Strata Skin Sciences Inc (SSKN) 2014 Q2 法說會逐字稿

Good day, everyone, and welcome to the MELA Sciences second-quarter financial results conference call. Today's conference is being recorded. (Operator Instructions)

I would like to remind everyone that this call is being recorded and would now like to turn the conference over to Mr. Michael Wood with LifeSci Advisors. Please go ahead, sir.

Thank you. Good afternoon, and thank you for joining us. With me on the call today are Rose Crane, President and Chief Executive Officer; and Bob Cook, Chief Financial Officer of MELA Sciences.

Before we begin, I would like to remind you that management's comments today may contain certain forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. These statements include but are not limited to plans, objectives, expectations, and intentions and other statements that contain words such as expects, contemplates, anticipates, plan, intend, believes, assumes, predicts, and variations of such or similar expressions that predict or indicate further events or trends that do not relate to historical matter.

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

Actual results may differ materially from the Company's 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. Factors that might cause such a difference is due to whether MelaFind achieves market acceptance or becomes commercially viable, given the uncertainties affecting companies in the medical device industry.

Any or all of the Company's forward-looking statements may prove to be incorrect. Therefore, you should not rely on such factors or forward-looking statements.

In addition, more specific risks and uncertainties facing the Company are set forth in the Company's reports on Form 10-Q and 10-K filed with the SEC. MELA Sciences urges you to carefully review and consider the disclosures found in its SEC filings which are available www.sec.gov and melasciences.com.

I will now turn the call over to Rose Crane, MELA Sciences's President and Chief Executive Officer.

Thanks, Michael. Good afternoon, and thank you for joining today's call. I'm pleased to be able to provide a more in-depth overview of our current strategy and also a business update.

A critical element of our strategy was to improve the Company's finances so that we'll have the runway necessary to meet our very important business objectives. We are very pleased to have closed a financing last month totaling $27.3 million, which will enable us to do just that. The deal raised approximately $14 million in net proceeds, and that can be directed to be help us achieve the goals I will discuss with you shortly.

Closing this financing during the summer was an important accomplishment for the team, because it allows us to fully concentrate on our business without distractions and concerns over our ability to reach very important milestones. This financing will carry us into late next year without giving consideration to future revenues from the sales of the MelaFind system.

I have really spent a fair amount of time with our dermatologists, our investors, and have attended many of the key dermatology conferences. As I've discussed in previous calls, we are very focused on a few key strategies which will drive MelaFind toward becoming the standard of care and the detection of melanoma at its most curable and cost-effective stage. The strategies include key opinion leader support, reader study development and publication, rollout of the new user interface, reimbursement, and new product development.

We are taking a top-down approach because the dermatology community is very tight, with a small number of physicians who are very influential. We have realigned our efforts on placing MelaFind with key opinion leaders within the medically oriented dermatologists. When these physicians talk about melanoma detection, other physicians listen to them.

Currently we have systems at top teaching institutions in the country, including Mount Sinai, Northwestern, Baylor, and the Cleveland Clinic, to name a few. Our approach is to have these thought leaders within the institutions share their experience and expertise with MelaFind in peer-to-peer settings at many of the key medical dermatology conferences.

Additionally and importantly, we have focused on conducting and presenting reader studies to measure the real impact of MelaFind on physician biopsy management. Our medical advisor to the Board, Dr. Darrell Rigel, clinical professor of dermatology at NYU Langone Medical Center, is one of the foremost experts on melanoma detection. He recently led three reader studies within the last five months, all of which will be presented this year.

Preliminary results showed statistically significant increases in overall diagnostic accuracy by the physician with new MelaFind probability information. Currently the standard of care for biopsy management is the physicians' use of their eyes and their expertise without objective metrics or imaging to determine when to biopsy or when not to biopsy. A recent study showed that MelaFind is able to increase dermatologists' accuracy in their day-to-day biopsy management decisions, which directly improves outcomes for the patient, for the physician, and the healthcare system.

The results of the first of the three reader studies was presented at the American Dermoscopy meeting in Bar Harbor, Maine, just this past June. The study was conducted at the January 2014 Winter Clinical Dermatology Conference. At that particular conference, 191 dermatologists reviewed images of 12 lesions in a reader study format.

The physicians were then asked if they would biopsy each lesion before and after seeing the MelaFind system probability information. Then both sets of data were analyzed. The study measured the impact of the predictive probability information in probability of a lesion being melanoma or melanoma high-grade on the dermatologists' decision to biopsy ambiguous lesions.

