Champions Oncology Inc (CSBR) 2015 Q2 法說會逐字稿

Good morning, I'm Joel Ackerman, the CEO of Champions Oncology. Thank you for joining us for our quarterly earnings call.

After a brief introduction I will start with a strategic update then talk about highlights from the quarter and end with a review of the operational and financial performance of the Company. As always I will open the call to questions at the end.

Before I start I will remind you that I will make forward-looking statements during the call and actual results could differ materially from what is described in those statements. Also, additional information on factors that could cause results to differ is available in our Forms 10-Q and 10-K. Reconciliation of the non-GAAP financial measures that may be discussed on the call to GAAP financial measures is available in the earnings release.

Let me start with a strategic update. As I mentioned last quarter, we are in the midst of an important shift in the stage of the Company.

When I joined the Company four years ago with Ronnie Morris, it was clear that the Company was still in a proof-of-concept stage. We had not yet demonstrated that our technology was truly predictive of response in patients, that we could scale up our operations to deliver these results, or that enough customers would be willing to pay for tumor grafting to ensure we could ultimately deliver on a profitable business model.

So much has changed for us over these four years. The acceptance of TumorGraft as a tool for the development and use of oncology drugs has spread dramatically. We have done work in 50 different drug companies and more than 500 patients.

We have built a lab that delivers high quality work on dozens of study using thousands of mice simultaneously. Equally important, we have built a commercial model that at scale will be nicely profitable even after a healthy investment in growth in R&D.

As we exit this proof-of-concept mode we are entering the next stage of the Company's development: scaling the business. This shift has been challenging but we are feeling good about the transition and believe that the path forward will be smoother.

As we look forward we need to scale along a number of dimensions. We don't have time to cover all the dimensions today but I do want to talk about what we have accomplished with respect to growing the breadth and depth of the TumorBank, increasing our commercial organization and enhancing our information technology capabilities.

As a result of these investments we have made over the last few quarters, we enter calendar 2015 with capabilities that set the stage for great progress. These include a new business development team that is more than double the size we had last year and is well-trained and gaining more experience every quarter, a new medical affairs team led by our Chief Medical Officer that is focused on developing partnerships to help grow our TumorBank and increase the validation of our platform, and an integrated approach to information and information systems that has dramatically increased and improved the clinical and molecular data that we can make available to our customers for designing studies and for driving value through the interpretation of study results.

In the short term developing these capabilities has had significant cost to the organization. One-time costs included data and IT costs related to next-gen sequencing data and developing new information systems as well as recruiting and start-up costs of new employees.

The other cost to the organization was the disruption of the growth in our new study bookings. Ironically, it is the upsizing of the sales team as well as the restructuring of the territories that has caused this disruption.

The overall impact of all this over the last two quarters has been an increase in expenses and a slowdown in revenue during the first half of fiscal 2015. With the one-time expenses largely completed and the increased commercial effort in place, we are confident that these investments will start paying off in the near future.

Looking forward, we see this scaling exercise as the beginning of our path to profitability. We have better visibility on pricing, costs and margins and we expect that over time we will also have more predictability on volumes. We are managing our costs more effectively and are focused on increasing productivity to ensure a significant portion of our revenue growth falls to the bottom line.

A key question for us is how to find the right balance between growth and profitability. This balance will depend on many factors but we do expect to see a rapid decline in our burn rate and a path to profitability based on the scaling of the TOS business.

Now let me talk a little bit about some highlights from the quarter. First on the list is bookings from the core TOS business. As a quick explanation, core bookings are the signing of a contract or statement of work with a customer in our core TOS business.

This includes all of our TOS work with the exception of one-off sources of revenue such as the large Pfizer contract we signed in December of 2013, or the one-time risk sharing payment from Teva a few years ago. Bookings are so important because they are the leading indicator of future revenue. They can be volatile from quarter to quarter; however, when looked at over the course of a number of quarters, in combination with our future sales pipeline, gives us an important leading indicator on our progress.

