NantHealth Inc (NH) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the NantHealth Q3 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference may be recorded. I would now like to introduce your host for today's conference, Robert Jaffe, Investor Relations for NantHealth. You may begin.

Welcome, everyone, and thank you for joining us today to discuss NantHealth's 2017 Third Quarter Financial Results. On the call today are Dr. Patrick Soon-Shiong, Chief Executive Officer; Ron Louks, Chief Operating Officer; and Paul Holt, Chief Financial Officer. This call is being broadcast live at www.nanthealth.com. A playback will be available for 3 months on NantHealth's 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 today 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 U.S. 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 2017 third quarter financial results for the company's reasons for including those non-GAAP financial measures in its financial results 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.

Today, Patrick will provide a brief overview of the quarter and 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. Good afternoon, everybody, and welcome to NantHealth's 2017 third quarter financial results. Today we have much to report, including a number of very positive business and operational developments. But before I start, I'd really like to take this opportunity, at every one of these earnings calls, to reflect on the complexities of GPS Cancer test and reflect on how encouraged I am quarter by quarter. Both the scientific and medical clinical community are beginning to understand the comprehensive nature and the value of this test to a cancer patient. Perhaps the one way to think about this test is, if a cancer patient were to ask his or her oncologist, "Doctor, have you done everything in that's available on the market to interrogate the elements of what's driving or what's part of the mutation cause or what are the elements surrounding my cancer?" To my belief and knowledge, the GPS Cancer test is the only test in the market where the doctor can truthfully answer, "Yes, I've done so" because the current tests that are currently on the market, including the gene panels and even the liquid biopsies, do nothing to address the following: One, the whole genome or the whole exome integrated with the RNA mutation or overexpression integrated with the proteins. And more importantly, and I have never emphasized this in the past, where actually the patient's own tissue and the patient's own normal genome is used as the control. I have always asked myself the question is, if we now believe that cancer is a consequence of genomic alteration of the patient's own genome either in the world of epigenetics or even in the world of inherited disease, then how could we more accurately -- most accurately identify the accuracy of the mutation without using the patient as his or her own control. That is what GPS Cancer does. It takes the tumor and it takes the normal, measures the full DNA, measures the transcriptome, and measures the protein and tries to integrate this with protein pathways. So on reflection, if a patient were to ask a doctor, "Doctor, have you done everything to try and find out the most comprehensive information about my tumor?" I think the answer for the doctor to respond, is "Yes, I have by actually using your own tissue as your control." So that background takes me to the excitement I have to report about 3, what I consider, positive scientific developments that relates to this concept of GPS Cancer using the patient's own tissue as a normal control. Firstly, we are really encouraged and heartened by the positive results of an independent 1,040 patient clinical study performed at the Memorial Sloan Kettering Cancer Center and recently published in the Journal of American Medical Association, a journal called JAMA. What was important about the study is that the results showed that universal sequencing of a broad panel of cancer-related genes when paired with the germline, meaning the normal, and tumor DNA samples, which is exactly what GPS Cancer does, was associated with increased detection of clinically significant mutations. So this study's conclusion not only directly supports our long-held contention that GPS Cancer improves the quality of patients' lives, but also aligns with the data, which I will talk about later, which we presented to MolDx, which illustrates the important need for tumor-normal sequencing for all cancer patients. So in summary, this study -- independent study confirmed our belief that tumor-normal was important.

Secondly, NantHealth presented data at the World Conference on Lung Cancer just last month, and we revealed for the first time in this forum the inaccuracy of tumor-only sequencing. In other words, today's panels take the tumor and use a reference genome to conclude the presence or absence or positiveness or negativeness of a mutation core. Using a reference genome as the control rather than the patient's own tissue as the control results in a large amount of inaccuracies, which were presented. So based on this data, we have formally requested from the Molecular Diagnostic Service Program, called MolDx, coverage for our tumor-normal DNA sequencing combined with RNA sequencing platform for lung cancer.

Thirdly, one of the most exciting events that has happened is the approval by the FDA of the use of pembro, which is a checkpoint inhibitor, for treating cancer patients based on the molecular characteristic of that cancer known as MSI or microsatellite instability. This breakthrough approval, based on the molecular finding rather than an anatomical basis of disease, is a new treatment paradigm in oncology, and expands the clinical utility footprint of precision medicine. But why is MSI, or this microsatellite instability, important? It turns out that patients with microsatellite instability have a much better response to a checkpoint inhibitor. Yet, the most accurate way to determine the presence or absence of microsatellite instability, or MSI, is to use the patient's own tumor tissue and the own normal tissue as his or her own control. I am pleased to announce that NantHealth has -- now will launch the GPS Cancer test as a validated assay available for microsatellite instability. So GPS Cancer, which is built on tumor-normal sequencing, offers a more precise method for assessing MSI rather than the current gene panels, which utilize the reference genomes.

