NantHealth Inc (NH) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NantHealth 2018 First Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. 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 2018 first quarter financial results. On the call today are Ron Louks, Chief Operating Officer; and Paul Holt, Chief Financial Officer. This call is being broadcast live at www.nanthealth.com, and the playback will be available for 3 months on NantHealth's website.

I would 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 2018 first 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, Ron 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 Ron Louks. Ron?

Thanks, Robert. Good afternoon, everyone, and welcome to NantHealth's 2018 First Quarter Financial Results Conference Call. I'll begin with an overview of the quarter. For the quarter, revenue increased 17% to $22.3 million from $19.1 million in last year's first quarter and total gross margin grew to 50% of revenue from 40% for last year's first quarter. Our financial performance in Q1 continued to show improvement as a result of the restructuring plan we implemented in the third quarter of last year. Through these actions, we have enhanced efficiencies, reduced costs and substantially narrowed our adjusted operating loss from continuing operations.

With regards to our business line, SAAS revenue in the quarter was $16.2 million, up 9% from the first quarter of last year. GPS revenue grew 65% over the prior year first quarter. We had 677 GPS commercial tests, which were ordered in the first quarter, up 12% on a sequentially quarterly basis. On the GPS front, we expanded the GPS product portfolio to include proprietary blood-based tumor profiling services.

Turning to GPS updates on the science and medical fronts, we will be featuring GPS Cancer and our new liquid biopsy platform in 11 presentations at next month's American Society of Clinical Oncology, or ASCO annual meeting. This high number of presentations is quite an achievement for NantHealth, and we're excited and very much look forward to presenting this information to the medical oncology community.

In conjunction with the presentations, we will unveil and commence the commercial launch of our new liquid biopsy, a 26-analyte test for circulating-free DNA and RNA, extracted from patient blood permits noninvasive detection of expressed biomarkers and monitoring of response to immunotherapies such as Keytruda or Opdivo or resistance to anti-androgens such as Xtandi.

During the first quarter, we submitted to the FDA a medical device application for our proprietary circulating-free DNA liquid biopsy platform. We commenced the beta launch of our GPS ordering and results portal, which enables ordering physicians to electronically receive GPS results and request molecular tumor board and medical affairs consultations.

And as previously announced, we submitted to the FDA a 510(k) premarket notification application for tumor/normal DNA sequencing and signed several agreements. These include a new GPS reimbursement contract with a large national health care IT company, a laboratory service agreement with a 20-plus facility hospital system for the availability of GPS Cancer testing to its patient community and a strategic reseller agreement with a partner in the U.K. for the provision of molecular services for clinical studies and other research initiatives.

More recently, in the second quarter, Oncotarget, a peer-reviewed biomedical journal, published the results of a company-sponsored study. The study results demonstrate significant gains in accuracy by performing tumor/normal DNA and RNA sequencing and the risks associated with higher error rates of tumor-only sequencing.

Turning to our software and services business. In our payer engagement NaviNet division, in Q1, we upgraded our industry-leading document exchange solution to include an enhanced document viewer and an ability for payers to tag and categorize documents. Also in the quarter, as previously announced, we signed a 3-year renewal contract with a total contract value of approximately $17 million

In our clinical decision support Eviti division, in Q1, we introduced new dual eligibility features, which enables payers to concurrently manage dual membership patients covered under Medicare and Medicaid and includes drug shortage configuration features that provide improved management of high-cost drugs.

In our Connected Care division, in Q1, we released DeviceConX5.14 (MDE), the first MDI solution to adopt the FHIR standard; and VitalsConX2.1 with support for offline mode, enabling clinicians to continue nurse rounding when connectivity is lost and submit data to the EMR once connectivity is restored. In Q2, we completed our first CE Mark submission for the DeviceConX software platform.

In summary, we reported a solid first quarter and look forward to many activities and presentations planned for ASCO next month.

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

Thank you, Ron, and hello, everyone.

Before I begin, I want to note that we've made a change in our presentation of revenue and cost of revenue on our financial statements beginning this quarter, coinciding with our adoption of the new revenue recognition guidance, which we adopted on January 1, 2018. We moved all professional services revenue related to our Connected Care software and hardware solutions from what we previously referred to as other services to the software and hardware-related revenue line.

We also renamed other services to home health care services in recognition of the fact that the remaining revenue in that line consists solely of home health care services. We believe this grouping better represents the breakdown of revenue across our product lines.

For the first quarter of 2018, revenue from continuing operations increased by approximately $3.2 million or 17% to $22.3 million from $19.1 million reported in the same quarter the prior year. Revenue grew in every category of our business, but was primarily driven by growth in software-related revenue, including SAAS.

I would point out also that as a result of the adoption of this new revenue standard, which I just mentioned, our revenue, which we recognized this quarter, was $0.5 million higher than what we would have reported under the old revenue recognition standard. The impact of the new revenue standard was primarily in the software and SAAS revenue categories and is about evenly split between software and SAAS. Our prior year Q1 results are reported under the old revenue recognition standard.

