Cancer Genetics Incorporated (NASDAQ:CGIX)
Q2 2016 Earnings Conference Call
August 10, 2016 08:30 AM ET
Edward Sitar - CFO
Panna Sharma - President and CEO
Jay Roberts - COO
Ben Haynor - Feltl and Company
Ram Selvaraju - Rodman & Renshaw
Thomas Pfister - RedChip Company
Sherry Grisewood - Dawson James Securities
Good day and welcome to the Cancer Genetics Inc. Second Quarter 2016 Earnings Call. And the end of today’s conference there will be a question-and-answer session. [Operator Instructions]. Today’s conference is being recorded. At this time, I would like to turn the conference over to, Edward J. Sitar, Chief Financial Officer. Please go ahead sir.
Thank you, Vez. Good morning and thank you to everyone for joining us for the Cancer Genetics’ second quarter 2016 earnings conference call. On the call today are company President and Chief Executive Officer, Panna Sharma; Chief Operating Officer, Jay Roberts and myself, Chief Financial Officer, Ed Sitar.
The company issued a news release last evening highlighting the company's financial results and progress on operations, which is available under the Investor Relations' section of the company’s website.
Following the Safe Harbor statement, Panna will provide an overview of the second quarter, including recent events and company activity. I will then provide a summary of the second quarter financial results, and Jay Roberts and Panna Sharma will provide updates on our operations and portfolio. We’ll then open up the call up to questions.
We’d like to remind everyone that various remarks about future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Cancer Genetics cautions that these forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those indicated, including risks described in the company’s filings with the SEC.
Any forward-looking statements made on this conference call speak only as of today’s date, Wednesday, August 10, 2016, and Cancer Genetics does not intend to update any of these forward-looking statements to reflect events or circumstances that occur after today’s date. This conference call is also being recorded for audio rebroadcast on Cancer Genetics’ website at www.cancergenetics.com. All participants on this call will be in a listen-only mode. The call will be followed by a question-and-answer session.
With that, I’d like to turn the call over to President and CEO, Panna Sharma for his opening comments. Good afternoon, Panna.
Thank you, Ed and good morning to everyone. Thank you for joining us on our second quarter call and to hear about updates about Cancer Genetics. Our second quarter was a record revenue quarter for us and also pointed to several other major improvements in the company, namely revenues were up 67% year-over-year at $7 million this quarter, driven by strong organic growth and increasingly larger book revenue from our biopharma customers.
Operating losses were down 20% year-over-year to 4 million and down 23% in sequential quarters from Q1. Gross profit margins were up upto 39% this quarter, a 7% improvement over the last quarter and a three-fold improvement from 13% during the first quarter after our acquisitions in California in Q4 of last year.
Additionally, during the second quarter, we increased our future revenue expectations from contracted revenue with biopharma customers to over $47 million, and are now actively supporting and providing the testing, data and companion diagnostic services for a 100 clinical trials and studies throughout CGI.
For those of you who are new to CGI and would like additional background on the focus of our company, we are emerging leader in precision oncology, providing critical genomic and biomarker information for the personalization of oncology diagnosis, patient management and treatment selection.
Our proprietary and disease focused genomic panels support the work at many clinical centers, hospitals, as well as the precision medicine initiatives and clinical trials of biotechnology and pharmaceutical companies. We have a unique and unparalleled global infrastructure for the development and delivery of oncology diagnostics from bench to bed side through our state-of-the-art facilities in the US as well as India and China.
We currently have research collaborations of 18 leading academic and research centers including Mayo Clinic, Memorials Sloan-Kettering, The National Cancer Institute, Columbia University, Moffitt Cancer Center, the Keck School of Medicine at USC, and the Huntsman Institute at the University of Utah to name a few.
These collaborations allow us to leverage the vast and rapid innovation going on in oncology, biomarkers and genomics and immune markets today and more importantly to help us translate and rapidly validate these insights with real patient data that powers our tests and services. This unique access and ability to leverage translational oncology programs, generates a significantly differentiator for our shareholders and also for our business partners.
Our vision is to be the oncology diagnostics and precision oncology partner from bench-to-bedside by combining innovation and execution. This is especially critical today in our industry as the fundamental business of laboratory based genomics and molecular diagnostics is rapidly changing. And we feel that our proprietary technology, our scope and our business model would make us an enduring and clear leader in this industry as it continues to have an impact on patient care and on therapy development.
Today you’ll also meet Jay Roberts, who joined our team recently as COO and EVP and he will be responsible for the continued improvement and optimization of CGI as well as a number of strategic initiatives to optimize the company to better scale and deliver increasingly better margins. We are excited to have a proven leader and a highly collaborative partner like Jay on board.
Driving our growth this quarter, was a strong increase in revenue from our biopharma contracts, where we provide critical information in genomics and biomarker profiles of patients before, during and often times after the trial. Revenue from biopharma services was $4.2 million. We estimate that nearly $4 billion to $4.5 billion is spend by biotechnology and pharma companies that need critical biomarker and genomic information and companion diagnostic development in markets that we are active in today.
