Q4 2019 Earnings Call
[music].
Good afternoon, and welcome to H.C.G. molecular diagnostics your and earnings Conference call. My name is Devon, and I will be a coordinator for the call today.
All participants are in listen only mode.
We've lifted so setting a question that's especially towards the end of the today's call.
As a reminder, this call is being recorded for replay purposes, I would now like to turn the call over to Oneq coffee.
Hi advisors for a few introductory comments. Thank you you may begin.
Operator.
Earlier today, it's TP released financial results for the year ended December 31st 2000 <unk>.
Before we begin the call let me remind you that the company's remarks includes forward looking statements within the meaning of the federal Securities laws.
Any statements regarding possible additional collaborations with pharma customers.
Hated continued growth in our yield profile in this field related revenue expected growth in and benefits from pharma programs and collaboration product development and commercialization activities.
These forward looking statements are subject to numerous risks and uncertainties many of which are beyond h. teaching control that may cause H.T. cheese, actual circumstances or events or results to differ materially from those projected on today's call.
Factors that could cause if that's a results to differ materially include those risks and uncertainties described from time to proceed in H.T. Geez FCC quietly.
It's TG cautions listeners not to place undue reliance on forward looking statements.
She is providing this information as of the date of this call much 22020, and its Teachey undertakes no obligation to update any forward looking statement.
With that I would like to turn the call over to John Mccluskey, Chief Executive Officer John.
Thank you money.
Good afternoon, everyone and thank you for joining us on our yearend conference call.
I'm very pleased with the progress we've made it HDD in 2019 and believe Weve laid much of the groundwork for strong product and service revenue growth in coming years.
I'm very proud of our entire team and thank them for their hard work and your continued support and he's trying times.
That said clearly the world today looks very different than I did even a week ago.
And while the markets are volatile to say the lease we have not taken our eye off the wall in terms of our business.
Operationally, we developed agile countermeasures some of the challenges that we're facing.
We are still open and operating.
Portions of our team are working remotely or lab teams are operating on a modified ship schedule, we keep our labs operation.
And as I said I'm very proud of all of our employees and how their core coping with these extraordinary times, they're making personal sacrifices and going above and beyond to help us continued to execute our business plan.
We're doing everything in our power to maintain business as usual.
Before I get into our 2019 numbers, let me take a moment to talk about the two different types of revenue driver business model, which I think it's important I understand particularly when it comes to those factors that impact our results.
The first is what we call direct revenue.
[noise] revenue, which is reflected in our product and product related services revenue on our financial statements is where we are selling directly into the market net is primarily the products and services that are in our molecular profiling business.
This is our core.
Our view is that growth here shows market adoption of our technology proving the value proposition and demonstrates our ability to execute our business plan.
I've seen strong growth in this revenue and believe that there's tremendous opportunity in this market.
The second type of revenue this collaboration revenue.
Collected in our financial statements, that's collaborative development services revenue.
This revenue is recognized through our collaborations with pharma partners.
Where we seek to build a companion diagnostic the pair with their therapies.
This remains an important part of our strategy, we continue to see significant opportunity here.
Collaboration revenue unlike direct rep direct revenue in our products and services is more reliant on our pharma partners and not in our media control.
This is made collaboration revenues more unpredictable, it's as they're also linked the clinical trial outcomes.
With this in mind, our collaboration and the revenue that they produce should be looked upon as a strategic initiative not a separate business or revenue line.
Collaboration revenue as a byproduct of our efforts to attempt to develop a killer app, which is a companion diagnostic.
It is essentially pharma sponsored R&D for HD G.
And hcg companion diagnostic paired with a lead drug in a major indication would be transformational for HD G.
But it is less predictable than our direct revenues.
We expect collaborative development services revenue, the ebb and flow.
The direct revenue demonstrates our continued growth in the large and fast growing molecular profiling market from this revenue, we expect to generate new opportunities for collaborations and also progressed our way to develop our own proprietary diagnostics like our exciting perhaps a breast cancer product.
