HTG Molecular Diagnostics, Inc.

Q1 2021 Earnings Conference Call

5/13/2021

spk01: Demolecular Diagnostics Incorporated First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Should you require operator assistance during the conference, please press star zero to signal an operator. Please note, this conference is being recorded. I will now turn the conference over to your host, Monique Cossey, with Lifestyle Advisors. Thank you. You may begin.
spk00: Thank you, operator. Earlier today, HTG released its financial results for the first quarter ended March 31st, 2021. 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. These forward-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 or 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, May 13th, 2021, and the company undertakes no obligation to update any forward-looking statement. With that, I would like to turn the call over to John Lubnatsky, Chief Executive Officer. John?
spk02: Thank you, Monique. As always, it's a pleasure to present the results we've delivered during the past quarter through the hard work of our employees. While it's disappointing our results continue to be affected by the COVID-19 pandemic, we believe the macro drivers for HCG's eventual success remain strong. Cancer and personalized medicine are not going away. And while the last several quarters have seen headwinds, we strongly believe that these markets will return. Cancer is a very complex disease, and we believe understanding the biology of disease and its treatments is a key to improving care for patients and managing treatment costs for our healthcare systems. We believe the ability of HTG's EDC technology to help unlock the secret of the transcriptome with our advanced technology is more relevant than ever. And I believe the best days for this company are still ahead of us. There's no doubt that Q1 was challenging for HTG. In the fourth quarter of 2020, we saw an increase in the number of our customers returning to work in either partially or full time. This created cautious optimism that we were starting to move past the COVID-19 related revenue headwinds that we had faced through the second and third quarters of 2020. However, in the first quarter, we saw another wave of country and company shutdowns, especially in Europe, that again created turbulence for our commercial teams. Orders weren't lost, but in many cases, they were delayed to later in the year. We've been in close contact with our customers and approximately 30% are reporting that they're more or less back to normal, but over 70% are still in partial or complete shutdown. In part, and as a result of the COVID-19 impacts on our customers, our total revenue for the quarter was 1.4 million, down from 2.2 million for the same period in 2020. Product and product-related services revenue was 1.4 million, compared to 2 million for the same period in 2020. and there was no collaboration development services revenue for the quarter compared with 200,000 for the same period in 2020. Though we came out of the previous quarter with a robust forecast, we saw many of the expected orders slip out as customers were either too aggressive in their expectations of returning to their workplaces or, as in many situations in Europe, another wave of shutdowns closed laboratories that had just begun to return to normal operating levels. As it has throughout the COVID-19 pandemic, this limited the ability of our customers to either run planned tests or to send samples to our VarioLab in Tucson for processing. Early indications suggest that some of these planned studies will resume in the second quarter of 2021, but given the unpredictable COVID-19 landscape and resulting impact on laboratories being open, we cannot predict our customers' business. While the challenges that we have faced cannot be overstated, I'm proud of the accomplishments that our team has made in areas that are more under our direct control. In our development program for our transcriptome panel, we continue to achieve all of our development milestones scheduled for the first quarter of 2021, including completing our sixth and final round of probe quality control, locking our probe design for the planned transcriptome panel, and ordering the final probe pool, reflecting this design, finalizing our reagent formulation for the panel, defining our quality control metric strategy, and completing the sample input robustness study for the panel. Our next steps are to achieve design lock, initiate verification testing, and get the panel into the hands of our scientific collaborators as part of our early adopter program. As of the date of this call, we are in active discussions with over 25 current and prospective customers to identify cohorts and to develop study designs as part of our early adopter program collaborations. These collaborations will provide access to the transcriptome product to both academic and pharma customers prior to commercial launch to generate critical data and customer feedback for the promotion of this product at launch. To prepare for this exciting launch and commercialization, as well as to continue our customer and market diversification strategies, we completed a comprehensive overhaul of the company's website in the first quarter of 2021. adding new applications and content intended to make HTG more discoverable from search engines and to increase customer engagement. We also launched targeted online campaigns to help drive traffic to HTG and created two new microsites, y.htgmolecular.com and htg.transcriptomepanel.com to help drive new traffic to our primary website. Our customer and market diversification efforts continue to be another bright spot, where we saw 13 new customers and 24 new pharma programs added for the quarter. The new pharma programs bring us up to a net of 68 active programs at the end of the quarter, up from 50 at year end. New customers and new programs start small and won't offset the impact that some of our largest customers from prior years delaying studies or being partially or fully closed, But in time, we expect they and the company will grow. We expect that this diversified customer base will be far more decentralized and in many new markets in addition to oncology, creating a more balanced revenue engine that isn't so reliant on big pharma and oncology in the future. Finally, on the publications front, We added 20 new publications for the quarter, bringing our cumulative total to 286, a further demonstration of our market penetration and customer satisfaction with our products. I'll now turn the call over to Sean for a deeper dive on our financials. Sean?
