NantHealth Inc (NH) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NantHealth 2018 Fourth Quarter Financial Results Conference Call. (Operator Instructions)

I'd now like to introduce your host for today's conference, Mr. Robert Jaffe, Investor Relations for NantHealth. Sir, you may begin.

Hello, and thank you for joining us today to discuss NantHealth's 2018 fourth quarter and full year financial results.

On the call today are Dr. Patrick Soon-Shiong, Chief Executive Officer; Ron Louks, Chief Operating Officer; Bob Petrou, Interim Financial Officer; and Dr. Sandeep Reddy, our Chief Medical Officer.

This call is being broadcast live at www.nanthealth.com. A 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 provision 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 2018 fourth quarter financial results for the company's reasons for including those non-GAAP financial measures in its financial results announcement. A 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.

Shortly, Ron will provide a brief overview of the quarter and discuss the business lines, followed by Bob, 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 Fourth Quarter Financial Results Conference Call.

Over the course of 2018, we made excellent progress on a number of fronts. We grew revenues, lowered costs and reduced our cash burden. For the 2018 fourth quarter, revenue increased to $22.9 million from $22.3 million in last year's fourth quarter. Our SaaS business continued to perform well, contributing $17.3 million in Q4, an increase of 9% from Q3.

Turning to our software and service business. Our Clinical Decision Support Eviti product, we deployed release 7.5 with multiple new features that include a new configuration that enables users to display custom drug deviation messages. This enhances value-based care as well as compliance with payer guidelines, a new analyzer deviation that supports unique risk factor associated with white blood cell growth factors, this is a key driver of regimen costs, and an updated medical policy QA report that assists partners and resellers with their internal quality assurance process.

We also enhanced our Precision Insights Portal with features that include the ability to save and store all treatment plans that are presented to a user. This enables the analytics for the understanding of treatment plan trends and improvement in the presentation of the plans to users and enhanced drug mapping management in the portal, which enables a comparison of the Precision Insights Portal recommended drugs to the evidence-based Eviti drug recommendation to help align to the standard of care library.

For our payer engagement NaviNet product, in Q4, we completed 12 implementation products for a total of 57 in 2018. Also in the fourth quarter, we introduced 2 key features for NaviNet Open. These include enhanced routing features for Document Exchange, which provides health plans more control over document routing to users. The second feature allows NaviNet Open subscribers to a detailed view of user activity for all Authorization Appeals, which is delivered to the health plan in a monthly report.

In December, at the Healthcare Payers Transformation Assembly hosted by the Millennium Alliance, we met with payer groups and led a roundtable discussion entitled Looking at the Challenges Health Plans Face with the Convergence of Precision Medicine and Value Based Care. As a result, we now have a number of ongoing sales conversations based on discussions initiated at this event.

And for our Connected Care, DeviceConX products in Q4, we completed DeviceConX implementation in Sweden, which include our first deployment physiological waveform capabilities. Also in Q4, as previously announced, we collaborated with B. Braun Australia, GE Healthcare and iProcedures to demonstrate the exchange of data between patient devices and medical records at the Interoperability Showcase that took place at the HIMSS Asia Pacific Conference.

In Q1 of 2019, we significantly increased connectivity license sales, which, among other things, drives ongoing recurring maintenance revenue. Also in Q1, we deployed and upgraded DeviceConX. The upgrade allows OS security patches to get pushed directly to HBox Connected hardware.

Turning to our Sequencing and Molecular Analysis business. 1,021 total tests were ordered in the fourth quarter. This includes 539 GPS Cancer and 482 Liquid GPS tests. The total number of GPS Cancer and Liquid GPS tests increased 10% from 1 quarter ago. In Q4, we expanded the Molecular Analysis reporting of GPS Cancer to provide the information on a patient's pharmacogenomics profile. These results provide insights of the potential drug toxicity and/or interactions.

Also in Q4, we expanded an existing employee reimbursement contract with Northwest Firefighters Benefits Trust to include Liquid GPS coverage. And we signed a new reimbursement contract for both GPS Cancer and Liquid GPS with additional city fire/police employee trust.

