Strata Skin Sciences Inc (SSKN) 2013 Q2 法說會逐字稿

Hello. For the MELA Sciences Call this afternoon, we would like to have the operator read the Safe Harbor provisions. Below is the text.

Good day, ladies and gentlemen. And welcome to MELA Sciences Q2 2013 Earnings Call. At this time all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. This presentation includes forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995.

These statements include, but are not limited to, our plans, objectives, expectations and intentions and other statements that contain words such as expects, contemplates, anticipates, plans, intends, believes, assumes, predicts, and verification of such words or similar expressions that predict or indicate future events or trends or that do not relate to historical matters.

These statements are based on our current beliefs or expectations and are inherently subject to significant known and unknown uncertainties and changes in circumstances, many of which are beyond our control. There can be no assurance that our beliefs or expectations will be achieved.

Actual results may differ materially from our beliefs or expectations due to financial, economic, business, competitive, market, regulatory, and political factors or conditions affecting the Company and the medical device industry in general, as well as more specific risks and uncertainties facing the Company such as those set forth in its reports on Forms 10-Q and 10-K filed with the US Securities and Exchange Commission.

Factors that might cause such a difference include whether MelaFind achieves market acceptance or becomes commercially available. Given the uncertainties affecting companies in the medical device industry such as the Company, any or all these forward-looking statements may prove to be incorrect.

Therefore, you should not rely on such factors or forward-looking statements. The Company urges you to carefully review and consider the disclosures found in its filings with the SEC, which are available at www.sec.gov and www.melasciences.com.

I'd know like to turn the conference over to your host Robert Coradini, Interim CEO, MELA Sciences. You may begin.

Thank you. Good afternoon, and thank you for participating in today's call. This is Bob Coradini, the interim CEO of MELA Sciences. Joining me from MELA Sciences are David Stone, Chairman, and Richard Steinhart, our Chief Financial Officer.

On today's call, I'm going to give a brief overview of our second quarter activities then turn the call over to Richard for a review of the financials. I will then provide an overview of the restructuring that we announced today and other actions that the leadership team is undertaking toward achieving commercial success of MelaFind, driving meaningful revenue acceleration and managing expenses thoughtfully with a goal to eventually deliver profitability.

Before I begin, I would like to reiterate my previous comments by acknowledging that the Board and I are as concerned as our shareholders with our results to-date, which have fallen below our expectations. We remain frustrated by the slow pace of system uptake and low utilization rates among dermatology practices with the MelaFind system.

We are focusing intensely on addressing expanded system placement and utilization and on managing the Company's resources carefully. Despite these challenges, the MelaFind technology is fundamentally sound, and we believe it has the potential for great success in the marketplace.

With a view towards achieving that success, we are realigning our priorities and operational activities to manage costs and drive growth in a measured but achievable way.

Now to second quarter results. Second quarter recognized revenues was $144,400 and deferred revenues totaled approximately $434,000 as of June 30. We ended the quarter with signed user agreements for 168 systems, 145 of which were installed with 23 pending installations.

The quarter's revenue of $144,400 was basically flat to that of Q1. This was due in part to the Company's focus on utilization at the expense of placements as well as the roll-out of a new per lesion pricing model at a lower price point.

Placements were down from the prior quarter because of management's decision to refocus the field force on utilization. Utilization was also generally flat from the prior period. The Company rolled out a new and untested per lesion pricing model in March, which we believe, caused confusion, likely resulting in lost time and productivity during the second quarter. Although we had some sites use MelaFind over 100 times per month, the average was much lower.

We are highly focused on increasing the overall level of utilization. The original pricing model was $50 per patient card which could store up to five lesions per session. The new pricing model charges $12.50 per lesion and results in an average revenue of about $25 per patient.

Since MelaFind is a cash-pay procedure, it was anticipated that the lower price would drive additional patient volume, however this did not occur. We are currently in the process of reassessing our entire pricing and reimbursement strategy. Neither of these reasons for the revenue being flat is acceptable to the Board or to me as interim CEO. We are a growth company and later I will describe steps that we are taking to bring growth back into the equation.

