OvaScience's (OVAS) CEO Harald Stock on Q2 2016 Results - Earnings Call Transcript

| About: OvaScience, Inc. (OVAS)

OvaScience, Inc. (NASDAQ:OVAS)

Q2 2016 Results Earnings Conference Call

August 04, 2016, 04:30 PM ET

Executives

Jennifer Viera - Investor Relations

Harald Stock - President and Chief Executive Officer

Jeffrey Young - Chief Financial Officer

Analysts

Rohit Vanjani - Oppenheimer

Michael King - JMP Securities

Operator

Ladies and gentlemen, thank you for standing by and welcome to the OvaScience's Conference Call to Discuss the Company’s Second Quarter 2016 Financial Results. At this time, all participants are in a listen-only mode. There will be a question-and-answer session to follow. Please be advised that this call is being recorded at OvaScience's request.

At this time, I would like to introduce our host for today's call, Ms. Jennifer Viera at OvaScience. Please go ahead.

Jennifer Viera

Thank you. Good afternoon and thank you for joining us on today’s call to discuss OvaScience’s Financial Results for the second quarter ended June 30, 2016. With me today are Harald Stock, our President and Chief Executive Officer and Jeff Young, our Chief Financial Officer.

Our discussions during this call today will include forward-looking statements. Actual results could differ materially from these forward-looking statements. Please see our press release issued this afternoon and our annual report on Form 10-K and our most recent quarterly report on Form 10-Q for important risk factors that could cause our actual results to differ materially from those projected or suggested in the forward-looking statements. We undertake no obligation to update or revise the information provided on this call as a result of new information or future results or development.

We will begin first with Harald who will discuss highlights from the quarter followed by Jeff who will discuss our financial results. After our remarks we will open the call for Q&A.

Now I’ll turn the call over to Harald.

Harald Stock

Thank you, Jennifer and good afternoon, everyone. I’m delighted to be here to discuss OvaScience, our financial performance and our progress in the second quarter.

But before I begin, let me reiterate why I am so excited to have officially begun my tenure here. As you know, OvaScience is driven by our mission to transform fertility. This is an urgent and important cause and one our employees strive to achieve each and every day. The team here is driven and capable. In four years they successfully developed and commercialized the transformative treatment AUGMENT and made important progress in the development of two others, OvaPrime and OvaTure.

I feel extremely fortunate to be part of a company so committed to making an impact and I look forward to working with our employees to help women and couples build the families they deserve.

On our first quarter earnings call, I outlined three strategic pillars, which will serve to grow our business in the months and years ahead. With the close of our $53.9 million financing in June, we have the cash on hand to execute against each of these pillars and to continue building OvaScience into the successful, global, commercial organization with multiple fertility treatment paradigms, each supported by high-quality robust scientific research.

The first of these three pillars relates to our regional expansion. We seek to build out our operational platform and execute a targeted commercialization of the AUGMENT treatment with a narrow and deep focus on Canada as our initial market and Japan as our next priority region.

We have made significant advancements towards this goal and are pleased with our progress to date. This progress is reflected most clearly in the revenue we generated this quarter. Specifically, we recognized revenue from 34 AUGMENT cycles, a 42% increase in commercial cycles over the first quarter of 2016 and a 55% increase in commercial cycles over the full fiscal year of 2015.

We continue to gain traction in Canada. During this past quarter, OvaScience entered into agreements with two new clinics, Clinic OVO and the Clinic of Fay Weisberg formerly of First Steps. Both will join existing partners in offering the AUGMENT treatment commercially following the completion of the preceptorship training program. With these additions, we now have six clinics offering AUGMENT in Canada four of which signed on in the past six months alone.

Turning to Japan, following the completion of our noncommercial preceptorship training program, we remain on track with our preparations for the commercialization of AUGMENT. In May 2016 OvaScience signed a letter of intent with IVF Japan. The company is in the process of finalizing a commercial agreement with this clinic group. We are making solid progress in recruiting our in-market team, building out our infrastructure and expanding our customer base.

