NantHealth Inc (NH) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the NantHealth Q3 2016 financial results call.

(Operator Instruction)

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Robert Jaffe, Investor Relations for NantHealth. Please go ahead.

Thanks, Candice. Welcome, everyone, and thank you for joining us today to discuss NantHealth's 2016 third quarter financial results. On the call today are Dr. Patrick Soon-Shiong, Chief Executive Officer; Bob Watson, President and Chief Growth Officer; and Paul Holt, Chief Financial Officer.

This call is being broadcast live at www.nanthealth.com. A playback will be available for three months on NantHealth website. I'd like to make the cautionary statement and remind everyone that all of the information discussed on today's call is covered under the Safe Harbor provisions of the Litigation Reform Act. The Company's discussion will include forward-looking information reflecting management's current forecast of certain aspects of the Company's future, and actual results could differ materially from those stated or implied.

In addition, during the course of this call we may refer to non-GAAP financial measures that are not prepared in accordance with US Generally Accepted Accounting Principles, and may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review NantHealth's press release announcing its full 2016 third quarter financial results for the Company's reasons for including those non-GAAP financial measures in this financial statement announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in the Company's earnings press release issued earlier today.

This evening, Patrick will provide a brief overview of the quarter, then Bob will discuss the business lines followed by Paul, who will discuss the financial results in more detail. We will then open the call for questions.

With that said, I will now turn the call over to Dr. Patrick Soon-Shiong. Patrick?

Thanks, Robert. So good afternoon, everybody. Welcome to the 2016 third quarter financial results conference call. So before I really go in the details of this call, I'd like to maybe give you an overview of NantHealth since we went public in early June; it's only five months ago, where we raised approximately $83 million.

For some of the folks listening, it may be new in trying to understand what this company is about. So I'd like to take maybe a few minutes before we actually go into the earnings call to really discuss how you think about NantHealth, because NantHealth is a leading next generation evidence-based personalized healthcare company. And you hear that all the time, but it truly is a complex organization, which we've for the first time, taken one of the most comprehensive molecular diagnostic assays and integrated that with technology to enable improved patient outcomes and effective treatment decisions for patients with critically ill diseases, such as cancer.

We've taken truly a systems-based approach and we've applied this novel diagnostic to profiles of patient's tissue. And the issue that we generate is such a huge amount of data, we figured out a way how to integrate this with machine learning and augmented intelligence, which I'll speak to a little later, and take this data with large scale real-time biometric signaling tied to phenotypic data so you can track patient outcomes one patient at a time and truly deliver precision medicine.

For nearly a decade we've developed what I call this adaptive learning system, and this is the complexity because it truly is an adaptive learning system, which on the one hand includes a clear [capsulized] molecular diagnostic profiling, which is then integrated with software, and the software in its own right is complex because it has middleware, hardware applications and infrastructure, which we call NantOS.

So by NantOS, we really mean the next generation clinical operating system. And this operating system collects, indexes, analyses and interprets billions of molecular clinical operational data, but it also includes financial data and it also includes data derived from novel and traditional source, but it also includes data that we actually generate. So we are self-data generating organization, but we need to continuously improve decision making and optimize clinical pathways. But we don't think of pathways in the form of pathways, we think of pathways as real-world data that allows the doctor to make decisions in real-time on behalf of the patients.

That's why this is so complicated, because we really believe in real-world data. We believe in patients in which the doctor has to make a decision at point of care at time of really seeing the patient. And it is more important for the doctor to know what information not to have regarding what drug not to give as opposed to what drug to give. And yet, that kind of information has to be integrated with the phenotypic data, and in this pragmatic world, also the financial data.

So NantHealth is a pioneer in this era of big data and augmented intelligence and we really believe we are uniquely positioned to benefit from the significant market opportunities as healthcare providers on the one hand and payers on the other hand transition from fee for service to value-based reimbursement model. I'm really excited by the new payment model, and things called oncology care model that's now being pioneered by CMS. And I think we are as an organization uniquely qualified to accelerate not only this novel payment model, but also accelerate the pursuit of evidence-based clinical practice. We spent the last 10 to 15 years of our lives committed to this process of transforming healthcare and for the millions of lives impacted by cancer.

So the summary of what we are as an organization; on the one hand you need to think of the Company as a company that's actually generating data through GPS Cancer -- the most comprehensive, unique molecular profiling of the tissue -- not for the same of merely understanding the genomic signature, but for the sake of helping the doctor make an important decision as to what treatment the patient should receive.

Today now for the first time, we can actually measure whether the test will show whether you're sensitive or not sensitive to chemotherapy like taxanes. When you think of taxanes and cisplatin and Herceptin, for example, these cover cancers for breast cancer, lung cancer, gastric cancer. And they routinely use, and yet the doctor has little information other than to empirically make a decision whether or not the patient will be sensitive to these drugs or not. For the first time now, this kind of information could be made available to the doctor before he or she makes a decision. We believe that all patients with cancer deserve to have this kind of information; all doctors deserve to understand the complexity. And through our GPS Cancer report we bring a very actionable piece of information at point of care before we start treatment.