Finally, before I turn the call over to Richard. Let me conclude my summary of the second quarter with some good news. The month of May, as many of you are aware, is melanoma awareness month. We decided to work with our customers to generate an increase in patient awareness about this growing epidemic.

According to the national survey we commissioned through Harris Interactive, 76% of Americans have never had a skin cancer exam, proving that melanoma detection is a huge untapped market for the Company. To spread awareness and emphasize the importance of these exams, we began a PR program that specifically targeted patients. These activities are slowly starting to spread green shoots of optimism even though it is still too early for it to bear fruit or harvest.

A few of our PR activities include, one, articles and editorials about MelaFind in magazines, including Self, Prevention, Red Book and Allure. Two, Combi Next Corporation hosted MelaFind at the Self Magazine skin cancer screening with two of our key opinion leaders, customers on-site to use MelaFind on every of the eligible patients.

Three, a multi-month targeted patient campaign on WebMD, which is a number one source for people seeking out healthcare and wellness information. We have seen a significant increase in traffic to a dermatologist [located to] on MelaFind as a result of this campaign.

As we review our progress and success in PR activities, we will evaluate future plans with a more emphasis in social media.

I would like to turn the call over to Richard for a review of the financials and then I will provide comments on our strategic initiatives and perspectives going forward. Richard?

Good afternoon, and thank you Bob. Total invoicing to our customers in the three months ending June 30, 2013, was approximately $192,500 resulting in $144,400 of net revenue being recognized and approximately $434,000 in deferred revenue reported as of June 30. This is compared to $146,500 in invoicing, $75,760 of recognized revenue and $87,980 of deferred revenue in the same period in 2012.

As a reminder about recognized and deferred revenue, as we have discussed in the past, we established contracts with multiple elements of delivery and must defer a significant portion of our placement fee despite the fact that we generally do receive the entire cash payment on installation. As a result, deferred revenues reflect the time, recognition of the installation fee revenue over the term of the user agreement, which is usually two years.

Correspondingly the cost of revenue for the second quarter of 2013 was $1.4 million compared to $372,000 in the same period in 2012. The current quarter represents the full three months of commercial activity, including three months of depreciation for all 140-plus MelaFind systems installed in the field.

Cost of revenue is made up of the direct costs associated with the placement of MelaFind systems in the doctor's office, the cost of consumables, technical support costs and depreciation expense of the MelaFind system placed with the customer, which does remain the property of the Company.

During the quarter, we recognized a charge of $250,000 for inventory obsolescence, resulting from recent system enhancements that eliminate the need to use the individual patient exam cards as we shifted to the electronic per lesion model.

Research and development expenses for the second quarter were $1.1 million versus $1.7 million reported in the same period last year. The decrease in research and development expenses is primarily attributable to the redeployment of certain R&D staff and associated costs to support commercial operations and reduced research and development expenses at our contract manufacturer, Askion, in Germany.

Selling, general and administrative expenses were $4.7 million in the second-quarter 2013 versus $3.5 million reported in the same period last year. The increase is a result of increased marketing and sales expenses in both the US and Germany.

For example, Company-wide we had 28 people in marketing and sales during the second quarter of 2013 versus 14 people in the same function in the same period in 2012. The overwhelming majority of our sales and marketing staff are field-based sales and practice support personnel.

Our net loss for the second-quarter 2013 was approximately $7.4 million or a loss of $0.17 per share versus a reported loss in the second quarter of 2012 of $5.54 million or a loss of $0.18 per share. At the end of the second quarter of 2013, the Company's cash and cash equivalents were approximately $15.2 million.

I will now turn the call back to Bob who will provide greater detail on our strategic initiatives that are underway, and then we will open it up for questions. Bob?

Thank you, Richard. We have several initiatives underway aimed at both driving the commercial success of MelaFind and right-sizing our cost structure so that we can become a profitable and sustainable business over time.

Today, we announced a restructuring to align our spending and structure commensurate with our stage of commercialization. We have eliminated a number of positions across the Company, reducing our workforce by roughly 25%. As difficult as it was to say goodbye to some of our colleagues, we believe this is the prudent thing to do to preserve cash and to better match our spending with the realities of revenue generation.