The biopsy sensitivity of the dermatologists increased from 68% to 89% with the addition of the MelaFind probability information; in specificity, increased from 39% to 54%. Now, sensitivity measures the percent of lesion correctly identified as melanoma, and specificity measures the percentage of lesions correctly identified as not being melanoma.

The average percentage of benign lesions selected for biopsy decreased from 61% to 46%. The P-values in all three measurements were statistically significant at P minus 0.001. There was a nonsignificant change in the percentage of total lesions selected for biopsy.

The important take-home message: physicians identified more melanoma, biopsied fewer benign lesions without increasing the overall number of biopsies. Clearly, the use of objective metrics in imaging positively improved overall outcomes.

Dr. Rigel conducted the second study with 122 residents at the Real World Dermatology meeting in March 2014. The third reader study was conducted at the June 2014 American Dermoscopy meeting with 67 dermatologists. The participants in both studies were asked the same set of questions. The result mirrors those from the first study and shows an improvement in all three measures: sensitivity, specificity, and diagnostic accuracy.

Again, the take-home message here is that with MelaFind, the information accuracy improved for the physician without doing additional biopsies. Top-line results from the third study will be announced in the fall, and we will continue to conduct reader studies globally throughout the next 12 months. Importantly, all of the reader studies that I just discussed were conducted using the new MelaFind user interface and data.

So to capitalize on this reader study momentum and to continue with product innovation, we are currently rolling out the new user interface, which incorporates this probability information. Through the new interface, dermatologists are now able to view the probability of a lesion being melanoma or melanoma high-grade based on a statistical model.

Now, previously, dermatologists were only able to review and view a binary output. This reflects a significant improvement in the continuing evolution of the commercial product. Our goal is to leverage this recent positive data in the new user interface to drive adoption and engagement of MelaFind.

We have recently seen encouraging trends as current users become more comfortable with the new user interface. As we continue to roll out the new interface, our goal is to convert those units currently being rented by the medical dermatologists into purchased units. The business model is in line with what physicians are comfortable with and moves us away from the old fee-per-click model.

Additionally, we believe the reader study data will drive the adoption of new MelaFind users. This reader study data will also be used to support our case for reimbursement by showing three important points for the use of MelaFind. Physicians are able to, number one, identify more melanoma at the most curable and cost-effective stage, which saves money in the long run; biopsy fewer benign lesions, which is an immediate savings to the healthcare system; and importantly, the overall biopsy rate does not increase, which signifies an improvement in diagnostic accuracy.

We are also moving forward with reimbursement process. We've taken the first step toward achieving our important goal of receiving Medicare Part B reimbursement for our procedure, which is called Multispectral Digital Skin Lesion Analysis, or MSDSLA.

In July 2014 we did submit our application for a CPT code or current procedural terminology. It could be eligible for payment by the Centers for Medicare and Medicaid services, or CMS, under Part B as early as 2016. We'll also commence efforts to obtain reimbursement from private insurance companies as the CMS process proceeds.

We believe our application makes a compelling argument in favor of receiving the CPT code and for obtaining reimbursement from CMS. It is the AMA's CPT editorial panel that ultimately decides whether to accept a new code and will refer to a new code to the AMA's Relative Value Scale Update Committee or the RUC Committee.

The RUC determines the relative value of physician work within the procedure of service and then makes a recommendation to CMS. CMS then establishes the appropriate reimbursement level for the service. Obtaining Medicare reimbursement is critical in order to secure reimbursement from other private insurers.

In addition to improving MelaFind with a newly validated user interface, we are also expanding into new product platforms. The platforms will open new markets for us, a critical element of our future success.

A patient's journey through the clinical pathway many times not only involves the dermatologist, which we focus on now, but also the pathologist and the reconstructive surgeon. We are currently developing a platform which utilizes the current optical imaging technology combined with new proprietary software for use by pathologists and reconstructive surgeons who are focused on tumor removal.

The rationale for this direction is twofold. First, we're able to broaden the Company's target market; and second, by introducing this technology at additional points in the clinical pathway, the overall accuracy of detecting, diagnosing, and treating melanoma should improve. We are collaborating with physicians in both the US and Europe to develop this platform. Our goal is to file a 510(k) and CE Mark sometime in 2015.

Additionally, I would like to welcome Michael Stewart to our Board of Directors as a new independent director. Mike is COO and Executive Vice President of PhotoMedex, and he is a very seasoned veteran in the dermatology market with special expertise in reimbursement and manufacturing.

