NantHealth Inc (NH) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NantHealth 2017 Fourth Quarter and Full Year Financial Results Conference Call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the call over to Robert Jaffe, Investor Relations for NantHealth. Sir, you may begin.

Thank you, operator. Welcome, everyone, and thank you for joining us today to discuss NantHealth's 2017 fourth quarter and full year 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 fourth quarter and full year 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 would now like to turn the call over to Dr. Patrick Soon-Shiong. Patrick?

Thanks, Robert. Good afternoon, everybody, and welcome to NantHealth's 2017 fourth quarter financial results conference call.

So I'll begin with an overview of the quarter. Our financial results were significantly improved in the fourth quarter with revenues up 25%, gross margin percent increasing to 60% of revenue.

As you will recall, last quarter we initiated a plan to focus NantHealth of being the leading cancer diagnostic and outcomes-driven solutions provider. The plan included identifying noncore assets and the divestiture to Allscripts of software related to patient/provider portals, together with the restructuring of the design to enhance efficiencies and reduce operating costs. The effect of this divestiture, combined with our restructuring effort, has resulted in substantially lower cost structure and much improved bottom line.

With regard to our business line, our SaaS revenue continues to grow, not only the revenue growth in the fourth quarter compared with the prior year, but also on consecutive quarterly basis.

GPS revenue grew threefold over the prior year fourth quarter, and GPS revenue for the 2017 fourth quarter was also up on a sequential quarterly basis, even with the impact of the holiday season.

606 GPS commercial tests ordered in the fourth quarter, up 11% compared with Q3. I'm pleased to report that last month, February, was the largest month of orders to date of GPS cancer.

Our momentum is continued into the first quarter of 2018.

With regard to our GPS business, we have signed a new GPS Cancer reimbursement contract with a large, national IT company. We also signed a laboratory services agreement with a 20-plus facility hospital system to make GPS Cancer testing available to its patient community.

On the international front, we've signed a strategic reseller agreement with a partner in the United Kingdom for the provision of molecular analysis services for clinical studies as well as for research initiatives.

Also in Q1, we, as announced previously, have submitted to the FDA a 510K premarket notification application for our tumor/normal DNA sequencing.

And lastly, as previously announced, we agreed to provide GPS Cancer molecular analysis to the University of California San Francisco, UCSF, to support research initiatives focused on metastatic breast cancer.

This study will allow UCSF researchers to utilize advancements made in molecular technology to examine the potential clinical feasibility of molecular profiling, including gene mutations and gene expressions in the context of patient care. The biopsy materials collected will also allow researchers to examine immune markers within the tumor architecture. And we expect results from this clinical study to be presented at major medical conferences.

As you know, Ron Louks, as our Chief Operating Officer, has done a superb job in orchestrating and helping with the restructuring of the organization. And I'd like now to turn to our Software and Service businesses and ask him to report on those businesses. Ron?

Thank you, Patrick. Turning to our Software and Services business. In our Payer Engagement division, in Q4 we signed a 3-year NaviNet renewal contract, with a total contract value of more than $1.2 million. We also went live with one of our largest costumers for a new Document Exchange solution.

More recently, in quarter, we signed another NaviNet renewal contract, with a total contract value of approximately $17 million.

In our Clinical Decision Support division, formerly called Eviti, in Q4, we signed an expanded services contract with an existing, national insurance carrier customer. Under the contract, we have the potential to extend Eviti to an additional 2.4 million lives.

In our Connected Care division, during the fourth quarter, we signed a device connectivity license contract extension with an existing customer. The contracts has the potential to expand our solution to additional facilities within the customer's 74-hospital system.

Our pipeline for device connectivity sales continues to make solid progress. We're developing a large number of international opportunities through our strategic resellers in Europe and Asia.

Last week, we presented at The Future of Device Connectivity Across the Continuum of Care at the Healthcare Information & Management Systems Society, HIMSS, Annual Conference Exhibition.