That's the analysis of the Company. As we proceed over the course of the next quarter or two, you will learn more how we are actually able to deliver this kind of information in this large scale through our engines of augmented intelligence and big data analysis. You will learn more about our machine learning and augmented intelligence capabilities. You'll learn more about how, in fact, we have the Nation's most sophisticated machine learning algorithms and tools that generate information that ends up as a GPS Cancer report.

With that, let me turn to our third quarter performance. In the GPS Cancer profile segments of our business, you will see that we have now had rapid adoption of GPS Cancer with more than 100% increase in the number of oncologists ordering the test from the second quarter to the third quarter. We have 524 GPS Cancer orders in the quarter and we've delivered completed reports on 334 of these to date as we're going through the processing.

With regard to the information technology suite of product and solutions, you will see we've exceeded our expectations for the quarter. Bob and Paul will describe operating financial performance in more detail later, but as you could see from our release today, our third quarter 2016 versus 2015, we had a 76% increase in total of Q3 revenues with a tripling of the gross profit.

Let me turn my attention to GPS Cancer. We've clearly made significant progress during this quarter and have learned a lot with regard to a launch of this novel breakthrough product. Of the 524 of GPS Cancer orders in the quarter, 344 were commercial and 180 were ordered under a research agreement with University of Utah, which we announced earlier this year. We completed more than, as I said, 334 GPS Cancer reports.

For the patients being profiled by GPS Cancer, the underlying insurance coverage was provided by over 25 different health plans. As we will discuss later this call, the reports themselves and the physician relationship has significantly accelerated our conversations with our payers. So we've made a big investment both in time and organizational resources to provide what we call physician education in target markets, and this is beginning to pay off.

At the end of the second quarter, there were merely 85 ordering oncologists. But by the end of Q3, in less than three months, we've more than doubled that. So by end of Q3, there were 181 ordering oncologists. And I think the reasons for this change is slow, but exciting realization by physicians seeing and understanding this test for the first time is that how the actionable information that's derived from the test, actual information as it relates to chemotherapy, actual information as it relates to monoclonal antibody therapy, actual information as it relates to targeted therapy, and even actual information as it relates to checkpoint inhibitors influenced the decisions they make on a day-to-day basis as it relates to the treatment of patients with cancer.

We've had several recent and pivotal developments that further highlight this accelerating momentum. For example, last quarter, we announced that we're advanced discussions with ASCO regarding our novel diagnostic profile, GPS Cancer. And this was a sequencing option for use by physicians participating in the type of clinical trial sponsored by American Society of Clinical Oncologists, or ASCO.

I'm pleased to report today that GPS Cancer is listed on the NH Genetic Testing Registry as of August 2016, and that's available for trials such as TAPUR, which accrue patients based on their molecular profile. While this is but one trial, you will soon hear over the next quarter as we progress the role of GPS in multiple other trials, including the trials called QUILT trials, which is a Quantitative Immuno-Oncology Lifelong Trial, which we announced and launched as part of Cancer Moonshot 2020.

We believe that GPS should be the test of choice because many of the comprehensive information provides allowing for that accrual on the basis of DNA, RNA, and protein biomarker availability and the ability for the doctor and/or the trialist to really explore what the biology of the cancer is saying at the time of treatment decision.

Talking more about TAPUR, for those who aren't familiar with TAPUR, it's called the Targeted Agent in Profiling Utilization Registry, and it's a clinical trial focused on individuals with late-stage cancer. With regard to QUILT, it's, as I said, the Quantitative Immuno-Oncology Lifelong Trial, and it's related to the pursuit of immunotherapy as a comprehensive paradigm changing treatment for patients across all tumor types with cancer at all stages. We will speak more to that over the following quarters and with much more detail at the JP Morgan conference coming up in January of next year.

Let me now talk to some numbers as it relates to GPS Cancer, the number of covered cancer lives. So, this is a concept we, again, want everybody to consider inside the insurance industry. It's not covered lives, but patients with cancer that are covered, and we called this covered cancer lives. At the end of the second quarter, this was approximately 180,000. During the third quarter, we had four new payers and 20,000 more covered cancer lives, bringing the total to approximately 200,000 covered cancer lives. This brings us to a total of seven at the end the quarter. However, last week, we reported that we entered into an agreement with the Horizon Blue Cross/Blue Shield of New Jersey; one of the largest payers in the East Coast with 3.2 million covered lives, and they will cover GPS Cancer for their members enrolled in these pilot studies for multiple types of cancer. When this pilot is completed, we expect coverage expanded within Horizon, bringing our total covered cancer lives to approximately over 360,000.

With regard to the international distribution, again, we're making huge progress. In Israel, Oncotest-Teva has made a huge push to get this delivered in Israel, and we've had over 50 GPS Cancer orders from Israel alone, and they are one of the Nation's largest insurance companies now covering GPS Cancer test. We also announced our second international distributor, Sorgente, as our exclusive distributor of GPS Cancer in Italy. Here, over 350,000 people per year are diagnosed with cancer in that country, and this is an important relationship with our innovation partner in that market as we move towards Europe.

With regard to the payers in the United States, during our last call we reported that we had initiated conversations with 13 payers, including eight Blue Cross/Blue Shield associated affiliates, and two self-insured employer groups. Horizon Blue Cross/Blue Shield of New Jersey was one of those payers, as I just mentioned. And during this quarter, we also initiated conversation with five additional payers. So, that brings us to a total of 18. Of these five, two are Blue Cross plans and the others are Fortune 500 self-insured employer groups. So the total potential covered cancer lives represents by these new sales prospects exceeds 700,000 covered cancer lives, or said another way, we may add 250,000 covered cancer lives to our prospects for coverage metric.