So that is the scientific portion of my earnings report. And I now will turn to the business report. But as I said, we are making every effort to share this medically important information with the broad oncology community, with insurers, with regulatory bodies, including the CMS, with detailed discussions ongoing with regard to establishing coverage of GPS Cancer. I recognize that this is a complex subject. We recognize this is a complex report. But we truly believe as a company, on behalf of the patient, a most comprehensive accurate information is what the patient deserves. And despite the difficulty of the complexity and the adoption challenges that could result therefrom, we are persevering. And I'm excited to say, that it's paying off as we look at our GPS business.

So with regard to adoption, during 2017 third quarter, 547 GPS tests were ordered and this is up from 379 in Q2. We recorded our best month ever in October with 204 GPS tests ordered. We believe the ramp-up is largely due to our efforts to extend coverage and most importantly to drive physician education, engagement and utility for our GPS test. Let me address our issues as we're moving towards GPS coverage. Outside the United States, we are pursuing opportunities to add international resellers of GPS through partnerships with locally based resellers. To that end, in August, we entered into an agreement with Asia Genomics, under which Asia Genomics will distribute GPS Cancer in Singapore, Malaysia, Thailand, Vietnam and the Philippines. These international markets are in addition to our existing coverage in Israel, Italy, Mexico and the Middle East. On the domestic front, in the meantime, we continue to introduce pilot programs with commercial insurance and self-insured payers to accelerate coverage adoption. Post quarter-end, we signed a large national employer and expect to sign additional GPS Cancer reimbursement contracts with self-insured employed and commercial health plans before the end of the year.

So let me turn to our payer engagement and clinical support -- Decision Support Software and Services, and moving now to the software side of the business of NantHealth. In our Clinical Decision Support division, which we formally called eviti, we added 2 key customers and won a 2-year renewal with our largest customer. In our Connected Care and Payer Engagement divisions, during the third quarter, we added nearly $6 million in recurring revenues and new business bookings. Also in our new Navinet Open and Clinical Decision Support divisions, we expect to complete, in early 2018, 2 implementations, which we announced last quarter.

Also in our new NaviNet Open, and just to remind those who are not aware, this is the Payer Provider Portal for which we have over 700 clients associated. Together with our Clinical Decision Support divisions, we expect to complete, in early 2018, 2 implementations, which we announced last quarter.

So before I turn the call over to Paul, a brief update on our recently announced plans to focus on our core competencies, accelerate profitability and position the company for growth. During the third quarter, we initiated a plan to focus NantHealth on being the leader cancer diagnostic and outcomes-driven solutions provider. The plan included identifying noncore assets, the divestiture to Allscripts of software related to the patient/provider portals and the restructuring of the designed, enhanced efficiencies and reduce operating costs. I am pleased to say that we completed the transaction with Allscripts and the restructuring resulted in a substantial reduction in operating expenses. The restructuring was implemented during the third quarter resulting only in a partial benefit for this quarter's report. But going forward, we expect to see even lower operating expenses and greater efficiencies.

So with that overview of our business lines and the scientific dialogue on GPS, I'll turn the call over to Paul to discuss our financial results in more detail. Paul?

Thank you, Patrick, and hello, everyone. I first want to remind everyone that as a result of the divestiture of our provider/patient engagement solutions business to Allscripts this quarter, our financial statements now include a new line item called [losses] from discontinued operations, which captures the net operating results of this business. Our income statements for current and prior year periods, including revenue, cost of revenue and operating expenses have been recast to include only continuing operations. The operating results of discontinued operations are now reported below the results of continuing operations as a single-line item. My commentary will focus on the financial results of our continuing operations. As we mentioned in our press release, the sale of these assets eliminated approximately $50 million in the annualized operating losses, which we expect to improve our ongoing forward operating results. I will also note that in addition to the sale of assets already discussed, management has initiated a restructure plan and has executed cost reductions in late August and early October, which reduced our operating expenses associated with continuing operations by approximately $18 million on an annualized basis. Majority of the impact of these cost reductions, which will impact cost of revenue, SG&A and an R&D expense categories will be reflected in our fourth quarter results and beyond. Over time, we are planning on optimizing our use of third-party vendor spends and implementing additional operational efficiencies to achieve further expense reductions, which will accelerate our time line to profitability.

