CombiMatrix Corporation (NASDAQ:CBMX) Q3 2016 Earnings Conference Call November 2, 2016 4:30 PM ET
Bruce Voss - LHA, IR
Mark McDonough - President and CEO
Scott Burell - CFO
Kevin DeGeeter - Ladenburg
Brian Marckx - Zacks Investments
John Powell - Redwood Funds
Welcome to the CombiMatrix’s 2016 Third 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, November 02, 2016.
I would now like to turn the conference over to Bruce Voss. Please go ahead, sir.
Thank you. This is Bruce Voss with LHA. And thank you all 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.
This morning CombiMatrix issued financial results for the third quarter of 2016. If you have not received this news release, or if you would like to be added to the Company’s email database, please call LHA in Las Angeles at 310-691-7100 and speak with Anne Mccallion.
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 combimatrix.com.
The content of this conference call contains time sensitive information that is accurate only as of today, November 02, 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, Bruce. Good afternoon, everyone, and thank you for joining us. I'm pleased to report that we are executing exceptionally well on our business model. We are making meaningful and tangible progress in further establishing CombiMatrix as a leader in diagnostic services for the reproductive health market.
Today, we are reporting across the board improvements in important financial and operating metrics, including solid increases in revenue and test volume, expanded gross margins, a new record in cash reimbursements, and a reduction in operating expenses. As a result, compared with last-year, we nearly cut in half those operating loss and operating cash burn. Our strong performance shows our confidence in reaching our goal of profitability by the end of next year, and enhancing shareholder value. I'd like to share a few highlights from the third quarter of 2016 compared with the prior year period.
Total revenues increased 29%. Reproductive health revenues were up 39% on a 17% increase in test volumes and a 19% increase in average revenue for test, which now exceeds $1,500. Miscarriage analysis revenues increased 42% on a 14% increase in test volume and a 24% increase in average revenue per test. Prenatal microarray revenues increased 11% with a 3% increase in average revenue per test. Gross margin reached 54%, which marks our third consecutive quarter above 50%. Our number of billable customers reached 257, up 10% from the year-ago. And lastly, our quarterly operating cash burn decreased 47% to $817,000.
I'm pleased to report record cash collections totalling $3.1 million for the quarter. While many companies in the diagnostic industry struggle in this regard, our cash collections are robust. Our collection success is attributable to our investment in the billing and collections team and the improvements we have made to the processes over the past several years. Among the actions our billing and collections team has taken is to involve patients and physicians to serve as our best advocates for reimbursement with the payers. We continue to see the effects of positive reimbursement decisions by third-party payers to cover miscarriage analysis testing, based on the overwhelming data supporting the medical necessity for this test.
Other contributing factors include the fact that we’re selling more of our frequentations in our screening tests, which is a cash-pay business. And also the very few of our tests in the portfolio are built in Medicare. As we break out of payer mix, 29% of our tests are either direct billed institutions or cash paid by the patients, and 71% are billed directly to third-party payers. We work hard to add their contracts and increase the number of covered lives nationally.
Q3 was a particularly strong quarter for miscarriage analysis testing, reflecting increases in tests volume and revenue per test. Revenue for this segment increased both sequentially and over the prior year. Our volume momentum came from adding several large accounts in the second and third quarters of this year. As mentioned previously, additional support is coming from the growing base of clinical evidence supporting the use of microarray testing to determine the reasons behind the current pregnancy loss. As discussed throughout this year, test plans are increasingly recognizing the clinical support and the value this information to patients in family planning.
To-date in 2016, we know 22 health plans that have reversed their medical policy decisions, and now will reimburse for the current pregnancy loss. These include top names such as Cigna, which is the largest customer and health insurance company in United States, as well as multiple Blue Cross Blue Shield networks. We have seen some early impact new decisions and increased reimbursement amounts. Noting this was already our highest reimbursement test.
Turning to Preimplantaion Genetic Screening or PGS. Although, this is a smaller piece of our revenue mix, we’re reporting a 92% increase in revenue on a 57% increase in volume compared with the prior year. The increase in revenue per test for PGS is due partially to the fact that we are screening more embroys per case. We introduced PGS on a NextGen sequencing platform last June. NGS, shortens the turnaround time, improves those margins and allows us to build on our momentum in reproductive health diagnostics with established customers while adding new ones. Again, the majority of PGS testing is self-pay, which help to reduce our concentration of third-party payers.