You have to keep in mind that these are sales prospects, or some stage of the sales prospects, and we really can't give any assurances in terms of timing when these arrangements or contracts can be closed. With that being said, we continue to be exceptionally encouraged by the willingness now, and of major commercial insurers and self-insured employers to enter into discussions and negotiations with the us regarding coverage for GPS Cancer.

The volume of inbound inquiries has really increased dramatically over the last three to four weeks and continues to accelerate. So as we've noted in the press release earlier today, the number of ordering physicians ordering GPS Cancer in the quarter has increased from 85 in Q2 to 181 in Q3, and Bob will talk more about this velocity, but let me just digress a little bit with regard to my personal insight to some physicians dealing with this. As a physician in Sarasota Florida who has now shared with me personally how this has affected how he treats patients, and he believes there should be no patient that actually -- a decision is made with which this test has not afforded this information.

At University of Indiana, we've had very exciting reports that over 90% of these reports resulted in actionable information. And again, this highlights the fact that this is not report to match a targeted gene, which was how panels were developed. This is a test to really look at the current methods of treatment, including chemotherapy, monoclonal antibody therapy, targeted therapy, and allow the doctor to understand what the biology is saying and enable them, the doctor, to actually make an informed decision rather than a decision based on empirical protocols and NCCN guidelines.

Now let me talk about the Fortune 500 self-insured employers. As we discussed last quarter, our agreement with the Fortune 500 self-insured employer to provide GPS Cancer to over 400,000 insured lives was scheduled to be made available to those insured in the fourth quarter. I have, as we discussed during our Analyst Day in December, we anticipated a delay in starting that program given that we were asked to extend our workflow planning to other administrative service organizations supporting that employer. And unfortunately, that employer has three healthcare different plans associated with the coverage of all the large national employer base. Those planning sessions continue, which will push the start into sometime in 2017. The exciting buy product of these conversations is that it serves to accelerate our broader conversation with those payers about coverage for the commercial book of business and for the other ASO businesses.

With that lengthy overview, I will now turn this call over to Bob to discuss our business lines in more detail. Bob?

Thank you, Patrick, and welcome, everyone. Thank you for joining us this evening. First on the issue of revenue. Revenue in our non-GPS Cancer business lines were favorably impacted by several items. First, we began recognizing revenue from a device connectivity client in Denmark a quarter earlier than anticipated. And second, we had numerous small projects go live in the quarter that triggered some degree of revenue recognition. This continues to support our view that our teams are tightening the implementation timelines.

For example, in our NantOS Inoperability Suite we had four clients go live on NaviNet Open. While the revenue recognition is not significant, we do believe that the continued movement of these clients to the open platform will improve the cost structure of our support organization and will lead to some margin improvement once these transitions are completed. We anticipate all major clients to have completed the transition by the end of Q3 2017.

Also in this suite of products, we had our first client go live on NaviNet Document Exchange. Other notable go lives in the quarter include; New York Health and Hospitals, phase one of a very significant device connectivity project, Advocate Healthcare, phase three of our patient portal project, and Health Management Partners on eviti connect.

Secondly, as Patrick noted, GPS orders accelerated in the quarter. The number of reports delivered in the quarter was 334. However, revenue recognition was adversely impacted by three issues. First, the 180 profiles that were completed under the research agreement with the University of Utah were not recognized as revenue because it was considered a research project that was started in advance of the IPO. Second, as I noted in the previous call, we have found that physicians are, as they're educated about the test, they order the test without regard to the patient's underlying insurance coverage if that patient is eligible for our patient assistance program. That said, we will bill with the exception of Medicare and Medicaid patient, all commercial third party insurers, including those with whom we do not have a contract. In those cases, we will recognize revenue if and when payments are received given the uncertainty as to the ultimate reimbursement received from those insurers. Third, while ordering commenced with our first international distributor, Teva that we have last quarter, we are deferring revenue recognition until we have fully completed certain process workflows to have reasonable assurance that our fees are fixed and determinable.

During the quarter, GPS Cancer was ordered for patients that have covered from over 25 different health plans, as Patrick noted earlier. Over 100 GPS Cancer were ordered for patients covered by Medicare or Medicaid. We will use the results of those profiles as a basis to begin conversations with those payers or to accelerate our existing conversations that are already underway with those payers. For example, we have a physicians group in the Midwest that is ordering GPS Cancer on a pace of more than 50 per quarter. They are in market where there is one dominant payer. Therefore, we will use the clinical evidence gathered from those GPS Cancer orders as part of our negotiations. It is worth noting that every profile completed for this group has had an actionable result.

I do want to take a moment to discuss what we have learned about physician ordering patterns. While we believe it's the pathway to what we refer to as ordering velocity, we think it will take about 180 days. There is a 60 day education period with the physicians. GPS Cancer is a new and novel molecular diagnostic that, as I noted on our last call, requires our medical liaison teams to have multiple visits with the oncologist. This period is then followed, but we now anticipate to be 120 days where the physician will order the test for a sub-segment of his or her patients. As we near the end of that period we reach velocity, which we define as that physician ordering the test for majority of their patients presenting with a cancer appropriate for GPS Cancer.

