NantHealth, Inc. (NASDAQ:NH) Q4 2019 Results Conference Call February 28, 2020 4:30 PM ET
Robert Jaffe – Investor Relations
Dr. Patrick Soon Shiong – Chief Executive Officer
Ron Louks – Chief Operating Officer
Bob Petrou – Chief Financial Officer
Dr. Sandeep Reddy – Chief Medical Officer
Conference Call Participants
James Auh – Cowen
Brandon Couillard – Jefferies
Ladies and gentlemen, thank you for standing by and welcome to the NantHealth 2019 fourth quarter and full year financial results conference call. At this time, all participants are in a listen only mode. After the speaker presentation, there’ll be a question and answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Robert Jaffe, Investor Relations for NantHealth. Please go ahead sir.
Welcome everyone and thank you for joining us today to discuss NantHealth’s 2019 fourth quarter and full year financial results. On the call today are Dr. Patrick Soon Shiong, Chief Executive Officer; Ron Louks, Chief Operating Officer; Bob Petrou, Chief Financial Officer, and Dr. Sandeep Reddy, our Chief Medical Officer. This call is being broadcast live at www.nanthealth.com. A play back will be available for three months on NantHealth’s website. I’d like to make the cautionary statement and remind everyone that all of the information discussed on today’s call is covered under the Safe Harbor provisions of the Litigation Reform Act. The company’s discussion today will include forward looking information reflecting management’s current forecast. Certain aspects of the company’s future and actual results could differ materially from those stated or implied.
In addition, during the course of this call we may refer to non-GAAP financial measures that are not prepared in accordance with US generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review NantHealth’s house release announcing its full 2019 fourth quarter and full year financial results for the company’s reasons for including those non-GAAP financial measures in its financial results announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in the company’s earnings press release issued earlier today. In a moment Ron will provide a brief overview of the quarter and discuss the business lines followed by Bob who will discuss the financial results in more detail. We will then open the call for questions. With that said I’ll turn the call over to Ron Louks. Ron.
Thanks Robert. Good afternoon everyone and welcome to NantHealth’s 2019 fourth quarter and full year financial results conference call. We are very pleased with the significant improvements for 2019 financial results for both the 2019 full year and fourth quarter we grew total revenue, gross profit dollars and gross margin percentage, while also lowering operating expenses. These results speak to the dedicated efforts of the entire NantHealth team who rallied around initiatives to grow our business and drive down expenses. Comparing the 2019 full year to the 2018 full year total revenue is $96 million an increase of 7% from 2018. Our SaaS revenue increased 11% the 72.8 million over the prior year. Gross profit climbed to 57.5 million from $45.2 million and gross margin rose to 60% of total revenue from 51% of total revenue. Comparing the 2019 fourth quarter to the prior year fourth quarter, total revenue is $24.29 an increase of 6%.
Our SaaS revenue also increased 6% to 18.4 million over the prior year fourth quarter. Gross profit for the quarter climbed $15.2 million equal to 63% of total revenue from $11.5 million or 50% of total revenue for the prior year fourth quarter. Bob will further discuss the financial results in more detail shortly. Turning briefly to our balance sheet, at December 31st our cash position was $5.2 million. This amount does not include the proceeds from the sale earlier this month our Connected Care business for $47.25 million. I’ll discuss this transaction in more detail shortly. Turning to our software and service business and our clinical decision support division we presented new breast cancer research finding at the San Antonio Breast Cancer Symposium. The study results indicated simultaneous presentation and publication of oncology data is an effective method for relaying practice changing clinical data, which enables oncologists to quickly address treatment patterns and resident selections.
We deployed three significant workflow enhancements to the Eviti platform. The first multipayer access is a significant time saving tool which simplifies workflow by allowing user with multiple payers to toggle quickly between payer dashboards. The second configuration for appeal allows payers to self configure the appeals function within their account and the third patient match and attach automatically associates provider submitted medical records to the appropriate treatment plan, eliminating the manual processes and helping speed up treatment plan reviews. As previously announced, we signed an agreement with Wexford Health Services, one of the nation’s largest correctional healthcare companies. We completed the implementation early in the first quarter of 2020. Also in January we expanded two LD connect programs. For the first one a leading US health insurance company extended successfully in two state our program to 13 states after seeing a significant improvement in the use of evidence based medicine for member oncology care. And for the other one of the largest nonprofit rural health plans in the country, we signed a three year renewal agreements to continue for running high quality, high value care for its members.
