VIVS Q3 2017 Earnings Call
Presentation:
Operator: Good day, and welcome to the Organovo Holdings Fiscal Third Quarter 2017 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Steve Kunszabo, Investor Relations. Please go ahead.
Steve Kunszabo: Good afternoon, and thanks for joining us. I’d like to welcome you to our fiscal third quarter 2017 earnings call. Joining me on the call this afternoon are CEO, Keith Murphy; our CFO, Craig Kussman; and our General Manager, Paul Gallant. Today’s call will begin with a discussion of the 2017 fiscal third quarter results, followed by Q&A. Before I turn things over to Keith, I’d like to caution all participants that our call this afternoon may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical fact, and include statements about our future expectations, plans, and prospects. Such forward-looking statements are based upon our current beliefs and expectations, and are subject to risks, which could cause actual results to differ from the forward-looking statements. Such risks are more fully discussed in our filings with the Securities and Exchange Commission. Our remarks today should be considered in light of such risks. Any forward-looking statements represent our views only as of today, and while we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations or views change. During the call, we’ll also be referring to certain supplemental financial measures. These supplemental financial measures are not prepared in accordance with generally accepted accounting principles. Please refer to today’s earnings release for a definition of these supplemental financial measures. With that, let me turn over to Keith.
Keith Murphy: Thanks, Steve, and good afternoon, everyone. I’ll kick us off by highlighting that with a quarter still left in fiscal 2017, we’ve already more than doubled our total revenue from the previous fiscal year. Excellent progress on many fronts during the last several months, but we have a great deal left to do. New markets, new tissues and new applications are on the horizon, as we seek to maximize the value of our platform technology. The foundation of our business remains compelling. We address attractive and growing markets with critical unmet needs. We enjoy favorable competitive dynamics with a first-mover advantage. And finally, we’re technology leaders with a strong IP portfolio. While we may have some unevenness on how our quarterly revenue tracks to our long-term growth profile, these key elements will continue to serve us well. We revised our guidance today closer to the lower-end of the range, where we originally started the year due to some temporary headwinds. Our fiscal third quarter was strong and continued our solid year. Our fiscal fourth quarter won’t be quite as strong due to a couple of specific short-term challenges that I will cover today. However, we expect to be back on track with a robust sales pace in a few months. With that overview, I’ll move on to my customary business update and focus on two primary areas. Progress in our preclinical safety segment and how we’re addressing this bump in the road and advancing our liver therapeutics tissue and what lies ahead in the coming months and years. As always, Craig will follow me with a detailed financial review, and Paul Gallant, the GM of our commercial business is also here to join us for Q&A. In our in vitro business, liver research services continue to be our primary source of growth. We’ve seen adoption across the pharma space with companies of all types and sizes and recently added our 11th global top 25 pharma customer. Taking a closer look at that key group, we now have six of the top 10 global pharma firms on our roster. We’re also seeing a healthy mix of business as we build up our base with revenue recognition from six new customers and seven repeat customers during the fiscal third quarter. All in all, these are solid performance indicators for the value we provide to the drug discovery ecosystem. For now, we’re working with a number of these customers on an issue basis, oftentimes providing data that are important to their decision-making when they run into toxicity issues with a particular compound or compounds that they’re trying to move into or through the clinic. However, we’re increasingly connecting with these organizations at the senior executive level and touting the full value proposition. Adopting our services across their pipelines can generate hundreds of millions of dollars in potential savings and meaningfully reduce development time lines. As I shared on our last earnings call, we’re also expanding the addressable market for our liver and kidney tissue services by adding metabolism studies to our offering. We’re now staffed to support this additional service have purchased and qualified the instrumentation to mass spectrometers and recognize revenue during the fiscal third quarter from a new customer using this service. Even with all our tremendous progress, we’ve had a couple of recent developments that will cause a pause in our revenue growth as we end our 2017 fiscal year. First, some pending orders that we anticipated being complete in the fiscal fourth quarter have been delayed by late in the game customer requests, or change orders to qualify an additional cell source. Second, we’re seeing a change in the timing of other orders due to requests for validation data to support specific use