As we continue to execute against our strategies and make progress, I will keep you updated. Now I'd like to turn the discussion over to Bob, who will review our second-quarter financials.

Thanks very much, Rose. For the three months ended June 30, 2014, we recorded revenues of $0.2 million, resulting from our first sales of MelaFind systems since adopting our sales-based strategy earlier this year. Total expenses decreased by $2.6 million, consisting of $0.7 million in R&D expense and $1.9 million in SG&A in accordance with our cost reduction program initiated in August of 2013.

We recorded a net operating loss of $4.3 million compared with a $7 million loss for the 2013 period, a 39% improvement. We reported a net profit of approximately $0.6 million or $0.12 per fully diluted common share compared with a net loss of approximately $7.4 million or $1.72 per common share for the comparable three-month period ended June 30, 2013. The net income for the period primarily is a result of a $4.9 million benefit from a change in the fair value of our outstanding liability for warrants accounted for as derivatives.

We reported a net loss of $7.4 million or $1.46 per fully diluted common share for the six months ended June 30, 2014, compared with a net loss of $13.9 million or $3.38 per fully diluted common share for the comparable period in 2013, a 48% improvement. Six months 2014 results were impacted by the $5 million benefit from a change in the fair value of our outstanding liability for warrants accounted for as derivatives, partially offset by $3.4 million in liquidating damages from the 2014 financing.

Sales in the second quarter were partially offset by lower placement revenue. Total operating expenses of $7.1 million fell 38% from 2013, and our net operating loss improved to $9 million from $13 million in 2013, a $4.5 million or 33% decline.

The improvement in our net operating loss is more reflective of our operating activities and resulted from our cash conservation and cost reduction activities. Net cash used in operations during the six months ended June 30 was approximately $11 million, which includes $3.4 million in liquidating damages that were paid to investors in the February 2014 financing.

Without the inclusion of this transaction-related expense, our net cash used in operations during the first half of 2014 would have been only $7.6 million, almost 40% lower than the comparable period in 2013.

On a monthly basis, adjusted cash used in operations averaged $1.27 million during the first half of the year, which we believe can be further reduced throughout the balance of 2014. The Company's cash balance at June 30, 2014 was $4.2 million compared with $3.8 million at December 31, 2013.

As Rose mentioned at the beginning of her presentation, for we raised net proceeds of approximately $14 million in July that will fund our operations until late next year without considering further sales increases of our MelaFind units. We are continuing to assess the effects of our previously announced cost-reduction plan and will reduce various costs as necessary and appropriate.

At this time, I would like to open the call up for questions. Operator?

(Operator Instructions) Ramakanth Swayampakula, H.C. Wainwright.

This is RK from H.C. Wainwright. Can you help me split that $225,000 in revenues into the number of converts from the rentals and new product sales?

Well, there are three things going on in the revenue number. There is the sale of new units; there is the conversions of old units; and then there's still the remaining pieces of the legacy business, which is the rental units. So we are not at the point yet where we're talking numbers, numbers of units, because quite frankly the numbers are quite modest. But I would say that I think we did have a conversion in that quarter and some new sales.

And as far as where we are currently, I think that the amount has been accelerating. So I would expect that in the third quarter, we'll be able to put more clarity on that. But at this point, I think it's best just to think of that number as primarily a small number of sales with the remaining pieces of that legacy placement revenue.

And then this is more a question for Rose. It's actually great to see Dr. Rigel do all those reader studies and put out analyses as well. What I'm trying to understand is since he has started, and obviously that is a huge PR campaign, I would think, for the device, what kind of interest has been generated in the community? And how are you managing that? And how are you also managing in terms of utilizing that PR to the maximum that you can?

So what's happened at the conferences, when the physicians sit in the studies and actually do the reader studies themselves -- it's really generated a lot of buzz and some good leads. So the sales reps are following up on that.

Our goal, obviously, is to get this data -- each one is presented as an abstract and/or a poster -- and then to publish the data. And then this is the data that the sales reps will start to carry out to the physicians. Because the wonderful thing is it incorporates our new user interface, and we've just rolled that out.

So all of this is so new. It's really -- even though the first reader trial was conducted in January, we just rolled out the results and the new user interfaces in about 60% of our accounts. So those things combined will continue -- we're managing it by the reps following up with the physicians, and then that is the data that will become the basis of our story moving forward for both the general dermatologists and for reimbursement.