On the international front, we announced our second international distributor in Italy. We anticipate ordering from this source to commence in Q1 while we complete the required workflows and process steps during this quarter. As with out other international partner, they will sell GPS Cancer at a price that is consistent with our pricing, however, these tests will be recorded by NantHealth at a lower margin than if we sold the test directly. We will now have an estimate of GPS Cancer orders from this partner until we complete the workflows.

As expected, our other international partner, Oncotest-Teva in Israel, began ordering this quarter. While the test volumes are inline with our expectations, we are not recognizing revenue from this partner until the workflows and processes are finalized so that we have reasonable assurance that our fees are fixed in the determinable. This contributed to a lag in the revenue recognition in the quarter.

Turning to bookings; during the quarter our total bookings, including net new sales, renewals and product expansions were approximately $11 million in total contract value. Year-to-date bookings including net new sales, renewals and product expansions are $45 million in total contract value. Overall, we are ahead of plan on bookings.

With that overview of the business lines, I'll turn the call over to Paul to discuss our financial results in more detail. Paul?

Thank you, Bob, and hello, everyone. For the third quarter 2016, our reported revenue of $25.4 million represents an increase of 76% over $14.4 million in last year's third quarter. Our growth was driven primarily by our acquisition of NaviNet, which we acquired earlier this year in January, as well as continued growth in our NantOS decision support solutions. NaviNet Solutions contributed approximately $10.2 million in the quarter.

Our GPS related revenue was approximately $0.1 million. GPS revenue recognized this quarter was primarily on a cash basis, given that a substantial majority of our commercial GPS profile is delivered or with patients insured by payers we don't yet have agreements with. We expect the proportion of revenue being recognized on a cash basis to come down over time as we gain experience with the growing number of payers who are covering our GPS profile. We experienced continued growth in our current maintenance and SaaS services related to our acquisition of NaviNet as well as the expansionary customer base for NantOS decision support and device connectivity software platforms.

As we complete our implementations of our solutions, we add to our recurring revenue streams. Our total recurring SaaS and maintenance revenue was approximately $17.8 million compared to $7 million in the year ago quarter. Our gross profit was $8.1 million; an increase of $5.8 million over gross profit in last year's third quarter of $2.3 million. Our gross profit margin was 32% compared with 16% in the same quarter year ago. The improvement was tied to both an increase in margins for other services and a shift in the mix of our total revenue toward higher margin SaaS revenue.

SG&A expense was $24.7 million compared with $18.1 million and last year's third quarter. This increase was primarily related to the inclusion of NaviNet's operations as well is approximately $2.8 million of stock compensation expense, which was not included in the prior year. Our R&D expense was $13.9 million compared to $7 million a year ago. This increase includes approximately $2 million in stock compensation expense as well as the inclusion of NaviNet R&D expenses. R&D expense as the percentage of total revenue was 55% compared to 49% a year ago. This reflects our continued focus and investment on our product and solution offerings.

On a GAAP basis, we reported a loss per share of $0.30 compared of the loss per share of $0.24 for last year's third quarter. Our 2016 third quarter results include approximately $5.2 million in stock compensation expense tied the initiation of vesting after our IPO in June of 2006. It also reflects investments we're making in the future GPS group growth, as well as our patient engagement [center] and increased investment in our NantOS platform. On a non-GAAP basis, we reported loss per share of $0.18 compared to $0.17 in the third quarter of last year.

Turning briefly to our nine months financial results; our total revenue more than doubled to $76.3 million from $37.9 million in the first nine months of last year. The primary driver of this increase was wedded to our acquisitions of Harris Healthcare and NaviNet, which we completed in July 2015 and January 2016, respectively. We also had meaningful organic growth in the NantOS decision support and NantOS engagement solutions revenue, which contributed to both SaaS and other services revenue growth.

With that, I will now turn the call back over to Bob.

Thanks, Paul. Operator, we've completed our prepared remarks. We'd now like to open up the call to questions.

(Operator Instructions) Richard Close, of Canaccord.

Considering the revenue recognition that you're talking about with some of the distributors, and then the Fortune 500 company that is pushed a little bit, and then your velocity comments in terms of the timing, can you just walk us through how we should be thinking of the ramp up [in test]? As we exit 2016 and then go into 2017, how we should be thinking of that?

Let's go through this. What we've learned just in since we've actually truly launched this test, and we've only really truly launch this test (after) ASCO, is that once the doctor understands the test, the (model) that they have is they feel almost ethically compelled to make this available.

Then we come to chicken and the egg. What I've learned amazingly and it's not - wasn't [intuitive] from my personal perspective, is that the health insurance [coverages] - the organizations - the health payers, they're not [reticent] about wanting to cover it. Actually, they were actually questioning [whether] the doctor would find value in the test. Which was really [counterintuitive] to me, and so I didn't realize I had this little vicious circle in which I [believe] that the doctors would find value if in fact the insurance [coverage] will cover it, because they wouldn't want to give it.

So we instituted this whole opportunity now where for the first six months, which you begin to sort of see, whether the patient had a contractual insurance company that that contractual relationships [with us] or not. We would encourage the doctor to go ahead and order the test.