Okay now to the numbers.
Total revenue for 2019 was 19.2 million.
Breaking that down we recognized an increase in direct revenue of 14.6 million in 2000 and Nike.
Growth was powered by continued strong interest in our oncology biomarker panel or precision immuno oncology panel and our whole transcriptome micro Arnie panel.
We're pleased with our continued execution in this line of business and our bullish going forward as we know we're just scratching the surface or the opportunity in gene expression profiling with these proprietary panels. This is an $800 million plus market growing at 10% to 20% per year, we're very confident in our ability to continue to robustly grow this bill.
Yes.
Collaboration revenue was 4.6 million dollar for the year down 63% compared to 2018.
This decline was caused by a few factors.
First as mentioned in a previous call PDP, one had activity in 2018, but not in 2000 Tonight.
Next both PDP too and PDP three remain quiet periods for the majority of 2019.
All that said and as mentioned earlier working with farm it to develop assets that may become companion diagnostics remains a core strategy for HD G.
Our base of phase one in phase two programs continues to build and we expect to add new collaboration partners in the future.
When we do contract these new partners it will be a direct contract between hcg in our pharma partner. We believe this will result in better revenue and margin economics versus the legacy PDP programs that were contracted through college, and which included a profit split.
Okay now, let's look at our profiling business.
On this subject we continue to see strengthen our pharma profiling business, we exited the year with 88 active pharma programs spread across 13 different customers.
We now have a full commercial team both in the U.S. in Europe, and we expect to see the positive effect of this as they work new opportunities through the sales cycle.
New program and new customer growth, our key objectives for this team.
The unique advantages of our edge seek platform technology, specifically, our low sample input and simplified bio informatics enable h. TG continued to grow in this large and rapidly growing market.
One new work stream for the company will be to develop partnerships with leading CLIA laboratories to expand the availability of edge seek technology.
Partnering we're increasing our commercial reach making it easier for pharma to do business with us.
Look forward reporting on our progress in this area throughout 2020.
Next I'd like to say a few words about our academic profiling business. This is the business we recognized from the major academic centers in their translational research groups.
Historically this business requires a long lead time as thought leaders and institutions carefully evaluate the site with scientific rigor the clinical value of each new panel in system.
This business grew substantially in 2019, and we believe we've approached a turning point in this area with the scientific acceptance of our technology and the academic community.
We continue to invest in R&D and molecular profiling molecular profiling and expect the launched several new applications. This year.
Very pleased to had two significant publications come out of this market in the past several months. The first was a nature article that document that the use of our new mouse marinade cattle and the second was a sell article the profiled microrna technology providers for hcg fared very well in a comparative evaluation.
This brings the number of publications referencing and seek to over 140 at year end in 2019 tripling the number from just three years ago.
We're very pleased by the progress we've made in our profiling business, both in pharma and academic in 2019.
As we look into 2020, while we anticipate demand in profiling to continue we believe that it's likely that we will be impacted by the by the recent cobot 19 situation because many customers have either shut down for gone to close campuses.
It is likely this could impact our revenue growth in 2020 compared to prior years.
Now I'd like to talk about the work being done in our California Technology Center and how its advancing as we progress toward building our proprietary breast diagnostic.
We highlighted this business opportunity last fall in a kaombo event in New York, where we outlined our vision and build a comprehensive breast cancer diagnostic plant platform.
Besides this market opportunity to be well over $1 billion and believe our offering will be a significant advanced versus current diagnostics.
The first phase this project has been a technology development initiative.
We are building a next gen Ed's see platform technology, they gauge DG higher levels of performance flexibility and plaques than we've ever been before.
Probe synthesis methods advanced bio informatics formulation improvements in advances in our automation platform are all being incorporated into this next generation I'd see technology.
Once the building blocks are in place, we expect a whole transcript on product of approximately 22000, Biomarkers, which is being designed to operate at a clinical grade for precision reproducibility and robustness.