So this is a large and high growth market, given the number of trials, especially combination trials and immuno-oncology trials sponsored by the well-funded biotech and pharma communities. As I mentioned earlier, our company is now supporting actively about a 100 clinical trials and studies throughout CGI and as we shared with you in our last call, we continue to accelerate that with a significant amount coming from immuno-oncology and combination trials using immune markers as a key status determinant.
We’re now providing crucial data and testing results to support 20 immuno-oncology trials and studies. This is up sharply from the 12 that we talked about during our last call and the three that we had signed at the end of last year. The traction our business is receiving in the market place is also driven by our clinical services, which contributed 2.5 million in revenue, which is a 103% increase over the last year and a 4% increase over the first quarter.
During our last call, we reported that CGI had delivered genomic and biomarker information for over 6600 tests, that number during Q2 was up to now over 7150 tests. To give you some rough dimension of where those tests are coming from, approximately what are they being used for? Roughly a third of those tests in the last quarter were used to support decision making and patient therapy selection and monitoring for lung cancer. These are largely delivered from our West Coast Center of Excellence for Solid Tumors and roughly another third were delivered from our East Coast Center of Excellence for Hematologic cancers, mostly for leukemia, lymphoma and multiple myeloma studies.
From our portfolio we successfully launched our multiple myeloma profiler to support clinical trials and nearly 5% of our revenue during Q2 came from new studies in the areas of multiple myeloma and trials that leverage the unique M3P product, the Multiple Myeloma Mutation Profiler that we co-developed with Mayo Clinic and we believe that the clinical launch which is expected later this quarter will be even more successful, given the need to manage and appropriately diagnose this challenging, changing and expensive cancer.
Two major trends that we’re seeing across all cancers and ones that are critical for us to continue delivering on the mission to be the partner for precision oncology from bench-to-bedside are: Number one, the availability and integration of immuno-oncology data and immune marker status for patient care and clinical trials. Two, the need for highly sensitive disease validated liquid biopsies for solid tumors done through the analysis of cell-free DNA or RNA from blood.
Both of these are important pillars of our future portfolio of innovation. These along with our continued focus on developing unique disease focused oncology panels, largely funded by our partners and collaborators comprise the three areas of our focus on innovation and portfolio development. The first area, immuno-oncology is expected to impact nearly 60% to 70% of cancer patients in one form or another, and CGI is ideally positioned on both the solid tumor and [hema] side to provide disease relevant biomarker status.
In fact in many cancer categories, CGI is helping to discover and define the markers and cut off values that establish the sensitivity points that need to be achieved for other markers to be actionable or meaningful. As many of you know, this is a very important area for clinical trials as evidenced by some of the recent news, and we also in addition to the clinical trial support we now support all the FDA cleared IHC markers as well as complimentary diagnostics and we offer two unique proprietary panels for comprehensive immuno-oncology status assessment. One that is done by a large scale RNA sequencing via NGS and one done by immunophentotyping on FLOW cytometry.
Driven by these world class capabilities, we are now supporting immuno-oncology for merely 50 clinical ordering sites, and that number is growing rapidly. Most of these today are for lung and it’s become one of our fastest growth areas on the clinical side of our business. In addition, we are supporting over 20 clinical trials and studies across nearly a dozen different tumor types, including a variety of solid tumors lymphomas, myelomas and leukemia.
This is especially critical since many of these drugs will eventually make it in to market place and will require immune marker monitoring and status determination, and CGI will be ideally positioned as these [inter] either is complimentary or compelling diagnostics to provide that transition from the clinical trial in to the commercial clinical market place. This is a core area of our future growth and our future margin expansion.
Let me now turn to the second area, liquid biopsy; this is very exciting and crowded category, where everyone from six person startups to even IBM has some form of technology or solution. At CGI we are focused on integrating the best of breed technologies and capabilities that are market ready and pragmatic and focused on making these available in a clinically actionable way.
We further believe that liquid biopsy has to again be disease focused, determining status depends on the specific cancer category and the markers have to be accessed or very particular either at monitoring or therapy selection. The first two areas in which we’ll be launching are going to be kidney cancer and lung cancer. I spend a little time on the last earnings call talking in detail about our program for the University of Utah and City of Hope in kidney cancer where we’re validating from both cell-free DNA both from blood and urine, our multi-gene signature for kidney cancer assessment and therapy selection.
But also let me remind you given our unique heritage in DNA and RNA extraction and analysis from blood and the high sensitivity assays we’ve developed for leukemia’s and lymphomas, we’re ideally positioned in applying our know-how and biological expertise to provide multi-gene panels which is really where the industry is today. The industry is not going to go backwards from looking at multiple genes to only one gene at a time. So it’s important for these liquid biopsy assays to provide multi-gene information from blood for kidney and lung which we will be doing.
Both of these projects very important are being developed in collaboration with leading institutions, and also with biopharma markers that see the value of developing liquid biopsy programs and assays with Cancer Genetics. More importantly these assays are tuned to the specific areas of cancer that they are interest in for patient monitoring and therapy selection, not just initial diagnosis or determining mutation status. We expect to launch our sell-through lung cancer assay in non-small cell lung cancer later this year and kidney cancer by early next year. These will be in clinical trial use at least three to four months prior to clear validation.