In summary, we've reported an excellent fourth quarter and made solid progress on focusing the business on our core competencies; enhancing efficiencies, growing revenues and lowering our cost structure. Combined with our growing pipeline, we are feeling optimistic about the balance of this year.

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

And hello, everyone. Our 2017, fourth quarter is the first full quarter to include cost reductions related to the restructuring plan announced last quarter. The cost reductions resulted in significant improvement to our bottom line and cash burn rate as indicated in our fourth quarter results. As we discussed on our last call, our restructuring plan, we initiated in August, included both the sale of certain assets to Allscripts as well as payroll-related cost reductions.

Additional payroll-related cost reductions were initiated at the beginning of our fourth quarter. I'll discuss these expense reductions in more detail shortly.

I will first comment on our 2017 fourth quarter and then our 2017 full year results.

For the fourth quarter, revenue from continuing operations increased by approximately $4.5 million, or 25%, to $22.3 million from $17.8 million reported in the same quarter last year. This increase is primarily due to software-related revenue including SaaS and software license fees as well as other services revenue.

While the number of GPS orders increased by 90% to 606 versus 325 a year ago, GPS revenue recognized in the quarter grew by a smaller percentage due to a larger portion of orders coming from patients with noncontracted or out-of-network payers compared to a year ago.

We continue to work to enhance and improve our billing and collection process for out-of-network payers and educating them as to the value of GPS support.

We're also actively engaging with payers who have initially denied our claims and working through the appeals process. Our ability to continue to accelerate GPS revenue will be partially dependent on driving growth in volume and reimbursement simultaneously.

Turning on other revenue lines. Software and hardware revenue more than doubled to $1.7 million compared to $0.7 million in the prior-year quarter. As I mentioned before, revenue from this line often varies quarter-to-quarter due to the timing of completion of various device connect implementations.

SaaS revenue grew by 10% to $15.8 million compared to $14.4 million a year ago.

Our SaaS revenue streams have been growing every quarter this year, both on a sequential and a year-over-year basis. With our sales pipeline as well as our implementations in progress as well as sales bookings, we don't see any signs of this trend changing in 2018. Our SaaS revenue category includes both Eviti and NaviNet product solutions.

Other services revenue increased to $2.0 million versus $0.2 million a year ago. This increase is primarily due to an increase in completed device connect implementations compared with prior year resulted in the increase of revenue from our Assisteo healthcare services revenue.

Gross profit nearly doubled this quarter to $13.4 million, that represents 60% of revenue compared to $7 million or 39% of revenue in the same quarter a year ago.

This increase in gross profit was driven by a combination of higher software and SaaS revenue as well as lower costs, including amortization of personnel-related expenses, tied to restructuring as I mentioned earlier.

Selling, general and administrative expenses increased to $20.8 million from $16.4 million in the prior year fourth quarter, as a result of an increase in stock compensation expense from certain equity awards made in the fourth quarter of this year. Stock compensation expense was partially offset by lower expenses resulting from the restructuring.

Research and development expenses declined to $8.8 million from $10.8 million a year ago, and that's also driven by reductions tied to our restructuring activities.

Loss from operations on a GAAP basis declined to $17.2 million from $21.3 million a year ago. This improvement was, again, driven by restructuring as well as increased revenue this quarter compared to a year ago.

On the GAAP basis, net loss from continuing operations was $22.6 million or $0.21 per share compared to $48.4 million or $0.40 per share for the prior year fourth quarter.

Our prior year results included an impairment charge related to our investment in NantOmics. Our non-GAAP loss per share from continuing operations was $0.07. This is the lowest we've ever reported as a public company. Non-GAAP loss per share for the fourth quarter, a year ago, was $0.12.

Turning to our full year results. Total revenue from continuing operations was $86.7 million, an increase of 8% over the prior year of $80.4 million. Revenue growth was driven primarily by a combination of higher SaaS, maintenance and GPS revenue. And our operating loss narrowed to $67.9 million, compared to $120.5 million in the prior year.

