HTG Molecular Diagnostics, Inc. (NASDAQ:HTGM) Q4 2019 Earnings Conference Call March 25, 2020 4:30 PM ET
Monique Kosse – LifeSci Advisors
John Lubniewski – President, CEO & Director
Shaun McMeans – SVP, Finance & Administration, CFO, Secretary and Treasurer
Conference Call Participants
Puneet Souda – SVB Leerink
Alex Nowak – Craig-Hallum
Good afternoon and welcome to HTG Molecular Diagnostics Year-End Earnings Conference Call. My name is. Devin, and I will be your coordinator for the call today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s call. As a reminder, this call is being recorded for replay purposes.
I would now like to turn the call over to Monique Kosse from LifeSci Advisors for a few introductory comments. Thank you. You may begin.
Thank you, operator. Earlier today HTG released financial results for the year ended December 31, 2019.
Before we begin the call, let me remind you that the company’s remarks include forward-looking statements within the meaning of the Federal Securities Laws, including statements regarding possible additional collaborations with pharma customers, anticipated continued growth in RUO profiling business and related revenue, expected growth in and benefits from pharma programs and collaboration, product development and commercialization activity. These forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond HTG’s control that may cause HTG’s actual circumstances, events or results to differ materially from those projected on today’s call. Factors that could cause events or results to differ materially include those risks and uncertainties described from time to time in HTG’s SEC filings. HTG’s cautions listeners not place undue reliance on any forward-looking statements. HTG is providing this information as of the date of this call, March 25, 2020 and HTG undertakes no obligation to update any forward-looking statements.
With that, I would like to turn the call over to John Lubniewski, Chief Executive Officer. John?
Thank you, Monique. Good afternoon, everyone and thank you for joining us on our year-end conference call. I’m very pleased with the progress we’ve made at HTG in 2019, and we believe we’ve laid much of the groundwork for strong product and service revenue growth in the coming years. I’m very proud of our entire team and thank them for their hard work and their continued support in these trying times.
That said, clearly the world today looks very different than I had even a week ago. And while the markets are volatile, to say the least, we’ve not taken our eye off the ball in terms of our business. Operationally, we’ve developed agile countermeasures to some of the challenges that we’re facing. We are still open and operating, portions of our team are working remotely, our lab teams are operating on a modified shift schedule to keep our labs operation. And as I said, I am very proud of all of our employees and how they’re coping with these extraordinary times. They’re making personal sacrifices and going above and beyond to help us continue to execute our business plan. We’re doing everything in our power to maintain business as usual.
Before I get into our 2019 numbers, let me take a moment to talk about the two different types of revenue that drive our business model, which I think is important to understand, particularly when it comes to those factors that impact our results. The first is what we call direct revenue. This revenue, which is reflected in our product and product-related services revenue on our financial statements is where we are selling directly into the market, and that is primarily the products and services that are in our molecular profiling business. This is our core, our view is that growth here shows market adoption of our technology, proof of our value proposition, and demonstrates our ability to execute our business plan. We have seen strong growth in this revenue and believe that there is tremendous opportunity in this market.
The second type of revenue is collaboration revenue, reflected in our financial statements as collaborative development services revenue. This revenue is recognized through our collaborations with pharma partners where we seek to build a companion diagnostic to pair with their therapies. This remains an important part of our strategy and we continue to see significant opportunity here. Collaboration revenue, unlike direct revenue in our products and services is more reliant on our pharma partners and not in our immediate control. This has made collaboration revenues more unpredictable, as they are also linked to clinical trial outcomes. With this in mind, our collaborations and the revenue that they produce should be looked upon as a strategic initiative, not a separate business or revenue line.