And with respect to the U.S. a market of interest to many of you I'm sure, we continue to work diligently to determine our FDA strategy for AUGMENT and we will provide an update on our progress by year-end.

We also made the decision to discontinue availability of the AUGMENT treatment at clinics in Panama and Turkey in order to align with our narrow and deep geographical strategy. We are committed to minimizing the impact of this decision for women and families in this region.

Moving on to our second pillar, we aim to build a patient centric business model, in part by intensifying our direct-to-patient marketing efforts and offering patient support services. We will proactively educate patients and physicians about AUGMENT by providing them credible and convincing clinical facts.

Our goal is that the more clinics in Canada have experience with AUGMENT the more feedback we can integrate into our building of personalized patient services and marketing campaigns and we believe the more successful these launches of our treatments in Japan and future markets will be.

To that end, at ESHRE 2016, the European Society of Human Reproduction and Embryology's annual meeting in July, more than 200 attendees came to our sponsored symposium to hear presentations from three fertility specialists.

Dr. Robert Casper of TRIO Fertility spoke on clinical experiences with the AUGMENT treatment. He described the treatment process from a physician's perspective and presented clinical data demonstrating improvements in ongoing clinical pregnancy and life birth rates following treatment with AUGMENT compared to standard IVFs.

Dr. Evelyn Telfer of the University of Edinburgh spoke on her experiences with the isolation and characterization of egg precursor or EggPC cells from adult women which has potential applications in fertility preservation and restoration and supports the continued development of all of OvaScience's treatments.

And Dr. Justin St. John, of the Hudson Institute of Medical Research discussed work regarding the mechanism of action related to AUGMENT which supports the use of autologous mitochondrial supplementation to enhance fertilization and embryo development.

Our focus on building patient and physician experience with each of our treatments ties into our third and final strategic pillar, educating patients and physicians objectively through the development of robust, gold standard data sets that support the use of our products and demonstrate their clinical benefit.

We are extremely pleased to have presented preclinical data relating to each of our three treatments in the second quarter, while also progressing our ongoing clinical development of AUGMENT and OvaPrime and our preclinical work with OvaTure.

First, with regard to AUGMENT at the seventh Ovarian Club meeting in May, our scientists presented data supporting the feasibility of freezing and storing mitochondria isolated from EggPC cells prior to performing augment. Results from this pilot study demonstrated our ability to sustain the viability, energy potential and structural integrity of mitochondria after long-term storage. These data have important implications as they suggested our current decentralized cell processing centers can be migrated into a more centralized cell processing structure without any negative effect on mitochondria quality.

Also with respect to AUGMENT we continue to work on an adaptive, prospective, controlled, double-blind and randomized echolocation study in conjunction with the EV group to evaluate the success of standard IVF versus AUGMENT. As a reminder this study is focused on poor prognosis patients which redefined as those who have failed at least one prior IVF cycle with embryo transfer and no pregnancy due to low embryo quality. We continue to expect those data in the second half of 2017.

Turning to OvaPrime, at the ESHRE meeting, our scientists presented preclinical data supporting OvaPrime's safety profile in monkeys. In six months, post EggPC cell repositioning treatment, no morbidity, mortality or treatment related abnormalities were observed and no significant pre-to post-within animal changes were shown for bodyweight, hematology, serum chemistry or urinalysis parameters.

In addition, all animals maintained normal menses after the EggPC cell repositioning indicating that there was no negative impact on ovarian physiology. This study further supports the development of OvaPrime as a safe treatment option for women who do not produce any or enough eggs potentially providing them with alternative to surrogacy or adoption. And we continue to progress our clinical program with OvaPrime.

In addition to our ongoing study in the UAE, we recently received IRB approval to begin a second broader study in Canada led by principal investigator Dr. Robert Casper, Medical Director of TRIO Fertility base in Ontario. This study, like the one currently ongoing will evaluate the safety of OvaPrime and changes in patients' hormone levels and follicular development as measured by ultrasound.