And now you begin to sort of see the velocity. And obviously it becomes the chicken and egg because we need to then generate the data [to] take back to the payers. Not whether the test is valuable or not or whether the test could generate value, but in fact the desire for the oncologist to want to use this test. Which as I said, our now experience so far - in our very short limited experience, we found the doctors to really want this test.

So we're going into this process. And I think the guidance that Bob gave you, where we thought this would take 30 days or 60 days, [it's] actually [180] days to go through the cycle of educating the doctors, the doctor [doing] the test, doctors loving the test. And then we actually [getting] the data and going to the payer and saying, "The doctor wants [you to] do the test." And the payer says, "We want to cover [it] if the doctor wants to do the test."

So a long answer to your question is, start really thinking of this [thing] really taking real velocity, let's say by the second quarter of next year. First or second quarter, but really more of the second quarter next year. [It'll] give us through organization [times] like [ASH] and meetings that we are now going to. I'm going to the SITC Meeting, as some of you may know, which is the immuno-oncology meeting. And we are already now having, out of these 180 physicians ordering, real advocates who [are] themselves are becoming advocates.

So the way to think about this is not whether we're going to get reimbursed. I think we are. There's no question from all the 18 organizations we're talking to. Not [whether are] we going to actually get this adopted. I think we are based on the fundamental biological basis of the test. I think what I did underestimate is the speed [in] which the coverage and/or usage [would occur] hand [in] glove. With regard to the Fortune 500 company, the workflows with the three [is] so provided each very different and each very technology heavy. Let me ask Bob to comment about some of that as he sees it, as well as the ordering processes, as well as the international business. [Maybe you could] touch on that.

Yes, as most of you probably remember, we had the workflows worked out with one of the ASO providers for this client. And, frankly, the appropriate decision on their part was to expand [it] and to cover all their employees, which required us to negotiate technology agreements with two other ASO providers. It's the technology platforms of each are very different, the interfaces are very different. It's significantly more complicated than simply turning on a switch. So that creates some delay as it relates to that.

On the international side, our experience in Israel has been that there's a certain degree of work that has to be done in terms of educating the pathologists, educating the physicians like here in the United States, and the processes of getting those tissue sample distributed [to the] United States and that results back, there's some degree of complexity. So as we noted, that we elected to not recognize revenue in the Q3 as we work through those processed steps. In the same way with our new partner in Italy, we don't anticipate taking samples in until Q1 as we used this quarter that really solidify the workflows.

So to give you a sort of more succinct answer with regard to the timing of how you sort of think about this thing being ramped up. As [I] said, Q2 is how you [start] of thinking with this [thing being] ramped up. I think the other complexity that maybe people didn't appreciate, because we're dealing with very secure information and the HIPAA nature of it. We'll speak more to this, again, over the course of the next four weeks. But [our] ability to create a secure cloud and move data in a secure fashion, we believe we're one of the few companies now to have actually pass that security test with the Fortune 500 company.

So we will speak to that in more detail later. [And] I think people should not underestimate the amount of work it takes to actually have this kind of secured data being passed to a Fortune [50] organization with the employees across this entire nation.

My follow up would be, with respect to the self-insured employers, that's obviously different than [a] payer relationship in terms of the education process that the test is reimbursed. Can you talk a little bit, Bob or Patrick, with respect to how you think about the self-insured employers how? [The] ramp up or the test velocity that you laid out here, the 30, 60, 180 days, do you think it will different for [a] self-insured employer?

No, quite the contrary. [With] what we discovered, the self-insured employer relies very much on the health even though they're paying the bill. They're relying incredibly much on the payer to help them through the medical policy process. But having said that, we've now brought on the team and you will hear more about the team. There's [Nancy Powers] and [Dean Packer] and [John Calhoun all on a] team, who've worked not only with payers. But worked also with self-insured and also [worked] with benefits programs, who understand the rigor needed for self-insured [on] the scale of Fortune [50] companies. What they need to get prepared.

So we are very, very encouraged because we [talking] to more than one, four, five or six self-insured in large national associations, which we will name over the course of the next three to six months, that of all indicated a great desire to bring this on behalf of either [their] employees or the associates as a benefit actually, almost like a supplemental benefit.

Charles Rhyee, of Cowen.

Patrick, maybe I missed that. When we talked about the [524] GPS order in the quarter, did you mention how many were from [Independence's] patients?

No, we didn't. But I don't think we're going to break out the different payers, because it really almost is irrelevant soon, right? [It'll] be [across the nation], and [as I said, there's] 25 healthcare plans that have - the doctors have ordered them for patients in healthcare plans that are covered by [healthcare plan]. But we're not going to break out payer by payer with regard to [just] their reimbursement. So, it's really a reflection, not of the payer. It's interestingly enough, it's [a] reflection of the education of the doctor.

Yes. No, I was just curious as to see if it was through the [Independence's] that was pulling now. And so I would - is it fair to think that there's a greater number of that's [Independence's] or [has] it turned out to be really, regardless of the payer now, they're just ordering tests on behalf of the patients? That's [all I was going to ask].

That's what encouraging, right? I mean, one would think that if it's covered automatically, everybody would want to use it. It turns out that what [we're] encourage by whether it's covered or not, so this is across the board. So that's why it's encouraging, because all the doctors are ordering whether the patient is covered or not and they want it sufficiently - they think the test is sufficiently important.