SAAS revenue, which includes our NaviNet and Eviti solutions, grew by 9% to $16.2 million compared to $14.8 million a year ago. We've grown our SAAS revenue streams not only on a year-over-year basis, but also sequentially for the last 5 quarters. And we believe we have every opportunity to continue that trend moving forward.

Software and hardware-related revenue, which includes software, hardware and related services from our Connected Care product group, also known as DeviceConX, more than doubled to $1.5 million compared to $0.6 million in the prior year quarter. As I've mentioned before, revenue from this line often varies from quarter-to-quarter due to the timing and completion of Connected Care implementations.

Sequencing and molecular analysis revenue grew 65% to $0.8 million versus $0.5 million a year ago. Included in our Q1 results is approximately $48,000 of revenue related to our new proprietary blood-based tumor profile and services, which we began marketing in March of 2018.

Gross profit grew 48% this quarter to $11.2 million, which represent 50% of revenue compared to $7.6 million or 40% of revenue in the same quarter a year ago. The increase in gross profit was mostly driven by higher software and SAAS revenue as well as lower costs, including amortization of developed technologies and personnel-related expenses related to our restructuring, which we implemented in the third quarter of last year.

Selling, general and administrative expenses increased to $20.7 million from $17.4 million in the prior year first quarter as a result primarily of a $3.6 million increase in stock compensation expense compared to the prior year. Stock compensation expense increase was partially offset by lower expenses resulting from the restructuring plan, which we implemented and announced in the third quarter of last year.

Research and development expenses declined $5.2 million from $8.9 million, driven in part by reallocation of internal resources between cost of revenue and R&D.

Our net loss from continuing operations declined to $22 million from $28.1 million a year ago. This improvement was driven by a combination of cost savings related to our restructuring plan, which we mentioned earlier, as well as increased revenue in this quarter compared to a year ago. On a GAAP basis, net loss from continuing operations was $0.20 per share compared to $0.23 per share a year ago. Our non-GAAP loss per share from continuing operations narrowed to $0.12 from $0.15 a year ago.

And turning to the balance sheet. At March 31, 2018, our cash was $46.4 million compared to $61.7 million at the end of the preceding quarter. I note that during the quarter, we paid approximately $5 million in an earnout payment related to our acquisition of NaviNet.

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

Thanks, Paul. Operator, we've completed the prepared portion of the script. Please open up the call to questions.

(Operator Instructions) Our first question comes from Charles Rhyee with Cowen.

Just maybe I missed it a little bit earlier. Can you give us the status on the submission of the GPS for the coverage decision and sort of where we stand with that?

Charles, this is Bobby Reddy. We have submitted for FDA approval on both actually the liquid and the solid GPS tests. The GPS test, solid tissue, has been reviewed by the FDA. We are in constructive dialogue with them ongoing. We've received back comments and submitted back our replies. And we're very pleased about the process.

And you said -- and the liquid biopsy is a separate submission, so these aren't tied together, right? You'd get a decision on GPS first?

That is correct. They are separate submissions.

Okay. Just a question on the number of sequences ordered. It looks like we're starting to get a little traction here, step by step here. Any sort of incremental commentary you can provide in terms of sort of the education sessions that you're still providing for physicians -- ordering physicians, sort of the ordering velocity that you guys had talked about in the past? Any kind of additional commentary there we can get?

Well, I mean, I think that you're exactly right. We're continuing to see sequential Q-over-Q growth in orders. We had the publication, as we referenced earlier, that suggests the significant improvement in value by doing both tumor and normal sequencing.

We pair that with others in the space who are moving there, particularly Memorial Sloan Kettering. We're excited about the fact that they also have FDA approval for tumor/normal sequencing product.

So what we see, I think, is we're arriving at the right time, that the market is mature enough. Clinicians are understanding this. So it's becoming a little easier. The educational objectives are becoming easier. So we're happy, and we're seeing, I think, that positive trend.

Okay. Last question for me. We used to talk about a large employer customer who is supposed to launch a big wellness -- not only a wellness program, but also is going to -- you're going to launch -- they're going to pay for GPS. Any update there? I know there was delays trying to get it tied to all their payers. Just curious where we are with that.

Charles, this is Paul. I think, we're still early stages with that. I think it's going to take a little bit of time before we really get that. We can report back on material impact on things. But I think it's -- the answer is that it's ongoing.

Can I ask, at this point, what is kind of holding things up? Because it's -- we're obviously kind of pushing on to kind of a no man's land here on the status of this.

Before, my understanding was you're tied to coverage under Independence Blue Cross, which seemed fine. And then a decision was made. It looks tied to all the payers that I was obviously -- I guess, United and Anthem, if I was correct in remembering. So you had to code the benefit into those plans as well.

But at this point, I would think that, that -- I don't know how much more difficult that is from a systems process. But just curious, what is sort of the hangup at this point, you think?

Charles, let me just clarify. Are you asking about Bank of America, specifically?

Yes. Yes.