Some analysts think that this market for liquid biopsy can be highest $20 billion in the next five years. I’d remind you replacing tissue based biopsies and potential imaging is a major opportunity, but in all cases significant time and effort will be spent by the oncology community both IVD companies, research organizations and biopharma companies to develop standards and validate results with the existing goal standards, which are still based on next gen sequencing, IAC sequencing, PCR and (inaudible) tissue which are all done today by CGI.
Providing the most comprehensive capabilities in the development of precision oncology is what CGI is uniquely and ideally positioned for. It is what’s driving our growth today, as well as our margin expansion, and more importantly we are focused on continuing to stay relevant by combining innovation and execution. I’m particularly excited that the multiple growth drivers that we have in front of us and the steps we’ve taken to optimize our company.
With that I will ask Ed, our CFO to review the financial performance and then Jay Roberts to introduce himself and his priority at CGI. Ed?
Thank you, Panna. Since our last conference call we have continuous strong organic revenue growth as well as revenue from our integration of our Solid Tumor Center of Excellence based in Los Angeles. The second quarter of 2016 was another record quarter for the company. Revenues were slightly over $7 million, a 67% increase for the second quarter of 2015 and 15% higher sequentially in the first quarter of 2016.
27% of our year-over-year growth was organic, driven primarily by our biopharma business. Revenue from biopharma services totaled 4.2 million and increased 58% year-over-year and 26% in Q1. As we’ve discussed previously we are seeing a strong increase in biopharma activity especially in the immuno-oncology arena and from historically contracted revenue turning in to recorded revenue for a number of larger clinical trials.
Revenue from clinical services totaled 2.5 million in the second quarter, an increase of 103%. In the second quarter of 2016 we had the activities of our Solid Tumor Center of Excellence CGI West for the full quarter, and this is the primary driver for the increase. As we said previously, the most significant opportunity from the acquisition is in the area of revenue synergy and the ability of the combined entity to capture additional market share with both biopharma clients and healthcare systems.
Discovery services or services provided to develop new testing assays and methods for research organization and to aid in the discovery or creation of new preclinical translational insight. The discovery services generated $240,000 in revenue, down 8% sequentially from 262,000 during the first quarter. The slight decrease was driven by the startup and timing of a key NGS study which will be delivered during the third and fourth quarter.
Our discovery operations are now heavily concentrated in NGS opportunities, and we expect growth in this category to return during the second half of the year. Gross margins were 39% or 2.7 million, which is a 13 percentage point increase over the second quarter of 2015 or $1.1 million, an increase of 7% over the first quarter of 2016 from 32% to 39%. The improvement in gross margin percentage is attributable to our cost reduction efforts and better utilization of infrastructure and equipment.
Cost of revenues increased 38% or $1.2 million year-over-year, but only 4% Q1 to Q2 of this year largely due to supplies just to support increased volumes, going from 4.1 million during Q1 to 4.3 million in Q2. This increase includes the cost of revenues from the acquired businesses of 1.8 million offset by cost reductions across our facilities primarily compensation.
Research and development expenses in the first quarter increased 34% to 1.7 million, an increase of $424,000 compared to the same quarter last year, and up only 9% Q1 to Q2 of 2016. In Q2 we increased the validation and development initiatives across our facilities with an emphasis on transforming the LA facility in to our tumor Center of Excellence. This included implementing our immuno-oncology testing platforms and significant updating of the NGS capability.
These activities resulted in increased cost of $700,000. These increases were partially offset by a decline in our share of the loss from Oncospire, our joint venture with the Mayo Clinic. In Q2 2016, our share of the loss was only at $15,000 compared to a $198,000 last year. As our multiple myeloma mutation profiler and the [small] development and its now being prepared for clinical launch under (inaudible).
General and administrative expenses in the second quarter increased 19% or $600,000 to $20.7 million year-over-year or were down 15% Q1 to Q2 of 2016 from $4.3 million to $3.7 million. Our acquired operations contributed $500,000 of the $600,000 increase year-over-year. Sales and marketing expenses in the second quarter of 2016 increased 16% or $194,000 to $1.4 million, primarily due to the sales efforts of our acquired operations and increased efforts of biopharma clients.
Quarter-over-quarter, our sales and marketing expense increased 6% largely [fuelled] by increased focus of biopharma clients. In our recent calls we emphasized the amount of work we’ve done to rationalize our clinical sales effort. We’ve made great progress in this area and continue to evaluate clinical sales investment in a very prudent manner.
Total operating expenses including cost were $11 million this second quarter compared to $11.3 million during the first quarter of 2016, a reduction of 2.3%. Year-over-year its up from 8.6 million. Sequential expenses are down 300,000 due to our cost reductions initiatives, which will continue in the third and fourth quarters. Included in the operating expenses are non-cash based stock compensation expenses of $480,000 in Q2 2016.
Our shares outstanding at June 30, 2016 were 16,120,000. We raised an additional 5 million in equity on May 20 which added an additional 2, 468,000 shares to our outstanding total. Our basic and diluted shares for Q2 EPS calculations were 14, 538,000 shares. Our net loss in the second quarter was $4 million or $0.28 per diluted share, compared to a loss of $0.51 per diluted share in the corresponding period of 2015 and down from $5.2 million or $0.39 per diluted share during the first quarter of this year.