We recently outlined our development strategy and associated activities which include improvements in three primary areas; one, operational focus; two, marketing and commercial execution; and three, financial discipline. I would like to provide an update on each of these objectives.

On the operational front, many of the operational improvements that we are undertaking fall under the restructuring that I just highlighted. That said, we are focused on reducing the cost to manufacture and deploy systems while also improving the user experience.

The two design improvements we are working on are one, the system self test that must be done at the start of the day whenever a system is used, and two, the card design to allow for maximum flexibility in offices that generally are already (inaudible).

On the issue of the system self test, I recently returned from visiting Askion, our partner in Germany, which is responsible for the design, test and assembly of our handheld detectors. They are a leader in optics engineering and are working diligently to making the calibration process and self test an integrated part of the handsets.

We are also making progress on our wireless billing system, which has allowed us to gain more information and insight as to how our customers are using the MelaFind system. Also on the operational front, we have turned our attention to system reliability and performance to optimize our customers' experience. I have made this a priority of the R&D team and anticipate improvements in the weeks and months ahead.

On the marketing and commercial front, in light of information we have learned during the commercialization phase, we are developing a thoughtful and strategic plan to achieve long-term commercial success for MelaFind that includes a clear and compelling pricing formula linked to a straightforward value proposition for dermatologists.

However, price alone makes no sense if viewed by itself. Rather, price is a function of perceived value. As a result, we at MELA Sciences need to do a better job establishing and building the value proposition for dermatologists and patients alike. We are taking steps in both areas.

We are starting to establish a more formalized Key Opinion Leader group as well as the User Advisory Board. We are also stepping up the pace of publication and submission of scientific data. You'll soon begin to see more posters and medical journal articles.

We recently held a symposium during the 8th World Congress of Melanoma held in Hamburg, Germany, which I personally attended. We had about 100 attendees, many of whom are considered the top thought leaders in this field. After the presentations by Doctors Hauschild and Blum, there was a widely open discussion.

While physicians were met and concerns were raised about specificity, one thing was clear. MelaFind is objective. A data is the data, with a sensitivity of 98.3% based on the pivotal trial used to get FDA approval. MelaFind, a big tool that provides additional information and when used properly in the hands of trained dermatologists, both doctor and patient alike, find it useful.

So it should come as no surprise that many KOLs or key opinion leaders who do not yet have a system, approached our booth after the symposium seeking demos and more information, as well as a number requesting an on-site visit by the team.

And just this past weekend in New York City, we had the Summer AAD, the American Academy of Dermatologists Meeting, where we engaged in discussions with a number of key US dermatologists, some using the system and many who aren't yet. Dermatologists with whom we'd spoke were eager to learn more about MelaFind and how it might fit into their practice.

During our call a few weeks ago, I said that we would be reassessing our publication and PR approach to get information about MelaFind out succinctly, and to targeted dermatologists, their staff and their patients. The dermatologists in this month's issue of Practical Dermatology, the clinical update piece is Clinical Implants, written by doctors King, Day, Nestor and Rigel. It outlines the pearls and pitfalls in using MelaFind appropriately and correctly.

The weekend of July 19, we saw the emergence of a number of new stories of MelaFind, including a prominent article in the New York Times, as well as the CBS Morning News Report with dermatologist, Dr. Elizabeth Hale from New York University School of Medicine. And while the headlines were mixed, the articles and reports were fairly balanced, ending on positive notes in both cases.

In the case of the New York Times, Dr. Tsao, Associate Professor at Harvard Medical School and Director of the Melanoma and Pigmented Lesion Center at Mass General, said, MelaFind both captures images and analyzes the likelihood of melanoma. That extra intelligence, it's accuracy notwithstanding, is bound to change doctors' impressions with patients.

Dr. Tsao's clinic is participating in a post-marketing study of MelaFind, financed by MELA Sciences, and he said he and his colleagues were thinking hard about how to develop a role for such new devices in informing physicians and patients. "Until now you trusted the doctor to make the decision" Dr. Tsao said, now you've got a three-way interaction. It's a brand new paradigm". In the case of CBS News, Dr. Hale said, "I do mole checks several times every day in my practice, but at some point I might use MelaFind because the technology is impressive."

