OpGen Inc (OPGN) 2016 Q3 法說會逐字稿

Good afternoon, and welcome to the OgGen, Inc. third quarter financial results conference call. At this time, all participants are in listen-only mode.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Chris Erdman. Please proceed.

Thank you, Jonathan. And thank you all for participating in today's call. Before we begin I'd like to caution that comments made during this conference call by management will contain forward-looking statements regarding the operations and future results of OpGen Incorporated.

I encourage you to review the Company's filings with the Securities and Exchange Commission, including, without limitation, the Company's Forms 10-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. Factors that may affect the Company's results include, but are not limited to, the rate of adoption of its products and services by hospitals and other healthcare providers, the success of its commercial efforts, the successful completion of its new product development efforts, the effect on its business of existing and new regulatory requirements, and other economic and competitive factors.

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live call, today, October 24, 2016. The Company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

With that said, I'd like to turn the call over to Evan Jones, OpGen's Chairman and Chief Executive Officer. Evan?

Thank you, Chris. And thank you for joining us this afternoon. OpGen is harnessing the power of informatics and genomic analysis to shift the current paradigm for diagnosing and treating infectious diseases. We've made meaningful accomplishments this quarter as we build our portfolio of next-generation infectious disease diagnostic products and services to combat the significant global challenge of identifying and treating multidrug resistant bacteria and the needs of hospitals, health systems, and other healthcare providers.

It is evident from the rising healthcare infection rates and costs and constant media headlines that the issue of drug resistant bacteria and rising antibiotic resistance requires thoughtful and rapid intervention. OpGen is preparing a fundamental advance in our own offering, advances what we believe will help transform the state of the art in infectious disease diagnostic decision making. Our approach combines pathogen genomic analysis with drug susceptibility testing to create a powerful knowledge-base of clinically relevant information.

Our growing Acuitas Lighthouse knowledge-base provides insights to power rapid diagnostics, improved healthcare management information, and insights for pharmaceutical companies. In the third quarter, we achieved significant technical milestones in the development of our antibiotic resistance testing solution. Following the successful verification of our expanded resistome multiplex gene test and the initial performance confirmation of our mAST genotype/phenotype predictive algorithms, we began testing thousands of pathogens to support development of the Acuitas Lighthouse rapid antibiotic resistance test and knowledge-base.

Our automated rapid pathogen ID system is on track to begin 510(k) clinical trials in Q1 of 2017 with an anticipated FDA submission by yearend. These products and solutions address the large and growing global antibiotic resistance testing opportunity.

Before reviewing the developments in our portfolio and highlighting future plans and strategy, I would like to turn the call over to Tim Dec, our CFO, to give an overview of our financial results for the quarter. Tim?

Thank you, Evan. This afternoon, I will highlight our third quarter and nine-month financial results. Total revenue for the third quarter of 2016 was $800,000 as compared with $1 million for the third quarter of 2015. The reduction in revenue was due to timing of our sales, the phase-out of our legacy whole genome mapping products, and supply chain issues related to our rapid pathogen ID products.

As we noted in our press release earlier today, we resolved the temporary supply chain issues during the third quarter. Gross margin on product sales in the quarter was 45%. Total operating expenses for the third quarter of 2016 were $5.6 million compared with $5.6 million for the third quarter of 2015. Research and development expenses were $2.2 million in the third quarter of 2016 as compared to $1.8 million in the third quarter of 2015. This increase was driven by third-party software and instrument development costs associated with our automated pathogen ID project.

We anticipate that these third-party development costs should begin to decline during the first half of 2017 as the clinical trials are completed for this new product and we begin our international commercial launch. General and administrative expenses were flat at $1.6 million for both the third quarter of 2016 and 2015.

Sales and marketing expenses were $1.3 million in the third quarter of 2016 as compared to $1 million in the third quarter of 2015. This increase was due to increased personnel related expenses. Net loss attributable to common stockholder for the third quarter of 2016 of $4.8 million or $0.23 per share compared with the net loss attributable to common stockholders for the third quarter of 2015 of $4.7 million or $0.38 per share.

Turning to the nine-month results; total revenue for the nine months ended September 30, 2016 was $3 million compared with $1.8 million for the same period of 2015, a 65% increase. Revenue from product sales and laboratory services increased 90% to $2.9 million from $1.5 million in 2015. This increase was primarily due to sales of our rapid pathogen ID molecular diagnostic testing products.

Gross margin on product sales for the nine months ended September 30, 2016 was 53%. Total operating expenses for the nine months ended September 30, 2016 were $17.3 million compared with $12.1 million for the nine months ended September 30, 2015. Research and development expenses were $6.3 million for the nine months ended September 30, 2016 as compared with $3.9 million for the nine months ended September 30, 2015. The increase was primarily due to the costs related to the automated pathogen ID project.