We expect the leverage our whole transcript on product in the all three growth verticals for the company.
It will serve as an R&D seek seragut to help drive even more rapid growth in our our euro profiling business.
Serve as a universal aren't a companion diagnostic platform to support our biopharma collaborations and it's going to serve as our core arent a platform technology for our breast cancer comprehensive profiling product.
We also expect the whole transcript on product the serve as a platform technology to be made available as an OEM the CLIA labs and other tests developers.
This is a major value creation initiative for hcg.
Whole transcriptome product that brings the benefits of small sample requirement easier workflow simplified bio informatics and transcript on level multiplexing will enable hcg to fully compete in the entire 800 million dollar plus aren't IC market.
As a very strong value proposition.
We're very excited about our potential for this business and are moving forward with initiative. This initiative very quickly.
And our published development roadmap, we plan to have all of the Biomarkers and gene sequence is identified by the end of Q1, and we are on plan to meet that milestone.
By the end of Q2, we expect to have the asset configuration established.
In Q3, we plan to publish attachment fees technical feasibility report demonstrating concordance to Arnie seek by the ended the year, we expect to sign up our first collaboration partner.
At the start start commercialization with an early adopter program in late 2020 into began initial product commercialization midyear 2021.
There's a lot to be excited about HDT at HKG, we have a terrific core technology platform and I'd see we continue to make it better every single day.
And we're leveraging our differentiated technology platform across several large and growing markets.
Going forward to this year as we continue to grow our direct product and services business manage our partnership collaboration business and develop our proprietary molecular diagnostic business.
With that it's now my pleasure to turn the call over to our CFO John Wick means for an update on our financials. John Thanks, John as John mentioned total revenue for 2019 was 19.2 million versus 21.5 million in 2000 anything.
Direct revenue defined as product and product related services revenue in our financial statements was 14.6 million in 2019 or 60% increase over 2018 direct revenue of 9.1 billion.
Collaborative development services revenue decreased year over year by 7.8 billion as existing programs reached partner decision points.
No new programs were entered into in 2019.
Despite the slowing collaboration revenue, we're very pleased with the strong growth our profiling were director of though reflecting increased sales of instruments and consumables, resulting from expansion of our profile in venue available to an increasing number of pharma and academic customers adopting our technology in the United States in Europe.
Our cost of product and product related services revenue increased 8.1 million in 2019 compared to 5.1 million in 2018.
This reflects our increase in direct rather than for which related costs are included in cost of product and product related service thrown out there.
In addition, a portion of our 2019 direct revenue included low margin subcontracted laboratory services related relating to two large pharma company customer programs, we do not anticipate a re recurrence of this volume and type of profile and revenue in the future.
Selling general and administrative expenses decreased approximately 6% 18.7 million in 2019 compared to 2018, primarily due to higher stock based compensation consulting costs incurred in 2018.
Research and development expense decreased approximately 16% to 10.6 million 2019, compared to 2018, primarily due to less collaborative development services revenue in 2019 or whats related costs are reported in research and development expense.
Continued new product related research and development expenses unrelated for a collaborative development programs.
Amounted to approximately 7.7 million for 2019 compared to 4.6 million for 2018. This increase reflects the activity of our California Technology Center, where we initiated work at our whole transcript on panel in 2019.
Our operating loss for 2019 was 19 million compared to 16.2 million in 2018.
Net loss per share was 51 cents for 2000 1960 cents for 2018, the reduction of our year over year loss per share reflects additional shares of common stock so that underwritten public and private offering in 2000.
We currently have approximately 15.4 million shares of common stock outstanding.
We ended Q4 were $33 million and unrestricted cash cash equivalents and short term available for sale securities at this point I would like to turn the call back to John for some closing comments.
Thank you Sean.
Yes, like many companies we are facing some uncertainties regarding that go with 19 situation, but we're making daily adjustments to our business plan that countermeasure potential negative impacts.
