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spk08: Greetings, and welcome to the HTG Molecular Diagnostics, Inc. Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Arndt, with Lifestyle Advisors. Thank you. You may begin.
spk05: Thank you, Operator. Earlier today, HTG released its financial results for the third quarter ended September 30, 2020. Before we begin the call, let me remind you that the company's remarks include forward-looking statements within the meaning of the federal securities laws, including statements regarding increasing use of RNA-based biomarkers, expected growth in the molecular profiling market, anticipated growth in the company's RUO profiling business and related revenue, expectations regarding biopharma programs and collaborations, product development and commercialization activities, and the impact of and potential recovery from the ongoing COVID-19 pandemic. These four looking statements are subject to numerous risks and uncertainties, many of which are beyond HTG's control, including uncertainties regarding the ongoing COVID-19 pandemic and its impacts on HTG and its customers that may cause actual circumstances events, or results to differ materially from those projected on today's call. Factors that could cause events or results to differ materially include those risks and uncertainties described from time to time in the company's SEC filings. HTG cautions listeners not to place undue reliance on any forward-looking statements. HTG is providing this information as of the date of this call, Tuesday, November 10, 2020. and the company undertakes no obligation to update any forward-looking statement. With that, I would like to turn the call over to John Lubneski, Chief Executive Officer. John?
spk04: Thank you, Paul, and welcome, everybody. Let me begin with an overview of where we are in the near term and how we view our business in the longer term. This year has been challenging as COVID-19 interrupted our growth trajectory, but our commitment and belief in our technology has not wavered. we continue to see the fundamental macro trend of personalized medicine driving increasing use of biomarkers, and especially RNA-based biomarkers, to guide treatment decisions. Precision medicine is better for the patient, the family, and the payer, and molecular profiling is one of the key tools to enable this. Molecular profiling is a large and fast-growing market in which we believe we will be a player. COVID has had a short-term impact on some of our oncology efforts, but it's also provided visibility to areas where biomarker-based medicine should be embraced in other disease areas, including immune response. And our EdSeq technology continues to be adopted as a platform technology for NGS-based gene expression. In the short term, we continue to feel the impact of workplace restrictions due to COVID-19. Work-from-home restrictions and precautions remain in place for many of our largest customers and have impacted our business for the simple reason that lab work can't be done from home. Fewer people physically in the labs this quarter meant fewer customers running our instruments in their facilities and sending us samples for lab services. This quarter also reflects the historical trend of softness during the summer months, especially in Europe. While we have seen many begin the slow process of opening back up, we're adjusting to the new normal. In the last few quarters, it's become apparent pandemic is going to continue to impact our customers and their businesses for an extended period. So we're remaining nimble and are adjusting to this new environment. We are looking for where we can leverage our business, technology, and people without sacrificing our strategic priorities. We're aggressively looking for new opportunities and making adjustments to our near-term objectives to help offer the impact of COVID-19 on our business. This includes accelerating our customer diversification, which includes a larger number of smaller and mid-sized biopharma customers, and increasing our presence in academic medical centers. Other opportunities include targeting the large immune response market by leveraging our current call points and expanding into new call points within the same customer addresses. And I'm pleased to say we're starting to see the results of those measures as many of our key metrics in our business show that we're starting to see the signs of revenue recovery in our business. And let me take a look at our performance for the quarter. Total revenue for the third quarter was $1.8 million, compared with $5.4 million for the same period last year. Product and product-related services revenue, or what we refer to as direct revenue, was $1.7 million, compared to $4.3 million for the same period last year. Our direct revenue business offered up a few bright spots this quarter as well. We continue to see a margin-friendly mix shift in business from lab services to kits and instruments. We've also been able to post modest revenue gains in Europe year-to-date, in spite of significant headwinds. Growth in this region is being driven by many factors, but one tactic that's been especially effective is a focus on existing instrument placements and a related reagent pull-through. we