Thank you. And in a general way -- I know it's quite early in both of the market strategies that you have initiated, but in your thinking, how long does it normally take between identifying the leads, working with a physician, and getting the sale done? What is kind of a lifetime -- I'm sure it varies from physician to physician and practice to practice, but in general, what are you as management thinking is a feasible amount of time that you can spend with a physician before we get the sale done?

Because we've moved to the sales model, it's a capital equipment sale. It does take a good 6 to 9 months. It really does, because the doctor is getting used to the new user interface; and then working with the equipment, we do give some trial time for them to use it. And then they have to get the approval if it's bigger than a one-man practice. So it's a typical equipment capital lifecycle -- or sales cycle.

And the time that you record your sale is when the sale is completed, or in the period of six months?

Yes, we record it at the time that -- some of the physicians were using leasing companies. So as soon as we get the sale, we record it.

And regardless of how the sale is recorded, whether it's being done through a leasing company or not, we'll record the sale upon -- basically on the delivery of the unit. I mean, there is some accounting stuff that goes on, but basically once a unit is delivered, then it's a sale.

And so, RK, think about this: the user interface was rolled out in April -- started to be rolled out in April; and the reader trial data, even though done in January, was recently shown. So all of this -- and the new business model was truly rolled out in about March. All of this is fairly new to the market. We have three things going on at once, all of which are very positive, but which will take time.

Okay. One last question. What are the potential catalysts that we as investors can look for from some of the management over the next 6 to 12 months?

Over the next 6 to 12 months, we'll continue to provide -- we'll continue to do reader trials to get them published; to move along the CPT process, although that probably will be another 12 to 18 months of reimbursement process before we know more; and continue to move units into teaching institutions and discuss collaborations that we have on the new product.

Okay, thank you.

(Operator Instructions) George Chryssis, Private Investor.

Just a question about reimbursement and what you expect that to do and to change in terms of the market adoption?

Yes, so right now, as you know, it is all out-of-pocket. And so as the doctor looks at the return on investment -- it's depending; if you're on the Upper East Side of New York City, you can get out-of-pocket payment pretty easily or in the West Coast, the higher economic areas. Once reimbursement comes, it's easier for physicians to use the equipment, because they're getting reimbursement for the patient and the patient doesn't have to pay out-of-pocket.

So at that point, our assumption is that there will be a higher penetration and a higher uptake. But in the meantime, we are -- as physicians -- as we get a good installed user base, and as physicians are -- they are using different economic models across United States; we will be sharing those models and ideas with other physicians so they can understand how to more easily get patients involved with MelaFind.

So what would you say is the biggest barrier or obstacle that the sales reps are getting now when they're within the sales cycle? Is it reimbursement, or is it --?

It is reimbursement. It really is. And I would tell you, before, the big issue was that we were -- because of the user interface we were getting -- which was just a binary output, high or low, physicians were complaining that there were a lot of highs being called, and then they would biopsy benign lesions.

This has fundamentally changed with the user interface and with the reader trials to show what the new user interface has done. So between the number of highs that we were getting and reimbursement -- those are the two big obstacles. One, again, we've just taken care of, but it will take time to roll this out; get the data out; get physicians to see the new data, to use the new user interface.

And does the business model going from kind of a rental to a sale at all change that perspective on reimbursement? Because if it's more of a capital equipment buy and not a pay-per-click -- I'm just trying to -- because I know the strategy has kind of changed, but wouldn't the reimbursement be less of a concern if they're just basically purchasing a machine for its value proposition and not worrying about essentially the cost that they would be losing on the per use?

That's a great question, and it's a yes and no. Because once they purchase it, they don't worry about having to pay every time they use it. So they'll use it more often. What they want to do is the math to get them -- they need to have the right amount of patients to figure out how to get a return on that capital investment.

Yes, I can appreciate that. And that actually brings me to my last question. It's just around the new model: are you able to elaborate a little bit more in terms of the pricing structure of this new strategy -- i.e., what are you selling your units for?

Yes, we haven't disclosed that yet. It is -- let's just call it somewhere in the middle of the laser prices. And they run all the way from as low as $20,000 all the way up to $100,000. So it's not outside the realm of what dermatologists have seen.

Okay. Thank you for taking my questions.

And with no further questions in the queue, I'd like to turn the call back over to Rose Crane for any additional or closing remarks.

I'd like to thank everyone for joining the call, and I do look forward to reporting on the progress as we move forward with our strategy here at MelaFind. Thank you very much.

This does conclude today's conference. We thank you for your participation.