Collaboration revenue is a byproduct of our efforts to attempt to develop a killer app, which is a companion diagnostic; it is essentially pharma-sponsored R&D for HTG. And HTG companion diagnostic paired with a lead drug in a major indication would be transformational for HTG, but it is less predictable than our direct revenues. We expect collaborative development services revenue to ebb and flow. The direct revenue demonstrates our continued growth in the large and fast growing molecular profiling market; from this revenue, we expect to generate new opportunities for collaborations and also progress our way to develop our own proprietary diagnostics, like our exciting comprehensive breast cancer product,
Okay, now to the numbers. Total revenue for 2019 was $19.2 million. Breaking that down, we recognized an increase in direct revenue $14.6 million in 2019. Growth was powered by continued strong interest in our oncology biomarker panel, our precision immuno-oncology panel, and our whole transcriptome microRNA panel. We’re pleased with our continued execution in this line of business and are bullish going forward as we know we’re just scratching the surface of the opportunity in gene expression profiling of these proprietary panels, this is an $800 million plus market growing at 10% to 20% per year. We are very confident in our ability to continue to robustly grow this business.
Collaboration revenue was $4.6 million for the year, down 63% compared to 2018. This decline was caused by a few factors; first, as mentioned in a previous call, PDP-1 had activity in 2018 but not in 2019. Next, both PDP-2 and PDP-3 weren’t quiet period for the majority of 2019. All that said and as mentioned earlier, working with pharma to develop assays that may become companion diagnostics remains a core strategy for HTG. Our base of Phase I and Phase II programs continues to build and we expect to add new collaboration partners in the future. When we do contract these new partners, it will be a direct contract between HTG and our pharma partner. We believe this will result in better revenue and margin economics versus the legacy PDP programs that were contracted through QIAGEN, which included a profit split.
Okay, now let’s look at our profiling business. On this subject, we continue to see strength in our pharma profiling business. We exited the year with 88 active pharma programs spread across 13 different customers. We now have a full commercial team, both in the US and Europe, and we expect to see the positive effects of this as they work new opportunities through the sales cycle. New program and new customer growth are key objectives for this team. The unique advantages of our EdgeSeq platform technology, specifically, our low sample input and simplified bioinformatics enable HTG to continue to grow in this large and rapidly growing market. One new workstream for the company will be to develop partnerships with leading CLIA laboratories to expand the availability of HTG [ph] technology. By partnering, we’re increasing our commercial reach, making it easier for pharma’s to do business with us. We look forward to reporting on our progress in this area throughout 2020.
Next, I’d like to say a few words about our academic profiling business. This is a business we recognized from the major academic centers in our translational research groups. Historically, this business requires a long lead time as thought leaders in institutions carefully evaluate the scientific rigor, the clinical value of each new panel and system. This business grew substantially in 2019, and we believe we’ve approached a turning point in this area with the scientific acceptance of our technology in the academic community. We continue to invest in R&D — in molecular profiling, and expect to launch several new applications this year.
We’re very pleased to have two significant publications come out of this market in the past several months; the first was a major article that documented the use of our new mouse mRNA panel, and the second was a cell article, the profiled microRNA technology providers where HTG fared very well in a comparative evaluation. This brings the number of publications referencing EdgeSeq to over 140 at year-end in 2019, tripling the number from just three years ago. We’re very pleased by the progress we’ve made in our profiling business, both in pharma and academic in 2019. As we look into 2020, while we anticipate demand and profiling to continue, we believe that it’s likely that we will be impacted by the recent COVID-19 situation because many customers have either shutdown or have gone to close campuses, it is likely this could impact our revenue growth in 2020 compared to prior years.
Now, I’d like to talk about the work being done in our California Technology Center, and how it’s advancing as we progress toward building our proprietary breast diagnostics. We highlighted this business opportunity last fall in a KOL event in New York, where we outlined our vision to build a comprehensive breast cancer diagnostic platform. Besides this market opportunity to be well over $1 billion, and believe our offering will be a significant advance versus current diagnostics. The first phase of this project has been a technology development initiative. We are building a next-gen EdgeSeq platform technology to take HTG to higher levels of performance, flexibility, influx [ph] than we’ve ever been before.
