Q3 2020 Progenity Inc Earnings Call
[noise] welcome to the progenitor <unk> third quarter 2020 earnings call.
This time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press the star Didnt zero on your Touchtone telephone I will now turn the call over to Robert.
Ooh, managing director with Westwicke I see our virginity its investor relations firm.
Thank you operator, good afternoon, and welcome to progenitor <unk> third quarter 2020 financial results Conference call.
Joining me on the call are Dr., Arie stylish, chairman and Chief Executive Officer, and Eric Disbar Buss Chief Financial Officer.
Before I turn the call over to Dr. Stein <unk> I would like to remind you that today's call will include forward looking statements within the meaning of the federal securities laws, including but not limited to the types of statements identified as forward looking in our quarterly report on form 10-Q that was filed on August 14th 2020.
Our quarterly report on form 10-Q that we are filing today and our subsequent periodic reports filed with the FCC, which will all be available on our website in the investors section.
These forward looking statements represent our views only as of the date of this call and involve substantial risks and uncertainties, including many that are beyond our control.
Please note that the actual results could differ materially from those projected in any forward looking statement.
For a further description of the risks and uncertainties that could cause actual results to differ materially from those expressed in the forward looking statements as well as risks related to our business. Please see our periodic reports filed with the SEC.
Slide deck with some supplemental third quarter financial information is also now available on the website, but it will not be referenced by the speakers on the call today.
With that I will now turn the call over to Dr., Harry <unk>, Chairman and CEO of progenitor.
Thank you Robert and thank you all for joining us this afternoon.
A quick note with respect to our ongoing litigation matters why would continue to believe them to be unfounded and expenses vigorously defend our position we're not going to go into detail on this cool, but you could find the latest update you know third quarter 10-Q.
We made significant progress during the third quarter, both with a revenue generating business and especially with a pipeline innovation programs.
Progenics he has not issued guidance in 2020, but we do recognize we have analysts estimates and consensus forecasts, which we believe needs to be Recalibrated and Eric will cover. This later in the cool.
A leading indicator of demand and to a large degree revenue is reported volume, which grew 12% quarter over quarter.
It's probably depends then it can do for towns in certain of our key markets. This growth was driven primarily by our COVID-19 testing.
Great Britain you for US is a lagging indicator, especially for a company still very much progressing through the transition phase over in network contracting process and revenue cycle management optimization.
In the quarter, we also witnessed some customer turnover due to necessary changes we implemented in revenue cycle management earlier this year and this specific issue, but it's close to running its course.
We have also increased our focus on securing your business with significant success, the contribution of which will be evident in the coming months as.
As a result, our third quarter financial performance still carry some of the effects from prior quarters, which includes a pandemic can do slowdown that occurred in Q1, and Q2, where we still show relative resilience in demand and I could see imperatives thing, but also a slow overall reimbursement progression in general which delays.
The recognition of revenue.
I'm pleased to share that during the third quarter Progenics. He further increases in that Werent covered lives with an additional 1.5 million lives from new contracts with regional players and also added the multi plan national contract, giving potential excess of up to 60 million plan members in.
In addition to the achievement, we expect data in our PT revenue and his team will gradually improve as more payers transition to covering and I P. T for average risk pregnancies several.
Several state Medicaid plans and commercial payers, including more recently to your mono offering coverage for average risk.
As a result, a majority about has currently now cover average risk and of course, most have indicated that it's a permanent shift.
In September we expanded our carrier screening testing menu to better conform to pay a medical policy coverage, which we believe will also result in improved revenue and SP in the coming quarters, and we have already converted more than 50% of our carrier screening book of business.
We also implemented a patient cost estimates in September which was simply part of it sort of in the patient's responsibility early in the process and we believe will help drive revenue and expand business with.
We expect to begin realizing modest benefits from these changes in Q4 significant volume and revenue contribution from my and I could say encouraged testing product lines in Twentytwenty one.