Treated patients will be followed long-term and as this study progresses, we will also track pregnancy rates among patients. Based on the internal analysis of preliminary safety data from these two studies, we will evaluate the path forward for OvaPrime and plan to provide an update by year-end.

Finally, with regard to OvaTure our potential, next-generation IVF treatment for women with compromised eggs or those who are unable or unwilling to undergo hormone hyperstimulation we continue to work towards maturing human EggPC cells into human eggs and plan to further these efforts throughout the remainder of the year.

In summary, looking to the second half of the year, we remain focused on building out our company into a fully integrated global commercial business. I am excited to work with my executive team, our board of directors, and dedicated employees to achieve these goals and look forward to keeping you updated on that progress.

I will now turn the call over to Jeff, who will review our financial results from the second quarter. Jeff?

Jeffrey Young

Thank you, Harald, and good afternoon everyone. Earlier today we issued a press release detailing our financial results for the second quarter 2016 and I now would like to take a few minutes to recap these results.

As of June 30, 2016 we had cash, cash equivalents and short-term investments of $147.7 million. This cash balance reflects proceeds received from the completion of a follow-on offering in the second quarter from which we received $53.9 million net of offering costs through the sale of approximately 8.2 million shares of our common stock. Excluding the proceeds from the offering our cash burn for the second quarter was $16.4 million, which was slightly below our prior quarter cash burn of $16.6 million.

As discussed, we believe this cash balance is sufficient to support our corporate strategy, including the continued commercial expansion of AUGMENT in Canada, the preparation of our expected launch of AUGMENT in Japan, our ongoing clinical studies of AUGMENT and OvaPrime and the continued development of our OvaTure treatments.

Now let me turn to our financial results. Revenue for the quarter was $189,000 compared to $30,000 in the same period last year $146,000 in the first quarter of this year. The revenue recognized in the second quarter relates to 34 AUGMENT cycles. This compares to 24 AUGMENT cycles in the first quarter of 2016 and 22 augment cycles in the full fiscal year of 2015.

In addition, as a result of certain pricing programs that we currently have in place and the anticipated volume from these programs, we now expect the average or blended commercial price per AUGMENT treatment for the second half of 2016 to be approximately $5000 to $6000, similar to the average price per treatment in the first half of the year.

Net loss for the quarter was $18.6 million as compared to net loss of $17.5 million for the same period last year. We attribute this increase in net loss primarily to planned higher personnel costs and costs associated with the commercial expansion of AUGMENT in certain international IVF clinics.

Cost of revenue for the quarter was $1.2 million compared to $116,000 for the same period last year. This increase was primarily driven by the continued expansion of our commercial operations to support our current demand as well as our anticipated future growth. The current quarter's cost of revenue is consistent with our prior quarter of $1.2 million.

In addition, we did not incur material costs in exiting our operations in Turkey and Panama as we believe we can redeploy the assets from these regions to other clinics and we do not expect the discontinuation of our operations in these regions to have a material impact on our operating costs.

Research and development expense for the quarter was $6 million compared to $4 million in the same period last year. This increase resulted primarily from a $1.21 increase in employee compensation and related benefits driven by the hiring of additional research and development personnel, increase in lab supplies and patient related costs associated with our ongoing clinical study being performed at the EV [ph] group and a $300,000 increase in facility, consulting and other costs.

Current quarter research and development expense is consistent with our prior quarter of $6 million. We expect research and development expense to increase as we continue to advance our program successfully towards commercialization and work to complete patient enrollment in our studies.

Selling, general and administrative expense for the quarter was $11.2 million as compared to $13.1 million for the same period in 2015. This decrease was primarily a result of a $2.4 million decrease in stock-based compensation expense, driven by a $1.3 million reversal of expense related to the forfeitures of unvested options as a result of the resignation of an executive in the second quarter and $1.1 million decrease in stock-based compensation expense for executives that did not recur in 2016 as a result of certain leadership changes since the second quarter of last year.

This was partially offset by an approximate $650 million increase in personnel and personnel related costs driven by the hiring of additional selling, general and administrative personnel to support our strategy.