Add to this there were other articles that have been highlighting MELA Sciences, including Dr. Bailin from the Cleveland Clinic, both online at cleveland.com as well as in the newspaper. We were even featured in the August issue of Oprah's magazine O as well as online at oprah.com. All of these can visibly be found on our website melascience.com.

In our prior calls, we shared that we recognized a favorable insurance reimbursement could have a significant impact on MELA Science adoption. We intend to more actively focus on the issues relating to obtaining medical coverage, identifying appropriate coding and establishing adequate payments.

To that end, we have begun dialogue with experts in this space to give in their guidance and prospectus as to the best way to approach this. This will take time and effort, but we are committed to pursuing this avenue. We want MelaFind to be a vital tool in the fight against melanoma and do not want patients or dermatologists to be discouraged from using it due to costs.

Several weeks ago, I shared that we would also be focusing on improving commercial execution. We are looking to build, enhance and improve our relationships with the dermatology community. We are re-prioritizing our target list of dermatologists and their practices based on their geographic location and the proper level of support our reps and field specialists can provide.

This philosophy has guided the restructuring announced today and we have realigned our field-based organization accordingly. The goal is to have our field-based sales people spend more time with dermatologists and their practices. We have also created a new strategic consult here in the US and staffed it with a person (inaudible) in Germany. The knowledge brought from the other side of the Atlantic should greatly benefit us here in the US.

In conjunction, we are evaluating strategies to optimize selling and supporting functions to the regions within the US and Germany and elsewhere. We are evaluating distributors for regions where we have no current coverage where they could be more effective driving topline growth.

And on the financial discipline front, we spent a better part of July assessing the team, its skills and required work that is needed to get done to turn the Company around and to do so in a cost effective way. As I have mentioned, we executed our restructuring this week, which reduced our work force by roughly 25%.

We have also instituted salary reduction across many of the remaining roles and departments and balanced that with stock option awards for those affected. The intent is to align the team to drive overall success. The Company's Directors also agreed, effective after the third quarter, to take a portion of their director compensation in the form of stock options further demonstrating their commitment to the success of the Company.

Working with our partner Askion in Germany, we adjusted production schedules down considerably going forward so as to minimize the investments in parts and inventory. One of our key vendors, the Askion, believed in this Company and has agreed in principle to accept stock in MELA Sciences in exchange for certain payables that MELA Sciences owes to them in an effort to reduce our cash burn. We are proud to have Askion as an investor in MELA Sciences.

The bottom line is that we expect these actions to considerably cut our monthly operating burn rate from a bit over $2 million per month to approximately $1.2 million per month when fully implemented. But as always, we expect to realize growth in the back half of the year, which will be both modest and achievable.

Despite the heavy lifting that needs to be done, we are more enthusiastic about MelaFind than ever before. There is nothing here that cannot be managed. MelaFind works when used according to its indicated label for use. The technology is robust and the cost improvements are clear.

We continue to receive feedback from customers that validate the importance of MELA Science and its success in their practices. Remember MelaFind is the only FDA approved optical diagnostic device for melanoma detection. There is no other device out there that does what we do and is FDA approved.

I remain confident that MelaFind can and will become a standard of care for dermatologists in their fight against melanoma. You continue to have my commitment as well as that of the team that we are all working together towards this goal.

With that, we will now take a few of your questions.

(Operator Instructions) Josh Jennings, Cowen and Company.

Thanks and good evening. Just to start off, some of your last commentary, Rob, was just about your enthusiasm going forward and I know a lot of this call was based on laying out strategic initiatives, et cetera. But in terms of enthusiasm about the long-term utilization and adoption trends, they can be generated, can you give us any sort of -- anything more to sink our teeth into what's driving enthusiasm and this optimism on the heels of two quarters in a row of sequential installation declines and no uptick in utilization?

Josh, thanks for the question. It's David Stone, Chairman of MELA Sciences. You're correct, we have not yet shown an uptick in overall utilization, and it's not being reflected in the financial results. But what we see in the field are very encouraging, individual instances of how doctors can adopt MelaFind, use them on a large number of patients in a short amount of time and get results that are satisfying for them and quite satisfying for the patients.

