CombiMatrix Corporation (NASDAQ:CBMX) Q2 2016 Earnings Conference Call August 3, 2016 4:30 PM ET
Jody Cain - SVP, LHA& IR
Mark McDonough - President & CEO
Scott Burell - CFO
Kevin DeGeeter - Ladenburg Thalmann
Brian Marckx - Zacks Investment
Welcome to the CombiMatrix's 2016 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, August 3, 2016.
I would now like to turn the call over to Jody Cain. Please go ahead, ma'am.
This is Jody Cain with LHA. Thank you for participating in today's call. Joining me from CombiMatrix are Mark McDonough, President and Chief Executive Officer; and Scott Burell, the company's Chief Financial Officer.
During today's call, management will be making a number of forward-looking statements within the meaning of federal securities laws. These statements involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. For a list and description of those risks and uncertainties, please see the company's filings with the Securities and Exchange Commission, which are available at Sec.gov or in the Investors section of the Company's website at www.combimatrix.com.
The content of this conference call contains time sensitive information that is accurate only as of today, August 3, 2016 except as required by law, CombiMatrix disclaims any obligation to publicly update or revise any information to reflect subsequent events or circumstances.
Now, I'd like to turn the call over to Mark McDonough. Mark?
Thanks, Jody. Good afternoon, everyone, and thank you for joining us. At CombiMatrix, we are making excellent progress toward our goal of achieving profitability and I'm pleased to report another quarter of growing revenue, expanded gross margin, improved cash collections and most significantly, a narrowed operating loss. Let me start my business review by sharing some highlights from the quarter compared with the prior year period.
Total revenues increased 22%, reproductive health revenues were up 32% on 9% growth in test volumes and average revenue for test increase, 21% to more than $1,500. Miscarriage analysis revenues increased 22% with 24% growth on average revenue per test. Prenatal microarray revenues increased 12% with a 26% increase in average revenue per test. We achieved gross margin of 53%. Operating expenses were up less than 5% on 22% revenue growth. Cash collections on billable test increased 21% to $3 million, or 95% of total revenues. Our number of billable customers reached 261, up 17%. In 10 customers at 50 or more test do our lab during the quarter, up from five in the prior year period.
I want to take a moment to highlight our team's momentum in the direct sales of our prenatal microarray testing. Our strategy of targeting accounts in demographic and geographic areas are where we see the greatest opportunity of paying off. Prenatal testing revenues increased 12% from the prior year and 47% on a 14% increase in volume over the first quarter of 2016. We made us the difference in the loss of two prenatal accounts in the second half of last year, with one of those accounts simply shutting its doors and closing its practice. As a result of our strategy, we have gained several new accounts this year and they are contributing to momentum in this business.
In another action to support continued growth, we launched our Preimplantaion Genetic Screening or PGS in a Next Gene Sequencing or NGS platform in mid-June, this is our first test with NGS technology and expect to see a significant growth in the second half of the year, particularly in Q4 as a result. The PGS test helps to reduce the risk from miscarriage and abnormal pregnancies and to increase the success rate in couple's [indiscernible] fertilization cycle. NGS is the technology of choice for this test as it provides unparalleled accuracy and sensitivity in the detection of whole chromosome and segmental aneuploidies.
For CombiMatrix, offering this test on NGS shortens the turnaround time, improves gross margin as volume grows and allows us to build on our momentum in reproductive health diagnostics with established customers while adding new ones. The vast majority of PGS testing is self-pay so that testing supports our high cash reimbursement rates. We will look to leverage our NGS capabilities to bring other value-added tests to market in the coming quarters.
We continue to be very encouraged about the momentum we are building in the miscarriage analysis testing market. While we did experience a slight dip in volumes in Q2 due to loss of one large building center that internalize the testing on their own instrument late last year, revenues remain strong in Q2 due to positive reimbursement trends in 2016. We expect to regain our volume growth momentum on this testing going forward as we have our 2016 sales higher now establishing sales in previously opened territories and we have strategically redeployed one or our talented sales specialist to a high opportunity geography.
I would like now to discuss recent industry developments we're excited about and the anticipated tailwinds they will create for our business. First, we continue to see reversals in the medical policy decisions by health plans to now reimburse for recurrent pregnancy loss testing. Since the beginning of the year, you know that the 15 plans that have revised their coverage decisions and we anticipate that more will follow. We attribute these coverage decision changes to the growing clinical evidence that results from microarray testing can provide valuable information of women and their families in pregnancy decision-making. We have seen some early impact from these decisions and the increased rate of average reimbursement for our miscarriage analysis test that I mentioned earlier.