We always want to use our capital efficiently and expect to further focus our efforts on key value drivers and catalysts.
Furthermore, we have taken advantage of existing excess capacity, that's a a very <unk> affiliate, which until recently was still limited to offer COVID-19 test in the local markets by January we expect to be national we greatly increased capacity for Cobi 19 testing to serve.
Old Btwob cnnfn patients among others.
My team test and is expected to impact both margins and volumes positively and we expect that further growth will be driven by our ability to maintain a competitive 24 hour turnaround time for more than 98% of our accession tests.
We are working diligently to demonstrate that our revenue generating business is a strong and positive contributor to our success and expenses to be more evident beginning in 21 as a point of reference Vera affiliate, which is already in network with all major commercial players are not subject to pretend it's his trends.
Additionally effects in Twentytwenty experienced strong growth with this core offerings that include an IP to encourage testing Wifi.
We firmly believe such growth will also resumed projected see.
In the Meanwhile, we will be controlling our expenses and thoughtfully allocating capital, especially to ensure the success of our near term growth catalyst that include a core business.
Progenitor. She is innovation driven and in this regard we have achieved development and critical risk reducing milestones across all quite line programs.
For example, you know four continues to progress through development.
Last month, we made a critical advancement by finalizing a protocol design and testing we.
We have achieved high target specificity across all the tens of thousands of multiplex single molecule detection probes.
I don't think measurable and your core the dosage response, a minimal background noise.
This achievement is expected to enable assay integration and initial performance benchmark in Q4.
Last quarter, we also disclosed our ability to identify people DNA and we continue.
Well I'm in a foot to quantify fetal fraction experiments are now underway and we plan to achieve our next key milestone of demonstrating fetal fraction quantification in over 100 subjects and transfer the single molecule, what I'd say to optimization next month.
Peter qualification by single molecule platform is critical, especially given that he called recently indicated the quantification of fetal fraction is essential for an IP tests.
We believe that in idle for as a potential to reduce or and I P.T. direct cogs by up to 50%.
Allow much faster turnaround time, then sequencing and achieve equivalent performance to sequencing.
To fool can work with supersede sequencing for an IP TV.
In addition to an IP TV genomics.
Single molecule platform has the potential to detect ordinary epigenomics and proteins with exquisitely sensitivity and low costs provided the biomarkers are known.
Switching to our development experts in the field of pretty Clancy, a key milestone in analytical verification for LTAC rule that says no branded we Cludia was successfully achieved we are pleased with how essay and platform of progressing quickly.
Preclude you guys now out of R&D, and <unk> operations group, which will be responsible for both validation and commercialization of the test next year.
As a reminder, we already have the patient samples for validation, which we expect to complete by mid Twentytwenty. One followed by commercialization in the second half of Twentytwenty, one and still accessing a $3 billion U.S. market.
We also had a productive pre submission meeting with the FDA for IB de version of the test.
I'm pleased with the guidance, we see today.
We have scheduled a pre eclampsia R&D day on November the 20th that will include expenses and insights from physicians and patient advocacy groups to provide more information, including a discussion of the analytical and clinical verification data.
Moving to our G.I. precision medicine program and the performance of our Florists an essay metrics developed for the appeal with the ICSI brought program was recently presented at the American College of Gastroenterologist and by leading key opinion leader Toxicities Ral.
His oral presentation was honored with the highest award by the college for the small bowel function and this reflects the quality of the study receptivity of the college to EPS solution.
This is perhaps the most important risk reducing steps for this program as it was not clear how essay would perform against the gold standard.
And got to Rouse oral presentation. He just he discussed results from a study at three clinical sites and 66 subjects, where a bench top version of the progenitor cell about let's say at 94% agreement with the gold standard of Endoscopy and the Scopic exploration.
And total about two account by culture and plate reading.
The gold standard method is demanding for both the physician microbiologists and the patient and require sedation with the results taking a week.