For a number of reasons we believe it is still too early in our development to disclose exact quarterly bookings. That said, the second quarter was a strong bookings quarter for us. This is a function first of the total dollar number of the bookings, but in addition to the total size, we look at the number of customers, both existing and new, and the diversity of studies.

Overall, we were pleased with the result especially given the fact that this was the first full quarter for most of our sales force in TOS. We are equally excited about the bookings we have achieved to start the third fiscal quarter. We are off to a strong start in actual bookings and have a robust pipeline of studies in the proposal and negotiation phase as well.

We have lots of work to do in building on this effort and we do expect volatility going forward but we are very encouraged by the recent results. That said, it will take time for these bookings to show up as revenue but we are confident the revenue will come.

A second highlight for the quarter relates to ImmunoGrafts. These are a new product we are developing that result from the implantation of our TumorGrafts in humanized mice. These mice have humanized immune systems developed through the implantation of human CD34 cells.

We've been working on developing this extension of our TumorGraft models for a few quarters to enable the testing of immune-modulating oncology drugs. It is hard to overstate the investment the pharmaceutical industry is making in immune oncology and the need for better preclinical models is clearly important. Although these models are still in the experimental phase our pharmaceutical customers are very interested in trying them.

During the second quarter we had our first booking of a research study with a top 10 pharma company using our ImmunoGrafts. There are significant challenges ahead to scaling these new models including the high cost of humanized mice and access to human CD34 cells. Nevertheless, we think this is an important validation of our ability to innovate and expand our platform.

As the third highlight, I want to talk about the progress we have made relating to the information side of our TumorBank. We talk a lot about the number of models in the bank, which is more than 800 at this point, but equally important to the number of models is the information we can provide our customers about these models. This information consists of clinical data about the patients in tumors as well as molecular characterization.

Over the course of the last few quarters we invested a lot of money and resources in completing the clinical data compilation and using next-gen sequencing to develop whole exome sequencing and RNA-Seq data on our models. In parallel with these efforts we have been developing a new version of our customer-facing TumorBank database tool that allows customers to search our bank for the models they need based on clinical and molecular data. We see this combination of more data and easier access as a powerful duo that will help our pharma customers find the models they need in our TumorBank to drive more and bigger studies in the future.

Finally on financing, at the beginning of December the Company raised $2 million through the issuance of a convertible note to myself and Ronnie Morris, Champions' President. Ronnie and I have put our money where our mouths are since we joined the Company and have invested $0.5 million each in the prior rounds of financing. This investment of $1 million each represents a significant increase and we expect will be recognized as a sign of our commitment and confidence in the future of Champions Oncology.

Now let me turn to the financial and operational update. Q2 was another quarter of fundamental progress in building the business in ways that are not yet reflected in our financial results. So I do want to reemphasize what I mentioned last quarter.

We remain excited about our prospects over the next few years as we transition from the proof-of-concept phase to the scaling phase. I see no better way to demonstrate that than through the investments that Ronnie and I made a couple of weeks ago. Our strategy is not geared towards producing smooth results across quarters but targeted towards developing long-term value for our shareholders.

Additionally, I do believe that we have enough visibility to see a significant improvement in revenue and cash flow in our next quarter. I mentioned the bookings improvements earlier in the call and the investments we have made in our commercial infrastructure, next-gen sequencing data and information systems. These combine to give us great confidence in the top-line increases, which combined with the cost controls that we put in place, should result in a significant improvement in our financial results next quarter.

Now let me turn to the specific results. During the quarter we implanted 95 new patient tumors, an increase of 36% over last year. 61 of these implants came from our commercial POS offering which represents 11% year-over-year growth. Commercial POS implants this quarter were negatively impacted by a significant decline in implants in Singapore.