New probe synthesis methods, advanced bioinformatics, formulation improvements, and advances in our automation platform are all being incorporated into this next-generation EdgeSeq technology. Once the building blocks are in place, we expect the whole transcriptome product of approximately 22,000 biomarkers, which is being designed to operate at a clinical grade for precision, reproducibility and robustness. We expect to leverage our whole Transcriptome product into all three growth verticals for the company. It will serve as an RNA-Seq surrogate to help drive even more rapid growth in our RUO profiling business, will serve as a universal RNA companion diagnostic platform to support our biopharma collaborations, and it’s going to serve as our core RNA platform technology for our breast cancer comprehensive profiling product.
We also expect the whole Transcriptome product to serve as a platform technology to be made available as an OEM, through CLIA labs and other test developers; this is a major value creation initiative for HTG. The whole transcriptome product that brings the benefits of small sample requirement, easier workflow, simplified bioinformatics and transcriptome level multiplexing will enable HTG to fully compete in the entire $800 million plus RNA-Seq market with a very strong value proposition. We’re very excited about our potential for this business and are moving forward with this initiative very quickly.
On our published development roadmap, we plan to have all the biomarkers and gene sequences identified by the end of Q1, and we are on plan to meet that milestone. By the end of Q2, we expect to have the assay configuration established. In Q3, we plan to publish a technical feasibility report demonstrating concordance to RNA-Seq, and by the end of the year we expect to sign up our first collaboration partner. We expect to start commercialization with an early adopter program in late 2020, and to begin initial product commercialization mid-year 2021. There is a lot to be excited about at HTG, we have a terrific core technology platform in EdgeSeq and we continue to make it better every single day. And we’re leveraging our differentiated technology platform across several large and growing markets.
We’re looking forward to this year as we continue to grow our direct product and services business, manage our partnership collaboration business and develop our proprietary molecular diagnostic business.
With that, it’s now my pleasure to turn the call over to our CFO, Shaun McMeans for an update on our financials. Shaun?
Thanks, John. As John mentioned, total revenue for 2019 was $19.2 million versus $21.5 million in 2018. Direct revenue defined as products and product related services revenue in our financial statements, was $14.6 million in 2019, was a 60% increase over 2018 direct revenue of $9.1 million. Collaborative development services revenue decreased year-over-year by $7.8 million, as existing programs reached partner decision points. No new programs were entered into in 2019. Despite a slowing in collaboration revenue, we are very pleased with the strong growth in our profiling or direct revenue, reflecting increased sales of instruments and consumables resulting from expansion of our profiling menu available to an increasing number of pharma and academic customers adopting our technology in the United States and Europe.
Across the product and product related services revenue increased to $8.1 million in 2019 compared to $5.1 million in 2018; this reflects our increase in direct revenue for which related costs are included in cost of product and product related services revenue. In addition, a portion of our 2019 direct revenue included low margin subcontracted laboratory services relating to two large pharma company customer programs. We do not anticipate a recurrence of this volume and type of profiling revenue in the future.
Selling, general and administrative expenses decreased approximately 6% to $18.7 million in 2019 compared to 2018, primarily due to higher stock-based compensation and consulting costs incurred in 2018. Research and development expense decreased approximately 16% to $10.6 million in 2019 compared to 2018, primarily due to less collaborative development services revenue in 2019 for which related costs are reported in research and development expense. Our continued new product related research and development expenses unrelated for our collaborative development programs, amounted to approximately $7.7 million for 2019 compared to $4.6 million for 2018; this increase reflects the activity of our California Technology Center, where we initiated work on our whole transcriptome panel in 2019.