Turning to our balance sheet. At December 31, 2017, our cash was $61.7 million versus $73.5 million at the end of the preceding quarters.

Cost reductions from our restructuring activities, combined with increased revenue, contributing to reducing our cash burn to $11.8 million in Q4 compared to $19.2 million just in the prior quarter. This represents the slowest quarterly cash burn since our IPO.

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

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

(Operator Instructions) Our first question comes from Sean Dodge with Jefferies.

Maybe on the healthcare IT businesses, a lot of moving parts there, with the divestitures to Allscripts last year and then wins and renewals recently for both Eviti and NaviNet. How should we think about the -- how should we think about the long-term growth potential or trajectory of those businesses to date and now? Are these still mid-teens or better growers over the next few years?

Sean, this is Paul. Let me take that one. So -- as you can see, we really have 2 main revenue lines for our healthcare IT business.

You have software and you have SaaS. SaaS represents NaviNet and Eviti, and it's the majority of our revenue streams. We grew that 10% year-over-year, and we grew it sequentially every quarter last year. And the good news here is that we have implementations that are ongoing. We have sales pipeline. We're very confident in some deals that we're not too far away from being able to close. And all that gives us reasonable confidence that we can continue to grow into '18 as we did in '17.

We are not formally giving out any guidance as a company, but I will say that, obviously, we as a management team, we'd love to get into the mid-teens and even to 20%. But that's aspirational, it's not to tell you any formal guidance here, but I think we are really happy with where we're sitting in the software business. They're profitable, they are growing, and we have continued good opportunities there. So yes, hope that answers?

Yes. And then so maybe on -- so that's the SaaS, then on the license side, that's probably going to be a little bit lumpier. The kind of the longer-term growth there going to resemble that of SaaS? Or are you guys trying to move a little bit more away from the license stuff towards SaaS? And that may lag it over the long run?

Yes. So that business is a traditional professional software license business. And that is why, as you know, those revenues have been lumpy because of the way we've been recognizing revenue. And then, of course, I'm sure you're familiar, we're heading into 2018 and we're following a new set of rules, called ASC 606. And those rules are actually -- it's going to be interesting to see how that plays out with us. We're moving -- we will be moving more towards a percent complete type of model. That's not on every arrangement. There will be some arrangements that we will have to analyze and can possibly fit into a different category there. So I'm not -- that's not to say that device connects is going to never be lumping anymore. But there will be a bigger percentage of our arrangements that will be done more on a percent complete basis. So we'll have more to say about that, obviously, when we get into our call next -- Q1 next quarter. But just to get into the device connect side, we've got some very good opportunities in device connects, particularly on the international front. So many things happening in Northern Europe -- and not to mention the fact that we got a very good size customer base -- well over 300 hospitals using our product every day. And that provides a very nice base of add-on business. So every time one of our hospitals grows, we grow with them. And it's almost a very predictable add-on business that we can count on as well as the consistency of the maintenance revenue stream that we have there.

So all-in is -- that business is, it's more about you live with what you kill. And so there was -- obviously we have to close-on on our pipelines and our sales bookings to continue to grow that. But the good news is, we have the opportunities to do it, and we just have to execute.

Okay. Very good. And then the expansion piece, with the net payer. Can you talk a little bit more about that? When will the revenue associated with that begin to ramp? And then Ron, you mentioned the possibility that Eviti could be extended to an additional 2.4 million lives. How many lives are covered under the initial or the previous contract?

Sean, you're referring to -- help us out again, which item are you referring to?

Yes, you said clinical decisions in the quarter, you signed an expanded services contract with an existing national insurance carrier?

So Eviti today, we have 2.4 million lives -- 24 million, I mean, sorry.

So Sean, 2.4 million, that's about 10% of our existing base. So think about it as one opportunity to grow Eviti equivalent to 10%.