are seeing customers gradually starting to return to their laboratories. It's small, and in some cases, it may only be a day or two a week, but this is an improvement over what we've seen the last couple of quarters. We track and forecast this very carefully and are seeing more and more customers resuming some semblance of normal work schedules. Our current expectations, as long as there's not another wave of complete shutdowns, is that in the coming quarters, more and more customers will be returning to work, and oncology trials will get back on track, allowing us to regain our growth momentum that we had before the pandemic. Collaborative development services revenue continued on its expected reduced trajectory, with revenue of $76,000 for the third quarter, compared with $1.1 million for the same period last year. We remain very active with our sales efforts in this area, and we believe that as people return to work, HTG will eventually contract new collaborations. Now let me take a closer look at our profiling business. In spite of reduced activity by our existing customers, they do remain actively engaged with our sales teams. In addition, we recognize revenue from several new customers during the quarter. Approximately 20% of our Q3 customers were new. First orders are usually small, but they do graduate to larger revenue opportunities over time. This is a great example of how our sales teams employ new tactics and measures and measures that are starting to yield results. Similarly, on the publications front, we now have more than 225 publications that reference HTG edge seek technology, a 42% increase from the approximate 158 that we had Q3 2019. We believe the growth in customers and growth in publications reinforces our message that HTG technology is a cutting edge and scientifically integral part of the research process. These metrics give us confidence that our strategy is working. And with data showing that our customers are starting to return to their laboratories, we believe there will be increased demand in the market for our products. In biopharma, we continue to see the number of active programs time out due to work-from-home restrictions. As a reminder, for us to include a program in our active programs metric, it first needs to be a pharma-sponsored trial. It also needs to be traceable in clinicaltrials.gov. Finally, it needs to have generated revenue for HTG within the last 12 months. So with so many trials delayed and pharma not on-site running samples or sending samples to HTG, projects have started to time out, especially because many of our biopharma customers are on the coast where the impact of COVID-19 was more pronounced. With that in mind, we finished the quarter with 55 active programs. down from 88 at the end of 2019. This is a net loss of 33 programs, including 50 programs that have timed out. However, 20 programs have been extended. We've also signed up 17 new programs. So the numbers are actually more encouraging than at first glance, and another promising indicator that our sales measures are starting to deliver results, especially as it relates to customer diversification and biopharma. Turning to our strategic milestones and product development, we continue to operate at a very high level. First, we're very pleased to have achieved our milestone to produce a white paper on technical feasibility of our approximate 20,000-gene whole transcriptome edge-seq panel, which internally we call WTTX. Some of the high points of that white paper are it demonstrated HTG's edge-seq technology is highly scalable and allows measurement of the entire human transcriptome. while maintaining all of its advantages, such as low sample input, extraction-free chemistry, and the ability to test low-quality FFPE tissue. The prototype whole transcriptome panel demonstrated good directional alignment with RNAC. It generated differential expression data that were highly correlated to those generated also using RNAC. Additionally, excellent accuracy of differential expression analysis using spiked-in reference material was also demonstrated. This proof-of-concept study has underscored our view that the HTG EdgeSeq technology is a robust alternative to RNA-Seq for gene expression profiling, with all of the advantages it offers to traditional extracted RNA-based GEP methodologies. This study also demonstrated that our technology can measure the entire human transcriptome out of a single cut of tissue. This is exciting. as we are building what we believe is a game-changing product for HTG and the market. We believe we can enable translational researchers, biomarker leads in biopharma, and diagnostic companies who have medical content to use the WTTX almost like an RNA operating system. As with our existing products, WTTX uses less sample, has an easier to implement workflow, has a faster turnaround time, and greatly simplifies bioinformatics versus traditional RNA-seq. The WTTX has been designed to a clinical grade of performance for precision and reproducibility. In addition, if our customers want to down-select the smaller panels from the WTTX, probes can simply be selected from the WTTX and incorporated into smaller, more sequencer-efficient panels with minimal revalidation. As the assay chemistry and