Edited Transcript of IDXG.OQ earnings conference call or presentation 25-Jun-20 8:30pm GMT

As mentioned in our earnings release, we are preparing to launch our serology antibody ELISA testing for COVID-19 at our CLIA lab in Pittsburgh, Pennsylvania. We have acquired acceptable kits and reference samples. Validation is complete, and we are now offering this testing to our employees and customers. Remember the importance of serology testing is to determine who has developed antibodies to the virus, and we believe that this is an important component of the process of reopening workplaces.

Now I would like to hand the call off to Fred Knechtel, our CFO, to discuss in more detail our financial highlights for the quarter. Fred?

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Fred S. Knechtel, Interpace Biosciences, Inc. – CFO, Treasurer & Company Secretary [3]

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Thank you, Jack, and good afternoon, everyone. Today, I would like to focus on key elements of our financial performance and position. As previously mentioned, our first quarter 2020 net revenue was $9.2 million, up 30 — up 53% from the $6 million in the first quarter of 2019. Clinical services first quarter 2020 net revenue was approximately 60% of total revenue and pharma services was approximately 40%. In the first quarter of 2019, 100% of our revenue was due to our legacy clinical services since we did not acquire the biopharma business of Cancer Genetics until early in the third quarter of 2019. The business was impacted by lower-than-expected clinical service volume beginning in mid-March, which we believe resulted from the reduction in nonessential testing procedures in connection with the COVID-19 pandemic. Overall, clinical services gross margin averages in excess of 50%. Pharma services gross margin is currently in the low 30% range and is expected to improve with revenue growth and the success of our planned integration activities. Total business gross profit for the first quarter of 2020 was $3.1 million, and gross margin was 34%. First quarter 2019 gross profit was $3.4 million while gross margin was 56% and was all related to our legacy clinical services business. Operating expense for the first quarter of 2020 was $9.2 million as compared to $6.7 million in the first quarter of 2019. Operating expenses were lower than the $9.5 million in the fourth quarter of 2019, resulting from cost initiatives put in place late in the first quarter.

In March, we reduced lab costs, discretionary and nonessential spending. We decreased salary employee wages by 10% to 15% starting in mid-April. We expect operating expense to be further reduced in the second quarter of 2020 while volume is expected to remain at reduced levels. As the benefit of integration activities in the second quarter are realized, we will be reorganizing and streamlining recurring finance and accounting costs in the third and fourth quarter of 2020. It should be noted that integration of the pharma services labs in the latter part of the year may require the temporary addition of resources to support these activities, which we anticipate realizing benefit in the first quarter of 2021 and beyond. First quarter 2020 adjusted EBITDA was negative $4.1 million, and first quarter 2019 was negative $1.8 million. The increase of $2.3 million is related principally to the addition of pharma services’ losses not included in the first quarter of 2019.

We used $7.1 million of cash from operating activities as compared to $3 million in the first quarter of 2019. The increased cash was due to $2.3 million of pharma services losses and $1.8 million of increased working capital related to the acquisition. As of March 31, 2020, our cash balance was $13.4 million, with $1.2 million of borrowings under our line of credit with approximately $2.6 million of availability under the line. During the first quarter of 2020, we raised $19.5 million net from the issuance of additional Series B preferred stock and restructured the previously issued Series A preferred stock, now all under the Series B preferred stock. We also issued approximately $0.4 million net of common stock under our ATM and paid down $1.8 million under our bank line of credit.

In April 2020, we received a $650,000 grant from the Department of Health and Human Services related to COVID-19 virus and antibody testing and a $2.1 million cash advance for future Medicare billing reimbursement. As of June 17, 2020, we had a cash position of approximately $16.2 million and borrowings under our line of credit amounting to $3.4 million. To optimize the pharma services lab operations, we are transitioning lab work from Rutherford, New Jersey to our state-of-the-art lab facility in Morrisville, North Carolina. We will be investing to facilitate the move, transfer personnel, build out facilities and validate processes over the next several months. We are confident this investment will transition, and transition will result in reduced operating costs and provide a more robust platform for our customers in the future.

With that, let me turn the call back over to Jack for his closing statements.