spk03: Thanks, John. Total revenue for Q1 was $1.4 million compared with $2.2 million for Q1 2020. Our direct revenue defined as product and product-related services revenue in our financial statements was $1.4 million in Q1 2020. We believe COVID will continue to impact all aspects of our business in Q1 2021, with a continued extensive impact on our U.S. pharma customers and our European customers being especially impacted by resurgence of COVID-related closures during the period. We believe our pharma business will continue to recover slowly throughout 2021 as clinical trial activity resumes and pharma begins to normalize their operations and continue clinical trials. There was no collaborative development services revenue in Q1 2021 compared with 0.2 million in Q1 2020. We currently do not anticipate additional revenue from our existing collaborative development services programs, but continue to pursue new customer collaborations. Our cost of product and product-related services revenue decreased to approximately 0.8 million in Q1 2021 compared to 1 million in Q1 2020, primarily due to overall lower revenue. Research and development expense decreased by approximately 0.6 million in Q1 2021 compared with Q1 2020, primarily related to the decrease in collaborative development service-related costs and staff reductions resulting from transitioning our California-based research and development efforts to Tucson. Costs related for our collaborative development services programs are recorded in research and development expense. Our continued new product-related research were approximately $1.4 million for Q1 2021, compared with $1.7 million for Q1 2020, again reflecting the consolidation of our development efforts into our Tucson facility. Our development team successfully met their milestone goals in Q1 2021, and we believe are on track to meet their milestones for the remainder of the year, including design lock for a transcript and panel in Q2. Our operating loss for Q1 2021 was $4.6 million compared with $5.4 million for Q1 2020, reflecting continued successful management of operating expenses. That loss per share was $0.80 for the quarter ended March 31st, 2021, and $1.27 for the same period in 2020. This reduction reflects additional shares of common stock sold in 2020 and 2021 through our at-the-market facility and our one-for-15 reverse stocks, one of our common stock. As of March 31st, 2021, we had approximately 6.3 million shares of common stock outstanding. We ended the quarter with $30.8 million in cash, cash equivalents, and short-term available for sale securities. I will now turn the call back to John for his closing comments.
spk02: Thank you, Sean. As I said earlier in a call, I believe the best days for HTG are still in front of us. The world of RNA is significant. As previously mentioned, we believe the translational research market alone was approximately $1 billion and growing at 15% for the impacts of the COVID-19 pandemic. In many cancers, there's no actionable DNA mutation to guide therapy. We believe RNA gene expression presents a very real alternative to help guide therapy decisions for drugs and for those patients. In the coming quarters, HTG plans on launching and commercializing what we believe could be a game-changing product for these customers and laboratories, wanting to do transcriptome-level gene expression profiling at a very high level, but either lack the samples required or don't want to invest in the infrastructure required to do high-quality RNA-seq processing for gene expression. As noted in our recently released white paper, we believe that our planned transcriptome panel demonstrated superiority over traditional RNA-seq on many fronts, including working with smaller sample sizes, where HTG's EdgeSeq uses between four and eight times less sample than RNA-Seq, by developing robust data sets. HTG's EdgeSeq technology was more robust, delivering high-quality data, where RNA-Seq failure rates ranged between 25% and 37%. And lastly, faster turnaround times. HTG's EdgeSeq turnaround time is about half that of RNA-Seq and doesn't require sophisticated bioinformatics support. All the while, our prototype panel demonstrated repeatability, concordance to RNA-seq data, and agreement with spiked-in controls. We've been very rigorous with the development of this product, and as we move toward launch, we're excited about increasing our early adopter program and continuing to build market awareness about HTG and our new transcriptome panel. We believe this panel, in combination with our current products, will help get us back on a strong growth trajectory in translational profiling, with pharma collaborations, and clinical diagnostics. With this in mind, our planned focus for the remainder of the year is, one, to continue to build our translational profiling business with a strong emphasis on customer and market diversification and the planned transcriptome panel as a viable alternative to RNAC, especially when working with FFPE or small amounts of sample. Two, to continue to build our pharma pipeline of active programs and position the transcriptome product as a universal RNA gene expression profiling platform for collaborations and companion diagnostic development. And three, to position our products for LDT development by CLIA laboratories and centralized diagnostic companies now moving into the field of RNA. With that, I'd like to open up the call for questions. Operator?