Turning to the six months ended, June 30, 2016, revenues were 13.1 million, a 53% increase over the corresponding period in 2015, biopharma services were 7.6 million, critical services were 5 million and discovery services were 500,000. Biopharma services revenue grew 26%, driven by 500,000 of organic growth in our Select One business and $1.1 million of revenue from our acquired Los Angeles location.
Clinical services revenue increased 135% to $5 million, due to the increase in test volumes as a result of the acquisition of Los Angeles facility. Discovery services increased by 18% to $502,000. Total operating expenses were 22.3 million in the six months ended June 30, 2016, compared to 17.1 million in the same period last year. Our net loss for the six months ended June 30, 2016 was 9.3 million or $0.66 per diluted share compared to a net loss of $0.95 per diluted share in the corresponding period in 2015.
Our basic and diluted shares for the EPS calculation for the six months ended June 30, 2016 were 14, 042,000 shares, with total cash at June 30, 2016 of 10.6 million. In our last call we spoke about a number of initiatives underway to bring use of cash from accounts receivable growth down to lower level.
I’m happy to report that we’ve made significant progress in this area, and have input and billed about 90% of the claims that were delayed due to system integrations from the West Cast clinical lab including applying for new Medicare numbers and updating contracts with the payers. We expect to collect on these clinical claims in the next few quarters and some claims have already started coming in.
For additional information, please refer to our SEC filing, including our Form 10-Q for the quarter ended June 30, 2016.
I will now hand the call over to Jay Roberts, our COO and EVP. Welcome aboard Jay.
Thank you Ed. For the purpose of providing our listeners and investors with some context and background about my professional career; I have been in a variety of senior management and office position in the healthcare industry, both with public and private equity backed companies for over 25 years.
My career has always focused on growth oriented companies where I can bring my skills to integrate operations, technology and financial systems to drive shareholder value. At InfoLogix, a mobile healthcare company, we scaled the company to 100 million in revenue and did four acquisitions prior to being acquired by a strategic buyer, Stanley Black & Decker’s healthcare division.
At AdvantEdge Healthcare Solutions, I led four acquisitions and a subsequent integration to build a global healthcare and medical billing company with a significant technology enabled footprint in Bangalore, India. At Clariant we help to develop the infrastructure both optimizing the physical environment and putting the clinical billing processes in place to enable the company to support multi-year double-digit revenue growth, and all this was in an environmental high customer’s demand which required an immediate knowledge of the customers’ history and relationship. These unique experiences have helped shape my thoughts about how to help the CGI team in the culture to scale to the next level.
CGI has done a very good job of integrating cultures with California acquisition and rationalizing headcount at the same time. The research (inaudible) thought processes and projects have been and are being well integrated with CGI. But there is work to do to optimize our human and technology resources, so that we can continue our ability to develop high quality revenue and optimal margins.
In the near term, I have two major priorities for CGI, first with our billing functions we have to improve the velocity of cash on both our clinical and biopharma customers, and second, to focus on financial operations and improving our visibility as our financial complexity and scale increases. We will be implementing system that integrate with the operations more seamlessly and provide greater insight in to operating metrics and revenue and margin trends. Both for purposes of optimizing the mix of business today and for planning the book of business and activity for tomorrow.
We’ve seen our margins increased quite significantly over the past few quarters from 13% in Q4 after the acquisitions in California to three times that in the most recent quarter, 39%, based on workflow, staffing optimization and synergies of our infrastructure. To put this in perspective, we grew our topline $1.5 million, while increasing our gross profit margin by nearly 2 million. Putting the right systems processes and structure in place so that we can do this repeatedly is critical now so that we can continue driving an increasing amount of our growth towards our contribution margins and operating income.
In the medium term and going beyond improving our operating leverage, we will work to be more nimble, more responsive and more digitally enabled company. Our clients and customers are increasingly demanding that we respond faster and that response will enable faster and more differentiated growth so that we can adapt to changes in technology, market demand and critically emerging trends such as liquid biopsies, data sharing for outcomes and on-demand NGS analysis and reporting. These critical capabilities will require a disciplined focus on selection and integration while maintaining our cost structure to get to breakeven and to profitability more quickly as possible.
In order to accomplish this, Panna and I share the same vision, and one that creates a digital nerve center for CGI based on rapid access to business data and dashboard that provide intelligence to our managers to understand trends rapidly and with less cost. So that decisions can be made about reagent usage, test pricing, work flow and scheduling.
As our testing menu becomes more complex and supports more trial, as Panna has stated we now have about 100 clinical trials of various stages sizes and sponsors that are supporting throughout CGI. Optimizing our pricing and cost on a near term basis will have significant impact on our margins, cash flow and tab to profitability.
I will now hand the call back over to Panna and I look forward to future updates and meeting with many of the investors and supporters of CGI.