On the science and medical fronts. In December 2018, at the San Antonio Breast Cancer Symposium, NantHealth, along with our sister company, NantOmics, presented the findings of 3 investigations, which examine the theme of providing oncologists with the insights that enable cancer treatment tailored to the individual characteristics of each patient.

Before I turn the call over to Bob, I'd like to say we made excellent progress in 2018. Importantly, we anticipate an even better 2019. While we continue to push for FDA approval and ultimately, CMS coverage for our Molecular Analysis capabilities, we believe our software business has healthy prospects and a deep pipeline, which bodes well for the company going forward.

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

Thank you, Ron, and hello, everyone. Please note that financial results I'll present will include only new revenue standard values. For additional information and reconciliations of our financial results between the new and previous revenue recognition standard, see the tables included in today's press release and in our Form 10-K to be filed with the Securities and Exchange Commission.

Turning to our results. For the fourth quarter of 2018, revenue grew approximately $600,000 or 2.5% to $22.9 million from $22.3 million reported in the same quarter of the prior year. Compared to Q3 2018, revenue grew 2.6%. For the full year, revenue grew 3.2% to $89.5 million compared with 2017.

For the fourth quarter of 2018, revenue for our largest business category, SaaS, grew approximately 10% to $17.3 million from $15.8 million a year ago. For the full year, SaaS business showed continued improvement with over 8% growth year-on-year.

Q4 Sequencing and Molecular Analysis revenue grew 9% to approximately $622,000 from $570,000 in the same quarter of the prior year. This increase was primarily driven by a change in product mix on tests performed and reimbursement and timing of collection from noncontracted payers. For the 12-month period, Sequencing and Molecular Analysis revenue grew 23% to $3.1 million from $2.6 million in the prior year.

Included in the financial results for Sequencing and Molecular Analysis were revenue related to our new proprietary Liquid GPS molecular analysis service, which went live in March of 2018. A significant portion of Liquid GPS revenue was from our subscription-based pricing model for services delivered to Nant-affiliated sponsors clinical trials, which has continued to grow since the beginning of the year.

Q4 revenue from our Connected Care products group declined to $3.2 million from $4.5 million in the fourth quarter of 2017. As we have mentioned before, revenue from this line item often varies from quarter-to-quarter due to timing and completion of Connected Care implementation.

In Q4 of 2018, gross profit was $11.5 million or 50% of revenue compared with $13.4 million or 60% of revenue in the same quarter a year ago. The gross margin decline from a year ago was primarily due to the addition of Liquid GPS cost of revenue and the lower fee paid to NantOmics for Sequencing services in Q4 of 2017. Our current gross margin of 50% is consistent with our prior full year results and throughout 2018.

Q4 total operating expenses declined 32% to $20.7 million from $30.7 million in the prior year fourth quarter reflecting our continued cost management efforts.

For the fourth quarter, net loss from continuing operations was $49.2 million, or $0.45 per share, which included a noncash charge of $18.9 million related to loss from our related party equity investment in NantOmics, including an impairment as well as $16.9 million unrealized loss due to changes in the fair value of our Bookings Commitment liability. Without these noncash charges, our net loss from continuing operations would have been $13.4 million in Q4 of 2018 and $65 million for the 2018 full year.

On a non-GAAP basis, net loss from continuing operations, which excluded the losses from our related party equity investment including impairment and the Bookings Commitment, among other things, was $9 million or $0.08 per share compared with $7.8 million or $0.07 per share for the fourth quarter of last year. Full year non-GAAP net loss from continuing operations was $44.5 million or $0.41 per share compared with $55.5 million or $0.47 per share in 2017 showing a strong improvement in our financial results.

Finally, cash and cash equivalents were $18.3 million at December 31, 2018, compared with $22.8 million at the end of our third quarter, representing a net usage of $4.5 million. We continue to manage our cash position, and we have not yet drawn on NantHealth's $100 million line of credit.

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

Thanks, Bob.

Operator, we've completed our prepared remarks, and we're ready to open up the call to questions.