Okay. Sorry. Sorry. All right. With BofA, I mean, the issue there is that we have to work with their carrier. And we were trying to work through -- it's always difficult working with private insurance carriers, as everyone knows. And so we're working through that, working through the details, trying to move forward with getting contracting done.

I guess, my question is, if Bank of America has said they will pay for it, then I would have thought that, that would be more of a coding issue just into the benefit versus -- well, you're making it sound like you have to still go through those plans' medical review boards?

Yes. That's right. I mean, I think that they want to understand it. We want them to understand it. We would like them to adopt it broadly for their other clients as well. And so we look at it as an opportunity to educate them and bring them up to speed on the value differentiation, right, why GPS, why NantHealth's molecular informatic services would be superior. So we're happy to actually be engaged in that constructive dialogue.

(Operator Instructions) Our next question comes from Brandon Couillard with Jefferies.

Ron or Paul, maybe, I missed this, but can you help us understand where Patrick is and why he's not on the call tonight?

Yes. He had a prior commitment today.

Sorry he couldn't join us. Okay. I guess, Bobby, with respect to the liquid biopsy test, could you just help me understand the FDA device submission component. Just help me understand why you need to get that device cleared. And was that built internally? And just help us -- a little more color with what's proprietary about it.

Yes. So it's not necessarily the device. It's the assay in total. It's not really that we're doing a separate device per se. We would like to pursue across all diagnostic platforms that we use an FDA approval strategy. I think that's -- let's be honest, Foundation Medicine has shown that's a good path to take. We know that, that's a path to lead to reimbursement. And hence, we're doing that across all of our platforms.

Okay. And sticking with that upcoming commercial launch. How do you expect to position it with the current sales force alongside the core tissue test? And would you expect to add any feet on the street resources in support of that commercial launch?

Well, I can't speak to sort of the commercial parts of it. But what I will say is that, it is perfectly positioned to be adjunctive, right? We see this as being well differentiated in the space. So we know that Guardant and Foundation Medicine and many others are out there in the liquid biopsy space, but they are offering a DNA-only test. This is a DNA with, more importantly, a cfRNA component that's very unique and marries very well to what the tissue test is bringing.

We are uniquely positioned to look at markers like PD-L1 or other immune therapy markers in the blood. We're positioned to look at AR-V7 in the blood in a way that, for example, Genomic Health can't. So we see this as being adjunctive, synergistic. I think that our existing sales force absolutely can be used to drive that. And even in the first part of this year when we weren't really commercializing it, we were seeing uptake by clinicians.

Any chance you could share with us the targeted ASP you hope to capture from the liquid test?

At ASCO we'll announce that.

Did you catch that, Brandon?

Yes, at ASCO. Okay. I guess, last one. Paul, do you happen to have the number of ordering docs for GPS in the first quarter, total number?

So we talked about that as to is that a metric that we want to continue to be providing. And I think we're -- we decided that going forward that, that wouldn't be something that we would be putting out. So...

Maybe I'll ask it a different way. Bobby, is there any metrics or commentary you can share with us about some of the perhaps reorder rate trends that you're seeing amongst the doc base that have ordered at least 1 test so far?

Yes. Sure. I mean, I think -- and going back to what Paul said, I mean, I think it's just misleading to think about the number of ordering docs, right? I mean, you have new docs coming into the field, people retiring, all kinds of other factors.

At the end of the day, we like the fact that the total cumulative order trend continues to go up Q-over-Q, month-over-month. That to me is the best indicator of positive growth.

We -- I also think really strongly we want to focus more on depth in terms of the relationships we have with ordering physicians as opposed to breadth. So we're not trying to find every doctor everywhere to order the test. We want doctors who understand it to reorder, and we're seeing that.

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

I was wondering if you could just let us know what the count is in terms of how many payers are reimbursing for the test. And I apologize if I missed that earlier.

So let me get this straight, Richard, you're asking the number of contracted payers or the number of payers that have been paying for the test, whether they're contracting or not?

Yes. I mean, as it stands now, how many insurance companies are reimbursing for the test? And has that changed at all over the last quarter?

Yes. So I'll just put it this way, we've added 2 in the last quarter.

You've added 2 insurance companies that are paying. Can you name who those 2 are? Or is that the health IT company and the lab company that you're talking about here?

Yes. We have -- these are not paying. These are contracted. And it's not -- and yes, we -- unfortunately, I can't get into the -- necessarily into the names specifically. But we plan on -- if we have a significant or material event like a large contracted payer, rest assured we'll be announcing that.

And then is there anything happening with Cancer Treatment Centers of America. Are they ordering tests? Or...

Yes. So they -- so Rich, they order tests. We don't sort of treat them differently than any other ordering group or any other ordering physician. So we've seen orders come in from the various different CTCA hospitals and clinicians. That's all I can say on that.

And I am showing no further questions in the queue at this time. I'd like to turn the call back over to management for any closing remarks.

Thanks, Jimmy. We look forward to sharing our progress on our next scheduled conference call. Thank you again all for joining us today.

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