Okay. So the expansion with this national insurance carrier customer could potentially expand your Eviti base by 10%?

Yes.

Yes.

And our next question comes from Brandon Couillard with Jefferies.

Paul or Patrick, could you give us the actual number of GPS tests that haven't delivered results in the fourth quarter? It seems to be a bit of a disconnect between the actual order growth and the revenue growth, sequentially.

Yes, let me take that. So we've -- we're really only talking about orders going forward. We've gotten away from talking about the actual deliveries. And as I mentioned earlier in the call, we have -- look we are very happy with the growth in the number of orders. But in terms of how we recognize revenue, that's going to be based on either the mix of how many of those come from payers that we have contracts with as well as our success around collections with payers that are out of network. So there will be some impact of the timing of when we're receiving some of those, the cash receipts. And you also -- and there's also maybe some seasonality. But the orders, there is not necessarily a one-to-one relationship between the orders and revenue. Because there's timing -- pretty good size of timing differences of times between what's revenue and what's orders.

Fair enough. Could you share with us the number of docs that have ordered the test, so far? I think you put that in the Qs and the Ks regularly. And then if you have it at your fingertips, the number of covered lives that now have GPS coverage?

Hold on just a second. I'm pulling that up. 164 unique physicians. No, that's 164 versus 142 prior -- I'm sorry. We've got a good size. What was the other metric you're asking about?

Yes, number of docs that have ordered the test? And then number of covered lives?

So we've gotten away from that metric as well. But if you like for providing that on these calls, we've added the -- we did mention the -- adding some recent carriers with coverage. But the last couple of quarters, we've gotten away from that.

So this is Patrick. So with regard to the delivered versus ordered tests, there's sometimes a staggered business between the times of reporting of delivery and ordering. What I can give you is sort of a feel of these 617 orders. Is that right, 617? From these numbers, 600-plus, over 75% are delivered. So there's some level of staggering in between. In terms of covered lives or in terms of unique doctors, the good news is that the education is now happening, especially with tumor/normal. I think people are now beginning to recognize the inaccuracy of tumor-only and especially with the data filed with Sloan Kettering papers, showing that the foundation tumor-only results are basically inaccurate relative to doing tumor/normal. So we're getting a significant number of doctors understanding that just now.

Super. And then lastly, Patrick, could you elaborate a little bit on the lab services contract with the hospital network? It seems a little bit different, little bit unusual type of relationship. How exactly will that works in terms of driving commercial tests for GPS?

Brandon, this is Bobby Reddy. So what we're doing is reaching out to various hospital organizations to engage with the pathology groups. Largely, pathologists are the gatekeepers of tissue and can represent a chokepoint in being able to perform the order. And going back to your earlier question regarding success rates, they have the ability to affect that by selection of the types of tissues of the biopsy size or specimen that we're able to receive. So in engaging with them and providing laboratory service agreements, we'll become partners. And increase is not only the speed with which we can access that tissue, but also the quality as well.

Did that addressed your question?

Yes. I think so. Thanks.

And our final question comes from Richard Close with Canaccord Genuity.

Can you go over the NantOmics impairment charge for me? Was that in the quarter, just give us some...

No. Richard, this is Paul. No, there was no impairment charge. That was in the prior year.

That was in the prior year, okay.

Yes.

Okay. Okay. You guys sort of broke up or threw out a bunch of different number in terms of Brandon's question on that number of docs. What was that? And what's the real number?

The number of docs ordering was 164.

And that compared to what last year, or in the third quarter?

137, previous quarter.

137 in the third quarter?

No, I guess, that was the year-ago quarter.

Okay. Okay. All right. How many payers do you have now that you have an agreement with that they'll reimburse for it?

13 payers, Richard.

13 payers, okay. And how does that compare to last year?

8 payers. Fourth quarter of '16, 8 payers.