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

I had a question really about sort of the Sequencing revenue here. It declined sequentially even though our orders are going up. It sounds like what you're saying is that -- is that because of the way you're accounting for the Liquid GPS test? It's because it's paid under a subscription model? How is that accounted for on the income statement here -- for us here? And then secondly -- or is that also a function of -- are we starting to see an increase in the number of reimbursed GPS Cancer orders at this point now that we -- you've talked about some of the accounts that are adding the service. Maybe give us a better sense on where we are in terms of being reimbursed and recording revenues.

It's Bob here. From an overall revenue recognition perspective, we only generate revenue based on a contracted perspective or when we receive cash. So reimbursement has not grown or increased on the commercial side. And therefore, again, we've seen some challenges on reimbursement and ultimately driving some level of reduction in a quarterly basis on the actual revenue recognized for GPS.

This is Patrick. So I think -- Patrick Soon-Shiong. So the question has always been that's reimbursement until we get this reimbursement conundrum sorted out. That's always going to be then the struggle. But then I think the news is that we've now -- I think we've made that public in the last filing, but the -- that we've now filed with the FDA, and we're just now waiting for the approval. Just to give everybody in the call the background again, we call this the OMICS CORE. And by virtue of the background, this is an FDA Class II regulatory path in which we've used the predicate of the Sloan Kettering IMPACT test as a predicate device. So it took us a while to get this through because what we've done is we sequence all 19,396 genes, including all the oncogenes and tumor suppressors. However, the Sloan Kettering, the IMPACT device only reports on 468 of those 19,000 genes. We still feel it's so important for us to record and test all 19,000 genes because that data is so valuable to the patient, but we will report on the 468 genes in that from which the Sloan Kettering has received approval and obviously, reimbursement within our panel. So I think, as I said, with the day that, that occurs, we're hopeful that the reimbursement conundrum will at least be partly solved, even though the 468 genes, which we'll report on, we still feel is inferior to having 19,000 genes known. As a side note, however, the OMICS CORE -- and if you have any more questions with regard to the details, Bobby can give you more on that, but we'll provide really information on a thing called tumor mutation burden, which will differentiate it from the Sloan Kettering IMPACT study. And this tumor mutation burden is so important as it relates to today's concept of immunotherapy.

And can you just remind us when you -- when this was submitted to FDA, and so give us a sense on when the starting point as we think about sort of the timing for a decision?

Yes. So this was submitted very recently. We took a while because NantHealth and FDA had to come to an agreement on the analytical validity strategy because we were measuring 20,000 genes, and all they wanted was 468. So this was now completely submitted probably...

In Q1.

In Q1. So we'll just now -- we're at the -- obviously, at the behest of the timing of the FDA, but it is a predicate device on the Class II regulatory pathway.

If I recall correctly, on that path reduction, it's a fairly -- it's a faster pathway from general, isn't it?

Right. It's basically a 510(k), a revised 510(k) pathway. So we submitted ourselves as a predicate against the Sloan Kettering that is already approved. So it's a ready, approved product based on Sloan Kettering's product, the IMPACT product. And we took that product, even though it was only 468 genes and filed against that as a comparator. And that's called the 510(k) process.

Okay. Great. And then my last question would be sort of -- can you give us a sense as we think about 2019 uses of cash, sort of where we are in terms of cash flow, the burden for the year, sort of understanding like a source of cash as well? Do you think we -- I know we have the line of credit out there, should we expect to draw down on that this year? Or give us -- if you can give a sense on how we are in terms of cash use...

Yes. So as you can see from the financial results, we've been managing cash very diligently over the recent term. We expect to continue to burn some cash through Q1 and Q2. And then ultimately, in Q3, we'll have to reassess and determine where we're at to determine how much we may draw on. Our expectation is not to. But within Q1 and Q2, we still have appropriate liquidity to not draw on that.

I think Ron is doing a good job, and the team is doing a good job in managing the cash flow, but I think also the other thing is that we've now clearly made the decision with regard to GPS. There's just so much we can do without reimbursement. And the -- changing some of that policy where we're doing a lot of this without the reimbursement on behalf of the patient because it's the right thing to do. But we'll be over some time announcing how we will be managing that issue.