the probe sequence design remains the same. In Q4, we expect to take the technology to the market with an early access program. The final product for full commercialization remains on track for a mid-2021 launch. Also in the quarter, we introduced a new application on our precision immuno-oncology panel that identifies signatures that measure 23 unique immune and stromal cell types, allowing for immunophenotyping of the tumor microenvironment. We believe having these immunophenotypes available to researchers will allow them to characterize responders or non-responders based on an RNA molecular profile more easily than if they had to build their own pipelines and classifiers. We will continue to bring more apps for our pre-existing panels to drive utility and to make them easier to use for our customers. Lastly, we've renamed and repositioned our previously described autoimmune panel to what we now call our immune response panel. This panel is a powerful tool to help translational researchers and biopharma better understand the immune response, not only in oncology, but also in autoimmune disorders such as lupus and RA and infectious disease areas, including COVID-19. We continue to work at a very high level in product development and look forward to continuing to achieve our technical milestones as the year progresses. This quarter, we started to see the results of some of our strategy shifts that we made in response to COVID-19. And although our revenue was down as expected, we were very encouraged by our new customer growth and by the fact that we're starting to see our legacy customers return to their laboratories. I've said before that I expect HDG to emerge through all of this as a stronger and better company. And with more customer growth and diversification, better penetration of our instruments with tips, and exciting new product pipelines, we're producing results that justify that confidence. With that, it's my pleasure to turn the call over to our CFO, Sean McMeans, for a review of our financials. Sean?
spk03: Thanks, John. Total revenue for the third quarter of 2020 was $1.8 million versus $5.4 million for the same period in 2019. Direct revenue defined as product and product-related services revenue in our financial statements was $1.7 million for the third quarter of 2020 compared to $4.3 million in Q3 of 2019. This decrease was primarily a result of a decrease in product-related services revenue associated with the slow return of our biopharma customers from COVID shutdowns. In addition, in 2019, this product-related services revenue included significant levels of sample procurement and subcontracted laboratory services revenue for a pharma customer program, which did not recur in 2020. Collaborative development services revenue decreased over the third quarter of 2019 by 1 million, reflecting very limited activity on existing programs subsequent to 2019. Ongoing revenue reflects completion of remaining contract development tasks on these programs as we await further decisions on these programs. We do expect a continuing impact from COVID-19 on our revenue through at least the rest of 2020, especially the revenue from our large pharma customers. We are hopeful based on ongoing discussions with our customers that programs planned prior to COVID-19 will be restarted in future periods once our customers' operations return to pre-COVID levels. Our cost of product and product-related services revenue decreased to $941,000 in the third quarter of 2020 compared with $2.9 million for the same period in 2019. In addition to the lower revenue, this reflects a decrease in low-margin subcontracted laboratory services revenue in 2020 compared to the prior year. Research and development expense decreased approximately $1.3 million in the third quarter of 2020 compared to the same period in 2019. primarily related to the decrease in collaborative development services revenue and the ongoing impact of first half staff reductions. Costs related to these programs are recorded in research and development expense. Our continued new product-related research and development expenses, unrelated to our collaborative development programs, were approximately $1.2 million for the third quarter of 2020, compared with $2 million for the same period in 2019. This decrease primarily reflects the impact of development staff reductions in the first half of 2020, along with lower program costs and travel in 2019. Despite the complications created by COVID-19, our development team successfully met their year-to-date milestones. Our operating loss for the third quarter of 2020 was 5.2 million compared to 4.6 million for the same period in 2019. Met loss per share was $0.07 for the third quarter of 2020 and $0.15 for the same period in 2019. This reduction reflects additional shares of common stock and warrants for common stock sold in an underwritten public and private offering in September 2019 and common stock sold in 2020 through our at-the-market facility. As of September 30, we had approximately 71.1 million shares of common stock outstanding. We ended Q3 with $30.5 million in cash, cash equivalents, and short-term available for sale securities. I will now turn the call back to John for closing comments. Thank you, Sean.