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Jack E. Stover, Interpace Biosciences, Inc. – CEO, President & Director [4]

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Thanks, Fred. During June, we are seeing that our business, while down approximately 30% from where we were just prior to the pandemic hitting, is recovering nicely and largely as we anticipated. We feel that the worst is behind us. However, there is still much uncertainty related to the coronavirus pandemic. We are pleased to announce the launch of our serology testing to assist in transitioning back to normal. We do believe that one of the important global impacts of the pandemic is an increased awareness of the importance of the role diagnostics play. We’re confident that we are well positioned to take advantage of this opportunity with our diversification, focusing on improving diagnosis and customized assay solutions for physicians, patients and pharmaceutical and biotech companies developing products. At this time, due to uncertainties, we are not in a position to provide you with a confident revenue projection for the remainder of 2020. However, we are projecting net revenue for the second quarter of 2020 to be between $5.5 million and $6 million. Now let me turn the call over to Diego for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jeffrey Cohen with Ladenburg Thalmann.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division – MD of Equity Research [2]

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So I wanted to drill down a little bit as far as — Fred, you had some commentary on the OpEx for — was that Q2 or the year? Can you give us a little better flavor on Q2 versus Q1 on the OpEx and how that comes out and then — for the balance of the year? And then also, can you correlate that with margins for the second quarter? And then coming out or up how do you think that looks for the back half of the year?

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Fred S. Knechtel, Interpace Biosciences, Inc. – CFO, Treasurer & Company Secretary [3]

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Okay. So operating expense was $9.5 million in the fourth quarter of 2019, and we reduced that to $9.2 million with some of the actions that we took later in the quarter. And then we expect that with the actions that we have in place that operating expense will be down another 10% in the Q3 and then Q4, not down another 10% in Q4, but 10% in Q3 and then probably leveling off. We’ll identify if there’s other things that we may need to do depending on what happens with the next round of pandemic. So there’s still a lot of uncertainty, and we’ll continue to manage our costs very closely, depending how volume is coming in our door when we get better clarity probably later in the third quarter.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division – MD of Equity Research [4]

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Sure. And can you give us some, Jack, a little better flavor on what you’re seeing and hearing out there as far as trends that are going on for your origin of your tests for the patients and visiting the docs and seeing on the clinics, what are you hearing?

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Jack E. Stover, Interpace Biosciences, Inc. – CEO, President & Director [5]

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Yes, that’s a great question, Jeff. And we garner data. And as a management team, we meet almost every day on exactly that subject. And so what we’re seeing and hearing is that — and experiencing is basically the turnaround. And I’m talking about the diagnostic business alone. And so on the diagnostic business, what we’re seeing is, in the last 3 or 4 weeks that our sales reps have gone from only 20% that have been free to operate in their marketplace to now in excess of 50%. That was as of yesterday. And as you know, with the virus breakouts that we’re seeing, the change in the volatility continues day-to-day. As an example, we have a large lab in North Carolina, and we have people that go back and forth between Rutherford and North Carolina, and now they’re basically being sequestered because the breakout happening in North Carolina. So we’re concerned about sort of the general timing of what we’re seeing in terms of recovery. So that’s kind of front and center. What we have done is and what we are seeing is the positive impact of the alternative methodologies that we’ve been able to use in terms of being able to reach doctors and reach offices with our offering and answer questions and continue to bring in packages or biopsies effectively at a rate that, as I said, is probably around 30% less than the optimum that we had experienced. All that being said, we believe that and we’re seeing the improvement almost every day. What our concern is, Jeff, and I say this all the time to our people is that I want to make sure that we’re seeing solid upside recovery as, in fact, a recovery, and we’re not just pulling in units or biopsies that have languished because a lot of people haven’t been able to get to physicians in the last month, 2 months or 3 months. So we’re pretty optimistic on the diagnostic side.

On the pharma side, we’ve recently added a new sales rep in the Boston marketplace. So we have a full complement — well, we will have as of July 1, a full complement of sales reps. And we’re watching the backlog, if you will, of conversions that those business development people are doing, and that seems to be going very well. The concern and the piece that we watch is the pull-through as it relates to pharmaceutical and biotech companies that are actually progressing now more aggressively with clinical trials. And as you know, over the last month or 2, either shut down clinical trials or delayed them. We operate probably in a 30- to 60-day delay on both parts of our business such that when things were getting more difficult in the second half of March, we didn’t see the impact of that in April because of the operating activities and when we collect cash.