Last quarter our partners in Singapore, a large private oncology group, received a letter from the Ministry of Health that raised some questions about the regulatory approval process related to our tests. As a result we have curtailed new patient implants until we can resolve this issue.

34 of the patient implants came from a broad array of our research initiatives. This represents a 127% increase over last year. Going forward we are looking to diversify our source of tumors to ensure a steady flow and a diverse bank.

POS revenues was $452,000 for the quarter, a decrease of 28%. The decline was largely the result of the decline in POS patient test panel revenue.

While the number of patient test panels was relatively flat over the prior year, the average number of tests per panel declined significantly. Because we charge per test rather than per panel, this resulted in most of the revenue decline over the prior year in POS.

POS cost of sales were roughly the same this quarter as compared to the same quarter last year. We are looking carefully at this number and looking for ways to bring down the cost to improve the gross margins in this business.

Now let me talk about TOS, the business that serves the pharma industry. TOS revenues were $1.4 million and $1.8 million for the three months ended October 31, 2014 and 2013, a decrease of 19%. We talked last quarter about the disruption caused by the new sales team and structure in the TOS business and the impact that had on our sales effort.

As I mentioned before, the investment we made in building our commercial capabilities have started to bear fruit. Bookings were strong last quarter and continue to look very good so far this quarter. That said, it does take time for bookings to turn into revenue.

We do not recognize revenue until we have completed the work for a given model, and as a result there is a lag between the time of booking and when we recognize revenue. The average time from booking to revenue depends on a number of factors and varies widely. In some instances we recognize revenue in the same quarter that a study is booked, and in some instances it can take more than a year to recognize revenue.

Historically the average was approximately two quarters. Over the last few quarters we have seen an increase in the time from booking to revenue.

We believe some of this change is the result of volatility in the mix of our studies and will revert back to the historical average over the coming quarters. However, some of this change is the result of the larger studies we are selling and the fact that these studies often include models that are not immediately available for study, which results in a delay before study initiation.

Overall, this delay has led to a significantly larger backlog of business that we have signed but not yet completed. While this does result in a delay in recognizing revenue and growth, we do think it will add to the predictability of our revenue over time. In addition, we are paying careful attention to the cash terms of these studies to mitigate the impact on cash flow as much as possible.

TOS gross margins were 33% for the quarter versus 60% for the same quarter last year. The fixed cost of the business and the lower revenue resulted in the decline in gross margins.

In addition, increases in bookings have the impact of depressing margins as the lab costs increase for new studies that are initiated for which we have not yet recognized revenue. Over time we expect our margins to get back to our historical levels as the revenue line grows and we manage our expenses.

Regarding our operating expenses, year-over-year sales and marketing expenses grew as we increased the sales effort. This is an important investment for the future growth of the Company and we think it will pay dividends in the continued growth in fiscal 2015. Going forward we do not anticipate another large increase although total sales and marketing costs will rise as commissions are paid on increases in bookings.

R&D showed by far the biggest jump in expenses and is one of the major contributors to our negative cash flow for the quarter. The increase in expenses is a result of a definitive decision by the Company to invest in the growth of our platform.

G&A was also up over last year as a result of our continued investment in growing our senior management team to lead the development of the Company. Going forward we have initiated a number of cost management initiatives that ensure G&A costs are controlled and we are spending on things that help grow the revenue of the Company.

In conclusion, there is a lot going on at Champions. Although the financial results of the last two quarters have been disappointing, we are confident that the investments we made and the changes we implemented are taking effect. We've made great progress in building the team and growing the platform.

The growth in bookings is the direct result of these efforts. While it will take a little more time to see the results of this in our financial statements we are confident that the progress will begin to show next quarter.

These are the end of my prepared remarks. I will now open the call up to questions.

(Operator Instructions) And we have no questions in queue at this time.

Great. Well, I thank you all for listening. Have a great day.

That concludes this morning's teleconference. You may now disconnect your lines.