spk04: This has been an unprecedented time. Coming into 2020, HTG had strong growth momentum in our core business of molecular profiling, and we are in the process of reloading our biopharma pipeline to pursue additional companion diagnostic opportunities with new pharma collaborations. Since March, We've been impacted by work from home regulations that have reduced the number of samples coming to HTG's VarioLab for processing and the hampered ability of our customers who have our instruments to buy kits and run samples in their laboratories. Our business has also been impacted as a number of clinical trials have slowed or stopped. So we've adapted. Our company culture will not allow us to be a victim. We've taken steps to diversify our customer base We've taken steps to find market opportunities beyond oncology that have been less impacted by COVID-19. We've taken steps to increase our installed base of instruments to enable more samples to be run in our customers' facilities. We've worked aggressively with our lead users and collaborators to continue to grow our publication base. And we've not taken our eye off the key value creation product development initiatives that like exciting new applications on our existing panels and continued successful milestone achievement on our whole transcript on WTTX product. We've done all of this despite reduced revenue at our targeted cash burn rate. I believe we've made the appropriate adjustments to weather this storm, and we're starting to see the results. As we learn to operate in our COVID-19 world, we believe our oncology customers and now our new immune response customers will continue to come back to work, slowly building the growth momentum for our business. And HTG will be here, stronger, more capable, and soon with an exciting whole transcript on WTTX platform technology that we believe will transform the market opportunities for HTG. With that, I'd like to open up the call for questions.
spk08: Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Kristen Kluska with Cantor Fitzgerald. Please proceed with your questions.
spk02: Hi, John and Sean. Thanks so much for taking the question. So I wanted to ask about the whole transcriptome panel. So you've presented a lot of evidence, including this recent white paper, talking about the key differences with RNA-seq, as well as the potential advantages. So I wanted to ask, once this becomes launched in mid-2021, what are going to be some of the key metrics or items that you will look to collect from your customers to learn about you know, about any other potential advantages, especially in this situation since they might be, you know, switching from RNA-seq, and, you know, how might that collection of information help further advertise the product?
spk04: Kristen, thanks. This is John. Great question. Answered a couple different ways. One, we're excited by this product because today, if you're doing biomarker discovery, you're likely doing it if it's an RNA gene expression marker on RNA-seq. And so we then have to go in and kind of displace RNA-seq as they move to a smaller, more manageable panel. We believe with a whole transcriptome, we suddenly have a platform technology that can go from discovery through biomarker development and, if need be, all the way to the clinic with a companion diagnostic, again, with kind of a faster, better, cheaper way to do that. So it's a bit of a new play for HTG, and I think it opens up the entire billion-dollar RNA molecular profiling business that we've sized this to be. So in regards to key metrics for us, it's going to be in a couple areas. is going to be the number of customers that are actually bringing this technology on. And then two, it also opens up other disease states. Because up until this point, 99% of the efforts of HTG have been on oncology. And as we've seen, especially recently, immune response, as well as other disease areas like transplant, diabetes, and the like, are also attractive markets for RNA gene expression. And with a universal product that's not just a cancer product, we think it opens up that. So we will also be very closely monitoring and learning quickly and adapting about other disease areas that we're also repositioning the company into. So customer adoption.
spk02: Okay, great, thanks. Yeah, and I know in the press release when you announced the white paper, you also talked about the rare disease market, which we're seeing a lot more trials and a lot more FDA and EMA incentives for companies to focus on these indications. So how are you looking to learn about new customers out there that aren't in this oncology field where you've had most of your focus? And are you doing any efforts now ahead of this launch in six months or so in the middle of next year?
spk04: Great one. So one of the things that companies like us do is we have an early access program, and that's really the next stage for the development of this program. I mean, we'll continue the technical development. I do believe the heavy lifting there is mostly done. Now it's around characterizing the performance of the device, if you will, with how read depth and other differences in tissue types, differences in sample types, et cetera, so that when we do fully launch, we've got very tight protocols that we can recommend to customers. But between now and then, there's a tremendous amount of customer work that we'll be doing to run customer samples and begin engaging customers thought leaders and key opinion leaders that literally have them help us better understand how they would like to use the product, you know, in many cases, probably in parallel with the RNAC. And then also what other disease areas do they think we should also be looking at? What other sample type should we be looking at? So that's really the next big body of work is really our kind of our market development teams are now that we've got prototype assays that we can run here in Tucson. They will be now engaging, you know, people that we've already got on the list, but we actually now can actually start to run samples, generate data, and learn the best way to position the product in the market.