Our operating loss for 2019 was $19 million compared to $16.2 million in 2018. The loss per share was $0.51 for 2019 and $0.60 for 2018. The reduction in our year-over-year loss per share reflects additional shares of common stock sold and underwritten public and private offering in 2018. We currently have approximately 58.4 million shares of common stock outstanding. We ended Q4 with $33 million in unrestricted cash, cash equivalents and short-term available for sale securities.
At this point, I would like to turn the call back to John for some closing comments.
Thank you, Shaun. Just like many companies, we are facing some uncertainties regarding the COVID-19 situation, but we’re making daily adjustments to our business plan to countermeasure potential negative impacts but we do not believe that this impacts the longer-term opportunity for HTG. As mentioned earlier, I believe we have an amazing opportunity in front of us. We’re positioned to grow in a large and fast-growing markets with an excited and highly differentiated platform technology.
In 2020, our key priorities will continue to be; first, we will look to continue to grow our base profiling business, both help fund continuing operations, as well as to create new collaboration opportunities. We believe our performance in 2019 validates our strategy and demonstrates our ability to execute. This is in a $800 million plus market with robust growth, and we believe we’re just scratching the surface on the opportunity that this presents to HTG. And now that our sales teams are fully staffed, and we have new panels and applications, we believe we’re going to continue to show robust growth in this market.
Second, we’re going to look to continue to grow our pharma pipeline, both in the number of customers and the number of projects. We exited the year with 13 customers and 88 programs. Again, now with a full sales team, we believe we will continue to grow this line of business. Finally, we will look to build our next-gen EdgeSeq platform technology that will serve to be the base for our breast cancer diagnostic as well as an OEM platform for other developers. This work is underway in our California Technical Center and we’ve laid out key technical miles to measure our progress here, and I look forward to reporting out on those as the year progresses.
With that, it’s now my pleasure to open up the call for questions. Operator?
Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Puneet Souda with SVB Leerink. Please do with your question.
Yes, hi guys, thanks. So first one, I mean, I appreciate it’s hard to say when things will recover in terms of when folks will go back to return to the labs; but I’m trying to understand, can you — if you can elaborate on any customers or types of customers that are still utilizing the products in the direct channel and the direct revenue? And should we or, and how should we think about the impact here; should we assume majority of the impact is going to be on the direct revenue line? And should we expect the rest of the PDP funnel to be sort of pushed out? Just help us understand the timing given the current disruption.
Yes, Puneet. This is John. Thanks for the question. Really unfortunately right now it’s kind of too early to tell the impact. All I can really say is, it’s obvious we are going to be impacted. We’re seeing institutions both, pharma and academic shutting down during this outbreak. We obviously expect this to affect our business, but really due to the unpredictability in how fluid the situation is, we really haven’t been able to quantitate the impact at this time. That said, I’m reading year notes and notes from others; leaders in these institutions are confident that once they’re back, demand is going to snap back, once personnel are back in the laboratories. We believe the core fundamental market drivers still remain in place, and we expect that once pharma companies and large academic medical centers return to work that we’ll see our business with these customers resume.
Okay. And on the PDP funnel, you mentioned 88 different programs there with this current impact ongoing. I mean, help us just understand; it appears to me that the research in the academic and the pharma — are your profiling type of work will return back. But do you expect some projects to be permanently lost as a result of this? You know, help us understand on that 88 number and how should we think about that for the full year?
Good question. What we’ve seen so far and by the way, there is still a lot of clients, specifically pharma that are working from our home. So we’re continuing dialogues with a lot of those customers, but if you remember how we keep score on those ADA, it has to have generated business in the last 12 months. So, if we lose a month of work or two months of work, I would expect that that number in the near-term is actually going to go down because we’re going to time out of certain programs, simply because the account essentially is shutdown from that type of work. But what we’re seeing is not cancellations, what we’re seeing is things are just pushing out.
Okay. And Shaun, on cash burn, can you remind us what’s your expectation here for the full year and assuming that things — folks return back in a couple of week timeframe; how are you thinking about that? And if you can talk to us about the strength of the balance sheet; you have currently in any steps that you are taking in the near-term to ensure that you continue to manage the cash here? I think that’s an important question for a number of investors.