Current quarter selling, general and administrative costs represent a $3.3 million decrease from the first quarter of 2016. This decrease was primarily driven by the costs associated with the stock-based compensation expense reversal discussed earlier and cost associated with certain management changes in Q1 that did not recur.

We do expect selling, general and administrative expense to increase as we are hiring international sales and operational personnel to support our commercial efforts for the AUGMENT treatment and future treatments in our key region. As discussed we continue to build regional teams and infrastructure to align with our geographical strategy to support future growth. As a result, we anticipate our operating expenses and cash burn to increase to reflect the additional effort.

With that, I'll turn the call back over to Jennifer. Jennifer?

Jennifer Viera

Thank you, Jeff. We will now begin the Q&A session. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And from JPMorgan we have Tycho Peterson. Please go ahead.

Unidentified Analyst

Hey guys, this is Steve Reeman [ph] on for Tycho. Thanks for taking my questions. So, at this stage on the build out in Canada, would you say your near term commercial focus is more on signing up additional clinical partners or is it more on kind of directing patient flow into your existing clinical partners?

Harald Stock

Hey, thanks for the question and thanks for joining. It's going to be a two-fold answer here. Providing sufficient access to our treatment is one of our priorities and so we wanted to be able to cover the entire country, the entire market with our clinic footprint, and also driving patient awareness and directing patients into our partner clinics is the second lever in this commercial strategy.

Unidentified Analyst

Got it. And then can you just give us a little more color on how you are thinking about some of these discounting programs? I mean, should we expect pricing to trend higher over time as you become established in more of these markets and adoption growth?

Harald Stock

Yes, Steve, thanks for the question. As we said before, our patients are our priority and we want to make sure that we introduce as many patients to our AUGMENT treatment as possible through our pricing programs which are designed to broaden customer knowledge and really to provide clinicians with the hands on experience.

We do believe that the average – as we've talked about the average pricing for the second half of the year, will remain similar to what we have in the first half, but as we look beyond 2016 and as we introduced AUGMENT into additional regions and gain further experience and continue to strengthen the value proposition, I think we anticipate that the price will continue to increase.

Unidentified Analyst

Got it. That's all from me. Thanks guys.

Operator

From Oppenheimer & Company, we have Rohit Vanjani on line. Please go ahead.

Rohit Vanjani

Hi Harald and Jeff, thanks for taking the questions. For the 34 commercial cycles does that include previous biopsies where the revenue wasn’t recognized?

Harald Stock

It would, a portion of the – a portion of our deferred revenue is included in those cycles, yes.

Rohit Vanjani

And can you say how many of the 34 sites or how many total biopsies do you have in the quarter where you haven’t recognized the revenue?

Harald Stock

We haven’t been giving that balance out, but what we did say is that biopsies obviously for the quarter are 25 and the treatments are 34. So we are seeing some positive trend in the numbers.

Rohit Vanjani

You said biopsies are 25 in the quarter?

Harald Stock

That is correct.

Rohit Vanjani

Okay. And then the 34 cycles they were all performed in Canada?

Harald Stock

No, that is not correct, we had cycles performed in other regions, predominantly in Canada, but as we've talked about in the past, but we have – we are seeing treatments in other regions.

Rohit Vanjani

Okay. And then the preceptorship in Japan, is that still in the end of 2016 timeframe, I couldn’t tell by your comments in the press release?

Jeffrey Young

We earlier disclosed that we have entered into commercial negotiations with IVF Japan and we have in May, we have signed – signing NOI that actually provides the framework for those negotiations with IVF Japan. We are currently negotiating that contract and we are confident that we can wrap this up still this year.

Rohit Vanjani

Maybe I should have been more clear, so are you expecting a commercial launch in Japan sooner or kind of in the second half of the year?

Harald Stock

No, we expect the commercial launch to happen in 2017 the same way we guided earlier. Part of that is that we need sufficient access to the entire market in terms of customer base, clinic customer base and then creating the awareness both in the patient population as well as in the physician population driving referrals of clinics.