spk02: Okay, great things. And then the last question for me is how do you think about, you know, DNA versus RNA in some of these segments as well?
spk04: Good question. I think it depends upon the disease state. As is well known in oncology, obviously, the last decade, decade and a half, it's been a DNA game specifically around mutations. It's also, it's still going to stay a DNA game, I think, as you look at liquid biopsy. However, 50% of patients don't have an actionable mutation. So they're looking at pathways and molecular subtypes presents additional opportunities for clinicians to look at differing differential treatments for those patients. And I do think RNA will also work its way into liquid biopsy. So in oncology, you know, It's a multiomics world. I think you need DNA. I think you need RNA. I think you need protein. And as I said over and over again, what we're just trying to do is to build the best gene expression profiling chemistry and workflow. And we believe we have it. Now, in other disease areas like autoimmune, that's not a DNA game because it's not mutations that are actually, you know, that are helpful. as you're looking at immune response or cytokine storms or the like, that is absolutely going to be an RNA game and a protein game. So we believe there's new market opportunities for HTG in those areas. And then, as we mentioned, we also think infectious disease. We can take a look at building viral panels. We can look at respiratory virus response in diseases like what we've got here with COVID, but others as well. So we can actually develop profiles and subtypes to look at why some people respond one way and why some people respond another when they have a bacterial or a viral infection. So I do think the WTTX just is going to open up the entire market as opposed to just the oncology market. But again, I still also believe it's a multiomic world, and researchers need all the tools, and we just want to have, again, the best-in-class one for RNA gene expression.
spk02: Great. Thank you again.
spk08: Thank you. Our next question comes from the line of Alex Nock with Craig Hallam. Please proceed with your question.
spk09: Great. Good afternoon, everyone. You know, John, what are the next timelines here for the whole transcript zone test? You know, we got the proof of concept data. You reiterated the mid-2021 launch. What else should we expect between now and then?
spk04: Yeah, you're going to see the start of our early access program between now and the end of the year. Sometime late December, early January, you should probably look for another probably definitive white paper that will probably be the last one that essentially will be design lock. In other words, the final design. Gene content, probe designs, assay conditions will be locked, and then you'll see a full comparison to RNA-seq. We're going to strive to have that out before JPM. Right now, we're on the plan to do that, but, you know, there's always, you know, things that could come up, so... Our emphasis that I always give our product development guys are it's quality first, timing second, cost third. So I don't want to force them to do something that's out of order. And then from there, I think we will start to take it out and look to then... find commercial adopters of the technology in Q1 and in Q2. And, again, we are still on path for a June, July-ish launch, full-on, full throttles up for the product.
spk09: Yeah, maybe expand on what the sales strategy will be when this is launched next year. Is this still going to be a razor, razor blade test? sold through the EdSheik system, or is it going to initially be sold through the clinical lab and maybe expand on what the sales force, who the sales force is primarily going to be calling on? Is it pharmaceutical? Is it academic labs, OEM labs?