Moving on to the prenatal segment, volume increased 8%, revenue grew 11%, both compared with the prior year. These gains are especially notable given the challenge with lower referrals from Sequenom. We had replaced some of that business by establishing direct relationships with those maternal fetal medicine physician offices. And finally, in our Pediatric segment, volume is down very slightly but revenue increased due mainly to a slightly improved payer mix. We also continued to gain traction with physicians in clinics on the Buccal Swab test we launched in 2015.
Turning to our commercial operations. We are very pleased with increased productivity we are seeing from our field sales force. Our goal is for each sales represented to be responsible for $1 million to $2 million in annual revenue. We currently have 12 sales people in the field, and they are led by senior director of sales. We had one territory averaging over $2 million a year in revenue, and several others producing $1.3 million or more on an annual basis. The balance of the team is tracking between $600,000 million and $1 million per year in annual revenue.
We are increasing productivity through better training while all of our reps now carry all of our tests. Our goal is to keep a steady state of 12 to 15 high producing sales reps in the field. We feel very good about our sales model and have put more resources on super territories where we have consolidated customer base and a favorable payer mix.
We define super territories as individual territories that bring in well over $1 million in a year in revenue and that have the potential for significantly more growth. Our strong performance on key financial and operational metrics over past quarters gives us confidence we’re on the right path to achieve profitability and build shareholder value. We intend to continue executing on our business model to drive volume and revenue growth, and to expand margins by increasing the productivity of our commercial operation, reduce costs in the lab and in-house, and capitalize on favorable industry trends.
We are focused on continuing our very high rate of cash collections and managing expenses. Our ability to execute on this model gives us confidence in achieving the outlook we provided during our last conference call for positive cash flow from operations by the fourth quarter of 2017.
With that overview of our results and accomplishments, I would like to ask Scott Burell to review our financial results in a bit more detail. Scott?
Thanks, Mark, and good afternoon, everyone. I’m pleased to report that CombiMatrix delivered strong financial and operating results for both the third quarter and the first nine months of 2016. I'd like to share some highlights from our performance, starting with the third quarter.
Revenues increased 29% to $3.2 million for the third quarter, which includes $37,000 in royalty revenues. The number of billable diagnostic tests was $2,835 for the quarter, up 14% from the prior year period, while total diagnostic test revenues increased 29%. The increases were driven by gains on our reproductive health testing segments, which increased to $3.3 million, up 39%. Revenue growth exceeded volume growth due to improved reimbursement across all microarray tests.
The number of customers we serve during the quarter increased to 257, which represents a 10% increase from last year's third quarter. Total reproductive health volumes increased 17% to 1,483 tests for the quarter. Miscarriage analysis followed by PGS testing led the volume in this segment up 14% and 57% respectively. The average revenue per test increased by 24% from miscarriage analysis and by 23% for PGS.
Operating expenses for the third quarter of 2016 were $4.1 million compared with $4.2 million in the prior year period. The modest decrease was due primarily to a lower sales and marketing and R&D expenses, partially offset by higher general and administrative expenses. Gross margin for the third quarter of 2016 improved significantly from 43.6% in the third quarter of 2015 to 54% during the third quarter of 2016. The net loss for the third quarter of 2016 attributable to common stock holders decreased by $831,000 to $856,000 or $0.38 per share compared with the net loss attributable to common stock holders a year ago of $1.7 million or $2 per share.
As Mark mentioned earlier, we've cut our net loss nearly in half from the third quarter of 2015 to 2016, a significant milestone for us on our path to profitability.
Now turning briefly to our nine months results. Total revenues in the first nine months of 2016 increased 26% to $9.3 million. The improvement was driven primarily by increases in our reproductive health diagnostics business, driven by higher testing volumes and by continued improved third-party reimbursement. Reproductive health testing volumes increased 15% to 4,312 tests and corresponding revenues were up 37% to $6.7 million, both compared with prior year periods.
Operating expenses for the first nine months of 2016 were $12.9 million compared with $12.4 million in the prior year period. The increase was due mainly to higher general and admin expenses and higher cost of service, resulting from increasing test volumes. These increases were partially offset by lower sales and marketing expenses. And gross margins improved to 52.9% for the first nine months of 2016 from 44.8% for the same period in ’15.
The net loss attributable to common stockholders for the nine months ended September 30, 2016 was $5.2 million or $3.48 per share. This is a $729,000 improvement from a $6 million loss for the comparable 2016 period. The net loss attributable to common stock holders in 2016 reflect one-time non-cash charges of $1.9 million related to deemed dividends from the insurance subsidiaries as convertible deferred stock advance and the $8 million public offering that closed on March 21st of this year. This increase was partially offset by the reversal of the $890,000 Series E deemed dividend recognized in 2015 from the repurchase of those securities upon closing of our Series F public offering, partially reduced by the $656,000 deemed dividend paid to the Series E investors back in February.