From a revenue recognition standpoint though, the [Independence] test because it's already covered, once the results are sent then we recognized revenue for that? Otherwise, we wait until we see if we get some actual payment?

Yes. Hey, this is Paul. Yes, that would be an example of [pair], we have an agreement with, right?

Yes.

So, as we grow [in] the number of those [that] we have - we feel that we're able to establish that [fixed] determinable fees, notion. That's what puts us out of the cash basis and into the accrual basis.

Okay. The pilot with Horizon, how long do you anticipate the pilot with Horizon to go for before we see that move into sort of just a [lawful heart].

Well, [once] again, I met with [not only] the Horizon folks, but I met with the healthcare systems Hackensack and RCCA and the largest healthcare systems of all of New Jersey and then COTA, which is run by [Andy Pecora]. We've approved the protocols, we've probably - I can't give you with certainty the accrual rate, but I do know they see thousands of patients. So I would say within the next four to five months, we will have completed that, if not sooner.

Okay. And then just [moving] to QUILT, the QUILT trials, can you give us - I know you talked about it briefly, are all the centers up and running at this point? And how do those test numbers run through - as those [tests] performed within QUILT do they show up in the GPS test ordered?

So there's been no QUILT GPS test orders run through yet on the numbers of you've seen. The QUILT will be starting, as I said, I'm going to the Baltimore meeting [for] SITC this week [and] will be making a keynote on the QUILT. What's exciting, we anticipate in 2017, there will be close to 45 to 50 clinical trials [being done] through the QUILT Program [active] and GPS [can see] prerogative. Meaning that the patient cannot enter QUILT trial without being informed about the molecular status, and we'll be working through with NantHealth how that flows through over the course of the next quarter.

From Brandon Couillard, of Jefferies.

Maybe just split this a bit of a different way, I mean, [if you] could give us the percentage of the commercially related tests that were ordered in the period for which you do have a reimbursement relationship?

I'm not sure we broke it out that way Brandon. Let me just see, Bob, you did give a percentage of commercial business Medicare, right, in your remarks? I'm not sure whether we did.

There [are] 154 commercial tests. [We've] not disclosed that, because [we're] still working through the certain payment issues, which percentages came from contracted payers as opposed to payers which we do not have a contract today.

Okay, and then [any] update you can share with us in terms of the turnaround time you have experienced thus far into the initial rollout processing of GPS. And then secondly, when you discuss, or when you [mentioned] that the Midwest clients had generated an actionable result in for every test, how exactly do you define that and how is that different from perhaps where they may have changed behavior versus what the [doctor] might have otherwise done in terms of his treatment pathway?

Okay, So this is why this is exciting, because I think I made [a] mistake trying to explain this in the form when I started out as compared to a panel. And I take responsibility of actually falling into that trap. Because a panel was designed to treat [targeted therapies]. The panel [was] designed to look at [these] small molecule targeted therapies. This test was designed way beyond that. It has nothing to do - the targeted therapy was merely a subset of this test.

This test looked at the protein-protein interactions of all drugs. So the drugs that are well approved, like chemotherapy, [taxolcostatin], irinotecan. We know as clinicians and scientists that Taxol works through a protein-protein interaction. We know that if you have a protein that actually spells out resistance to Taxol, that is a well-established science. What has happened before is we can never measure that protein. So we would then say, "Okay, pancreatic cancer is a taxane plus gemcitabine and ovarian cancer is cisplatin plus [a] taxane as the standard of care. And we would just give it not knowing whether the patient has the resistance to cisplatin or resistance to taxane, because it was NCCN Guidelines. Knowing that 20% of patients would respond and the other 80% wouldn't. And the reason they don't respond [is] because they have these resistance proteins.

So for the first time you can measure the presence or absence of these resistance proteins. And now you can decide [a] priority whether you want to give a cisplatin to a cisplatin-resistant tumor or do you want to give another choice like a 5FU. [Do] you choose some other approved drug within the guideline? So what this is doing now is creating the equivalence of an MRI scan or PET scan of the tissue to enable the doctor to be better informed about the choices that he really has in his hands. Not as a match, not as targeted therapy, not as a panel.

So people still confused this test with a panel when it has almost nothing to do with that. But [has] everything to do with that, because the panel unfortunately in its own right is inaccurate. The panel does not speak to the downstream protein and you have false positives. In fact, we showed at ASCO 69% false positives, so you're choosing the drug for [a] panel [in] which you think you have a target but there's no target there. We spend a lot of time trying to explain that.

And just recently we said, "Look, the light bulb went on when it actually has to do not just only with [a] targeted therapy, which [it] is what you called small molecules targeted therapy, but also it has to with chemotherapy. It also has to do with checkpoint inhibitors, it also has to do with hormonal therapy."

So when we say an actionable result, all of a sudden, the doctor is amazed because we cover the biological activity of almost 80% of drugs that had been approved for the last 20 to 30 to 40 years. And for the first time, put the hands of the doctor this informed information, as opposed to this guesswork that we currently do across this nation, as to what drug to choose based on the biological status of that cancer before treatment begins.