spk04: Just help us out there. A great question, Alex. So it depends upon the segment that we're serving. So for the academic medical centers, it's going to be positioned in two places. First, in translational research, it will be positioned as a more efficient and easier to implement platform technology versus RNA-seq for biomarker discovery, signature discovery. And then you can down-select the smaller panels that are more sequencer efficient. So that's the one market. The other market it will be positioned in is actually in the CLIA lab. of the academic medical centers to be actually used almost as an OEM substrate that they then can build their own signatures to and bring up LBT tests under CLIA that they would then have validated and they'll use this product. And again, that's why we built it under design control to a very high standard, if you will, from a performance perspective. So that's the academic's Translational Research, CLIA Lab. In pharma, we expect that this will kind of replace almost all of our custom panels. This becomes the universal RNA gene expression platform that you probably should use. So why risk missing a pathway or risk missing something that could be relevant, especially as you're developing data sets? because it's not going to be that much more expensive to use than a 2,000 or 3,000 gene panel. And so the ability to get all of that data, an entire transcriptome off one cut of tissue, I think makes it a very, very, very attractive alternative to RNA-seq, which uses a lot more sample. And so that would be our intention there. And then if the a signature is then developed that they want to move forward with IUO on for the next set of collaboration, I fully expect they would then down select to a smaller panel of call it hundreds to maybe a thousand genes because why burn all that sequencer capacity if you don't have to? And again, that assay transfer is going to be a lot easier because the probe design is not going to change, nor will the assay chemistry change. So your bridging studies are much simpler versus if you're doing your discovery today on RNAC and then you're trying to port that assay either to HTG or port it over to nanostring or port it over to PCR, there's a chemistry change and there's a probe sequence change. And so there's a lot more risk with that bridging study. So I think we give pharma kind of a one-platform answer, at least as it revolves around RNA gene expression, to go from discovery all the way to a companion diagnostic. And then the last market that you called out is really the people who already have content. and are starting to bring up gene expression tests. And in that market, it might be they bring in our boxes and our kits, but it might also be they've already got automation. So that might look a lot more like a licensing agreement, a limited distribution or limited field of use distribution agreement. and then selling them reagents or perhaps a royalty on their test. So the value capture, I think, in the first two markets, the academic and the pharma will probably be either services or kits and instruments. As we play almost as an OEM provider to other test developers, I think it'll be more of a licensing agreement type transaction.
spk09: Okay, very, very helpful. And then Just kind of going and looking at the quarter here from the sales perspective, just given the results of some of the other life science names, and I guess even looking at someone like a neogenomics on their cancer research business, I'm just struggling to understand why your group of customers failed to return to work in Q3. Just kind of digging into it, do you think some of the pharma companies are returning to work and are dropping technologies that end up dropping HCG from the profile list, or Does any help to kind of parse out why some of these customers aren't returning to work when we're seeing other companies announce that they are seeing a return to work?
spk04: Yeah, I think it's hard to compare us to some others. I mean, folks that have clinical revenues, those clinical revenues are going to come back far quicker than project revenues out of pharma. We were very, very, very highly leveraged by a couple very big customers of ours. There were one on the East Coast and one on the West Coast that even today remain closed. They're pushing back work. And if anything, it exposed us, I think, that we were too focused on some of the big guys and on the coast. And we started immediately when we saw this happening in early Q and knowing it was going to sustain an early Q2 on a customer diversification, um, strategy because we need, we knew we needed to get into, you know, some of the smaller, um, biotechs and, and, and other pharmas. Now we do track, uh, pretty aggressively, um, the, uh, the status of things and just to kind of ballpark in our pharma business, you know, we're seeing now at the end of, uh, the Q3, you know, about a quarter of the pharma customers are back. So they're turning back on, which is up from probably single digit. And then we're seeing people that are in, you know, a day or two a week, almost half of them. So we're seeing our market, you know, almost three quarters of our pharma business is coming back online. And, you know, we're seeing that this quarter and then some of the orders that are coming through. In the academic market, the ratios are almost the same, which is, again, an increase in October from where we were in, say, June or July. And then in Europe, which I think has a lot to do with why we've been able to hold on pretty good, about 90% of Europe is fully open. So that's why I think we've maintained momentum. So we're cautiously optimistic that we've added new customers. which was part of our strategy. And then as our existing customers return to work, we expect that we're going to get back, you know, into that growth mode that we've seen. And then the question is going to be is, you know, how quickly can we make up, you know, that two, three, three-quarter gap that we've just gone through? But I do think we hit bottom and we're on our way up right now. Okay, that's very helpful.
spk09: And then just two more questions. The PDPs, the two PDPs you were working with, do you think those contracts, well, I guess, are those contracts still active and still programs that should come back online, you know, thinking in 2021?