Somewhat the same situation exists on the biopharma side, too. I know that’s a long answer. But I hope it gives you a little color that we’re seeing the recovery. We’re excited about what we’re seeing. We’re cautiously optimistic. And we’re managing our costs appropriately, meaning we’re not out there trying to increase costs until we’re sure that we have the growth and the full recovery that we’re hoping for.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division – MD of Equity Research [6]

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No. I appreciate it. That’s extremely helpful. And one more, if I may, just housekeeping item. The $2.1 million Medicare was from the 2019 Medicare billings for the annual, is that correct? That was the 10% of 2019 Medicare billings.

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Jack E. Stover, Interpace Biosciences, Inc. – CEO, President & Director [7]

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Yes. So I’m sorry, those were — that was in advance on future Medicare collections. So we didn’t apply for that, Jeff. Basically, my assumption is that Medicare through the government mechanism had evaluated and determined because they are a substantial part of our business, what those — what that cash decrease could be under the pandemic. And if I’m not mistaken, Fred, August, is really the time frame that they had targeted for the utilization of that cash for us.

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Fred S. Knechtel, Interpace Biosciences, Inc. – CFO, Treasurer & Company Secretary [8]

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Yes. August, I think, maybe closer to October, but in the — later in the third quarter.

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Jack E. Stover, Interpace Biosciences, Inc. – CEO, President & Director [9]

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Third quarter, yes. So that makes sense, Jeff. They basically deposited money in our account with the expectation of our business was going to be down, but they also know that there’s a delay from the selling side to the actual cash side of getting paid by Medicare.

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Fred S. Knechtel, Interpace Biosciences, Inc. – CFO, Treasurer & Company Secretary [10]

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Yes, Jeff. And I think you’re right. I don’t remember the exact calculation, but it was based on past billings. It was a percentage and it really equated to, I think, 2.5 months’ or 3 months’ worth of billings.

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Jack E. Stover, Interpace Biosciences, Inc. – CEO, President & Director [11]

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Yes. I think that’s right.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division – MD of Equity Research [12]

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Okay. But that’s included on your balance sheet and the $16.2 million you referenced as recurrent?

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Fred S. Knechtel, Interpace Biosciences, Inc. – CFO, Treasurer & Company Secretary [13]

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Yes, correct.

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Operator [14]

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Our next question comes from Kevin DeGeeter with Oppenheimer.

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Kevin Michael DeGeeter, Oppenheimer & Co. Inc., Research Division – MD & Senior Analyst [15]

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Can you comment on just the backlog for the pharma business and how you’re thinking about that? I mean, I think part of the logic of acquiring that asset from Cancer Genetics is there just really hadn’t been adequate selling support for the program or for the services, and there was a pretty modest amount of investment, you’d be able to see a step up there. Obviously, the world changed. It changed quite a bit. But — and we’re not seeing that in the revenue currently. But there are — how can you — can you contextualize the change in backlog that perhaps might be informative on thinking about second half trends for biopharma?

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Jack E. Stover, Interpace Biosciences, Inc. – CEO, President & Director [16]

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Yes. And so, Kevin, we don’t specifically disclose, as you know, backlog per se in terms of what we’re looking at. But let me tell you in general what’s going on. First of all, we’re seeing good solid — with the commercial team increase, we’re seeing a good solid increase in the overall backlog. That’s a really good sign of potential for the future, but also a healthy business as well. Two things though impact that. One is the pull-through related to the trials themselves and when that backlog gets recognized, and certainly, that’s one of them. But the other part of that is, as we enter Q3 and Q4, we’re transitioning from a relatively large lab in New Jersey to a single lab in North Carolina, primarily around the cost issues related to making that transition. But I can tell you from the bookings point of view that we’re really pleased with the bookings in terms of what they’re putting up, and we’re very optimistic what that means for us in the future as well.

By the way, the other piece, and we don’t disclose this, but I can tell you that we’re pleased with it, is the average value of a contract on the biopharma side. Our average contract size before we acquired the business was less than $100,000 and I can tell you that it’s growing nicely. And again, a sign of not only a robust business, but also a healthy business as well.

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Kevin Michael DeGeeter, Oppenheimer & Co. Inc., Research Division – MD & Senior Analyst [17]

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No. Absolutely fair enough. Appreciate the disclosure. I guess, really just 2 other quick items for me. First, on the diagnostics side, you provided some helpful context for growth trends in that business, but can you kind of break that down by PancraGEN and thyroid? Should we think about the rebounds there as being similar? Or are there a divergence in sample volume pickup between those 2 product lines?