Just last week, ACMG revised its guidance to inform all pregnant women about the availability of non-invasive prenatal test for copy number variations such as microdeletions testing. ACMG also noted the risk for potential false positives. You may recall that data from a CombiMatrix study that appeared in genetics in medicine early this year urged the need for extreme caution in the interpretation of non-invasive prenatal testing, due to the potential and over-representation of the positive predicted value, plus specific aneuploidies in microdeletions. Our study showed the value of identifying false positives through definitive testing with microarray analysis such as those that we offer at CombiMatrix.
In June, results from our retrospective study showing the superior diagnostic value of microanalysis over karyotyping for a recurrent pregnancy loss,we're also in genetics in medicine. In the largest study of this kind involving pregnancy loss, more than 8,000 consecutive products of conception samples received by CombiMatrix over a 44-month period were analyzed and the results were successfully obtained for more than 90% of these cases. This compares with reported success rates of between 60% and 80% for samples evaluated using karyotyping. Importantly, clinical significant abnormalities were identified in 53.7% of the samples, 95% of which were considered causative of the pregnancy loss. The market for miscarriage analysis increased dramatically over the past few years and we expect that these outstanding clinical results will further drive demand and pay a reimbursement for the use of microarray analysis for this market.
Turning to our commercial operations, we are highly encouraged by the quality of our new sales representatives following some turnover in our field organization earlier this year. We anticipate great stability with our field organization and increasing productivity over time as our newer reps come up to speed. We now are path of our direct sales representatives on pace to average between $1 million and $2 million in revenue in their territory for this year. Our training efforts to increase productivity are clearly paying off. We expect to hire another couple of salespeople in Q3 and head into Q4 with 13-15 representatives in the field. As we have stated previously, we believe it takes about six to nine months for a new sales rep to reach full productivity.
Our strong performance on key financial and operational matrix over the past two quarters gives us confidence we are on the right path and we are taking actions to drive volume and revenue growth, further expand gross margin, improve cash collections and manage expenses while pursuing a well-conceived growth strategy that supports our commercial operations. Given our momentum and our strategic focus on the cross effective profitable growth, we are introducing our outlook of achieving positive cash flow from operations by the fourth quarter of 2017.
With that overview of our results and accomplishments, I'd like Scott Burell to review our financial results. Scott?
Thanks, Mark, and good afternoon, everyone. As Mark stated, we are reporting another quarter of strong financial growth and good business momentum. I'm pleased to share some highlights from our performance starting with our second quarter. Total revenues for the second quarter of 2016 increased 23% of $3.1 million, compared to the second quarter of 2015 and consistent of $3.05 million in diagnostic services revenues and $58,000 in royalties.
The number of billable diagnostic test for the second quarter of 2016 is $3,780, up 7% from the prior year period. As Mark mentioned, its growth was driven by our reproductive health segment where our revenues increased 32% to $2.2 million and test volume grew 9% to $1,403.
Higher growth in reproductive revenues versus test volumes is driven primarily by higher per test reimbursement by third party payers for our miscarriage analysis test, combined with improved payer mix. For the second quarter of 2016, the average revenue for miscarriage analysis test of $1,617 was an increase of $317 or 24% over the second quarter of 2015. Strong cash reimbursement from our miscarriage analysis test contributed to the increased revenue per test for our reproductive health business.
Revenue growth in Q2 of '16 was also driven by an 11% increase in our prenatal microarray test segment over Q2 of '15. Although prenatal microarray test volumes declined 11% from '15, increase payer mix drilled our average revenue per test for $1,566 representing a 26% increase over the second quarter of '15. Finally, significant growth in our PGS testing segment which contributed $252,000 in revenues for Q2 of '16 rounded up a record quarter in terms of recognized diagnostic services revenues. Overall gross margin improved by 840 basis points to 53% in the second quarter of 2016, compared with 44.6% in 2015, and up 440 basis points over the 51.6% in gross margin reported for the first quarter of 2016.
The significant improvement in miscarriage analysis and prenatal testing reimbursement, coupled with cost reductions in our lab have an appreciable effect on our gross margin. This is the second consecutive quarter in which our diagnostic services gross margin exceeded 50%, which is an important milestone for us as we continue to drive our operations toward profitability.