spk04: They're still active. Whether or not they'll move forward, I still don't know. The longer they go, obviously, the more nervous I become. And, you know, Those are those, you know, we have to keep working them and we have to get new ones. That's abundantly clear. We've been in a drought. We kind of, you know, not by fault, you know, but the sky agent situation hurt us. And now, you know, we've repositioned that agreement. So now we're there, our distributor, which is what we need. And our sales team now is free to go in there and you know, do deals off the Illumina sequencers, and that's what we have to make happen. And it's abundantly clear that, you know, that's in the plans.
spk09: Okay, got it. And then, Sean, I missed it. How many shares were issued in the quarter through the ATM and the other financing agreements that you have in place?
spk03: We raised approximately $2.5 million for the quarter, Alex, at prices north of 60 cents. Okay, got it. Thank you.
spk08: Thank you, Alex. Our next question comes from the line of Puneet Soda with SVB Lyric. Please proceed with your question.
spk07: Hey, guys. This is Wesley on for Puneet today. Thanks for taking the question. Then I want to follow back up on the whole transcript of the panel, Aaron. Just a question on the economics and just kind of what your expectations are now looking forward and if we can expect any acceleration in cash burns. over the next couple of quarters as we look towards commercialization?
spk04: Yeah, I'll start with some of it, and I'll turn it to Sean. I actually think most of the risk of the development of that product is behind us. When we started, we weren't sure of a lot of variables, and we've kind of checked the boxes on most of the design criteria So I feel very comfortable that we're not staring at any unexpected, you know, oops in regards to increased costs. Matter of fact, I think as we go forward, we're expecting pretty much a steady state R&D line without a substantial increase in that. And where we're at, maybe without the risk of going too technical, is now we need to understand by tissue type, you know, how many reads are we going to have to throw at each of each of those sample types, both, both by disease and then by sample type. Um, and then that, that then determines the sequencer cost and sequencer efficiency. Um, and, and, you know, there'll be, there'll be puts and takes on that. And that's the body of work that's kind of in front of us right now. But we're, you know, we're expecting a product that's, that's gonna, you know, you know, maybe be a few hundred dollars more than what we're our current panels. Um, We still think that positions itself well underneath RNA-seq price points in the market. And we're expecting, you know, very similar gross margins on the product side, which is that, you know, 80% to 90% product margin. And then, Sean.
spk07: Great.
spk03: Thank you. Oh, yes. You know, nothing to add other than we're still targeting that $5 million per quarter burn. And, you know, we've managed that over the last three quarters and, you know, feel that there should be no material uptick in spending. You know, obviously, we metered cash and OPEX along with CAPEX, you know, just to make sure that we're adhering to that $5 million per quarter burn target.
spk07: Yeah, great. Thank you. I appreciate that. And then just kind of shifting gears a little bit, can you talk about some of the positive trends that you highlighted in the non-oncology opportunities? I guess how much of a contribution was that to performance in the quarter, and how can we expect that moving forward?
spk04: Yeah, so we've picked up quite a bit of new business in immune response. So specifically lupus is an area that is an area of focus. And we've got a fairly large pharma client that has us looking at some COVID samples for patients because they're trying to understand disease progression and how best to manage these folks. And so that is just starting. But they're fairly large sample cohorts. The one thing that's different about autoimmune and disease response versus oncology is the cohorts are in the thousands in regards to the number of samples, whereas oncology, usually a clinical trial might be a few hundred samples. So these are really, really big markets. And, you know, to some extent, we're learning as we go, but we've been very encouraged and about that. And also, these are different sample types. These are, in many cases, some sort of a blood-based sample type that we're working with. So we're pushing it into a different sample than we've worked before. And we're very pleased that the assays worked and continues to give us encouragement that we're going to be able to push this technology into markets beyond oncology.
spk07: Great. And then just last one, you mentioned that you're focusing recently on just kind of diversifying your customer base into the smaller and mid-sized customers. I guess, how much upside do you see there in terms of kind of like a new store, same store type of dynamic? I mean, obviously, smaller customers, smaller scope of business, but just curious on your thoughts looking forward.