But we do not believe that this impacts the longer term opportunity for HPG.
As mentioned earlier I believe we have an amazing opportunity in front of US we're positioned to grow in a large in fact in fast growing markets within excited and highly differentiated platform technology.
In 2020, our key priorities will continue to be first we'll look to continue to grow our base profiling business. Both helped fund continuing operations as well as to create new collaboration opportunities.
We believe our performance in 2019 validates our strategy and demonstrates our ability to execute.
This is an 800 million dollar plus market with robust growth and we believe we're just scratching the surface on the opportunity that this presented stage DG and.
And now that our sales teams are fully staffed and we have new panels and applications. We believe we're going to continue to show robust growth in this in this market.
Second we're going to look to continue to grow our pharma pipeline both in the number of customers and the number of projects. We exited the year with 13 customers. An 88 programs again now with a full sales team. We believe we will continue to grow this line of business.
Finally, the look to build our next Gen. Ed's seek platform technology that will serve to be the base for our breast cancer diagnostic as well as an OEM platform for other customer calipers.
This work is underway in our California Technical Center, and we've laid out key technical milestones to measure our progress here and I look forward to reporting out on those as the year progresses with that it's now my pleasure to open up the call for questions operator.
Thank you at this time will be conducting a question and answer session. If you will that tough question. Please press star one on your telephone keypad a confirmation. So indicate your line is in the question Q. You May proceed start you. If you will let your move your question from the Q.
All participants usually speaker equipment, it may be necessary to pick up their heads up before passing the sarkies one moment. Please as we call for questions.
Okay.
Our first question close a line of permit so that's what SBB Leerink. Please proceed with your question.
Yeah, Hi, good. Thanks, So first one I.
I appreciate it's hard to say when.
Uh-huh things will recover in terms of when folks will go back to return to the lives but are trying to understand it can you. If you can elaborate on any customers or type of customers that are still utilizing.
The the products in the direct channel and the direct revenue.
And should we or and how should we think about the impact here should we assume majority of or the impact is going to be on err on the direct revenue.
Line and and should we expect the rest of the PDP funnel to be sort of pushed out just help us understand that timing given the current disruption.
Yep Funny Jack this is John Thanks for the question really Unfortunately, right now it's kinda too early to tell the impact all I can really say as I. It's obviously are going to be impacted.
We're seeing institutions, both pharma and academic shutting down during this outbreak.
We obviously expect this debt to affect our business.
But really due to the unpredictability and how fluid the situation as we really haven't been able to quantitatively impact at this time.
That said I am I reading your notes and notes from others leaders in these institutions are confident that wants their back demand is going to snap back a wants personnel are back in the laboratories.
We believe the for the core fundamental market driver still remain in place and we expect that one's pharma companies and large academic medical centers returned to work that we'll see our business saw with these customers reserve.
Okay and on the PDP funnel, you mentioned 88 different programs there with this current impact ongoing I mean help us understand.
It appears to me that the you know research and the academic and the pharma are you a profiling type of work will return back, but do you expect some projects to be permanently lost as a result to this you know help us understand on that 88, a number in how should we think about that for for the full year.
Good question, what we've seen so far no by the way you know there's still a lot of.
Clients, specifically farm or would that are working from home. So where you know we're continuing dialogues with a lot of those customers, but if you remember how we keep score I know is 88. It it has to have generated business.
In the last 12 months. So if we lose a month of work or two months of work on it I would expect that that number in the near terms actually going to go down because we're going to time out of certain programs simply because the account essentially shut down from that type of work.
But what we're seeing is not cancellations, what we're seeing as things are just pushing out.
Okay, and Sean I'm on a cash burn can you remind us what's your expectation here for the full year and and assuming that things <unk> folks would turn back and a in couple of weeks timeframe. How are you thinking about that and talk to us about the strength of the balance sheet.