General and administrative expenses were $5 million for the nine months ended September 30, 2016 as compared to $3.7 million for the nine months ended September 30, 2015. The increase was primarily due to payroll and facility cost associated with the AdvanDx acquisition in 2015 and public company costs. Sales and marketing expenses were $4.3 for the nine months ended September 30, 2016 compared to $3 million for the nine months ended September 30, 2015. The increase was due to costs associated with our expanded sales and marketing team, the Intermountain Healthcare retrospective study, and industry trade show expenses.

Net loss attributable to common stockholder was $14.7 million for the nine months ended September 30, 2016 or $0.92 per share compared with a net loss attributable to common stockholders of $12.9 million for the nine months ended September 30, 2015 or $2.00 per share.

The Company had cash and cash equivalents of $4.3 million as of September 30, 2016 compared with $7.8 million as of December 31, 2015. In September, the SEC declared effective our shelf registration statement to raise up to $50 million through offerings of our common stock over time. We have launched the first offering under the shelf registration, an $11.5 million at the market or ATM offering of our common stock with Cowen & Company serving as our sales agent. We anticipate that the ATM offering and the capacity we have under our shelf registration will continue to provide working capital as we work to complete several strategic corporate milestones.

Additionally, we are working to reduce our overall net loss as we enter 2017 by combining cost reduction actions taken in the third quarter, future reductions in our out-of-pocket R&D investment needed for our automated pathogen ID development project, and an anticipated future revenue growth.

As discussed on previous calls, we are mindful of expenses and our cash burn. We remain committed to developing and advancing our portfolio of products and will continue to invest in our technologies to get them to market as efficiently as possible.

I will now turn the call back to Evan for a review of our portfolio progress and strategic plans for the near future.

Thank you, Tim. OpGen has a promising portfolio of diagnostic tests, information products and services that position us strongly to address the growing antibiotic resistant bacteria crisis. We made consistent progress this quarter on our commercial initiatives and product development activities. Let me give some key details on the progress we are making in each of our business initiatives and the upcoming goals we intend to achieve to continue on our strategic path.

First, our FDA-cleared QuickFISH rapid pathogen ID products. We are on track to launch automated versions of our QuickFISH tests next year with a targeted 510(k) submission by midyear. This benchtop instrument will use digital imaging to replace the fluorescent microscopy darkrooms required today, allowing us to expand our client-base and offer a more convenient, rapid, and precise tool for pathogen identification.

This automated system is being developed to provide 30 minute sample to answer results with technician guided image review for results sign-out. The first indications are based on our FDA-cleared positive blood culture pathogen ID tests. We are evaluating applications for new indications where pathogen quantification is important. Complicated urinary tract infections, or UTIs, respiratory infections, and wounds are examples.

Current methods take up to two days to confirm an infection and the appropriate antibiotic treatment. As an example, with our automated QuickFISH platform, we believe initial results confirming a complicated UTI should be available in just 30 to 45 minutes. These new products address large global market opportunities, and we believe the products will be highly differentiated.

Our goal is to follow this initial automated diagnostic test with our rapid mAST antibiotic resistance test to help physicians in identifying antibiotic resistance in just hours as opposed to days. Development of the mAST antibiotic resistance testing solution is progressing well. In the third quarter, we completed development of panels of 185 genes capable of predicting resistance to major classes of antibiotics when used in conjunction with the Lighthouse knowledge-base.

We are working to enable major healthcare systems with our rapid mAST test and to transition to clinical trials for our commercial product during the second half of 2017. Testing is now underway for thousands of pathogens from around the world to support development of the mAST and the Acuitas Lighthouse knowledge-base.

Looking forward through the remainder of 2016 and into 2017, OpGen expects to achieve several key commercial, technical, and operational milestones. First, we anticipate presentation of further data in the coming days during IDWeek from our health outcome study conducted in collaboration with Intermountain Healthcare. Second, data from the HARP-DC study will also be presented at IDWeek. This study was completed earlier this year, demonstrates the utility of the OpGen Acuitas Lighthouse management system in a major metro area.

The HARP-DC study provides the foundation for expanding our work to District of Columbia, other cities across the US, and integrated health systems. On the commercial side, in the coming months, we anticipate entering into our first health system information services agreement, an Acuitas Lighthouse knowledge-base agreement, and a pharma information services agreement.