Turning now to financial results for our third quarter 2017. Revenue increased by approximately $1.1 million, or 5%, to $21.8 million from $20.7 million reported in the same quarter of the prior year. The increase was primarily due to growth in GPS Cancer revenue and continued growth in our recurring SaaS revenue associated with Payer Engagement and Clinical Decision Support solutions. This was partially offset by a reduction in software and hardware and other services revenue associated with our Connected Care solutions. GPS revenue of approximately $1 million grew more than tenfold over the prior year approximately $0.1 million and more than doubled on a sequential quarterly basis. The principal driver of our increased revenue this quarter was tied to growth in volume and improved collections performance with payers with whom we do not have contractual agreements. We continue to work to enhance our process to improve billing and collecting from noncontracted payers and educating them as to the value of the GPS report. Our ability to continue to accelerate GPS revenue will be dependent on driving growth in volume and reimbursement simultaneously. We believe we're making excellent progress on both fronts as evidenced by the increase in revenue and orders in our third quarter.

Turning to other revenue lines. Our third quarter software and hardware revenue was $1.2 million, compared to $2.1 million in the prior year quarter. And as I've mentioned before on prior calls, revenue from this line often varies quarter-to-quarter due to the timing and completion of Connected Care implementations. SaaS revenue on our third quarter grew by 9% to $15.2 million compared to $14.0 million a year ago. Our SaaS revenue streams have been growing every quarter this year, both on a sequential and year-over-year basis. Our sequential growth rate this quarter was 4%. The increase was driven by growth in our Clinical Decision Support and Payer Engagement solutions. Other services revenue declined to $1.7 million versus $2.5 million a year ago. The decrease is primarily due to the decline in completed Connected Care projects compared to the prior year. Gross profit was $10.3 million or 47% of revenue compared to $10.6 million or 51% of revenue in the same quarter a year ago. The decrease in gross profit was driven by higher GPS cost of revenue and internally used software amortization compared to the same period a year ago. Cost of GPS revenue grew as a result of increased volume of delivered reports this quarter versus a year ago.

Selling, general and administrative expenses declined significantly to $17.5 million from $22 million in the prior year third quarter. Similarly, research and development expenses declined to $7.7 million from $10 million. The primary drivers of the reductions in operating expenses were tied to reductions in stock compensation expense, including reversals of stock-based compensation expense as a result of equity forfeitures associated with reductions in headcount in the restructure plan as well as other cost reductions achieved with the initiation of the restructure plan. On a GAAP basis, net loss from continuing operations was $23 million or $0.20 per share compared to $26.4 million or $0.22 per share for the prior year third quarter. On a non-GAAP basis, our adjusted loss per share was $0.13, which is the same as the third quarter of last year.

With that, I'll now turn the call back over to Robert.

Thanks, Paul. Operator, we have now completed the prepared remarks, and we'd like to open up the call to questions. Operator?

(Operator Instructions) And our first question comes from the line of Charles Rhyee from Cowen.

Patrick, if I could just get a -- as a clarification, when I look at the release here and you're talking about the MolDx news here, is it that you are requesting to get coverage determination? Or -- can you just clarify that part again?

Yes. So you know the MolDx has covered the lung cancer panel, and what we've done is we've submitted our data that completely complies with those -- that panel using our system. So we've put together the package and all the validity and the utility tests and submitted, and it's currently under review as we speak.

Do you have an estimated timing when we might hear a decision?

Sadly, that's really not even under our control. So I don't really have an answer for you other than they've informed us that it's currently under review.

Okay, that's helpful. And then going to the other one, on the microsatellite, the MSI. When you're saying here it's a validated assay, can you talk about what was the validation process? Is it -- was it in conjunction with the use of this -- with the pembrolizumab?