Yeah. It you have currently and then need steps that you are taking in the near term to.
Ensure that you continue to manage the cash here I think that's an important question for a number of investors.
Yes, I think again too early to tell punit, we're starting to model out scenarios preserve growth and value drivers, while still not exceeding our our targeted cash burn for the year, which we expect to be approximately five per quarter.
As far as countermeasures you probably saw that we entered into an agreement yesterday. It was done to preserve HPG his ability to raise equity capital as needed with registered shares.
We have had some activity on our ATM in Q1.
And are we going to small private placement with an investor and we also managed to get our interest only on our mid cap financing.
Our senior debt facility pushed out 11 months, which preserves about $600000 per quarter.
Okay alright, okay. Thank you.
Our next question comes a line of Craig Zoo with Cantor Fitzgerald. Please you with your question.
Hi, This is Dennis tack on for Craig vision, Thanks for taking questions.
So could you comment on the impact that you're seeing on breast program in California.
What this does to your timeline.
Great question, Dennis actually the team up there I, just I got to give a hats off to them.
They have continued working not necessarily in the lab, but at from home because so much of the work that is being done right now is actually planning and actually work that can be done individually kind of in silico.
So that team has just been phenomenal and how they have responded I believe we're well we I know we met our Q1 milestone depending upon how long the the shelter in place.
Stays in place and California will probably dictate how much risk there may be in our Q2 milestone, but so far I think we've probably only lost about a week.
Of our work.
Out of that program.
Great. Thank you and.
Is there a target number of.
Additional.
Ralph on panel introductions that you expect for the year.
Yes, so what we're doing this year is we have what we actually believe is probably the.
The majority of what we need with our oncology biomarker panel, our precision immuno oncology panel a mouse M&A panel that we brought out the micron a product and then the recent autoimmune panel what we're now doing through applications on our reveal software is actually we're going to be.
Opening up what we call apps on off of those panels. So we have plans for two to three new apps that will be released so off of those panels for the first being a hot cold tumors signature the second being a cell proliferation a rate.
Calculation and then third is going to be a molecular subtyping application. So we would expect probably have essentially one out about every four months.
Which actually so it's almost like a new product off of an existing panel [noise].
Great. That's it for me thank you.
Thank you.
Our next question comes a lot of Alex Noah with Craig Hallum proceed with your question.
Great. Good afternoon, everyone. John most of the work that Hcg does my understanding is about retrospective studies. So I would think those would be relatively immune to covert am I incorrect.
Yes, and now so.
Not immune because if we actually can't be on site at that whether it be a an academic medical center or a pharma, we can't continue to move opportunities through our sales process. So it it kinda. It we can do some of this by phone, but many of the.
The the sales.
Processes have essentially stopped.
You're right a lot of these are a retrospective on that being said I do think what will be somewhat of an impact as as our trials are either halted or slowed a.
That are that are currently enrolling.
Again, we don't see any changes so long term, but we do see some turbulence I think over for a while for however, this long if it lasted about a month to month or quarter whatever.
Okay got it and the direct business did 60% growth last year.
Obviously, not including co bid what was the growth in direct business in January and February.
Thanks.
Question as as you probably have have seen we're a little backend loaded and actually we were on half to hit our internal plan up until March.
When things you know kind to be.
Really the last two weeks things almost shut down I mean, we've got a crew and here are finishing projects we are trying to get things.
To a position that I say, our you know our part so that we can we can leave work, but we don't have customers that are sending a samples are so there you know that work as basically stopped so we were looking good.
What we're doing right now as we're actually taking this time.
It's almost like a time out in a basketball game to kind of sit back down with our sales teams in our commercial teams odd to get a reset and make sure that when the accounts turned back on were fully ready to take advantage of that when we can get back out into the field and then the same thing on our development milestones both in Tucson.
And in California are those teams are taking this opportunity the plan out experiments odd to access samples to get things in place. So that when everyone can return back to the laboratories.
