Bionano Genomics Inc (BNGO) 2019 Q3 法說會逐字稿

Good day, everyone, and welcome to the Bionano Genomics third-quarter 2019 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ashley Robinson from investor relations.

Thank you, Lynette, and thank you, operator, and good afternoon, everyone. Welcome to the Bionano Genomics third-quarter 2019 and financial results conference call. Leading the call today will be Dr. Erik Holmlin, CEO of Bionano, and Mike Ward, Bionano's Chief Financial Officer.

After market close today, Bionano issued a press release announcing its financial results for the third quarter of 2019. A copy of the release can be found on the investor relations page of the Company's website.

Before we begin, I would like to remind everyone that certain statements made during this conference call may contain forward-looking statements, including statements about our strategic and commercialization plans, expectations regarding the rate and expense of adoption of the Saphyr system in the cytogenetics segment, our 2019 sales pipeline, anticipated benefits of improvements to the Saphyr system, conclusions as to Saphyr's potential as a powerful new tool in cytogenomics, the advantages of the Saphyr system over current technologies, and our expectations regarding timing and content of study results and anticipated benefits of these studies in driving adoption of the Saphyr system.

Such forward-looking statements are based upon current expectations and there can be no assurances that the results contemplated in these statements will be realized. Actual results may differ materially from such statements due to a number of factors and risks, some of which are identified in our press release and our other reports filed with the SEC. These forward-looking statements are based on information available to Bionano today and the Company assumes no obligation to update statements as circumstances change.

An audio recording and webcast replay for today's conference call will also be available online in the investors section of the Company's website. For the benefit of those who may be listening to the replay or archived webcast, this call is held and recorded on November 7, 2019.

With that, I will turn the call over to Erik Holmlin. Erik?

Thank you, Ashley, and good afternoon, everyone. I am very pleased to have you join us today for an update on our progress this past quarter. With me on the call today is our Chief Financial Officer, Mike Ward, who will review our third-quarter financials. After our prepared remarks, we will open the call for a question-and-answer session.

Let me begin today with a review of the highlights from our third quarter, starting with our revenues. Our revenue grew 17% for the nine months ended September 30, 2019, as compared to the same period in 2018. And it was primarily driven by strong sales performance in North America. Revenues grew in Q3 2019 by 52% over the second quarter of this year, which is consistent with the seasonality in our business.

In North America, revenues grew by more than 100% for the three months ended September 30, 2019, as compared to the same period in 2018. For the nine months ended September 30, 2019, revenues grew in North America and Europe by 13% combined as compared to the same period in 2018.

Our revenues, particularly in North America, reflect the impact of investments in our commercial team and market development. Since our IPO, we have added four direct salespeople in North America and two in Europe as well as key leaders in marketing who are supporting our efforts to drive broad market understanding of Saphyr's utility in our chosen end markets: human clinical translational research and cytogenetics.

In China, our revenues were down on a year-over-year basis, both for the third quarter and year to date. The sluggish sales in China reflect a number of factors, including some we are able to address and others that are out of our control. For example, the geopolitical climate has introduced headwinds coming in the form of additional tariffs imposed on our consumables and instruments that are imported into China by our distribution partners and end users. Although recent developments suggest that relief in these tariffs may be coming.

One of the items we can manage in China is our commercial footprint. Earlier this year, we added a country general manager in China, and we reorganized our distribution channels in the region and established a local team of sales personnel who support our distributors in identifying and cultivating sales opportunities.

Finally, we have established a laboratory in China where we can process samples in pilot projects, which is often a required step in our sales process. Due to restrictions relating to Chinese samples leaving the country, we had previously been limited in our ability to provide pilot project access there since we cannot process the samples outside China. We believe our efforts to address these challenges will contribute to accelerated sales in China.

Moving on from our financial highlights, I am excited about our progress in executing our strategy to establish Saphyr as the leading platform to streamline and modernize cytogenetic testing. Cytogenetics is the analysis of genetic abnormalities that happen on a chromosomal level as opposed to the single-based current level common for sequencing analysis.

Nearly 90% of blood cancers and roughly half of solid tumors have some type of cytogenetic abnormality that is a driver of the disease. Diagnostic testing in cytogenetics labs has historically relied on four methods: FISH, karyotyping, micro arrays, and Southern Blot, which in turn rely on complicated, expensive, laborious, and slow workflows. And cytogenetics labs are seeking to replace these workflows.

Sequencers are not useful in detecting cytogenetic abnormalities. Saphyr, on the other hand, offers a single platform capable of replacing all four traditional cytogenetic methods, giving labs a four-in-one solution.