Thank you Ed and Jay. As noted this past second quarter we had strong revenue growth, increased contracts especially with larger new biopharma customers such as [ESI] and H3 Bio and ongoing margin expansion as a result of our efforts for cost containment and work flow optimization. Our goal is to serve the oncology community and market place through our unique content, our unique cancer panels, or comprehensive portfolio and global infrastructure is highly valuable and we continue to see strong evidence of that both through our collaborations such as the ones that we’ve talked about earlier, our acceptance of papers and posters, most recently US CAP next month for our FDA cleared Tissues of Origin test and our ability to close the service contracts with some of cancers’ most novel therapeutic development programs like the first ever gene splicing therapeutic program at H3 Biomedicine, where CGI will be providing both discovery and clinical trial services, or our Phase 2 lung cancer program where CGI will be providing both comprehensive immune market data along with focus in clinically actionable NGS data. These are all strong and good determinants of our unique value and our grown capabilities.
Our company strongly believes that the progress we’ve made and the work we continue to do are all important steps to realizing our vision of being the precision oncology partner of choice from bench-to-bedside.
With that I‘d like to now open the line for questions.
[Operator Instructions] the next question comes from Ben Haynor at Feltl and Company.
I was wondering if you could provide any color. It really seems like you’re adding a lot of new clients, a lot of new trials. Can you provide me a color on the feedback you’re getting from these new customers and kind of why they’re choosing CGI and what’s tracking them to your offerings.
Yeah, Ben good question, I think there are two buckets that I’d to put that in. One is the later stage and perhaps more complex trials, many of these are combination trials, immune markers and targeted therapeutics. And the reason we’re winning many of those is three-fold; one we have both the immune capabilities as well as the genomic panels already developed, many of which are CLIA, I think all of (inaudible) we had in New York state validated.
So many of the pharma see that as a major plus that they can go to one group that handle complex global logistics and testing, and that we’re disease validated. The second area that we are beginning to win more is in areas a little bit newer to us and that’s an earlier stage discovery and program optimization and analysis and validation. This is both with big pharma as well as with biotechs and again there its larger because of our disease focused knowledge and it’s a result of some of the collaborations that we have.
So the collaborations that we have in kidney cancer or myeloid cancer, and so many of pharmas are seeing value in those programs and value in the inside and then chose to work with us. So those are two buckets, I think, one is because the disease focused knowledge and the fact that we have assays ready to go is driving earlier stage work where we’re getting involved early in the development of the entire program and the setup of the trial and then later stage larger more complex trials, because there is a brand and infrastructure that they can trust that provides all of the testing, not just NGS or not just pathology. The fact that you have one global partner is an appealing choice for those larger trials. So those are two, I would say larger categories.
And then on the liquid biopsy you mentioned that its quite a crowded space at the moment, that’s certain the case. Just a little curious on how you see the differentiation there. You mentioned the multi-gene panels and not just doing the one-off (inaudible) for instance in lung cancer. But will you be taking some of the proprietary things that you’ve learned over the years and putting them in to the renal and lung cancer family that you’re developing for liquid biopsy.
Yeah, so one of the things that we’ll be doing and there’s a little bit of a departure from the past is that we will be integrating best of breed technology and capabilities. This is like you said; it’s a crowded field everyone from IBM to six person startups are in this space. I think our capabilities - we have a lot of knowhow, we have a lot of disease knowledge and so we’ll be selecting where it’s appropriate to put proprietary content in to the panel and where it’s not as clinically needed.
But either case the pharmas’ are very attracted because they also don’t want to hitch their wagon to a one-off platform or a one-off company. They want to really have the open standards. So the fact that we’re using technology from the best providers and evaluating them and then incorporating multi-gene technology which is critical is quite appealing. And so both our initial programs on lung and kidney again are being developed both with some know-how but also at the same time are being developed in conjunction with pharma partners.
So a lot of the cost for development will be significantly contained or reduced. So for example, our R&D as Ed mentioned from Q1 to Q2 increased slightly and that’s the result of our immuno-oncology which they certainly aren’t in the millions of dollars or tens of millions of dollars like other liquid biopsy companies. So I think we’re in a unique position and this space as I mentioned will be determined by clinically actionable multi-gene content. And so that’s kind of where we are moving towards.
One more from me and then I’ll jump back in queue for Ed. When it comes to the response from (inaudible) revenue, when would you expect to be able to recognize that on an accrual basis? Is that going - like it happened later this year or would you expect probably 2017?
So Ben the response revenue we’re recognizing on an accrual basis. And as we’ve disclosed in our Form 10-Q, we had about at June 30, about 1.04 million that was USP billed. We’re basically almost caught up with that and we had about 450,000 at the end of July which as to be billed. So we’re recording it and billing it, because the billing have been placed, the collections are delayed.
So that’s what we’re working on, but we think that now that all of these claims have been processed through our outsourced system, we’ll start to see collections. We do get some kick-outs because there are some new codes being placed at, but we’re resolving those issues as they come to our attention.
In terms of recording the revenue, we’re using a very conservative rate. We’re basically recording at the Medicare rate which is a low rate for all our claims including commercial payers. Obviously there’s mix and we believe we’ll actually realize more. But given the little bit of history we have with response and the large number of changes we had to make just to get the billing going and with some of their billing practices, we thought that being conservative like this was the best foot forward for the company.