Rohit Vanjani

Okay and then the last one from me, is there any updates the UAE or the UK coming online with AUGMENT?

Harald Stock

No news on this one Rohit.

Rohit Vanjani

All right, thanks.

Harald Stock

Thanks Rohit.

Operator

From JMP Securities, we have Mike King on line. Please go ahead. Mike King, your line is open.

Michael King

Sorry. Just a quick question about sort of maybe lessons learnt from the AUGMENT launch in Canada and how that might translate into Japan, are you – are there things that you feel like you can gain some advantage on your launch or is Japan such a unique market that it is going to be kind of a de novo launch there?

Jeffrey Young

Obviously each market has regional specifics and part of our hiring of end market teams that were currently performing is to hire experts, local experts in the market to actually adapt a go to market model of to the market specifics. That said, we have consciously chosen Canada as our first market in order to gain experience from a healthcare system that is close by, but then has both similarities of the U.S. market as well as the European markets and has been concentrated enough for us without exorbitant spend to actually refine our go to market. So we are expecting, we're gaining commercial experience in Canada. We are expecting to learn and to perfect our launch for our strategic priority regions such as Japan as the next market.

Michael King

Harald, could you say how promotion sensitive Japan is or is it typically a word of mouth market or is it one that where consumer advertising or some other kind of promotional efforts can be brought there?

Harald Stock

We can provide more color once we get closer to the launch, but it is as in other markets in my experience from launching products globally and with the specifics of the fertility market, it is a mix of patient outreach, it is a mix of OB/GYN and primary care physician education as well as clinical and commercial sale to the IVF clinics. So it is a three tiered marketing approach.

Michael King

Thanks for taking my questions.

Harald Stock

Thank you, Mike.

Operator

[Operator Instructions] From Credit Suisse, we have Kevin Meehan on the line. Please go ahead.

Unidentified Analyst

Hi, this is [indiscernible] calling in for Kevin. Thanks for taking the questions and Harald, congratulations on the transition to becoming CEO. I just wanted to get some more clarity around the 34 cycles, you had said that the cycles were done predominantly in Canada, also wanted to get a sense of which other regions cycles had been done in.

Harald Stock

Sure, the majority of the cycles comes from Canada in the second quarter. Before we closed operations in Turkey and Panama other international markets were also source of those commercial cycles.

Our regional strategy is a strategy of going deep and narrow in a few selected markets. As a small company we need to be conscious of our spend and really maximize the return on invest, especially in a space where we’re learning go to market model as the uniqueness of our business is that there is no cookie cutter approach, no blueprint here for a cell therapy in the fertility space.

It's not a drug launch. It's not a device launch. This is new and therefore we really want to stay focused. Our first market has been Canada or our second market and that’s a key strategic market for us is going to be Japan where we plan to launch next year.

Unidentified Analyst

Okay, great. Thank you and just a follow up on the decision to exit Turkey and Panama, was that primarily strategic or was it due to perhaps near the recent military coup that occurred in Turkey as well as, if you could elaborate on the decision to leave Panama as well?

Harald Stock

Yes, first and foremost, strategic decision to really focus our resources, obviously what happened recently in Turkey made that decision easier and accelerated our decision making.

Unidentified Analyst

Got it, okay. Thank you and if I could just ask a question on the U.S. market entry strategy that you alluded to, is the goal to involve a regulatory strategy and involving the FDA or leveraging the, practice of medicine features that traditional IVF method to be used?

Harald Stock

We earlier said that we will update publically on our market entry strategy for the U.S. before the year end and that’s what our current plan is.

Unidentified Analyst

Okay, great. Thanks for taking the questions.

Harald Stock

Thanks Lanic [ph].

Operator

We have no further questions at the moment. We will now turn it back to Jennifer Viera for closing remarks.

Jennifer Viera

Thank you again for joining us today. We look forward to providing additional updates on future calls. If you have any other questions, please do feel free to reach out to us. Thanks everyone and have a good night.

Harald Stock

Thank you, everyone.

Jeffrey Young

Thank you

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for joining. You may now disconnect.

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