A key step in readying Saphyr for adoption by cytogenetics labs has been validation by outside investigators that Saphyr is a suitable replacement. This quarter, we announced findings that support Saphyr's benefits that were presented by researchers at scientific conferences around the country, adoption of Saphyr by key players in the industry, and saw the Saphyr system continue to be highlighted in a growing number of peer-reviewed journals.

Let me take a moment to go into a bit more detail on these items. At the American Society of Human Genetics annual meeting this year, we saw presentations by key scientists from top institutions and diagnostic companies highlighting a series of new findings and validation results that support their adoption of Saphyr as a complement to sequencing for variant discovery and as a replacement for traditional cytogenetic methods.

There was a total of 22 oral and poster presentations highlighting their progress in clinical studies with updates from PerkinElmer, Mayo Clinic, GeneDx, M.D. Anderson Cancer Center, Mass. General Hospital, Emory University, George Washington University, and others. The quality of the studies in the wide variety of applications for Saphyr continues to increase. Data show that investigators are using Saphyr to help answer difficult questions in complex genetic diseases that have historically been very challenging.

A natural extension of the growing body of evidence supporting Saphyr as a routine tool in research and clinical settings would be to see growing adoption at key institutions, which is in fact what we are seeing. This quarter, PerkinElmer Genomics and the University of Iowa announced they were adopting Saphyr for use in their clinical genomics laboratories.

These institutions are using our technology to develop assays for genetic tests assessing diseases associated with chromosomal abnormalities. Their lead indication is FSHD, which is a highly prevalent form of muscular dystrophy. Traditional cytogenetic methods used to detect FSHD are imprecise, labor-intensive, and involve dangerous radioactive labeling methods, which are being phased out by laboratories due to safety concerns. The Saphyr system in contrast is safe, fast, reproducible, and very easy to use.

In China as well, we announced the adoption by major global service providers such as GrandOmics and Novogene that are using the Saphyr system to offer services to their clients for research and clinical applications.

In this quarter, we also saw another impressive number of publications featuring Saphyr. So far this year, we have exceeded the numbers of publications in all of 2017. And we believe we are on track to exceed the total number of publications in 2018 as well.

A major focus of our publication strategy is on key independent clinical studies designed to establish Saphyr as the platform to replace the outdated technologies such as fluorescence in situ hybridization or FISH, karyotyping, micro arrays, and Southern Blot. In light of the growing validation and publication of Saphyr's benefits, its wide use in a variety of applications, we believe other applications and broad adoptions will follow.

Now it is my pleasure to turn the call over to Mike for an update on our financials. Mike?

Thank you, Erik, and good afternoon, everyone. I will now briefly review some of the highlights from our third-quarter 2019 financials. During the third quarter, Bionano recorded total revenue of $3.3 million compared to $2.2 million last quarter and $2.8 million in the third quarter of last year.

Revenue compared to last year benefited from strong sales in North America but was impacted by lower contributions from Asia and Europe. US demand remained strong as we see our sales and marketing efforts gaining traction. Regardless of the geography, however, our business is very seasonal with the first half of the year traditionally being significantly lower than the second half and with quarterly revenues tending to increase as the year progresses.

Total cost of revenue decreased by $0.7 million or 23% to $2.4 million for the three months ended September 30, 2019, compared to $3.1 million for the same period in 2018. We incurred a $1.3 million expense to write down the carrying value of Irys Instruments on hand to 0 during the three months ended September 30, 2018.

Total cost of revenue decreased for the three months ended September 30, 2019, compared to the same period in 2018 due to the Irys write-down in 2018, which was partially offset by an increase in cost of revenue from the increase in sales in this year's period.

Third-quarter 2019 operating expenses increased by $0.9 million or 16% to $6.6 million for the three months ended September 30, 2019, compared to $5.7 million in the same period last year. The increase was mainly attributed to higher selling, general, and administrative expense due to increased employee compensation costs resulting from headcount additions to our global sales and marketing teams as well as back-office support to assist with the growth of our worldwide product distribution.

Finally, as of September 30, 2019, our cash balance was $8.2 million. Since the quarter end, we announced that we completed a public offering of our equity securities, resulting in gross proceeds to us of $18 million before underwriting discounts and commissions and offering expenses. This cash has bolstered our balance sheet and we expect it to help to support our efforts as we execute on our strategy in 2020.

Thank you. I will now turn it back over to Erik before going into Q&A.