So when we say an actionable result, all of a sudden, the doctor is amazed because we cover the biological activity of almost 80% of drugs that had been approved for the last 20 to 30 to 40 years. And for the first time, put in the hands of the doctor, this informed information as opposed to this guesswork that we currently do across this nation, as to what drug to choose based on the biological status of that cancer before treatment begins.

So that is the actionable information we speak to, Brandon. I hope that's a little clearer but I think of it as a -- almost like a drug screening test, that we're actually taking the drugs that only, I don't know, [either] 30, 40, 50 of these drugs that are available to us as oncologists enable for the first time to screen through them as it relates to the patient's tumor.

And so which of these drugs would work regardless of the so-called NCCN Standards of Care Guidelines regardless of our empiric choice of just trial and error as opposed to the protein that's present and now all of sudden a drug is available for which we are very comfortable. So there's a drug Pemetrexed, for example, that works on an alpha-folate receptor is used in lung cancer.

What we are finding remarkably some patients with cervical cancer, ovarian cancer, have high levels of these receptors and nobody ever thought of using a drug with which we are very comfortable using in this particular patient. That's what I mean by actionable. I'll give you a real-time example and this patient has made her name public, so I can speak about her and this is [Dr. Manliss] in Sarasota, Florida and he's made his name available.

That this patient went to a very highly reputable organization in Baltimore and was told that her lung cancer was such a state that she should make plans and she has at such end-stage disease, that there was basically very little they would do. And we found through this test, a high alpha-folate receptor and this doctor in Sarasota put her on Pemetrexed and she had a complete response. She is now cancer-free and she's six months out.

I think these kinds of pieces of information make lasting impressions. And for the first time, I think doctors are beginning to see this is not just a flurry of useless information. This is very actionable information for drugs which we are very comfortable using and in fact had been using for 20 to 30 years, except they had been using this in the quite literally, and I don't even mean in the pejorative way, blind fashion because there's no way to test whether the patient will be sensitive or resistant to that drug. Does that help, Brandon?

Yes I think so, thank you.

Thank you and our next question comes from Joe Munda of First Analysis. Your line is now open.

Good afternoon and thank you for taking the questions. Real quick, I just want to go back over the quarterly statistics on Cancer GPS. So there were 524 ordered, 334 delivered to date. Of the 334, 180 were ordered under the research with the University of Utah, so can we assume that there's 190 in the backlog if there is one?

No we just received some, we talked about those ordered. There are some tests, not tests, but some samples that we received where there's an education process where the doctors don't actually send tumor tissue and one thing we can't do is make magic. So when there is no tumor tissue, we then even though it's ordered, we then ask the doctor to resend another slice of the tissue.

So just to answer the question beforehand, the time turnaround time, from order to report is we truly can make our 14 days, that's not an issue at all for us. When we have DNA that's extracted from the tumor, we can actually turn this around in seven days if we so wish.

One thing we can't do unfortunately is control for the quality of the tissue that the doctor sends to us. So they may order it and then send the tissue, we look at the tissue and find there's no tumor in the sample and then we ask them to return a new block or a new slice. Does that help you?

That happened in 190 cases, is that what?

Well, there's a learning system right now and then some of them we just receive, we're talking about quarter by quarter. We just received some now, so it's not all of those. But there's a yes, there's a huge learning system where the blocks that I sent inappropriate -- not inappropriate, insufficient is a better way to say.

But we -- we'll be getting through that in the first, in the second -- the second quarter, that was huge. In the third quarter, that's significantly lower and after the doctors sent us one or two blocks they really understand what we mean.

So turning to capacity, 334 tests delivered, can you give us some sense of where you are in terms of capacity or where it was in terms for the quarter?

Yes, capacity we're not at the capacity where we can do 40,000 per year.

Thank you. (Operator Instructions). And our next question comes from Sean Dodge of Jefferies. Your line is now open.

Hi, good evening. Maybe just starting with a quick clarification. So the B of A contract, you're pushing out the GPS launch but the wellness part of that -- that agreement, is that still on track and that should be enrolling now, if I'm not mistaken, correct?

Yes, that is on track and good catch and we are going to announce that in the big, big press release probably in the next quarter. That's very much on track.

And then maybe turning to the IT side for a moment, you guys have talked about beginning to pivot eviti into something you sell directly to providers. What are the steps involved in making that transition and how far along are we in seeing this process unfold?

Hey Sean, it's Bob. If you look at our press releases throughout the year, there were a couple of large provider accounts we made in the press release that notes that these provider accounts had adopted eviti as part of the package they acquired. So that was a project that we started from a technology standpoint in 2015.

It was generally available to the sales force in Q4 of '15. The first sale was to Cancer Treatment Centers of America in Q1 and [Q4] this year. And essentially it's pivoting eviti to be used in a construct where the providers, the health system can use the fact that their physicians will be using evidenced-based pathways as a manner in which to negotiate with their managed care contracts with the payers.

This is really driven by the idea that a physician, take a physician in Chicago for example, may see a patient that the underlying insurance coverage has eviti. So he's got to go through the eviti, he may see three other patients that same -- new patients that same day that don't have it, so he doesn't have the pathways.

It was confusing for some of the physicians, so we felt this was a way to increase our footprint and have a -- strengthen our relationship with our provider clients. And there are been four -- I think four sales this year in that construct.