cases. We’re engaged with our customers to successfully complete additional scientific studies necessary to resolve this issue and expect to do so within a few months and provide an update for you on our next earnings call. Examining the second item – I’m sorry, examining this second item more broadly, our technology is a new and cutting edge. It’s unique in that it is living tissue sustained for a long duration outside of any living system. Therefore, when reviewing data from a project, our customers may ask for additional analysis before placing their next orders. We view this need for additional analysis by our customers as part of the natural evolution of our business. We’re pioneering new technology and both we and our customers are still learning specific details about how some aspects of our tissues perform in real world applications. Unfortunately, these unscheduled requests, when they happen, can delay the follow-on orders we have forecasted from a given customer, which can sometimes be high dollar value. We often have a set of planned studies that we discuss with a customer and we forecast our work based on the standard timeline to complete one phase and begin the next phase. An interruption in this typical workflow due to an unplanned validation study can delay revenue recognition from an order that can be in the hundreds of thousands of dollars. In addition to the internal validation studies we’re conducting, many of them hand in hand with customers as they ask us to evaluate a panel of test compounds, you should expect to see more posters and publications throughout calendar 2017. At the numerous commercial events and industry conferences we’ll be attending, we’re investing more to drive sales. We’ve taken a number of steps forward building our library of internal validation data in recent months. First, we published data on the use of our liver tissue to model fibrosis in the journal, Toxicological Sciences. In addition, we completed testing for one of our top 10 pharma customers on several proprietary compounds that represented internal unpublished preclinical misses. These compounds move forward into clinical trials and were not expected to show liver toxicity, but then did. We were able to detect the toxicity of these compounds at a hit rate near 70% and expect to conduct further studies with this partner on other compounds. This hit rate shows our ability to close the historical gap that exists using animal models and represents a major step forward in predictive power for our customers. I’d love – like to pause and update you now on the therapeutics tissues business. As we shared on our last earnings call and subsequently by publishing data at the TERMIS Conference in December, the early results for our tissue – our liver tissue patch have been promising and support our decision to move forward with a formal preclinical program. Our animal studies have shown robust vascularization, stable detection of human liver specific proteins in the animal serum, and tissue presence of key metabolic enzymes needed to treat the diseases we are targeting. We also believe that our approach is designed to overcome many of the challenges that cell therapies and conventional tissue engineering have struggled to address, including limited engraftment and significant migration of cells away from the liver. Given our progress to-date, we now expect to target an IND submission during calendar 2020. But before we reach that significant objective, there are number of steps we plan to take in the next 18 months, as we move along this novel therapy. First, we plan to select and optimize our final tissue design, then we’ll begin disease modeling studies in small animals, which is the prescribed next phase in understanding how well our tissue performs. Subsequent to that, we’ll partner with contract research organizations and advisers to define scope and execute IND-enabling studies. Then we’ll also continue to have early discussions with the FDA and other regulators with the aim of clarifying a pathway for the review and approval of new therapeutic tissues, as well as supporting efforts to shape government funding in this promising space. Lastly, we’ll start to refine our view of the initial indication areas we’ve selected, acute-on-chronic liver failure and inborn errors of metabolism believing that we could bring significant value to this 3 billion plus total addressable market by meaningfully impacting patient outcomes for these orphan indications. Beyond advancing our Bioprinted Liver, we’ll work internally and in collaboration with leading academic centers. For example, Yale and the Murdoch Childrens Research Institute to advance other therapeutic tissues in our portfolio. I’ll wrap up by noting that, we’ve had good overall momentum thus far in fiscal 2017. Our total revenue largely driven by tissue research services has more than doubled year-to-date. And we believe we can successfully address challenges that will keep our long-term trajectory on track. Our liver therapeutic tissue also continues to make steady progress. We’ve strengthened our balance sheet along the way and we’ll continue to make targeted investments to grow our business and maximize the value of our platform technology. We look forward to updating you again in June and providing our outlook for fiscal 2018. With that, I’ll turn it over to Craig for a more detailed financial review.