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Jack E. Stover, Interpace Biosciences, Inc. – CEO, President & Director [18]

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Let me tell you what we’re seeing currently, and we’re looking to evaluate it. And if you break it out, PancraGEN is mostly presented through a hospital and basically, the thyroid business is mostly presented through physicians’ offices, et cetera. So those are 2 very different kind of commercial points. Our thought was — our expectation was that PancraGEN would recover more slowly than thyroid would. And that hasn’t been the case. Our PancraGEN business is recovering really at a higher rate than our thyroid businesses, but they’re both recovering pretty nicely. And again, I think that’s a pretty good sign in terms of where we are. We get caught up, and I think it’s oftentimes difficult to assess the difference between units and revenue because revenue is tied to price and net realizable value and timing of that, and you’re familiar with some of the adjustments we’ve had in the prior year. That can get confusing when you’re trying to compare how are we doing against a particular point in time. But I think you can take a fair degree of confidence that PancraGEN is recovering at a higher rate and thyroid is also recovering. And in fact, as I think Fred said, basically 2/3 of our business continues to be thyroid and 1/3 of our business, a little more than 1/3 is PancraGEN.

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Kevin Michael DeGeeter, Oppenheimer & Co. Inc., Research Division – MD & Senior Analyst [19]

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Got it. And then just lastly from me. Previously, you provided some context as how to think about a path towards cash flow breakeven benchmark for the company. Once again, a lot has changed since some of those comments were made, particularly in and around the time of the acquisition of pharma services. Any updated thoughts either to a general time line to cash flow breakeven or the inputs that you think are most relevant for you to have clarity on to then be able to provide a little more context there?

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Jack E. Stover, Interpace Biosciences, Inc. – CEO, President & Director [20]

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Yes. I think we can both provide some comments on that. But from an EBITDA point of view, right, we are driving to get to EBITDA breakeven as soon as we possibly can. We probably have lost a quarter as it relates to the coronavirus. The last time we spoke, we weren’t sure what the impact of it was going to be. So as I said earlier, we’ve certainly gained a lot more confidence around that. And we have some challenges in terms of rebuilding the business to a stable level and then growing beyond that. But our expectation is that Q4, we’ll see most of the recovery. I think as we see the volatility in the marketplace, we recognize this isn’t going away, though. We’re going to continue to have to work our way around it. And both in terms of not just on the revenue side, but also on managing the cost side. And actually managing the cost side might be equally as important.

So again, optimism, but cautious optimism. And that’s why we’re really — in spite of the fact that we’re almost halfway through the year, we’re still being careful about what we actually project for the remainder of the year.

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Operator [21]

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Our next question comes from Yi Chen with H.C. Wainwright.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division – MD of Equity Research & Senior Healthcare Analyst [22]

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My first question is, would you see the COVID-19 impact on the testing revenue and the pharma services have been similar? And when you see recovery, do you see either of the sector is recovering faster than the other?

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Jack E. Stover, Interpace Biosciences, Inc. – CEO, President & Director [23]

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I’m sorry, Yi, on that second half of your question, do I see what recovering faster?

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division – MD of Equity Research & Senior Healthcare Analyst [24]

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You said that you have seen — start to see recovery. So do you see that whether the testing sector or testing revenue sector or the pharma services revenue segment, is one of them is recovering faster than the other?

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Jack E. Stover, Interpace Biosciences, Inc. – CEO, President & Director [25]

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Yes, that’s a good question. Let me answer your first question on the COVID activity. We really are just announcing the completion of all the validation work and hardware work, et cetera, on the COVID-19 serology work. So we are not projecting or anticipating any significant revenue the remainder of the year. But we do have customers that have an interest. In addition to that, we recognize that once we do announce that like other companies, there seems to be a pretty important need for quality testing, which obviously a lab like ours would be providing.

On the second question, in terms of the cycle, it’s really a very interesting cycle because as we were seeing around the beginning of the pandemic in March, what we saw very quickly by the middle of March through the end of March and into April was the impact on our diagnostic business. We followed the units down in that period, and I think we’ve discussed that. We’ve had drop in units in excess of 50%. On the pharma side, because of the timing issues, at the same time our diagnostic business was slowing up pretty dramatically, our pharma business was doing very well. And so part of the benefit of having those 2 kind of different revenue cycles. But I’d say that currently, we’re pacing in a very similar way in terms of the recovery of both diagnostic and pharmaceutical.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division – MD of Equity Research & Senior Healthcare Analyst [26]

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Got it. Second question is, you mentioned that you have a serological test for COVID-19. Do you think the potential revenue from the test could make up what had been lost from the diagnostics side? And also, according to the FDA, serological test for COVID-19 is mostly — is recommended to detect past infections, but not really recommended to detect active infection. So molecular PCR test and antigen test are recommended to detect active infection. So do you have any plan for those kind of tests?