Now, turning to our balance sheet and cash flows. We ended September 30, 2016 with $4.3 million in cash and cash equivalents, which compares to $3.9 million as of December 31, 2015. We are currently confident that our current cash resources will satisfy our cash reimbursements for at least the next 12 months -- excuse me, our cash requirements for at least the next 12 months.
Cash used in operations for the third quarter and nine months of 2016 was $817,000 and $3.4 million respectively. Both were below the comparable 2015 amounts at $1.5 million and $4.2 million respectively due primarily to increased cash reimbursement from revenue growth. We achieved record cash reimbursement for the three and nine months ended September 30, 2016 of $3.1 million and $8.5 million respectively. This compares with cash reimbursement of $2.4 million and $7 million respectively for the comparable 2015 periods.
With that overview, I’ll turn the call back over to Mark.
Thanks, Scott. I want to review a few of the many activities in our business model, aimed at leveraging favorable market dynamics and building on our leadership position in reproductive health diagnostics. Our plans include adding new customers, benefitting from increasing productivity of our new sales reps and capitalizing on tailwinds generated from favorable industry developments. They also include continuing to permit physician adoption by providing additional clinical validation with the guidance in support of our scientific advisory board.
We will pursue additional reimbursement contracts with third-party payers. We’ve already executed well on this initiative with more than 177 million lives currently under contract. We will continue to look to add new accretive test to our family health portfolio through partnerships and through our own internal development. We’re also working towards continuously improving cash collections, and reaping the benefits from investments made in our billing organizations. And as always, we’ll continue to tightly manage expenses to reduce operating cash burn.
I also want to share the strategic process with our investment banking firm, Torreya Partners, is ongoing. Should anything definitive occur as a result of that process, we’ll make that public. We’re pleased to announce that our Vice President of Clinical Affairs, Dr. Trilochan Sahoo will be making a presentation titled unravelling the diverse landscape of genomic abnormalities from conception to childhood at the second World Congress of pregnancy loss being held January 19th to the 22nd of 2017 in Cannes, France. Dr. Sahoo will be a catalyst for our team as we continue to build clinical support for the use of microarray analysis for miscarriage testing.
You may recall that this research was published in genetics of medicine in June of this year, making a case for the superior diagnostics value of microarray analysis over carrier typing based on results from the largest study of its kind, involving nearly 8,000 consecutive products and conception samples. We are delighted with Dr. Sahoo’s work in the ever expanding clinical support and miscarriage analysis testing.
We are passionate about executing on our business model. We have structured our organization to be nimble, allowing us to rapidly capitalize on incremental opportunities and provide a high level of personalized service to our customers. We had a strong foundation based on our quality tests, significant commercial expertise, and technical capability. Our mantra is to go from good to great by building on an even stronger foundation. We are diligently working to increase the productivity of our commercial organization who are concurrently managing expenses.
All of this is critical in achieving our corporate mission of providing accurate meaningful results in the compassionate way to our physician customers and the patients they serve. As I 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.
Now, I'd like to turn and open the call to questions. Operator?
While, we are waiting for the first question, I'd like to mention that we will be presenting at the Benchmark Company Micro Cap Discovery Conference in Chicago on Thursday, December 1st. We also would be meeting with institutional investors in San Francisco on January 9th and January 10th during the Annual JPMorgan Healthcare Conference. Okay, Victoria, we’re ready for the first question.
Your first question comes from the line of Kevin DeGeeter with Ladenburg.
I want to talk a little bit about PGS. You’ve gained some nice traction there with PGS. How should we think about the potential for, both portfolio expansion in the IVF channel to leverage by increasing interaction with clinicians? And how do we think about the current selling model for PGS. Is that a segmented portion of the sales force or do each of the reps on IVF for the PGS in addition to some of their other call points?
Yes, so PGS does continue to be a good growth segment for the Company. We have modified our model, and we just completed a training session here last week with seven of our field sales personnel on PGS. And to deep dive-into the product line and to answer your question, Kevin, we are going to make sure that everyone becomes a subject matter expert in that marketplace, because there are only 500 clinics in the United States and with our 12 people in the field, there is roughly -- it's not evenly this first, but call it 45 clinics in every territory. There is an opportunity to get that business.