[Operator Instructions] the next question comes from Ram Selvaraju at Rodman & Renshaw.
Firstly, could you comment on what you expect to see as a trend both in terms of revenue mix and revenue generated on a per capita basis going forward, particularly with regard to test you performed within the context of clinical trial?
Secondly, I wanted to ask specifically about the immuno-oncology front, given the recent failure of Bristol’s study with Nivolumab in lung cancer. I believe that was the CheckMate 26 study, and whether or not you think that this extenuates the need for ongoing molecular profiling, for example, of PD-1 or PD-01 expression in the context of immuno-oncology therapeutic clinical development.
And then thirdly, if you could just give us some color on the path to cash flow breakeven for the company. Obviously we are seeing significant improvements across the board and your gross margin overall revenues obviously, but I wanted to get a sense from you regarding where you expect cash flow breakeven point to be reached. Thank you.
Good complex question, we’ll start at the top, a little bit on the revenue by category and revenue mix. So in this past quarter of Q2, we had 60% of our revenue came from biopharma services. So out of the seven roughly 4, 2 came from biopharma side. Clinical services was about 2.5, and discovery was a little over 200,000. We expect the revenue mix for the year to be about the same, about 60% to 65% from biopharma and the remainder from a mix of clinical and discovery.
So we think near term that is the expected mix. There are a potential few wild cards like any clinical trial, or new pipeline we do have a couple of large scale opportunities that we’re going after on the biopharma side and these are big high seven figure, eight figure type deals. And so if those click this year and you get started, that could swing the 60% much higher any given quarter, depending on how we get started.
In terms of the revenue mix, and as you know these biotechs and pharma companies are very well funded and need to get their trials done faster. So I think in terms of the growth we expect more of our growth to continue coming from biopharma services. That said, we do have a number of launches on the clinical side as I mentioned, liquid biopsy, our renewed lung cancer program that we’ve updated significantly in Los Angeles, the launch of our multiple myeloma panel and then also the launch of our hereditary cancer panel later this year.
So all of those we think will drive new product revenue in the clinical service mix. Again those take a few quarters to catch on. So near term I would guide that our revenue mix will remain between 60% and 65% on biopharma, both for this year and probably well in to ’17, and we think in ’18 it could change based on the traction our clinical products get in the market place in ’17, namely the hereditary and liquid biopsy programs.
In terms of the immuno-oncology, that is something that’s grown rapidly on the clinical side. So as I mentioned in my earlier prepared comments, we’re now doing routine PD-1 or PD-01 testing especially in the lung cancer especially for (inaudible) and we think we won the part - the higher volume (inaudible) actually for that. And so if that continues that could also be a wild card in our clinical revenue.
We are pretty conservative in terms of how we model it out, but we have multiple growth drivers and so we expect any those drivers to continue.
In terms of the near term, revenue trend as you asked about, we’d really look at the number of trials that we’re beginning to sign up the number of studies and how those are transferring from contracted revenue to book to earned revenue. And that’s something that Jay now that he’s on board will help us integrate that from the finance and operations side. So that we have increasingly more visibility in to contracted revenue to kind of earned revenue and what that mix looks like.
But to give you some definition, if you look at the slides that we prepared for the investors this morning in our Q2 2016 earnings call, we have a slide deck. And on that slide deck on slide 7, we show over the last six months the trends. So we had about 37 million or so at the close of Q4. Today we have about 47 million. So 10 million increase in the signed contract value expected revenue going forward, and the immuno-oncology trials have gone from three to 20. And this kind of parlays into your immuno-oncology question on the [A-Z] study.
Obviously they used a very different cut-off percentage and a lot of people think that is the primary driver and I’m sure looking at respectively its very different than the Merck cut-off value which is at 50% for patients that are eligible as high expressers, and the AZ study it was 5%, as they wanted to capture more of the population. So they had a one [log] different.
Now that points to a number of things and again there are a lot immuno-oncology experts piling on this in one way or another. But again this is just one of many technologies that can be used to access who is going to respond and clearly that 5% was not adequate at least in their experience. So I think again it doesn’t necessarily drive, should they do more testing or different testing, but what drives that is this field has a lot of validation to do.
In our own experience, we are doing that validation on multiple tumor types, many of which will not hit the market for a year or two, looking at exactly those issues. What are the cut-off values that need to be looked at not only from a high (inaudible) but also RNA expression that we picked up, we’re correlating that, and is RNA expression sensitive enough, is it also a guide, can it be used in certain cases. So all this points to unfortunately the trial failure because it would be great to get a lot of these IOs in to first line in mono-therapy.
But what it points to is increased need for companies like CGI that have a comprehensive menu. And more importantly also, I’m sure they’re going to look back at this data and the samples that they’ve collected and say what if we had used 25%, what if we had used 50% etcetera. So again you want to get as many patients on to your therapy as possible and changing that one large difference maybe they do half a log or maybe they increase it by 3x. And would that have given them enough positive expressers.
So I think what this points to isn’t necessarily a huge set back, but what it points to is just the need for companies to look at this data more carefully and use multiple technology point. And so I think that bodes very well for companies that have the infrastructure and capabilities like CGI.