Operating expenses for the second quarter of 2016 of $12.3 million increased by 4.5% or $187,000 compared with the prior year period. Modestly higher operating expenses for the second quarter of 2016 were primarily driven by higher G&A costs from increased severance and bonus approvals, an increase in R&D expense related to the development and launch of our NGS testing platform, an increased cost of services from higher volumes. The next loss for the second quarter of 2016 of $1.2 million or $0.89 per share, compares with a net loss of $1.6 million or $1.91 per share in Q2 of '15 and this improvement was driven by higher revenues and gross margin.
Now turning to our six-month financial highlights. Total revenues of $6.1 million increased 25% from the first six months of 2015, with the increase driven by growth in our reproductive health diagnostics business. Reproductive health testing volumes increased by 14% to 2,829 tests and reproductive health diagnostic revenues were up to 35% to $4.3 million, both compared with the first six months of 2015. Gross margin improved to 52.3% for the first six months of 2016, from 45.4% for the first six months of '16. Operating expenses increased 6.8% to $8.8 million in the first half of 2016, being namely to increased cost of services driven by higher testing volumes, versus the prior year period.
Our net loss attributable to common stock holders decreased by $102,000 to $4.4 million compared to 2015. The 2016 period included one-time non-cash charges related to our Series F convertible preferred stock and warrant financing that closed on March 24 of this year and as more fully described in our first quarter financial results news release from May 4, 2016.
Turning now to our balance sheet of cashflows. We ended the second quarter with $5.2 million in cash, cash equivalents and short-term investments, providing us with sufficient operating capital beyond the next 12 months. Cash used in operations for the three and six months ended June 30, 2016 was $871,000 and $2.5 million respectively, compared to $1.5 million and $2.7 million respectively in the comparable 2015 periods. For the second quarter alone, our cash use in operations improved by $597,000 or 40.7% compared with the prior year quarter. This significant improvement in our operating cash burnsattributable to two main factors. First, we have achieved record-cash reimbursement so far in 2016. For the three and six months ended June 30, cash reimbursement hold up $3 million and $5.4 million respectively compared to $2.5 million and $4.6 million respectively for the 2015 periods. We are proud to report continued achievement from our billing and reimbursement team that is driving record reimbursement trends despite a challenging and dynamic reimbursement environment for some of the labs.
And second, we reported above-average inventory purchases of laboratory supplies in the first quarter of 2016 from increased volumes coupled with burning up the running additional microarray diagnostic platforms in our lab. This resulted in below-average purchases in the second quarter of '16. This helped reduce our cash burn period-over-period.
With that, I'll turn the call back over to Mark.
Thanks, Scott. I wonder if you have viewed the many activities we have under way to build up on our leadership position in reproductive health diagnostics and to leverage favorable market [ph]. Our plans include adding new customers and benefiting from increasing productivity of our sales reps as well as tailwinds generated from favorable industry developments. Continuing to promote physician adaption by providing additional clinical validation with the guidance of our new scientific advisory board. Pursuing new reimbursement contracts for the additional third party payers, we have already executed well in this initiative of more than $177 million lives currently under contract.
Improving test collections in reaping the benefits from investing to [indiscernible] in our billing organization and as always, we will continue to tightly manage expenses and focus on cash collections. We are pleased to have introduced five new tests over the past six quarters including our first test on the NGS platform. Our focus now is to drive growth by supporting our infrastructure and increasing the productivity of our commercial organization. As I've stated earlier on today's call, we are gaining momentum that supports our goal of reaching positive cash flow from operations by the fourth quarter of 2017.
In closing, we are building upon our leadership position in prenatal and postnatal diagnostics through quality test, significant commercial expertise and technological capabilities, along with our ability to provide vital information in the compassionate way to our physician customers and the patients they serve.
Now, I'd like to open the call to questions. Ginger?
[Operator instructions] One moment please for the first question.
While we're waiting for the first question, I'd like to mention that we will be presenting at the Rodman & Renshaw Healthcare Conference on Tuesday, September 13 and that's at the Ladenburg Thalmann Healthcare Conference on Tuesday September 27. Both conferences are being held in New York City. All right, Ginger, we're ready for the first question.
Your first question comes from Kevin DeGeeter from Ladenburg. Please go ahead with your question.
Hey, good afternoon, Mark. Congrats on a really nice set of results, kind of top to bottom here. As far as housekeeping item, can you comment on the contribution from your partner Sequenom in the first half of '16 in totality?