Craig Kussman: Thanks, Keith, and good afternoon, everyone. I’ll start by recapping our key financial metrics for the fiscal third quarter, and then walk you through updates to our fiscal 2017 outlook. I’ll wrap up my thoughts by briefly reviewing our balance sheet and liquidity profile. Organovo generated fiscal third quarter total revenue of $1.2 million, which was up 251% from the prior year period, but down 16% sequentially. On a year-over-year basis, total revenue benefited from an increase in customer activity for our tissue research services and milestone achievements to our collaborative work with Merck and L’Oreal. When assessing the impact of collaborations revenue on our overall financial result, it’s important to remember that revenue recognition can be uneven or lumpy, given the nature of these research partnerships. These agreements are often long-term and typically have multiple phases with interim milestones. As we transition through the various parts of these contract, it is common to have meaningful quarterly variances as we complete work and plan next step with our partners. Keeping this in mind, our updated fiscal 2017 total revenue guidance assumes very minimal contribution from collaborations revenue in the fiscal fourth quarter. I’ll focus next on operating expense. We reported $0.2 million in cost of revenues for the fiscal third quarter. As a reminder, we began reporting this expense line item for the first time at the beginning of this fiscal year. It captures our costs related to manufacturing and delivering our product and service revenues. It’s an important indicator of how effectively we’re commercializing the business and provides insight to our financial help when considering the associated profit margins. Research and development expenses were $5 million, a 10% year-over-year increase, largely due to higher costs related to increased staffing and lab supplies. We continue to expect that higher employee-related costs and expenses supporting the preclinical development of therapeutic tissues will be the principal cost drivers going forward. We recorded $5.5 million in selling, general and administrative expenses during the fiscal third quarter and a 11% year-over-year decrease, primarily resulting from lower non-cash share-based compensation expense related to accelerated stock option vesting for former executives in the prior year period. Given that this driver was not a run rate item, we anticipate that higher employee costs will get us back to moderate year-over-year increases in future quarters. And finally, a brief review of the full-year fiscal 2017 outlook we updated today and a few quick notes on our balance sheet and liquidity profile. We now forecast total revenue between $3.7 million and $4.5 million for fiscal year 2017, with the main contributions coming from our Liver Tissue services and Research Collaboration agreements. This updated range is back down to the lower-end of where we began our fiscal year, and as Keith noted,reflects two key elements that have hampered short-term revenue growth. Taken together, these items will delay a portion of our forecasted revenue into fiscal 2018. But despite this temporary pause, we have confidence in a growing pipeline. On the same basis for the full-year fiscal 2017, we expect net cash utilization between $31 million and $34 million, which is unchanged from our prior guidance. Our net cash utilization of $23.1 million for the first nine months of fiscal 2017 is consistent with this guidance. We continue to expect our net cash utilization will trend down on an annual basis, as we grow revenue and achieve operating efficiencies. At the end of the fiscal third quarter, we had a cash and cash equivalents balance of $70 million to carry out our business plan and invest in our key growth initiatives. To build on what Keith’s outlined during his remarks, we’ll deploy our capital with an eye towards maximizing the value of our platform technology. We’ll continue to scale the commercial toxicology business, but more importantly increase the revenue we captured by expanding our service offerings. We’ll invest in product development to bring new tissue to new markets with new applications, and we’ll spend a higher percentage of our annual R&D budget to move our promising liver therapeutics tissue through a preclinical program and to develop other therapeutic tissues in our portfolio. In closing, we made solid progress throughout the business and hitting many of our key objectives, along with the natural ebb and flow of continuing to validate the science with our customers and offer what matters the most – more data. With that, I’ll turn things back to the operator for the Q&A portion of this afternoon’s call.
Operator: [:
Luke Sergott:
Keith Murphy:
Luke Sergott:
Keith Murphy:
Paul Gallant:
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Operator: Our next question comes from Brandon Couillard of Jefferies. Please go ahead.
Brandon Couillard:
Keith Murphy:
Brandon Couillard:
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Craig Kussman:
Operator: Our next question comes from Ren Benjamin of Raymond James. Please go ahead.
Reni Benjamin:
Keith Murphy:
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Reni Benjamin:
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Reni Benjamin:
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Operator: This concludes our question-and-answer session. I’d like to turn the conference back over to Keith Murphy for any closing remarks.
Keith Murphy: Thank you very much. I want to thank everyone for joining us today and thanks everyone for the engagement in the good questions. Just to sum up, we’re very confident in our technology. We’re very confident in our results to-date, and we’re looking forward to a very strong rest of the year and calendar 2017 here. We look forward to engaging with you at the next call and summarizing how we move forward on – over some of these operational hurdles and continue to showing – to continue to show good progress, both on the uptake of our tissue services, but – and also moving forward and giving you more information on the pipeline, on the timeline for the liver therapeutic tissue. So thanks, everyone, for your time today. And I appreciate it and thanks from the whole Organovo team here. Thank you.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.