Our growth has been good. I'd like to see it get even better in that regard. And we will be adding tests into the IVF call-point over the next year as well, just to continue to expand our offering there to help make us even more differentiated with that call point. We're excited there was just, I think, a different article release today that things to market in 2015 for Preimplantaion Genetic Screening and diagnosis is $125 million in 2015. And in our analysis and research, we thought it was closer to $80 million. So the market opportunity is definitely emerging, and we want to grab a piece of it. And it's very much a focal point of our growth strategy.
And one thing just to add, I know, this is a long winded answer. But the one thing to add to that particular call point that’s been incredibly successful for us is we are also selling in carrier typing testing, which has been fairly lucrative, as well as miscarriage testing to that call point too. So even though we breakout PGS by just the nature of the tests in our analysis, what we’re getting out of fertility clinic is a whole lot more than just the $286,000 we did in Q3.
And can you just comment with regard to the pipeline and opportunities for reversal of coverage opinions from additional private payers has been a big driver of revenue over the last couple of quarters. Incrementally, how should we think about the opportunities for additional wins and additional opportunities have more favorable coverage in reimbursement policy?
I want to follow, so initially you’re talking about pipeline, within, are you talking about...
I’m talking about health plans as it pertains to cover decisions for miscarriage analysis and getting paid.
I think we believe that the data now is going to continue to be out there that is going to be supportive. I don’t have a forecast honestly of which plans will close. I can tell you one that’s been a non-coverage decision for a number of years, that’s very much a priority for us as that now, they want the last remaining hold out, so it’s not paying for the test, and we are trying to pull together data -- we have to pull together a whole [dossiated] data that we’re presenting to them. And we’re hoping that can change over time. But I think you’re only seeing the beginning of the revenue opportunities from those coverage decisions, going forward, because most of those announcements have been in the very recent past on that.
And then maybe one last one from me, and then I’ll get back into queue. As we think about gross margin and of course towards achieving cash flow breakeven by fourth quarter of next year. Are you assuming further gross margin expansion? And if so, kind of where does that come from? And just from a technology and processing standpoint, do you think there is opportunity to squeeze more costs, out of across the goods line?
Hi, Kevin, Scott here. So, obviously we’re pleased with the progress with our gross margin. We are hopeful that that will continue to accrete forward. As you know, there is two primary components of that, the first being the average reimbursement. And so that gets to your first question. So if we continue to see improvements there. And for purposes of the response, if there were no changes in the lab, improved reimbursement by itself will tick- up our gross margin obviously. But in addition to that, we continue to look at our operations, the platforms that we’re using, and ways to improve and reduce cost.
I think we announced earlier this year that for the miscarriage analysis test, we had switched from one aluminum products to another aluminum microarray product that is the lower cost product for us and it is better suited for the RPL test than the pediatric or the prenatal test. And that saved us approximately $45 per test in terms of materials and labor costs. Obviously, as volumes increase, there is a fixed amount of global issue that would be spread across more and more tests that will help improve gross margin.
And then the last item, the last thing I would say is with PGS relatively new test for us, bringing that on to the NGS platform. It's helping gross margins on that product. And we’re continuing to look for ways to reduce chip costs, and other areas to improve the efficiency inflow and just continue to grab those gross margins.
Your next question comes from the line of Brian Marckx with Zacks Investments.
Mark, miscarriage, as you talked about the reimbursement has been $1,600 plus, and I think this is the third straight quarter. And I’d probably be remised if I didn’t ask about it. So I'll go ahead. Is this, do you think that 1,600 plus is kind of the new normal going forward?
Yes, I think with what we know now and Scott can chime in. With what we know now, I think that's a fair number to expect and to model.
Relative to PGS, the new NGS platform, which I think you said rolled-out in June. How -- can you just talk about that a little bit in terms of how the reception has been? And do you see that, just NGS platform in general, expanding the potential for the PGS tests?
Yes. So to the second part of your question, we’re really pleased with how the system operates and how is the turnaround times that we can afford our customers, which are incredibly competitive, bordering on best-in-class. And next gen sequencing has really been embraced by the fertility space in the community as the technology of choice. And so we realized to be even more competitive. We needed to bring it up. And we've been very pleased with how that process is going, and our customers are responding to that as well.