spk04: Yeah, I mean, obviously, we're not planning to lose any of our big current customers. But, yeah, through the first three quarters, we added, you know, four new names to our pharma client list. And in Q4, you know, at least if sales delivers on what they're saying, you know, we will deliver that plus maybe 50%. And some of those are some pretty big names. So, but we're just, you know, I guess what I'm trying to say is We want to go after the folks we think have great new compounds. And we've also gotten some great help from some of our investors that have also made some key introductions for us. So I would look to see that our customer diversification will continue. And again, I'm very comfortable that between the new customer ads and then the legacy customers coming back online, we're really setting the stage, I think, for a pretty good year in 2021, you know, barring another shutdown.
spk07: That's great. Thank you very much.
spk08: Thank you. Our next question comes from the line of Yi Chen with HC Wainwright. Please proceed with your question.
spk06: Thank you for taking my questions. My first question is, would you say the upcoming launch of the Ho transcriptome panel in year 2021 is also dependent on the situation of the COVID?
spk04: First of all, good to hear you, Yi. Actually, this one I feel really good about. I mean, we have complete, I shouldn't say complete, we have like 95% control over our timelines. This is around us executing. you know, we're susceptible a little bit because, you know, we buy probes and if something happens to our probe vendor, that could cause a delay. You know, we're susceptible to if our sequencers go down, you know, and we got to have Illumina or Thermo come in here and provide service, which, you know, COVID days is more difficult than non-COVID days. But to a great extent, you know, we've got flexibility. We can do weekends to catch that up. So, you know, I think we're you know, we're comfortable with our target launch date of mid-2021.
spk06: But would you say if the COVID situation is too severe at that time, the potential sales of Papano in the second half of 2021 would be affected due to the situation of your customers?
spk04: Yeah, that's absolutely true. If our customers stop coming back to work, yeah, again, it's hard to use our products if no one's in the labs. And so, but we are seeing, I mean, we're really seeing people getting used to working in this new environment. You know, I think if there are temporary shutdowns, so for example, the UK kind of shut things down for a couple of weeks, but I saw three orders come through from the UK this week, this week and last. So, you know, it's, I think people are figuring out how to get back to work. And if we do have pushbacks because of COVID, I think they'll be regionalized, and I don't think they're going to be the three-month draconian responses that people were originally thinking about when this thing first started in March, April.
spk06: Got it. And regarding your large customers who are currently still closed, have they indicated that they plan to remain closed until the COVID-19 is completely eliminated or they will try to start open the labs when there is a vaccine available? or they will, regardless of the situation next year, they will try to gradually reopen the labs in the first half of next year?
spk04: Now, good question. I want to make sure I'm clear. We're seeing both of those big customers starting to come back a day or two a week. So they're not full. So they're not zero, which is what they were maybe for the Q2. But we're now, so they're starting, their revenue is starting to return. It's just not what it was in 2019. And yes, they have communicated to us that office staff, they expect to stay at home well into next year. But they also are dependent upon getting things out of their laboratories. So you can't shut down a pharmaceutical company for a year. And so I think they also are finding ways to bring people in with lower density, and hence that's why just it's a day or two a week, so that they can keep a safe working environment for their employees.
spk06: Got it. Thank you.
spk08: If there are no further questions in the queue, I'd like to hand the call back to management for closing remarks.
spk04: Sure. Well, first of all, I'd like to thank everyone for joining us today, the analysts and the and everyone else. In particular, I have to again thank the HTG employees who just continue to show tremendous loyalty and dedication to this company. I'd also like to thank our shareholders for their encouragement and support. As previously mentioned, I get a lot of phone calls and I appreciate it when there's some introductions that are made. And lastly, I really want to thank our board of directors who have been extremely helpful in guidance and counsel to me and to management during this unprecedented time in the history of our company. And we look forward to updating you again in our next earnings call. So thank you very much.
spk08: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
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