Yes. Second quarter, we had a good quarter from Sequenom. The first quarter was pretty light, but most of our prenatal growth, Kevin, we're pleased to say came from our non-Sequenom customers. We landed two very good customers in the prenatal space that had become two of our top four prenatal customers just at the end of Q1 and they really contribute to our success. The nice thing about our partnership with Sequenom, I do want to mention is that we have a lot of insight into the physicians that are spending through our relationships there and our because our genetic counseling team and PhD team reports out those cases through our partnership, we've developed pretty deep relationships with those customers through our partner.
Things developed over the next two quarters. We're bullish on our ability to continue to maintain our prenatal growth.
Any sort of evolution to that relationship you're reasonably comfortable that some portion of those customers, you'll be able to continue to capture? Is that the correct way to interpret those comments?
Yes, I think that's fair, is that we will work very hard to leverage the relationships that we've developed with those partners. They can change and still, there has to be the closing of their deal first of all and then a subsequent action to reduce the partnership. But our attitude is what continued to do our high such support of those physicians and if something happens where those physicians are compelled to make a choice, we think we're going to put ourselves in the best position to continue that partnership for well into the future.
Okay, that's really helpful. And then just sort of a question on gross margin and I guess it may tie back in the cash collections as well. But the last two quarters we've seen a really impressive step up in gross margin. I guess I'm just trying to better-appreciate. What portion of that is being driven by more favorable end market reimbursement and what portion of that is sort of indirectly being driven by cash collections? I guess how well can we try to appreciate? Are these 52% to 54% gross margins the new normal for CombiMatrix with this product mix? Are there reasons to think that the coming quarters may achieve some more volatility in that line?
Yes. Hi, Kevin, Scott here. We do think the low to mid-50%s is the new normal for CombiMatrix. We're very encouraged by that. It's driven mostly by the average reimbursement for the microarrays that we touched upon during our prepared remarks. Miscarriage analysis is our largest -- with 53% of our volumes. That's now coming in at over $1,600 per test. That significantly – in terms of year-over-year, that's an extra over $300 in the top-line on the test performed. That's a significant component of it.
And we've also talked about in prior calls and I think we touched on it today, just the platforms, the changes we've been making in our lab. We did bring up a new microarray platform for the miscarriage analysis test that's approximately $40 cheaper than the previous array that we were using. That's the '15 gross margin as well.
All right. That's really helpful and then maybe if I can just sneak in one more question. Just your thoughts on how to interpret the recent change in the guidelines from ACMG and just specifically what portion of your customer based business guidelines kind of have the greatest force and weight as opposed to those clinicians who may be more focused on ACOG and what ACOG has to say in those for the moment status quo and regard to the guidelines?
We believe those guidelines will continue to help utilization first and foremost of the NITT assay [ph] and we believe we were encouraged by the fact that they highlighted in the guidelines that there's in no way shape or form precludes that needs to do a diagnostic assay when needed on positive microdeletions. We feel that as the NITT volume continues to grow – which we all know it will and we're very supportive of because it's a great test and better mix priced efforts – it will also really lead to more positives which should be reflects to the array and we believe that will have a cascading effect and we believe we are the premier specialty laboratory for doing prenatal microarray testing. That's the effect I anticipated having in both near and longer term.
Great. Hey, thanks so much.
[Operator instructions] Our next question is from Brian Marckx from Zacks Investment.
Hi, guys. Great quarter. You beat me on not just everyone, I don't sell. But I got a couple of questions -- a couple, maybe more than a couple -- in terms of prenatal market, it sounds like you expected that business to grow which wasn't really I guess my expectation beginning of the year, but it sounds like there's a little bit of change that's going on. Is that sequential growth, or year-over-year growth that you expect or both?
Yes. Year-over-year, Q2 of last year we are down on the prenatal business. We had a couple as I mentioned in my comments, a couple of larger accounts that stops setting when to actually shut their doors completely. What we've seen is we've really felt a lot of momentum in Q1 and so our sequential volumes have been up in the prenatal business about 14%. Trending and trending going forward, as you know we don't give exact guidance, but a component of this will have to really wait and see on the lab core acquisition of Sequenom and when that closes, what ripple effect will that have on us. With Kevin's question, we've addressed that. But it's the focus of our business. We continue to be primarily first and foremost focused on miscarriage analysis testing. That hasn't changed from Q1 and we're very focused on just booming Preimplantations Genetic Screening market which we believe can be $80 million to $100 million in the next year. Those areas are also a focus along with our prenatal. But we're very encouraged by the reimbursement in that marketplace in Q2.
Can you talk a little bit more about the difference in reimbursement? It was up significantly, sequentially and year-over-year as well?