So now it's just the matter that we've trained up. We've had some new hires we brought on and since June, and getting the whole team firing on all cylinders on that product pipeline. And so I expect in early next year and in 2017 that that will be a continued growth catalyst for us. And we really love the fact that it's a cash paid business, which provides a little assurance to us in this dynamic reimbursement environment where we've been having a lot of wins, and we have many under contract. It's still a dynamic environment. And so continue to growing in all cash pay business is really encouraging to us as well.
In terms of operating expenses, sales and marketing, in particular, it has trended much more favorably, I guess, than what I expected throughout 2016, particularly given that sales have trended the other way. So I’m just kind of -- is there anything else that you can talk about relative to sales and marketing. Why it would trend down as revenues trend up, which is obviously a good sign?
I think the one thing that we said in our prepared remarks is we shifted our model. I won’t go into the long guide travel on my own personal thing when I was a senior military officer, hired into a company, Ventana Medical Systems, that believed in that model. And I’ve always been a fan of it. And so we had now really shifted our model to bringing in either military officers or people from the women’s health community that are a little bit earlier in their carriers where they are more excited about what they can make in variable comp. They may not have all the experience, but sometimes not all the bad habits as well. And we have to focus on training them at an optimal speed. It's really that the accountability now comes to in-house in medical and everyone here to teach these people who don’t have the experience in the lab how to become a top five sales person in the medical field with sophisticated test.
So that’s why we always say, hey it’s going to take six to nine months to rank people up because this is sophisticated. But we’re bringing in people with high acumen who understand biochemistry typically in their background at less base salaries with the same ability to make variable comp as people who have experience. And preliminary returns are favorable, but you got to earn it every day and every quarter, and we’ve realized that. So I would expect for your modelling to just keep that number flat. I don’t expect it to continue to trend down. We’re not cutting people. But we think we have the team right now that can get us to where we need to on the path of profitability with growth.
So Mark, it’s not that the compensation model is different. It's essentially that the efficiency and the productivity is better is that accurate?
Brian, the base salaries are different. So instead of hiring people in 100K, I’m bringing them in it 60-50. And so that’s a big delta. And then what they make in variables is the same. People who earn it are getting paid well and people who aren’t don’t make much. But it’s -- we’re minimizing that. We’ve taken a pretty strong look at the base salaries and we haven’t cut people who are here that are veterans, who are doing well. They still are getting paid where they work, but we want high morale team, et cetera. But it’s the folks that we’re bringing in. We’re looking at a new model of people to bring in.
And do you think you’re going to keep it right around 12 to 15, I guess, through 2017 anyway. Is that a reasonable expectation?
Yes, that’s the plan. Unless just such an amazing strategic opportunity -- here is some market consolidation going on. And our margins are in the 60s, and Scott and I say well gosh, we have an opportunity of this talent it just add 10 people, because they became available due to some outside factors. And that could be an area that would change it. But no, you’re exactly right. We’re planning on keep this 12 to 15 people.
[Operator Instructions] Your next question comes from the line of John Powell with Redwood Funds.
Congrats on a solid quarter. I just had one question for you. Your billable customers are up about 10% year-over-year, which was less than the growth rates experienced in the test volumes and associated revenue. I was curious, is that lower growth rate in billable customers restrict your future growth rates for tests volumes and obviously revenues?
So our number of customers are still strong and support our growth. We’re getting more out of each customer, which is the focus of our team. One of our -- part of our investment in the super territory model that I mentioned in my prepared remarks is to get more lemonade out of the lemon, or lemon juice out of lemon, if you will. And we've invested in some territories like in the State of New Jersey for one, where we had many base accounts. And I can give you an example there of the base line of revenue just from current accounts in the month of September it went up from the 160 grand to 250 grand from just getting more out of these same-store sales.
So we brought in some new folks. We added four people since June. You’re going have spits and spurts on new account activity. And so, the key there is to -- while we’re adding new accounts continues to get more out of your current accounts. But you look at our top 10 list, the average revenue from our top 10 accounts is ridiculously higher, that was a year ago. Yet, it's not -- the risk is not so strong there. That is actually less than -- our top 10 accounts produce less percent to our overall revenue than they did a year ago, even though they are driving a lot more volume in revenue to us. So, that’s talking a couple of things. We’re mitigating our risk, which is a great thing but we continue to get more out of our current accounts as well.
No that sounds very good. Thank you very much. Keep up the good efforts.
[Operator Instructions] There are no further questions at this time. Management, please proceed with your presentation or any closing remarks.
Okay, thank you. I'd like to close by thanking you again for joining us this afternoon. We’re 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 2016 year-end conference call in February. Thanks again and have a great day.
Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation. And ask that you please disconnect your lines.