Thank you, Mike. As I mentioned earlier, we are pleased with the interest we are seeing and optimistic that our execution in these core markets will continue to build demand. Some of the things you can expect to see from us throughout the rest of the year include a continued focus on our global commercial expansion, improvements to the Saphyr system, and execution on our strategy for market development and validation of Saphyr in clinical applications.

With that, I will open up the call for Q&A. Operator?

(Operator Instructions) Jason McCarthy, Maxim Group.

Hi, guys. Thanks for taking the questions and a good quarter as well. I want to ask more of a broad scoped question. Erik, can you talk or kind of opine a little bit about the importance of changing molecular testing, right? Because you had mentioned that this could really replace Southern Blots; it could really replace karyotyping, eventually micro arrays.

And there are other examples historically where we have seen a dramatic change in testing like on the Western Blots. It's different, but the analogy I think is there. Can you talk a little bit about the importance of Saphyr and how you could shift testing on the cytogenetic side?

Sure. What I would say is that Saphyr is offering a fairly significant upgrade, updating, modernization of this traditional workflow that has been in existence for decades now. And the labs that run it, the traditional cytogenetics workflow, are eager to replace it. And new labs that are being built are unable to adopt some of the traditional methods, especially the ones that rely on radioactivity.

So when we look at Western Blot, which was streamlined and industrialized by protein simple, when we look at in situ hybridization, monoclonal antibody staining, which was industrialized by Ventana, we see the Saphyr system doing the same thing for cytogenetics, where we are consolidating multiple laborious, manual, subjective workflows into a streamlined single assay that is digital.

And so that is going to benefit the labs because it is a tremendous cost savings. It is an improvement in the results because it's a much more stable and regular workflow. But there is a huge benefit that comes as well, and that is that the Saphyr system is scalable.

And so I think it's safe to say that there are going to be continuously more and more biomarkers that are discovered and added into these testing panels. And with Saphyr, you can add those biomarkers without any additional product development or assay development because you get all of those markers in a single assay.

So we've seen this type of transition take place in labs before. It is just that the Saphyr is the first one to go in and offer this kind of transformation to cytogenetics.

Great. And can you give us an update or do you know when the next update on the study from the Netherlands will be and the other studies? But I think those are going to be keys in really helping the space understand independently what the Saphyr machine can bring.

Sure. So we have, I would say, really now three flagship studies that are underway and ongoing. The first is at Radboud University Medical Center, which is in the Netherlands. And they are very far along in a 150-patient study. I would say they are about two-thirds of the way through and we have seen some interim reports over the course of this year. And we would expect data collection to be wrapped up by the end of this year.

We are also expecting there to be an interim publication. So it wouldn't be on all 150 patients, but it would be on a large subset of the patients who have been studied so far this year. And we are hoping to get that published by the end of this year or very, very early in the beginning of next year. But the Radboud data collection should wrap up this year.

Columbia University has organized under the leadership of Dr. Brynn Levy a consortium to validate Saphyr in a number of hematologic malignancies. Radboud also looks at hematologic malignancies. And that study is also progressing.

We expect data collection, which is in full bore now going well, to wrap up ideally by the end of the year. But we can see some signs that there might be a little bit of data collection still going on in early next year. But the publication has always intended to come out in the first quarter of 2020 and I believe we are on track for that. That is the Columbia study.

And very recently, M.D. Anderson Cancer Center, which is part of the consortium that is led by Dr. Brynn Levy at Columbia, has initiated a study. We together have initiated a study in MDS, which is a precursor to AML. And M.D. Anderson is a leader in MDS testing. And so we will be validating the system for MDS analysis beginning this quarter and we would expect that data collection to wrap up probably early next quarter.

Okay. And just one last quick one on the PerkinElmer deal and them coming on board. As a testing provider that they are, they tend to service the pharma and biotech industry. Do you believe that FSHD, the assay they developed, is just the first? Do you expect them to continue to layer on additional testing beyond FSHD?

Yes, we do. They intend to develop a full menu of assays, which they describe it -- it is their term for assays that are not easily addressed through a sequencing, which is a primary workhorse for them in their clinical and CRO business. A term that they use is markers or tests that are refractory to sequencing. So they simply don't comply with a sequencing analysis, and the Saphyr system is perfect for those types of assays.

And so FSHD is one example of a repeat expansion contraction deletion disorder. And there are others: Fragile X and other dystrophies. And these fit in neuromuscular panels and other indications; Fragile X is tested for autism patients.