Yes. I think again too early to tell Puneet. You know, we’re starting to model out scenarios to preserve growth and value drivers, while still not exceeding our targeted cash burn for the year, which we expect to be approximately five per quarter. As far as countermeasures, you probably saw that we entered into an agreement yesterday, that was done to preserve HTG’s ability to raise equity capital, if needed with registered shares. We have had some activity on our ATM [ph] in Q1, and we’ve got a small private placement with an investor. And we also managed to get our interest-only on our mid-cap financing, our senior debt facility, which is at 11-months which preserves about $600,000 per quarter.
Okay, all right. Okay, thank you.
Our next question comes from the line of Craig Bijou with Cantor Fitzgerald. Please do with your question.
Hi, this is Dennis [ph] on for Craig Bijou. Thanks for taking the questions. So, could you comment on the impact that you’re seeing on your breast program in California? And what this does to your timeline?
Great question, Dennis. Actually the team up there, I just — I got to give a hats off to them; they have continued working, not necessarily in the lab, but from home because so much of the work that is being done right now is actually planning and actually work that can be done individually, kind of, in-silico, and so that team has just been phenomenal in how they have responded. I believe we’re — well we — I know we’ve met our Q1 milestone. Depending upon how long the shelter in place — stays in place in California, it will probably dictate how much risk there may be in our Q2 milestone. But so far, I think we’ve probably only last about a week of work out of that program.
Great, thank you. And is there a target number of additional profound panel introductions that you expect for the year?
Yes. So what we’re doing this year is, we have what we actually believe is probably the majority of what we need with our oncology biomarker panel, our precision immuno-oncology panel, the mouse mRNA panel that we brought out, the microRNA product, and then the recent autoimmune panel. What we’re now doing through applications on our Reveal software is actually we’re going to be opening up what we call apps off of those panels. So we have plans for two to three new apps that will be released — so off of those panels with the first being a hot-cold tumor signature, the second being a cell proliferation rate calculation, and then the third is going to be a molecular subtyping application. So, we would expect probably to have essentially one out about every four months, which actually — so it’s almost like a new product off of an existing panel.
Great. That’s it from me. Thank you.
Our next question comes from the line of Alex Nowak with Craig-Hallum. Please do with your question.
Great. Good afternoon, everyone. John, most of the work that HTG does; my understanding is about retrospective studies. So I would think those would be relatively immune to COVID; am I incorrect?
Yes and no. So, not immune because if we actually can’t via on-site at — whether it be an academic medical center or a pharma, we can’t continue to move opportunities through our sales process. So it kind of — we can do some of this by phone, but many of the sales processes have essentially stopped. You’re right, a lot of these are retrospective; that being said, I do think there will be somewhat of an impact as trials are either halted or slowed, that are currently enrolling. Again, we don’t see any changes to the long-term but we do see some turbulence, I think over for a while — for however, this long if it lasted a month, two months, a quarter, whatever.
Okay, got it. And the direct business at 60% growth last year, obviously not including COVID; what was the growth in direct business in January and February?
Good question. As you probably have seen, we’re a little backend loaded, and actually we were on half to hit our internal plan, up until March, when things kind of — they really — the last two weeks, things almost shutdown. I mean we’ve got a crew in here finishing projects, we’re trying to get things to a position that I say are part — so that we can leave work. But we don’t have customers that are sending us samples, so there — that work has basically stopped. So we were looking good, what we’re doing right now is we’re actually taking this time — it’s almost like a time-out in a basketball game, to kind of sit back down with our sales teams and our commercial teams to get a reset and make sure that when the accounts turn back on, we’re fully ready to take advantage of that when we can get back out into the field.