We expect to be able to quantify like bacteria within our adjustable within hours of ingestion and without the need to recover the capsule.
Prevalence the ciba related disorders in the U.S population. According to got to route is at least 10%, which corresponds to over 100 million annual patient visits with signs and symptoms resembling those receivables.
We believe that our Pgx CBD advice will emerge as the first FDA cleared diagnostic solution for patients we suspect to see both a vast U.S. market with no clinical useful alternatives.
As a reminder, the purity JAKKS can perform a range of fluorescent assays for a variety of GE related pathologies.
How are assessed program is closely related to the appeal Dx and he is also progressing well.
And our targeted Therapeutics program last Friday, we announced a key milestone for the drug delivery system di di which.
Which is initially being developed to treat ulcerative colitis.
The DDS completed a preclinical device function study using a fully functional autonomous device.
Assertive Colossus is poorly managed with current therapeutics in part due to the inability to get sufficient drug concentrations at the site of disease without side effects.
Wilkinson boom Dr., William Sanborn, Chairman of a clinical advisory Board and Chief of the Division of Gastroenterology and director of the inflammatory bowel disease Center at the University of California, San Diego stated that our Tds platform, an oncoming preclinical studies have the potential.
True to lead to significant improvements in patient outcomes, what producing high drug concentrations locally at the site of disease to improve efficacy, while limiting systemic exposure to ensure safety.
The study endpoints with the voice function as determined by evaluation of the data from the recovered capsules and evaluation of the localization technology in canine as assessed by the PK profile of acetaminophen and five aminoshure, so listen late formulated in solution.
We are pleased to report that we'll do both.
She is used in the study functions as intended and the PK profile show drug release in the large intestine the intended target.
This provides evidence that our Tds device platform performed as intended.
Deepwater localization technology developed for use in humans works as well in a canine model, allowing us to use this model for R&D, enabling Nonclinical safety studies.
We expect to use the D.A. Tds and a full function study in normal human volunteers scheduled for March 2021, and then began preparation for an R&D.
Animal models mice and swine of colitis, we showed that by delivering.
Hello, topically drugs formulated in solution using a 10 year low.
Resembling the function of the D.S. with this disease models and delivery proxy, we were able to penetrate the mcos and achieve compelling PK PD effects with both monoclonals and small molecules with little systemic breakthrough occurring.
The summary chose ULE program for the systemic distribution of bought a molecule was quite Yodle has also advance and we expect to update.
The next key milestone shortly showing for the first time the performance of our fully autonomous device and they came online model.
We continue to be actively engaged with additional potential pharma partners as we advance our precision medicine pipeline and expenses developments on that front in the coming quarters.
With that I'll now turn the call over to Eric the spot is our CFO for a discussion of our financial results for the third quarter of 2020.
Thank you Larry and good afternoon, everyone I'll provide a brief overview of our financial results and also invite you to review our third quarter financial release, and our 10-Q for a more detailed description.
During today's call and in line with our second quarter call I'll describe our sequential quarterly performance focusing on our second and third quarters of 2020, we.
We also include year over year performance in our disclosures, but we believe the sequential comparison is more meaningful as progenitor he transitions to a largely in network operation.
And reflects the impact of the cobot pandemic, which was not a factor in 2019.
We reported $25.9 million in revenues in the third quarter of 2020 compared to $17.3 million in a second quarter EPS.
Larry already mentioned earlier in the call some of the transition we're still experiencing in our revenue cycle management process and in network and migration requiring us to maintain our current revenue recognition approach until such time as our trailing six to nine months test liquidation performance improves sufficiently.
To allow us to report higher realized ASP.
We are still of the view that this phenomenon is transitional and we remain optimistic in our financial outlook, especially in 2021, where we believe the vast majority of the operational improvements with implemented this year combined with the benefits of our increasing in network position and an E increasingly favorable average.
The risk and IP coverage by government and commercial payers will all combined to deliver a strong financial performance.