And so these indications will be added to a growing menu of tests that PerkinElmer and other diagnostic labs that are adopting Saphyr will be building. And these will be provided to patients as they are validated as laboratory-developed tests and to pharmaceutical companies using the test results to guide their drug development and guide enrollment of patients for clinical trials.

Great. Thank you, guys, for taking the questions.

Scott Henry, ROTH Capital.

Thank you and good afternoon. Just a couple questions. First, has the revenue model changed at all from the standpoint of customers taking placements as opposed to outright purchases? And might that impact what you would be reporting as revenues? Any changes or is it still pretty similar?

Well, there is no fundamental change in the model. We have always had a little bit of a mix of what I would call direct sales and reagent rental, and so that mix has persisted.

What we are seeing, though, is that as we go into the space where adoption is by clinical labs to develop an assay and validate it as a laboratory-developed test, those labs are more accustomed to and then therefore seek to adopt under the reagent rental model. And so for some deals, that ends up taking the $200,000, $240,000 of revenue attributed to a Saphyr sale and spreading it out over time.

The upside in that kind of a model is that the sales cycle, once we get past the validation stage, goes a little bit faster. And so consumables revenues start a little bit sooner. So economically for the Company, it's probably more beneficial. But it does spread some of the initial system sales revenues out over time.

Okay, thank you for that color. And when we look at the first nine months of 2019 versus 2018, revenues are, call it, flat, which is not what we want to see in a growth company. Could you talk a little bit about your expectations for Q4? Are you expecting a record quarter? Obviously, you don't know yet, but I just want to get your thoughts on the outlook for Q4.

Sure. Well, when we look at the nine months, I think -- and this is why we break out the geographies. I think what you see in the geographic breakout is the differences between what we are executing and seeing the benefit of in North America and in Western Europe, where we sell directly. And those geographies are progressing very nicely. North America is leading the way and that is probably not by surprise since that's where we start our initiatives.

And China is lagging fairly significantly. So I think that really the principal headwind for the revenues as a whole is coming from China. And as I mentioned in my prepared remarks but will reiterate, China has faced some challenges for other companies in our industry. And it is related to some of the ongoing uncertainty around tariffs and different trade impediments that have been put in place. And so we are hopeful that recent news around those impediments clearing up will break free.

In addition, we have begun to implement corrective actions on the commercial strategy side in China that we also believe will accelerate the return to growth there. So I would say that everything is progressing well in North America and Europe and China has been our challenge.

When we look to the fourth quarter, that's traditionally our biggest quarter of the year and we have that full expectation this year. Last year, our fourth quarter was a record quarter and it's our expectation to have another record quarter in the fourth quarter of this year.

And I think that the total amount of growth is somewhat dependent on how quickly we are able to restore that growth in China, but we had very good signs this quarter in the third quarter that growth is coming back. And so hopefully we can get that caught up by the end of the year.

But seeing 100% year-over-year growth in this third quarter in North America, for example, is a very positive sign. And we take that as feedback that the things that we are doing on the commercial side from a strategic and execution standpoint are working.

Okay, great. I appreciate that color. Kind of final question is a little more of a big picture question. Obviously, the markets have become more challenged for companies that are not turning a profit. It's getting a little harder to raise capital.

So when we think about 2020 from a big picture, you are kind of at a fork in the road. Either revenues are going to have to start reaching an inflection point. Or alternatively, maybe you have to tweak the business model a little bit. How do you think about 2020? Do you think the inflection point is right around the corner, which will kind of grow out of -- or grow into the expense base? Or at some point do you have to start evaluating the expenses?

Well, I mean, look, I -- we are very careful and conscious about how we have constructed the Company and the investments that we make. Having said that, more investment is -- the investments that we are making are required to generate the growth that we expect.

And what we believe is that the work that is going on in the field to validate the system for use in clinical laboratories will be that source of accelerated growth. And those validations are progressing extremely well. They are on track from a timing perspective, and the results of those validations will be out in time to have an impact on 2020.

When we think about profitability overall, we want to make sure that we balance the timing to get profitable against the efforts that we are making to conduct market development in favor of growing the business. And so we would never want to, I think, shortchange the full potential of Saphyr. And that is our current attitude and we believe that that inflection point is around the corner, as you said.

Okay, great. Thank you for taking the questions.

That does conclude the question-and-answer portion of today's call. At this time, I would like to hand the call back over to Erik Holmlin for any additional or closing comments.

Thank you, operator. That does conclude our remarks for today. And so thank you very much for joining.

That does conclude today's teleconference. We thank you all for your participation. You may now disconnect.