Yes, Brian. This is Scott. The improved reimbursement is really a multi-factorial. We've been talking publicly this year about positive coverage decisions that we've seen from various payers which prior to those coverage decisions, we still had volumes from some of these payers, but won't getting paid and now we are. That adds to the overall average reimbursement increase that we talked about. But probably more significantly is pretty significant billing policy change that we made late last year that basically provides for the greater patient involvement and patient advocacy for our billing team when they are out there fighting the battle – if you will – against the insurance companies if there is a denial or if you are having to appeal a case.
Just a lot of basic blocking and tackling by our billing team has resulted in a greater number of appeals and a greater number of those appeals being turned positively our way. Thanks to changes in our billing team and patient advocacy. So all of those things are leading towards improved reimbursement. Not just the book, we saw those in the first quarter, where the miscarriage analysis average revenue jumped up to -- or so dollar range and that's been sustained here on the second quarter. We're pretty excited about that change.
Yes. Again the miscarriage analysis improvement in the average pricing, I guessing mostly related anyway to the reimbursement. On the prenatal side, it sounds like – is that as sticky, do you think in terms of the higher reimbursement that we saw on Q2, or could that be somewhat, I guess variable depending of the billing success, I guess?
To answer your question, it's a little both and what we mean by that is as a company with a run rate of 260 customers were proud of that but it's still a relatively small number in the grand scheme of things. We lost a couple of big accounts that we talked about last year in the summer, but the two that we picked up are in pretty darn good payer mix areas. That's part of our overall commercial strategy as our productivity increases [ph]. We are at a point where we really look to higher and demographics that not just turn out the largest volume because large centers are there, et cetera, but also where the payer mix is optimal for our business. At times it's largely driven by the payer mix in addition to the factors that Scott mentioned and in the last factor, I do want to highlight is we've been laying this foundation with investment. We hired in a VP of Payer Relations 19 or 20 months ago and they don't just close deals overnight. We have just seen that approach with our billing and reimbursement teams adding human beings and muscle for the effort that there's a human capital aspect that's important here as well to contributing to our success.
Yes. Not to harp on reimbursement, but it has obviously been a big topic in the past and with it improving, I'm just trying to get a clear picture and certainly in terms of miscarriage analysis as a big part of the business and with the favorable recommendations from ACOG and others supporting the use of CMA, is what you're seeing here in the first and second quarter in terms of average reimbursement with miscarriage, is that something that you think is fairly sticky going forward?
Yes. To think that we'll continue at this pace at the objective numbers that we have now is realistic. This is all speculation, but we're not anticipating our budgeting as kind of continuing to grow at 20% clip, but we also feel very good with the collection patterns we have and the coverage decisions that where we are is sustainable. Yes.
Okay. And if I could on SG&A, it was now quite a bit – Mark, you or Scott could just talk about – why it came down quite a bit sequentially anyway.
You mean from our sales and marketing cost? Sale and marketing, right?
We break those out. We're down year-over-year. That's kind of multi-factorial. There were some basic changes in public relations, investor, the conferences that our team goes to, our headcount is relatively flat. There's a lot of various items different team, new patterns, same to that nature that drew all the change. For the quarter, year-over-year, we are averaging approximately 16 FTEs versus about 13 a year ago in the six months period in 2015. So, you would expect a higher number of FTEs, plus higher commissions from higher revenues without dragging increased sales in marketing year-over-year.
Okay. And one last one, I'm wondering if you're willing to say what level of quarterly revenue you'll need to hit the break even in Q4 of '17?
This is something we've addressed publicly before and it's arranged. But we believe that that number is going to fall somewhere anywhere between $4.9 million, $5.2 million or $5.3 million for that quarter. There is certainly some levers that we control on personnel and achieving if we continue to see the productivity that we've been really encouraged by from our reps as well as the reimbursement world because people are – were very pleased these payers are reviewing the data the way they are and dealing this charge miscarriage analysis will be medically necessary and needing a test for it. But all kind of plays into what that number is, but we do feel it's between $4.9 million, $5.2 million to $5.3 million.
Okay, great. Thank you.
That is all the time we have. There are no further questions at this time. Please proceed with your presentation or any closing remarks.
Thank you, Ginger. I'd like to close by thanking you all again for joining us this afternoon. We are executing well on our strategy to support continued top-line growth and move us toward profitability. We look forward to updating you on our progress on our next quarterly conference call in November and to seeing some of you in New York in the Rodman and Ladenburg Conferences next month. Have a wonderful day.
This does conclude today's call. Thank you for participating. At this time you may now disconnect.
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