Let me answer this a little differently, I didn't maybe go over what I called our patient provider engagement and I don't think people may recognize the significance of our first go-live document exchange. So the opportunity now is enormous because for the first time now we will have a multiple way communication tool.

So to give you some insight, this Nant Operating System which was like a clinical offering system and their middleware, we now have 89 organizations, health systems and single hospital organizations across North America and the United Kingdom with 25 million covered lives of provider-patient engagement clients.

To give you some scale, we have 51,000 licensed users now of provider and clinician accounts and we have 230,000 patient users on our patient portal. I think the enormity of that sort of cross-connect where we can now use this kind of patient portal together with eviti on the one hand to the payer is an enormous opportunity for us to take advantage of educating as well as generating decision support.

When you look at on the payment side, the NaviNet payment side, as we talked about before we have more than 3 million transactions a month now. But what's remarkable, we have 2,000 provided clients now that used [similar 50-plus] health plans. And we have over 646,000 providers which now represent 72% of the nation's physician practices. We have 473,000 active users transacting on this network.

So the scale of our real time interactivity and transactions has now put Nanthealth in this unique position where day to day mundane transactions is happening but with a two-way portal, where all of a sudden we have almost a network effect of a health network where we're connecting or transmit things like the [quote] trial, things like education, things like ordering GPS.

So that was the real insight into us integrating on the one hand this data generating test in its own right called GPS and other one, the data consuming opportunity but interconnectivity through the technology platform of the NantOS and the third hand is amazing Cloud now which we're building, which actually integrates real time, real world data.

And we will hear more about what we called our augmented intelligence engine which is truly the real-time, real world I believe transformative engine for big data. So again as I said, it's a complex interaction of an organism, Nanthealth is and it's going to take maybe several calls, several meetings, several investor presentations for the community to understand this company. But I think as I said, GPS is going to initially drive it but the technology platform is enormously valuable for integration.

And I think the payer models that are now changing and the oncology care model you should be watching that and watching what we do along that line as we take this pay for value system and it's unsustainable this fee-for-service and this million dollar drug fees for both the payer and the patient. And I think this is the only company that is so well-positioned to actually manage that and transform that. So eviti, the question about eviti is one part of this huge, huge engine that hopes to integrate and transform healthcare.

Thank you and our next question comes from Charles Rhyee of Cowen. Your line is now open.

Yes, thanks for taking the follow-up question here. Actually I had a question about the GlowCaps business, it's our understanding that it's being tested with, in some of the bigger PBMs and just curious as to how you're seeing those pilots kind of progressing, sort of what your expectations are in terms of expanding beyond some of the limit areas? We've see it in sort of multiple sclerosis being used, sort of where you're seeing it going and how we might think of it flowing through the income statement as we move maybe into next year and beyond? Thanks.

Yes, well good question Charles. Again we take a very different approach, right. So this is hardware but this is actually very sophisticated hardware that actually for the first time will give you a real world, real time data as if the patient is under air traffic control.

What was incredibly impressive to us is when the trial was done both in Boston as well as with the Fortune 50 company, we were able to show a conversion of 49% plus or minus medication adherence to over 90% medication adherence, and more important is sustained medication adherence. That is enormously important in terms of value driving both in the healthcare but also as it relates to all the diseases.

You mentioned multiple sclerosis but now oncology is largely going to be also oral medications. So for us to be able to drive medications adherence across the disease types whether it be hypertension, diabetes and what you call specialty pharma. And what's also exciting, I don't think people even understand the opportunity for us is to actually to have real time insight into drug usage but really data usage of whose taking the drug, when and where and interact with that patient in real time.

That's going to be the secret and key. One of the secret keys to mission control center where we truly will be able to interact in real time with patients during the course of their care. And we do this under wellness and illness. On the one hand, you have a very sick patient with cancer where we'll able to help and monitor. On the other hand, we have a patient on the wellness side to make sure that they continue their diabetes medications, hypertension medication. So we see GlowCaps as one interoperability platform on the hardware side.

Again, it's a self-generating data engine. I don't think people also again, fully appreciate how Nanthealth will be the generator of data as opposed to the consumer of the data. We'll generate it and consume it and actually integrate it and create what we called predictive modeling tools that will better inform wellness and transform healthcare.

So the GlowCaps, again, you take everyone of these elements, the HBox, the device connects, the GlowCaps, the evitis, the middleware, the NantOS, the Cloud, the GPS, they're all integrated into our system. But, we will be providing these devices, so to speak, this hardware not as a quarter of business but we'll start to look for partners and we are actively working with partners to drive the lowest cost hardware into the hands of these consumers.

And is the model --

I don't know if we break it out Paul, I don't know if we break out GlowCaps or --

We don't, no we don't. No, no we don't.

But Charles it's modeled within I supposed it's I'm not sure where you modeled in into the NantOS platform, right. So it's all within the NantOS platform, right, just basically consider us the app store I supposed, right, within the NantOS. It's a middleware and it's all baked into the operating system.

Thank you and I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Jaffe, for closing remarks.

Thank you everyone for joining us today. We look forward to sharing our progress on our next scheduled call in February. Have a great day.

And thank you for taking this strange time. We wanted to do this, so you can all go vote tomorrow. Okay, bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day everyone.