So the problem that we're referring was, is how to reproduce those results day and night, week to week across all of the systems that we have in the field. We have (inaudible) optimism. To give you a little more concrete example, as part of the melanoma awareness month, we worked with some of our customers to offer free MelaFind exams for a short period of time. And in that period, we saw tremendous volume of patients move to those practices.

Doctors and their staffs (inaudible) together. They might say, great (inaudible) where you can move all the units. So I think that's the approximation of what you would see if we had [an active reimbursement to] our product since patients knew [our reimbursement products are essentially pre-approved]. (inaudible) ability to use and examine and incorporating into the practice. They are examining our pricing reimbursement strategy [which were perfectly in line].

And, Josh, if I could just add a few comments to what David just shared. I was over, as I mentioned, at the 8th World Congress of Melanoma in Hamburg. And I would suggest that maybe you check with some of these physicians who were there. And especially seeing the thought leaders in Germany coming to the booth afterwards -- the dialogue that we were having with them and their interest in the technology.

At end of the day, this is a tool. It's a good tool. It's a powerful tool. It's the first time that a patient can actually see what the doctor sees and thinks. And it allows you to see below the skin. It allows you to see and make a decision and -- in the hands of the right doctors using it the right way, as David said, we are very encouraged.

Okay, thanks for those answers. I appreciate it. And on the reimbursement front in terms of your initial thrust here, can you just talk about your confidence level that reimbursement is achievable and any timelines in terms of when that can come into play? And I have one follow-up.

Sure. Let me share a little bit on reimbursement. Now reimbursement is a funny thing. It can cut both ways. And speaking with a number of experts and doctors, the question is at what level can we get a reimbursement that is fair, adequate and supports the proper use of the technology for the patients' benefit.

And a couple of things. There are requirements to have peer-reviewed publications. We have a number of them already. We're sorting through the various forms of whether we have enough authors and different patient population pools. All the things that the American Medical Association does when they do the probing.

On top of that, we need to look at really what is the right value proposition and pricing of this unit out there. And so there are some steps we can take well before reimbursement comes out either with the insurance companies directly or in a closed system, like the [Kaiser] or whatever to go in. And now we have not had any conversations with Kaiser at my level, so I'm not saying that.

But in past practices, we will start that conversations with those networks. And remember, I spent over 24 years in the medical device industry and there's a right way to do things and get technologies adopted and out there and involved.

And in Germany, on the other hand, we've actually had some reimbursement and it's very well in some of the cases. And actually there, they're actually reimbursing some cases for the reports that they get because it is additional information that the clinicians base their medical decision on.

And just a last question for me. Just an update on the post-marketing approval study -- post-marketing study. Can you talk about the design, number of patients that you need and what the endpoints are? And just -- what is the bar that you need to clear and what does the FDA want to see? And is there any risk to not reaching that bar? Thanks a lot.

Thanks Josh. Without going into all the details, suffice to say, post-marketing approval studies is very standard of any new drug, any new device from the FDA. So what they've asked for us to do is no different. Basically, they want to make sure that the claim that you've gotten from the FDA, because remember, this is a PMA device. This is not a 510(k) device, this is a PMA.

So we have an approved claim from the FDA that are claims indeed withstanding the test of time, and so that's [what] they do a post-approval study. The exact numbers, I'll be frank, I do not have that off-hand. So I can tell you this, our enrollment rate has been slow. We're supposed to have -- we have 5 sites in our PMA study, but the enrollment rates have been slow. And we're in the process of reassessing it and bringing in some outside expertise to help us in that process.

This is David Stone. (inaudible) Bob said, MelaFind, we have to prove something extra (inaudible) what we're showing to (inaudible) so we're seeking to reproduce our (inaudible).

Thank you. We have no more questions in queue. I'll turn the call over to Robert Coradini, interim CEO of MELA Sciences, for closing remarks.

Thank you. In closing, let me first start by thanking those of you who joined us on this call today. Just know that my team and I remain excited about MelaFind and the value it can offer dermatologists, their patients and our shareholders. We look forward to updating you on our progress. Thank you.

Ladies and gentlemen, this does conclude today's conference. You may now disconnect. Everyone have a great day.