spk01: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. If at any time you wish to remove your question from the queue, please press star 2. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question is from Puneet Souda with SVB Lyric.
spk04: Hey, great, guys. This is Wesley on for Puneet today. Thanks for taking the questions, and great to see the progress on the whole transcriptome assay. So I guess just starting there, from a data standpoint, is there anything else we can be expecting prior to the assay launching? And I guess I'll just kind of encompass my questions on the assay all in one. So data that we could be expecting before the launch. And I guess it's great to see the expansion of the early access customer base as well. Just what are your expectations on where that shakes out prior to the SA actually launching commercially? And how much read through do you think you have from those early access customers into post commercialization customers?
spk02: Thanks for joining us, Wes, and good questions. We do expect we're going to have one more white paper at launch that will include all of our V&V data associated with the final configuration of the product. So, you know, white paper one was essentially an equivalency white paper to RNA-seq. White paper two was a superiority, and white paper three is going to be even with a bigger data set that kind of backs up the white paper number two in its final configuration. So that is probably the next thing there. We're also excited about, you know, adding essentially about 10 new people into our early adopter program since my last reporting. We expect we're going to continue to add people between now and full commercial launch. What we're expecting to get on that is a head start on peer-reviewed publications. And obviously what we want to have is as many day one customers who we would see every one of these early adopter customers as a potential day one customer when we do fully launch the product so that we actually launch with, you know, commercial momentum as well as, you know, kind of, you know, good sets of data in the works for publications.
spk04: Great. And then I guess just as a quick follow-up for Sean, how should we be thinking about the sales spend or just building up the internal commercial infrastructure for the launch? Any updated assumptions on the OPEX side of things there?
spk03: I think we're probably at a low point on OPEX for the year in Q1, and you should see a steady increase, and that'll reflect the beefing up of the commercial infrastructure. We've got a number of sales positions open right now, but that, together with our marketing effort, will increase the selling spend.
spk04: Great. And then I guess just last one, on the quarter itself, can you maybe just walk us through some of the dynamics that you saw take place throughout the quarter, maybe from comparing March to January and maybe how things have gone in April and the first half of May here? Any, I guess, read-throughs to labs returning after shutting back down? How are, I guess, early discussions going with pharma companies that are looking to bring trials back online? Anything of that nature? Thank you.
spk02: Another good point. So I'll kind of handle it in segments. I'll start with the easiest one, which was Europe. In Europe, we unfortunately saw, I think in some countries, the seventh and in other countries, the eighth wave of country shutdowns. So we went from, you know, pretty solid forecasts in January to basically, you know, country shutdowns again. And that dampened Europe quite a bit. In the U.S., what we saw was was I'll start in the academic market. Many of those customers are back, but they're back like a day, maybe two days a week. And quite frankly, what we believe happened was people just believed they could get more projects out than they actually did. And so samples that we were expecting to get in, they simply weren't in their facilities long enough to either ship them to us or vice versa. If they were going to run samples, they weren't in their labs long enough to actually get all the work done. So we saw, you know, I would consider the customers being overly optimistic at how much they were going to do. And we saw just a lot of business just slip from one month to the next and into the next quarter. And then lastly, in pharma, as kind of we've stated before, We had a lot of our business in some of the largest pharmas that are still on the coast. And that business has been significantly impacted. JAMA produced a statistic that said 60% of all oncology trials were canceled or delayed last year. And we were concentrated in oncology in some of the biggest pharma. And so we've been impacted because those trials have basically been paused, stopped, or canceled. So we've been pushing hard into other markets like autoimmune, immune response, and also pushing hard into medium biopharma and smaller biotechs. But unfortunately, that mix shift, time to start small. So even though we added 18 new programs in pharma in the quarter, and we added 13 new customers overall in a quarter. Bringing on new customers takes time to get them up to the level of some of our really large customers that are still in fairly significant shutdowns. So I'd say near term it's still painful because we're dealing with this concentration, if you will, of business in biopharma, but longer term I do think we're going to be the better for it. because we're developing a more diversified customer base, and we're getting into markets other than oncology. And I do think oncology has been hit especially hard in the COVID pandemic.
spk04: Great. Thanks, John.
spk01: Once again, if you do have a question, please press star 1. Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to management for closing remarks.
spk02: I'd like to really thank everyone for joining us today. These are unusual times, but I'd especially like to thank our shareholders, our employees, and our board members for their continued support, and we look forward to updating you again on our next earnings call. Thank you.
spk01: This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.
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