With regards to guidance, we want to proactively manage investors' expectations and give you on our anticipated performance in the fourth quarter of 2020.
The fourth quarter tends to be slower for us in terms of volume growth due to holidays in November and December which affect demand a nymex and timing, but we are very encouraged by recent weeks volume growth trends.
Also the relative demand between our women's health products in our cobot, 19 testing, which carries lower ASP, but higher margins drives reported revenue.
All of these factors considered we expect to achieve in the fourth quarter revenues and volumes similar to what we reported in the third quarter. We believe the transition of our core molecular testing business will continue to progress into 2021, when we expect to see the benefits of growing volume demand and the revenue cycle management.
Movements with implemented so far this year.
Our ASV improves our third quarter 2020, compared to the second quarter. Since we had no revenue accrual adjustments in the third quarter without such a cruel DSP would be slightly down due to higher contribution from coated test volume.
Our third quarter Cogs per test decreased slightly compared to the second quarter due to higher volume during the third quarter and performance improvements through efficient cost control and product mix shift between the periods.
As Jay expenses increased between the third and second quarters of 2020, largely the result of additional stock based compensation accruals as well as slight increases in professional and legal consulting fees.
Sales and marketing expenses increased 3% in the third quarter compared to the second quarter, a slower pace than our volume growth in the period, while our R&D expenses increased slightly as we continued to make substantial progress in our innovation pipeline and achieving important de risking steps justifying increased investments.
I want to note that we continue to monitor our g. any incentive and marketing spend very closely to make sure. It remains in line with our topline progression and make only incremental investments in our R&D programs as we gradually achieve key de risking events and achieve important development milestones.
We are proactively reviewing our operating expenses for the next few quarters with a goal to maintain that alignment.
The third quarter 2020, net loss of 47 million was $6.5 million favorable compared to second quarter net loss largely resulting from increased reported revenues during the third quarter.
Third quarter third quarter, 2020, and putting operating clash flows were negative $51.3 million compared to negative $13.5 million in the second quarter. The main difference between the two quarters was the receipt of $22.7 million of cares Act income tax recovery in the second quarter compared to a risk.
The $15 million in the third quarter and with the payment in the third quarter of $16.2 million in accelerated government and payer settlement obligations.
We had a cash balance of $60 million at the end of the third quarter, while our balance sheet provided us with a cash runway to achieve in the third and fourth quarters of 2020 important value, creating milestones from our R&D pipeline as a heavy described earlier, we continue to work on optimizing our capital structure.
Including both debt and equity options with that I will now turn the call back to.
Over to Harry.
Thank you Eric as we look at the risk of Twentytwenty 221, and beyond we have many drivers of value creation and revenue generation that Progenics sales. We believe we will continue to experience resilient and we tend to sequential quarterly growth driven by the differentiation of our products and services and by recognizing the Ben.
If it's an increase in network.
Coverage from both our core business as well as.
Coated contribution.
But we are particularly excited with the progress and transformational potential of R&D pipeline with two major product launches anticipating 21 preclude here and there.
For both in our channel.
In 21, we expect to meet development and launch milestones corporate Cludia and that's before the scheduled preeclampsia R&D day on November Twentyth should help better inform investors with regard to preeclampsia and the large unmet clinical need of test can satisfy.
We believe that our precision medicine platform will continue to gain momentum and we anticipate further value right partnerships that will provide validation as well as non dilutive capital progenitor. She is well positioned for compelling value creation in the coming months and he is and will continue to identify effective ways of achieving that goes.
With with an efficient use of our capital.
With that operator, we're now ready for questions.
And ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
And we have a question from Steven Madden.
Piper Sandler your line is open.
Thank you operator, hey, good afternoon, guys. Thanks for taking the questions.
Hi, Steven Hey, Steve.
So maybe first one for Eric.
No.
I appreciate the color you gave us on the lower revenues per test in the quarter sounds like it was an accounting issue is at historic rates.
They were being applied to current volumes. So just one question.