Okay. All right. And then can you talk about the pilot? I think it was with the Horizon that you had. Can you give us an update on that, in New Jersey? Or...

Sure, Richard. This is Bobby Reddy again. We're continuing to accrue in that pilot. We're continuing to accrue. We're over 40 patients now in. So we're hopefully going to complete the pilot sometime, at the current rate, probably in Q3, may be Q4 at the latest this year.

Okay. And how does that compare to how you thought about that when you entered it?

Yes, I think it tracks very well with our anticipated accrual. I mean, clinical trials are always slow to accrue in the beginning, and then pick up steam as you move forward. So I think we're generally on schedule.

Okay. The health IT company, are -- you're classifying that is a payer? Can you just help me out with that or what that is exactly?

Are you -- for NaviNet? I'm not sure, are you discussing?

It's on the front page. I believe...

Okay. Yes, we are not allowed to give that name out, but suffice to say, it's a national, very well-known name and a very substantial company.

Okay. It's a substantial, healthcare IT company, well-known name.

Yes.

I'm confused because it says new national GPS Cancer payer. So is it a health insurance company? Or is it a health IT company?

Okay. No, it's a health IT company with a -- maybe this will clear it up. It's a health IT company with a self-insured health plan.

Okay, all right. That clears it up. All right. So then let's talk about the training program. I mean, you have 164 docs that are now ordering the test. If you were to look at those 164 docs, how would you categorize them being in the footprint of the payers that are actually reimbursing for the test? If that makes sense?

Yes, Richard. So the footprint is distributed across the country. There are certainly some hot spots where we have partnerships in terms of being able to try to track outcomes. So we focus on -- again, you heard about the UCSF protocol, you know about Horizon. So it is distributed, it's not necessarily focused directly where there is an existing payer contract.

Okay. How about maybe looking at the Philadelphia market, Independence Blue? That was one of the things you talked about, one of the first payers. How is the training efforts going in that community in terms of educating the docs? And have you seen any meaningful uptick with that payer or the tests ordered in that area?

Yes, the training is, of course, ongoing. It's always, it's never as good as we'd like it, but it's certainly improving month-over-month, quarter-over-quarter. We continue to show, I think, steady progress with increasing volume of orders across the board. And again, some of that is coming particularly in those areas, we have deployed more resources to try to educate doctors. And the biggest thing that we always bring up is data. And so as I said, we're trying to partner with people so that we can collect more data, collect outcomes and publish those to bring everyone, not just the people in, say, Philadelphia, but everyone to the same conclusion that this is a valuable, valuable asset.

Okay. And then just as we think about Eviti and NaviNet and integration of all your IT products, and physicians being able to get alerted that this test is out there. After things are run, analytics run on the claims and spurred to order test. Is that kind of stuff live now? Or is that something expected to be turned on during 2018?

So you threw a lot into that one. But we have some betas running in and some evidences. I think if you look to ASCO, you'll see some major announcements by us at ASCO this year in regards to all that.

Okay. Do you -- would you characterize as being behind schedule in terms of having all the IT products integrated? And then driving the -- driving test ordering, or behind schedule, on schedule.

On schedule.

Okay. All right. I guess, my final question here would be your international distribution. You guys have signed a lot, I guess, over the course of the 2 years. Can you give us any update in terms of what's going on in terms of those reseller agreements? And thoughts in and around that distribution channel.

I think, we don't break out the difference between domestic and international on any of our reporting. I mean, international, we continue to grow. We expect to announce a couple of additional resellers within the next quarter.

Okay. And revenue from resellers, is that -- does that -- that goes into the sequencing bucket right?

Yes.

Thank you, and that is all the time for the questions we have today. I'd like to turn the call back over to management for any closing remarks.

Thanks, Jimmy. And thank you all again for joining us. We look forward to sharing our progress on our next conference call. Have a great day.

Ladies and gentlemen, this does conclude your program, and you may all disconnect. Everyone, have a great day.