We anticipate receiving approval for our CLIA laboratory to receive specimens from New York State by the end of the year. And finally, in the first quarter of 2017, we expect to complete testing of approximately 10,000 bacteria to support our Acuitas Lighthouse knowledge-base development and validation of the mAST test. Our team is pleased with the progress we have made. The next few months will be busy and we look forward to updating our shareholders and the greater medical community on several of the ongoing product and business initiatives that we've discussed today.

I'd like to conclude with some comments highlighting while we are so energized about our mission to provide these solutions for combating multidrug-resistant pathogens. The recent announcement from the National Institutes of Health of the Antimicrobial Resistance Diagnostic Challenge for the development of new, innovative diagnostic tests to reduce the unnecessary use of antibiotics is clear evidence of the growing urgency and awareness to address what many may consider to be the single greatest threat to global public health.

We're proud and enthusiastic to be one of the organizations leading the way in this important effort. Thank you for your support and for taking the time to join us today.

Operator, we're now ready for questions.

Yi Chen from Rodman and Renshaw.

Could you give us some additional color regarding the decrease of the revenue in the third quarter? What exactly is the supply chain issue?

Let me start by saying the year is solidly on track. Our revenues are up 65% for the nine-month period. And so, when you look at the third quarter revenue question that you have a couple of factors affected the figures. As it relates to the supply chain question, when we acquired the AdvanDx business, we tightened up a lot of the QC and incoming inspection requirements. And so what has happened is with our vendors, a couple of key vendors, the quality hasn't been there and we had issues accepting the goods. That translated into a back order for really a good part of August and September.

Not much we can do about that looking backwards except to say that we've addressed the issue, we think that it's under control and our customers were very, I don't know, working with us in a positive way.

Do you expect the revenue to return to first quarter and second quarter levels starting from this quarter going forward?

So, if you look at the complexity of the revenue number during the first and second quarter, that's when the legacy business was still kind of up and running. Now that we've exited it, you need to expect to see a decline from that side of the business. In terms of going forward, you should expect the revenue levels at this quarter to be equal or even higher going into the fourth quarter and beyond.

Could you also comment on the gross margin in the third quarter which appears to be lower than the first and second quarter?

In terms of the gross margin, as Evan had mentioned just a minute ago about the supply chain issues, we added headcount in the middle of the second quarter, which was obviously the strategic move that we have been looking at and decided to do. So, that's the first real quarter, this quarter being the third quarter that you've seen kind of say maybe a little bit of an adverse or a little bit of an impact on the margin.

And certainly as we ramp in size, we'd expect those additional costs to be less impactful on our gross margin percentages, but we certainly feel that you're going to continue to see healthy margins going forward.

And you expect the sales and marketing expenses to return to the second quarter level, too? Because the third quarter expenses was quite lower than the second quarter.

If you remember, we've talked on the last couple of calls about the retrospective study we had with Intermountain Health, that was really kind of a main effort during the first and second quarter of this year where we had kind of a more of a significant cost running through. Now that we've completed that study that's the reason why you can see kind of the significant decline there.

Overall in terms of 2017 revenue, can you give us any additional color in terms of guidance or anything?

Yes. I'd say we're pretty optimistic about the way things are looking for 2017. We've got the automated QuickFISH product. It's solidly on track. It's been a huge effort here at the Company. But, we've held to the timeline of doing clinical trials in the first quarter and getting an FDA submission in by midyear.

That's going to be a big revenue driver when you think about transitioning the QuickFISH business. It's currently essentially a manual product that's fighting the whole ground in an automated marketplace. So, we expect to see good progress with the automated FISH products. And then the work we're doing with the Lighthouse knowledge-base and the mAST, we believe that they will begin to impact revenues in 2017 as well.

And they have the potential along with the work that's going to be published by Intermountain to really transform how our products sit in the hospital market, so that you'll have both infection control and rapid antibiotic decision making. So, in summary, I'd say the outlook for 2017 is pretty encouraging.

Sorry, just to clarify. You said that the 510(k) for the automated rapid pathogen ID system could be submitted around mid-2017?

That's right. (Inaudible) second quarter.

So, approval could be achieved by the end of 2017 or early 2018?

Just putting that submission in context, it's a 510(k) submission. There is no De Novo clinical trial work. It is basically confirming that our existing FDA cleared tests can be run on the automated imager.

So, that's the summary process. There is word to confirm the performance of the instrument, which has a fair amount of complexity. All of that having been said, we expect or would hope to have a pretty swift review, and 510(k) reviews can be short as 90 days.

One more side of that, Yi, which is that as soon as we have completed our registration work for the FDA, we will begin our international launch of that product and then we'll start to contribute to international sales.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Evan Jones for any further remarks.

Well, thank you for joining today and we look forward to providing additional updates in the coming months. Have a nice evening.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program, you may now disconnect.