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Jack E. Stover, Interpace Biosciences, Inc. – CEO, President & Director [27]

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Yes. We’ve been working with a potential partner on the PCR testing opportunity to marry that with basically what we’re doing in the antibody or the serology test. And we agree. We think the combination is important. Obviously, the serology test is focused on the creation of the antibody. But we recognize ourselves as we’re beginning to get back to work, the more current or the more common approach is going to be the PCR, the diagnostic test, the molecular test. So we agree. In terms of the revenue expectation, too early to make that determination. And I think we want to just be cautious about that. We have our hands full as we are rebuilding our business from the damage that was done to the commercial activities. And we’re spending all of our time making sure that, that comes back in a secure and a confident way. And good news is we are moving forward with the serology test. But I would say it’s certainly secondary. And I don’t think it’s going to make up, Yi, for the changes that we’ve had impacted by the virus. It may in the future, but not in the short term for sure.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division – MD of Equity Research & Senior Healthcare Analyst [28]

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Got it. And my last question is, would you please comment on the COVID-19 impact of the BarreGEN study and the timeline for potential commercialization?

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Jack E. Stover, Interpace Biosciences, Inc. – CEO, President & Director [29]

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Yes. I don’t think that COVID-19 has impacted anything we’re doing with BarreGEN except that for basically a quarter, we’ve reduced resources to essential activities. And as we’re dealing with health care centers and garnering samples, et cetera, everybody’s focus has been on the recovery of the overall business. And with health care institutions, obviously, dealing with COVID-19 patients, not necessarily worried about providing samples around BarreGEN. But the BarreGEN activities continue to move forward. We’re expecting study results that we think will be supportive of the BarreGEN assay, and we’re still very excited about the opportunity. But COVID-19 has had a nominal effect on BarreGEN.

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Operator [30]

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Our next question comes from Ben Haynor with Alliance Global Partners.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division – Analyst [31]

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Just on the M&A opportunity front, you have — you see anything — is there any change in your strategy, first off, given the impact from COVID and slowing things down potentially? Or are there more opportunities out there that you guys are looking at just because there might be some other labs out there or other entities out there with interesting assets that might be in dire straits financially that you guys could pick up on attractive terms?

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Jack E. Stover, Interpace Biosciences, Inc. – CEO, President & Director [32]

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It’s interesting, Ben. In the March time frame and maybe April time frame, we were getting some inbound calls due to, I think, mostly uncertainty with some potential competitors or opportunities. I’d say that’s slowed down. And we’ve been so internally focused in terms of rebounding our business and getting to EBITDA and cash flow breakeven that we really haven’t been focused on external activities. And by the way, not being able to travel to do things face-to-face, et cetera, I think, has had an impact. And by the way, I think there was an expectation, too, there was going to be a lot of difficulty in the small-cap market for companies smaller than us raising money, and that hasn’t happened either. Companies seem to be doing pretty well in terms of raising capital.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division – Analyst [33]

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That’s kind of an odd situation, but that’s how it’s turned out. And then just think this might be out of left field, but just with a lot of these procedures out there that have been delayed and insurers having quite a bit of money on the — that has flown in, in premiums that hasn’t been spent, do you get a sense at all that there might be some willingness to entertain reimbursement on some of the things that you guys might be doing that hadn’t been considered in the past?

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Jack E. Stover, Interpace Biosciences, Inc. – CEO, President & Director [34]

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Yes. It’s gotten to be such a quantitative process, Ben, meaning that it’s study based, it’s prospective databased, it’s analytically based that it’s hard to kind of leapfrog that process. And I’d say that — the only thing I can say is that being in the business longer, being more stable, having more data certainly opens those doors. And with Jeff Salzman that we brought on, Jeff’s done a very good job of converting some of the agreements to contracts. And so I don’t know if it’s a function of sort of the cash position of these insurance companies, but I’m really pleased with the progress that he and Greg are making in that area.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division – Analyst [35]

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Okay. So things are moving along on that front.

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Jack E. Stover, Interpace Biosciences, Inc. – CEO, President & Director [36]

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Yes.

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Operator [37]

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With that being our last question, I would like to thank you on behalf of Interpace Biosciences for joining the call today. Thank you. All parties may disconnect.