Well is this something that you were aware of that would happen or was there. Some expected or did you think you know the revenues are going to be offset because of additional reimbursement.
I just want to get a little bit more color sure sure it's purely a factor of the pace.
That it takes to actually.
See increased liquidation as you transition in network and under ASIC. So six rules you have to see until you have enough trailing history of liquidation improvement before recognizing revenues on new volume you generate at a higher rate, it's purely a conservative approach under GAAP.
So pretty straightforward.
Okay got it.
Okay and then do you think this is going to resolve in six to nine months.
Yeah. It just takes time to continue improving liquidation and as we progress there.
It should trend that transpire into.
Okay got it all right and then moving onto it to average risk.
Correct.
So obviously, a big catalyst for this space.
You mentioned the majority of your payers are now covering average risk do you have a give us a rough sense of the number of covered lives in average risk and then give us a sense how important it is getting a network was average risk quickly and then you know where where you're at now in terms of covered lives are you.
Happy with that number now or do you think you could have done better.
So with regards to covered lives weve updated the deck a little bit too.
To show were at 144 million covered lives not including the multi plan plan and the reason for this is that the multi plant national plan as a little bit of overlap force for certain in network agreement as well.
So right now were above where close to 70% of our.
Revenues that are really in network.
So that gives you an appreciation of where we are currently so we still have a few large contracts in progress so and salmon United are really the two big ones that remain.
In our in our plans.
Okay got it and all of those 144 million covered lives excluding multiclient, they're currently reimbursing average risk.
The the majority of them I would say, we're about 55% or so when we run the numbers that are currently cover average risk and IBT and its increasing we've seen a fairly good momentum than last quarter, both government and commercial plans, adding average risk reimbursement.
So the trend is definitely visible.
Okay about 55%, Okay, great and then is that is that 55% is that right.
Ahead of schedule or are you happy with that number or could you have done better yeah. So I think the last quarter or at least in one of the conferences. We answered the question that would probably see a couple of years of progression before.
Before you know most of the market actually covers average with its probably going a little bit better than we originally thought we should we view this as a very positive sign.
And the other thing is that the acre guidelines was pretty clear.
Where where physicians are highly incentivized prescribing.
And I think you test for all pregnancies. So thats why did this momentum gathering there.
Okay, great Yeah. It seemed like that was a good that that's a pretty reasonable number.
Then real quick.
You mentioned the sales and marketing expenses can you give us an update on on the build out of the sales and marketing team. I know you said you recently added 15 sales reps and you're going to continue to higher waivers should become closer to the size of peers given your comments on the watching the cash spend.
And keeping it in line with topline revenue growth could you just an update on the sales team and the build out.
So this is Harry Uh huh.
Hey.
Yes, we did add a additional head count to the team and I think as I said on the on a previous cool.
We will do it in kind of way, we want to see the impact on positive impact on top line overall the investment.
I won't make any additional hires until that really transparent.
Okay, great. Thank you I'll get back in the queue.
And your next question is from Catherine Schultz of Baird. Your line is open.
Okay. Thanks for the question.
You mentioned covered testing.
Right.
Volume increased its what the Kobe testing.
The volume.
A quarter what are your expectations for the core non core business from a volume perspective in the fourth quarter.
And so we still don't really break down the relative contribution from on the specific test in our in our volume, but covet is gradually taking a larger contribution in probably start being relatively material in Q4.
So that's the way I would I would position this.
At this stage the core business I think Harry mentioned that we are gaining business and accounts and over the last few weeks, we've seen good growth momentum for the core business.
So we we remain cautiously optimistic for the Q4 performance.
Okay, and you touched on average risk from a payer perspective.
One of your peers talked about seeing an uptick in average risk PT order. Following the ECOG guidance is this something that you've observed as well and how much of a driver or do you think that.
Going forward.
Oh wait were seen evidence of that and.
And we do expect we do expect a broader demand for a an IP to see because of the cold apologising.