I'm sorry, when will we expect to hear about that? I mean, are we changing sort of the policy and how we provide the testing?

Yes. I think we're working out amongst the team. The conundrum is patients -- we believe, internally on behalf of the patient, this is the best test. Unfortunately, we pay for it, and it's very difficult. I mean, if I were a patient, this is the test I think that gives a -- most important information. But as a publicly traded company, it's very difficult to continue doing a test without reimbursement, whether from the insurance company or from the patient. So we will have to have this internal discussion now in light of its unpredictable -- from a timing perspective of the approval status.

And our next question comes from Brandon Couillard with Jefferies.

Maybe if Bobby's there, as far as the GPS Cancer business in the fourth quarter. Kind of curious as to get your view as to -- if there's something that perhaps explains the sequential growth in the GPS Cancer orders, which reaccelerated sequentially, whereas Liquid orders kind of, I think, to moderate a bit in the fourth quarter presenting behind that. And as far as the step-up in orders in terms of the growth, is that more -- is that coming from existing users of like same-store docks or some type of expansion in the user base?

Yes. Thank you, Brandon. So I think that there's a combination of factors that drive that. Actually, we had a reasonable year-over-year growth. If you look at it -- I wouldn't just go Q-over-Q, but if you look at the year-over-year, it's a 20% growth in total volume. And this is just, I think, the natural evolution of a product in the space, where there's been enough time that there's a growth, not just in the user base, but there's enough data. We had a much better ASCO this year in terms of the volume and the impact of the presentations we made. As Patrick referenced earlier, the importance of TMB, tumor mutation burden, with respect to immunotherapy, we had a presentation on the accuracy of our tumor mutation burden and the value that brings in the context of making a decision on a very expensive class of drugs. We had a presentation on RNA silencing, where we have demonstrated that when you find a mutation, it's not always present in the RNA. And in fact, 17% of the time, it's not. So we're prescribing drugs that don't work. And I think once doctors see that for real in an actual patient of theirs, that reinforces that finding to them and then they become a reorderer. So it's a slow process that you and I have talked about before, and I think it just continues to build on itself.

And I appreciate all the comments around the FDA process earlier. But can you just update on where you stand with CMS? And we've seen other competitors out there like Guardant's 360 test, that they get a favorable draft coverage decision. Just where you stand with the coverage process with CMS.

Yes. So it's not dissimilar to, I mean, what we had spoke earlier with respect to the FDA. We were going after FDA approval to then be a gateway to CMS coverage, and we will follow a similar pathway with the Liquid product as well.

Understood. A couple for Bob. Number one, do you think you could quantify the dollars in the fourth quarter for the GPS test to revenue that stems from Nant-related trials? And secondly, the quarter-over-quarter step-down in SG&A, can you sort of elaborate on what drove that and how sustainable that might be going forward?

With respect to the GPS test, there was approximately $200,000 of the total amount, which was interparty-related testing revenue, so it's about $200,000. And with respect to SG&A, again, I think we're at that stage where we've revisited our business in assessing where we want to invest, need to invest for the future. And as we grow the top line, we will invest in SG&A and continue to grow in R&D and other parts of the business. We do see significant improvement in prospects for '19, and so with that, will come investment in SG&A. I don't have exact dollars, but we will invest in the proper areas to ensure that we can sustain the growth and the expectation of where we're headed within 2019.

We've actually already made some of those investments.

Okay. Maybe a couple for Ron. It sounds like you've signed a fair number of new Eviti and NaviNet deals over the last year. Are all of those implemented now and generating revenues?

No. Each one, obviously, is scheduled different. And based on the customers, there's a lot of work on their site for preparation as well. We've done some implementations, but we still have a pipeline of implementations over the full year this year.

Very good. Okay. Maybe last one. A couple for Patrick. Any update you can share with us as far as the status of the CFO search and finding a permanent fill in there?

I think we found our CFO. I was surprised to see the word acting on it. But to be honest with you, Bob has done a fantastic job. And so I think -- I don't know, maybe we should announce it on the earnings call here. But I'm comfortable that we will announce that officially soon.

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

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

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