Last question or last category in cash flow, I’ll comment a little bit on and Ed can also comment on it. We improved our operating income and our net income by 23% quarter-over-quarter, 20% year-to-year while we’re on our top line, and also increasing gross profit margin. So we think we’re going to continue increasing our top line and continuing to make more cost rationalization. We started in Q1 and Q2; we’ll continue some in Q3. So for us our goal is to get to cash flow positive over the next few quarters, and for us that looks roughly like a 9.5 to 10 plus million quarter which we’re getting closer to. So that’s kind of our path.
If I could just ask a very quick follow-up question to Ed regarding stock based compensation, do you expect the stock based compensation to stay at the level that you recorded in the most current quarter, or do you expect that to trend upwards, trend down significantly going forward. And then I guess this is kind of finance but also an operational question. It was mentioned in the press release that you did some streamlining of operations and the headcount reduction. Do you anticipate any significant further headcount reduction going forward, in particular, with respect to the integration of the Californian CLIA facility or has that more or less been completed at this juncture. Thank you.
So Ram on the stock based compensation, I think stock based compensation will get larger. We’ve gone through the integration of Los Angeles, and people that are there now or people that we want to be with us for a long time. So they are being brought in to the equity plan and that will increase expenses. Unfortunately though our stock price, we have to look at our equity plan at all time. So I think that will trend upwards, but there’s so many variables I can’t give you (inaudible).
So I think we’ll see that move upward in the coming quarters. It won’t be the - the third quarter probably significant in the third quarter, but ’17 will probably some higher numbers.
To give you some dimension on that, we had roughly 90 plus employees in the Los Angeles facility, when we took it over today, we have about 50. So maybe a little less, and we will continue with Jay now as we’re going to continue to look at places where we could optimize and he definitely has some ideas already. We’re looking also to leverage India more as a shared service environmental center.
So is there a massive big area or change? Probably not, but there’s going to be definite refinements in terms of how the cost is allocated, which we’ll continue improving our cost structure. And so it’s not just going to be a headcount, but it’s also going to be on where we’re allocating our cash resources in terms of technology and expenses. I think we’re just sensing that, but --.
The next question comes from Thomas Pfister of RedChip Company.
Just my first question, I think you touched on this a little already. But can you may be discuss on your biopharma segment once you bought the company (inaudible) it seem was the clinical trial design and may be going forward does this impact on the potential revenue you could receive per clinical trial.
So Tom could you repeat the early part of your question, it’s a bit muffled. The clinical trial --.
So basically just kind of what you’ve seen from a company business in general on what your biopharma finds are looking at what the complexity of clinical trial.
That’s a very good question. So to give you some perspective, for example, we had certain immuno-oncology compounds that are single ARM, that are multi ARM, that are combination, and so its uncommon for us to have a compound and three, four, five, six different types of trials, and they are becoming more complex. At the same time they might be even doing retrospective analysis on prior Phase 2 or Phase 1 samples. So I think the growing need for information and information of all types is becoming bigger and bigger.
So I think in the next two to three years there’s a massive opportunity to not only develop and deliver the data, but to manage and model the data. And that’s an area we’re looking at very carefully. How do we now have not only do the testing that delivers data, but then how do we take that data for our partners and help them really make more value of it faster.
I see there’s a big revenue opportunity for us. It’s something that we’re looking at, and I do see the potential convergence of big data and data modeling tools from all these different test with some of the data that already exist at the pharma. And so I think that’s a big area to drive additional intelligence and additional velocity of compound just to the potential therapy.
And again we’re not in that market today, but I wouldn’t be surprised in the next few quarters we are, because it’s one thing to just provide the testing and the data on samples, it’s a whole another potential value to then provide an integrated solution to manage, model and deliver more value out of data being generated. And as you know these trials are becoming more complex and cancer is for better getting in certain cancers more manageable, and that also points the need for more testing and it points the need for more chronic management of these cancers.
So I think for a company that has multiple shots on goal, with multiple technology capabilities, the next obviously area of growth and revenue is to then manage and model that data. In that scenario we’re looking at the partner or to do something, and so that will generated perhaps hopefully more revenues per customer and more revenues for a clinical trial opportunity.
Thanks for the color there. My next question relates to the discovery services segment. Can you just maybe give some general color on how initially expect some of the work you do in discovery to eventually translate in to biopharma revenue and maybe what’s the expectation on online maybe of when do you start doing work for discovery and how fast that could get to information that could be used in a clinical trial for humans.
So we have done some discovery work for example in an oral cancer project. We are doing some discovery work and looking at mutation drift in a number of cancers and those can go under trial in a year or two. There’s another that we’re just beginning the discover work to look at basically transcriptome data that could go in to a trial probably in a year or so, really depending on the nature of the discovery, still some of this is really early, we’re not really - it’s just pure fee for services to help develop and deliver the insights. Others are more program-specific, so it varies. And ones that are program specific tend to be anywhere from a year to two years from discovery and into trials and programs.