Okay, maybe last one for me any comments on how the collaboration.
Corridor is going and did it contribute any revenue in the quarter.
Well it contributed some revenue to the quarter and it's growing it's growing very well.
It's advancing and progressing as expected.
Right great. Thank you.
And again, ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone.
Your next question is from Andrew Cooper of Raymond James Your line is open.
Hey, guys. Thanks for the questions maybe just one on gross margins Firstly as you think about.
The commentary you gave around mix for ASP.
If we back out the accrual it seems like you had a lot bigger impact on EPS tier four.
Owning a piece for the current mix than we did on margins or just how do we think about what that that dynamic is really like or help me kind of square the circle. There. When we think about the comp search is not necessarily dropping as much as we saw.
Yes.
Yes, so the so Andrew Thanks for the question. The main reason is really proportionate.
Contribution.
To the revenue versus the versus the the the Cogs and.
The.
You will probably see still some evolution moving into the fourth quarter.
Our or approach to.
The edge of the book of business that we have is that.
And the the core the core business cards. This is pretty.
Is proportionately much higher than the Covidien.
Covet testing Cogs, so it will take a little while before proportionately the margin coming from.
Covidien overseas will supersede the few while the margin contribution from the core business, just because of relative size well hopefully that helps.
Okay, and then maybe just kind of on average risk assay.
A little bit.
Then the other side, but.
Yes, I think in past conversations at times, you sort of reference that that that would give you maybe a little bit more.
I will talk a little bit of a shift in sort of how you think about marketing relative to being a little bit more targeted sometimes on the volumes you were asking so just maybe an update on how you think about going after what is now a material we bigger potential record revenue opportunity with a greater greater.
Average how should we think about how that changes.
Youre sort of sales marketing efforts.
So we're definitely targeting.
More aggressively and 90 and BT business and I think we've said historically, we took a conservative approach because of poor reimbursement, obviously as for India as change.
During the course of this year and when should we see the results you see the prescription behavior by physicians is moving towards broadening.
Subscription for an IP to help all pregnancies. So it definitely affects how aggressive we are to go after and IP business compared to before.
Okay and then.
I'll save my questions on creates last year for a couple of weeks from now so I will jump back in the queue appreciate it.
Perfect. Thank you really appreciate your questions.
And again, ladies and gentlemen, if you have a question at this time. Please press star and then the number one key on your Touchtone telephone.
Your next question is from Dan Leonard of Wells Fargo. Your line is open.
Thank you so so harry at that sort of your prepared remarks, you mentioned some customer turnover.
Could you elaborate what proportion of your customers did you have to essentially let go due to revenue cycle considerations.
I'll give you a rough number 10% to 15%.
And in that we'll we'll lap that impact in Wendy in Q1 of next year Q2, or when when do you expect to lap that happens when were already at the the tail end of it. So I think this quarter, there's a small transit spill over into next quarter.
As well, but I think most of it will be done you know this quarter and probably the first months of next quarter.
But we really really are the the tip of the two most of it has a has worked through.
The other process.
And then on the managed care side do you still think it's a possibility to getting that work well with anthem by year end or do you think that's more likely now.
2021 cycle of that.
I think it's a first half 2020 one cycle.
Cycle event.
Okay, and then finally, just on the cash use in the corridor.
The 10.3 million associated with the revenue accrual last quarter did that come out of cash in Q3 or do you pay that in October.
Well.
It's the actual cash out came out in October.
Okay. Thank you yep.
Norris.
I am showing no further questions at this time I would like to turn the conference over back to Harris Tai Lee for any closing remarks.
Thank you all once again for participating in the call and thank you for your interest in Progen anti.
Hope that you will join us for a virtual credit Clemson invest the R&D day on November 22. In addition, we will be participating in the upcoming virtual Piper Healthcare conference in early December and look forward to reconnecting with many of you. Then do you have any additional questions. Please feel free to contest I have a good evening everyone.
And ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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