And then the same thing on our development milestones, both in Tucson and in California. Those teams are taking this opportunity to plan out experiments, to access samples to get things in place so that when everyone can return back to the laboratories, we can be most productive. And then — and in both locations we are being very smart as I was mentioning, trying to minimize any employee risk; so we may have a person or two in because actually we don’t require a lot of lab work to generate a lot of data, so we can get the — actually the lab work done in a very light fashion, and then get all the computational and analysis and report write-ups done by folks that are working at home, and that’s essentially what we’ve been doing.
Okay, got it. And we were hoping that HTG was good to have basically sign-up a new PDP partner without Qiagen by the end of December, that obviously didn’t happen. So I’m just curious, what are the reasons for the continued pushout of any new PDP program? Then these pharma partners that you had in the pipeline, did they go with other diagnostic companies or are you still in discussion with them?
In both of the two opportunities that we’re developing, that the account or our partner has developed a delay, so it’s a pushout, it’s not lost, if you will. So they haven’t gone with an alternative vendor or an alternative technology, it’s just they have been slower to execute than they had told us they were going to be. And since that time we’ve actually have — with us there has been one to two new opportunities that are also — we’re starting to look at that we think could happen this year. So we’re trying not to put a number on it, but again, I’ll go back to what I’ve always been saying; I fully expect that we will add additional collaboration partners in 2020.
Okay. Where do we sit with PDP-2 and PDP-3? Are those still kind of inactive over 2020 or should we expect to hear news on either one of those two this year?
Yes. On PDP-2 is, I’d say they are waking up, they’re — now that you’re kind of post-merger, so where we expect to see kind of a renewed activity if not on that assay, on something else with that client. PDP-3, they’ve got the data, and again, now — and we’re waiting a readout.
Okay, got it. Thank you.
[Operator Instructions]. Our next question comes from the line of Yi Chen with H.C. Wainwright. Please do with your question.
Hi, this is Edward [ph] for Yi. I appreciate you taking our questions. Just two from me. Can you describe what the status is of the autoimmune panel?
Yes. So we’ve got it on market. We’re starting to see revenue on that. Again, our sales cycles sometimes — that can be a three to six month sales cycle. It was launched late last year, we’re just now starting to see a pick up. Unfortunately, we’re not being able to make sales calls, obviously isn’t going to help that cause, but we still remain very bullish about that opportunity. Autoimmune is of the large market and biomarkers are now just starting to be used in that market whereas in oncology, I’d say that’s probably — they’ve got a 10-year head start versus autoimmune. But again, we remain very bullish on that panel.
Excellent. And then with everything going on in 2020, I’m wondering if you could describe what you anticipate being the primary revenue growth driver this year?
Yes. I think it’s going to be more of the same where the profiling business that we really build in and quantitated that with some third-party consulting last year. It’s a big market and we did 14 and change in that business, 14-6, last year we’ve size the market at $800 million plus. We think that’s going to continue to be a real revenue driver for the company with the current panels that we have. Eventually, we’ll bring out when we get it there, we’ll bring out the whole transcriptome product for gene expression profiling. I think that will open up another segment of the market, and we’re going to continue to bring out new applications on the pre-existing panels which make — which basically make the product easier to use and that helps drive market adoption.
So, you know, we think that this core business of RUO profiling can really be a very nice business for us. And then, it sets the stage for us to potentially get a companion diagnostic, and it also becomes the foundational technology platform that our California team will then start to build our breast program on.
Thank you. I appreciate the details.
At this time, I see no further questions left in the queue. And I would like to turn the floor back over to management for any closing remarks.
Great. Yes, I’d like to thank everyone for joining us today. I know there’s a lot going on, but in particular, again, I want to thank the employees here at HTG, both in Tucson and in San Carlos for their tremendous work and self-sacrifice that they continue to make and demonstrate to help us grow the company. Additionally, I’d like to thank our board and our shareholders for their continued support. And we look forward to updating you on our next earnings call. Thank you.
This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.