The other part of the - to answer your question Tom is what we’re seeing from the opposite way. We’re seeing now companies and this is an example related to bio, while others were insights from a clinical trial or early clinical work is then driving new retrospective or new discovery opportunities. So the results from a trial might go back and feed in to additional discovery work. So it’s really a two-way flow, not just from discovery to trial, but also then from times in trial back to discovery.
And then just one last question and I’ll hop back in the queue. I know the environment around the (inaudible) rate is obviously at least from the information there’s five [CREO PEG], but just looking long term what you kind of think needs some of the triggers that improves reimbursement rates over time and you think a lot of it is driven by further approval of immuno-therapy drugs or do you think that may be you could persuade some insurers to improve the reimbursement rate.
That’s a good question. So what we see is happening are three things; one, I think putting the politics and election materials aside. What relatively determine as putting those aside, one thing that has to happen is that these test have to be linked more and more closely with therapy selection.
I think immuno-oncology is paving for that. I think a lot of these targeted panels that are clinically actionable are also paving their way for that. I think that is very important. I think insurance companies when they get bills for $7,000 or $4,000 for 300, 400, 500 genes of which 14 or 8 or 6 might clinically actionable on relevant and understandable for patient care that tends to taint the category.
From a clinical standpoint, I think that’s wonderful for discovery, I think it’s fantastic for diagnostic odyssey work. I think it’s essential for improving our understanding of oncology. But how an insurer be forced to look at and pay that, and so that backdrop is very, very loud in our space today.
Our reaction to that has been always and this goes to heritage accompanied to be disease focused and make panels that are relevant for that disease, and force them to be as clinically actionable as possible. We think that is a friendliest way to deliver content. So I think that whole category will take about another year or so to shake out.
Second, we see pharma companies beginning to be more active. We see everyone from AstraZeneca to Merck to even clinical trial programs like some of these basket trials that last year we are now stepping and paying for some of this testing or wanting to drive the value of the testing because that’s the only way for their therapeutic programs to get to market.
And so if the testing doesn’t occur, there’s obviously risk and there’s obviously lack of patient getting on to the drugs and so for every $1,000 test, you’ve got a potentially a $50,000 to$100,000 therapy on the other side, and so what FX does for maybe couple of hundred thousand or tens of thousands a months and tens of millions for pharma, and so they are waking up to this and they are realizing that they have to drive this testing.
So I think the pharmas are getting a lot more vocal about driving that and that will obviously drive the insurers to pay and reimburse properly.
The first thing that is happening and its very important is that the movement and more I would say voice of accountable care organization that are really looking at disease programs or patient populations more holistically. Part of that the data has just not been available historically to merge the electronic health record, the outcome data, the per patient spend and the routine testing at one site or multiple sites.
But we now are in an area where lot of things have happened. Oncology practices have consolidated, so the records are available as patients may go from one practice or group to another. We’ve also now have an areas of electronic health and medical records, so it’s not as pain staking to gather all the data and gather the testing and gather the spending across patients. And now you have a lot more open access to spending data. So all three things are converging, so that we get a better snapshot of what the true cost and the true outcomes are for specific diseases.
I think these accountable care organizations have a year or two again to really look at what are algorithms or decision trees for testing, and almost every one of them that I speak with our look at or review is looking at how this testing fit in to an optimal algorithm of therapy selection and patient management, and testing is part of that. In most of it, not all, in most.
So I think that is also going to drive that. I think this whole space, will it improve reimbursement? I think it will because it will do away with unnecessary testing, it will do away with testing that is not as meaningful clinically and doesn’t drive improved outcome or improved insight. And I think also the pharmas will be watching on more to it. So this takes in the clinical side for reimbursement, it still takes a few quarters, and that’s why we’ve oriented our resources and capabilities more towards the pharma side especially over the last year, a year and a half increasingly.
So we think this environment will be around for about a year to may be two years, but hopefully not much longer than that.
The next comes from Sherry Grisewood at Dawson James Securities.
Could you please give us a little color on the mix of the biopharma’s new contract on business? Is it evolving from Phase 1 opportunities, Phase 2 opportunities, Phase 3 opportunities or retrospective, and are you seeing a trend in the direction of the biopharma service business?
That’s a great question Sherry. So we have and it’s a good mix. We have everywhere from early stage work which is validation and getting ready for Phase 2 type work all the way to Phase 3 etcetera. So we have a tremendous mix of all that going on today. We are seeing larger trials being awarded to us. We’re now also in a proposal phase with some of the largest trials that we are proposed on, so I think that’s very positive. And we’re also doing a lot of early stage design and validation work for early Phase 2 or a combination trials with immuno-oncology compounds.
What we’re seeing, one of the biggest trends though was really the earlier step that we saw in Phase 2 now is going to Phase 3 and those are all contracts that we started say last year or the year before. So we a lot more of that activity happening.
That concludes today’s question-and-answer session. At this time I’d like to turn the conference back to today’s speakers for any closing or additional remarks.
Thank you everyone for joining for our Q2 call. Again we think we had a very good solid growth, a clear path towards driving more revenue and increasing margin, and very importantly creating what we think will be a durable leader in bringing together innovation and execution for our precision oncology. So thank you for joining us and we look forward to our visits or further discussions.
That concludes today’s call. Thank you for your participation, you may now disconnect.
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