No. So let me -- maybe I should be very clear. And these are unrelated, but tightly related events, right. So first event, unrelated, but important, was that FDA approved pembro, as you know, not for an anatomical disease but for patients with microsatellite instability. So point number one, this is the first time an inflection point in history of the treatment of cancer patients where the diagnosis is molecularly based and requires, therefore, a molecular test, in this instance is microsatellite instability. Point number two, which is related, is I try to emphasize and we maybe have not done a good job before emphasizing that we are, to our knowledge, the only company taking the patient's tumor-normal, meaning the patient's own normal tissue as his or her own control. As it relates to microsatellite instabilities, which are these tiny little fragments, the most accurate way to completely identify the presence or absence of microsatellite instability is to do the tumor-normal. So we undertook a test with -- in partnerships with our group in Singapore where they had confirmed microsatellite instability, and we actually were able to not only confirm that but find cases in which they had not called microsatellite instability in 150 patients. So it validated the accuracy of tumor-normal analysis, and therefore validates the importance of GPS as a test for which no other test exists on the market. And that is really the complexity in which, as I said, we need to educate that a gene panel test is grossly inadequate from an accuracy perspective. We then highlighted this inaccuracy, so to speak, by taking the lung gene panel test. And when the lung gene panel test is done, as it currently is in the market and approved by MolDx, using a reference genome as a reference, the amount of false positives that we discover is highly significant. And I'm not going to go into the details because we've submitted this as a publication for one of these journal articles. But importantly, we submitted this particular data itself to MolDx for the consideration that while we will accept the exact same test with exact same panel for lung, we want to improve the accuracy by also at the same time using the patient's genome as their own control because we were able to show MolDx that when you don't do that, you end up with a huge number of false positives and even false negatives. Thirdly, related to that, we were able to present this at World Lung and we did that. And importantly, this was an oral presentation, which confirmed the importance of doing tumor-normal. And then finally, fourthly, completely independent of us, Sloan Kettering did a 1,040 patient study that showed the importance of doing tumor-normal. It's not only important just to have accuracy, it is important also to actually capture the positiveness in a druggable gene and that was also emphasized by these various studies. So taken together, when we make the statement from a doctor's perspective to a patient or patient's perspective to doctor, have you done everything in your power to comprehensively determine the accuracy of the call and the decision you're about to make? We honestly scientifically believe that unless you do a tumor-normal analysis -- whether you do whole genome or exome or whether you do even a panel, you need to use the patient's own control.

I guess, just two quick follow-up. So Paul, do you have a cash flow from operations number for the quarter? And given with the divestiture, I understand -- and with the restructuring as well as sort of the costs that you offloaded as part of the asset sale, can you give us an estimate, maybe what your -- the cash flow from ops you maybe estimate in the fourth quarter?

Hi, Charles. So listen, we're about to file our 10-Q here within a couple of days. You have all the details of our cash flows from operations historically. But yes, certainly, given the divestiture as well as the restructuring plan, we know that our cash burn is going to be reduced by a fair amount. But I'm not going to necessarily give out any sort of specific guidance on that. But just I think -- intuitively, I think it's relatively straightforward to take a look at see what the losses that were shared to combine with cost reductions that we talked about earlier and the impact that will have on cash flows, I think, is certainly going to reduce the burden.

Okay. And I apologize, just last one from me is, obviously, an uptick in the sequences ordered. Can you give us an update on the integration of ordering GPS and eviti through NaviNet? It'll be integrated...

Well, we would -- yes, it's being integrated at multiple levels, right. It's being integrated at NaviNet. It's actually being integrated at eviti and it's also already been integrated at Allscripts. So I think the teams now with the divestiture are working very closely and that's exactly why one of the value of us being a focused entity now focusing on cancer. So the order entry and the ease of actually ordering, integrating at these multiple levels, not just at NaviNet, but at eviti, at Allscripts, at the EMR, into an order entry system, and that's going afoot and going well.

And our next question comes from the line of Richard Close from Canaccord Genuity.

Back on the second quarter release, you talked about July being a strong month for you. Can you talk a little bit in terms of the tests ordered, how the quarter progressed?

So Richard, I'm not sure I understand the question. We have given you the information on in terms of the number of tests ordered. You're talking about this quarter? From July, we've actually had...

I'm sorry. Yes, if you go back to the second quarter conference call, you mentioned July was a very strong month. And I'm just trying to better understand, was July a majority of the test ordered for the third quarter? Or how did it progress month by month?

Okay. So let me just look at the raw data. No, the -- July was strong, but August was stronger than July and October was stronger than August.

Sequential growth.

So there's basically sequential growth month over month.

Okay, great. And then, also, on ordering (inaudible) on tests ordered. When you guys do these reseller agreements internationally, do those show up as tests ordered? How did those show up in terms of the sequencing revenue -- tests ordered in sequencing revenue?

Hi, Richard. This is Paul. I'll take that one. So yes, the -- our international reseller agreements, provided that they are covering the costs of the tests, would be deemed to be a contracted pair. So if we get an order and we've got a negotiated rate, we deliver the tests. We will take that as an order and will take it as revenue, when received.

Okay. And then my final question would be, is there any way to get a sense in terms of the tests ordered in the quarter? How much is domestic U.S. versus international?

I'm not sure we break it out that way.

Yes. We're not breaking out that way specifically. But let -- but suffice to say that international is definitely a contributor.

.

But I -- but the important thing is, the trend in the U.S. is increasing. So if the underlying question is there an increasing trend? The trend lines that I just shared with you July, August and October was significant to U.S. as well.

And I'm showing no further questions over the phone lines at this time. I would like to turn the call back over to management for closing remarks.

Thank you, again, all of you for joining us today. We look forward to sharing our progress on our next scheduled conference call. Thanks, and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.