You know we can be we can be most productive and then and then in both both well locations we are.
Being very smart as I was mentioning trying to minimize any employee.
Risk. So we may have a person or two in because actually we don't require a lot of our lab work the generate a lot of data. So we can get the the actually about the lab work done.
In a very light fashion, and then get all the computational and and analysis and report write ups done by folks they're working at home and that's essentially what we've been doing.
Okay got it and we were hoping the hcg was good to have.
Basically sign up a new PDP partner without cage and by the end of December that obviously didnt happen. So I'm just curious what what are the reasons for their continued push out of any new PDP programs that these pharma partners that you had in the pipeline did they go with other other diagnostic companies or are you and still in discussion with them.
Now in both of the two opportunities that we're developing odd that the account or our partner has developed a delay. So it's a push out it's not a lost if you will also they havent gone with an alternative vendor or an alternative technology. It's just they have been slower to execute and they had Paul this there we're going to me.
And since that time, we've actually have when there's there's been one to two new opportunities that also we're starting to look at that we thank you know could could happen. This year. So we're trying not to put a number on it but again I'll go back them up but I've always been saying I fully expect that we will add additional.
Our collaboration partners in 2020.
Okay, and where do we sit with PDP to NPP three are those still kind of inactive over 2020 or should we expect to hear news on either one of those two this year.
Yeah on PDP too is I'd say they are waking up.
There you know now that you're kind of post merger.
So were you know we expect to see kind of renewed activity if not on that assay on something else I would that client our PDP three they've got the data and you know again that when we are waiting a readout.
Okay got it thank you.
Yep.
Once again, if you will notice question. Please press star one on your telephone keypad. Once again, if you will that does question. Please press star one on your telephone keypad. Our next question comes on line of weekend with HC Wainwright. Please proceed with your question.
Hi, This is Ed remarks on for you I appreciate you taking your question.
Just two for me.
Can you describe what the statuses of the autoimmune panel.
Yep. So we've got it on market, we're starting to see revenue on that again, our sales cycle, sometimes can be a three to six months sales cycle. It was launched late last year.
We're just now starting to see it picked up unfortunately, not being able to make sales calls obviously isn't going to help that caused but we still remain very bullish about that opportunity.
You know autoimmune as is.
The large market and Biomarkers are now just starting to.
The used in that market, whereas in oncology I'd say that's probably.
They got a 10 year head start versus auto immune but again, we're we remain very bullish on that that panel.
Excellent and.
And then with everything going on in 2020, I'm wondering if you could describe what you anticipate being the primary revenue growth driver this year.
Yeah, I think it's kind of it's going to be more of the same. We're you know the profiling business that we really don't been and quantitative that with some third party consulting last year to big market and dock.
We did.
14.
And change in that business 14 six.
Last year.
We've sized the market at 800, plus 800 million plus.
We think thats going to continue to be a real real revenue driver for the company with the current panels that we have.
Eventually, we'll we'll we'll bring out when when we get it there will bring out the the whole transcriptome product for gene expression profiling I think that will open up another segment of the market and we're going to continue to bring our new applications on the preexisting panels, which makes me make the product easier to use and that helps drive market adoption.
So now we think that this core business.
Are you all profiling can really be a very nice business for us and then it sets the stage for us to potentially get a companion diagnostic and it also becomes the foundational technology platform that our California team will then start to to build our breast program on.
Thank you appreciate the detail.
Okay.
At this time I see no further questions left in the queue and I will let's turn the floor back over a management for any closing remarks.
Great Yeah, I'd like to thank everyone for joining us today I know that's theres a lot going on.
But in particular I again want to find the employees here at age TG, both in Tucson, and in San Carlos for their tremendous work and sell sacrifice that they continue to to make and demonstrate the help us grow the company.
Additionally, I'd like to thank our board and our shareholders for their continued support and we look forward to updating you on our next earnings call. Thank you.
This concludes todays teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.