And Mark sends his best from there.
All right, that’s appreciated.
Thank you. I'm not showing any further questions at this time. I would now like to turn the call back to Mr. TJ Johnson for closing remarks.
Okay, everybody. We very, very much appreciate you calling in for our earnings conference call, and look forward to talking with you again in about six more weeks for the Q1 call. Thank you and have a nice evening.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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