Turning to our NaviNet payer engagement solution, NaviNet direct to provide revenues in the fourth quarter 2019 increased 25% compared with Q4, 2018. In January 2020 we signed an agreement game with the health plan, a large managed care organization where NaviNet Open will help decrease administrative costs and improve provider network communication and collaboration for the plant in West Virginia and Ohio. We have several enhancements to the NaviNet Open platform. These include claims appeal, the new application that allows payers offered electronic channel for appeal submission which enables stronger collaboration with the payer for claim resolution and streamlines the manual analog process for both the provider and payer. The second enhancement is now well within our claim investigation workflow. It provides users the ability to easily submit the required documentation through a portal to payer partners. This eliminates the need to send supporting documentation through manual processes and save time when reviewing and resolving inquiries.
And third we’ve introduced new open authorization enhancements that enable payers and providers to manage complex payer authorization requests through electronic submissions, this reduces manual workflows based on tax reform submissions and for connected care product line as I mentioned earlier, we completed the sale of our Connected Care assets to Massimo, a global leader in noninvasive monitoring technologies for $47.25 million. Included in the sale were assets related to our DCX device connectivity software product, formerly known as Device ConX, DCX patients vital software, formerly known as Vitals ConX, HBox connectivity hub and Shuttle interface cable. I’m pleased to report as part of the transaction the NantHealth team and employees associated with Connected Care business joined Massimo.
Turning to our sequencing and molecular analysis business we announced FDA R10K clearance for Omics Core, nation’s first tumor normal mutation profiling of overall tumor mutational burden or TMD from whole exome sequencing and solid tumors. TMD is an emerging biomarker that predicts response to checkpoint therapy and identify tumors that may benefit from immunotherapy. In January 2020 we presented GPS cancer platform data at the 2020 gastrointestinal cancer symposium sponsored by the American Society of Clinical Oncologists, ASCO. The data not only revealed increased opportunities for HER2 directed therapy in colorectal cancer patients, but also showed that up to 40% more patients may be eligible for HER2 directed therapies which has implications for drug development clinical trials.
Also in January, NantHealth and NantOmics presented a novel artificial intelligence platform for aiding pathologists in image based lung cancer subtyping at the Society for Imaging Sciences and Technologies international symposium on electronic imaging 2020. This novel machine vision software platform activity subtypes lung cancer pathologies and achieves high concords with analysis performed by trained medical pathologists. And in February 2020 NantHealth and NathOmics announced the publication of peer reviewed study in breast cancer research a Springer Net Nature journal on a novel AI technique and breast cancer. The study reports on a novel deep learning system of digital pathology images and omics data used together to more precisely identify mechanisms of therapy resistance.
To sum up we reported strong fourth quarter and full year financial results largely due to growth of our high margin SaaS business. Last month we completed the sale of the assets related to our Connected Care business for $47.25 million. The transaction is approved, our capital position and financial flexibility and allows us to explore growth opportunities. We continue to enhance our product offering, add new customers, and expand our existing customer agreements. We received FDA marketing authorization for Omics Core and our team continues to present important medical and scientific conference around the world. With that overview of our business lines I’ll turn the call over to Bob to discuss our financial results in more detail. Bob.
Thank you, Ron. As Ron mentioned earlier, for the fourth quarter of 2019 revenue increased to 24.2 million from 22.9 million in the same quarter of the prior year. As a reminder, we’ve divested our home health business at the end of 2019 second quarter. Consequently, we did not record any revenues for this business in the current year fourth quarter on an apples-to-apples comparison which exclude revenues from the home health business from last year’s fourth quarter. Revenues grew 14% from 21.2 million in the fourth quarter of 2018. For the full year 2019 revenue from all categories excluding the home health and sequencing was up over 11 million or 14% from 2018. SaaS revenues increased 6% to 18.4 million from 17.3 million in last year’s fourth quarter. The primary drivers for the improved performance were the additional key contracts and partners as mentioned in previous quarters.
For the full year of 2019 SaaS revenues grew 11% from 2018. Q4 sequencing and molecular analysis revenue was approximately 152,000, down from 622,000 in the same quarter prior year. Although we received FDA clearance as we have referenced in the past, we expect to continue to see a decline in sequencing revenue until we receive a positive coverage determination from CMS. Q4 revenue from our Connected Care products increased 75% to 5.6 million from 3.2 Murray in the fourth quarter of 2018. As previously noted we sold this business line in early 2020 and we’ll have limited revenues of Connected Care asset the sale finalized in early February.
Q4 gross profit grew to 15.2 million or 63% of revenue, which was a substantial increase compared with 11.5 million or 50% of revenue in the same quarter a year ago. The gross margin improvement was primarily due to changes in product mix specifically the continued growth of our software related businesses. For the full year of 2019 gross profit grew to 57.5 million or 60% of revenue compared with 45.2 million or 50.5% of total revenue in 2018. Q4 total operating expenses decreased 4% to 19.8 million from 20.7 million in the prior year fourth quarter, reflecting our continuous cost management efforts. For the full year 2019 total operating expenses decreased by 7.6 million representing an 8% improvement year on year. For the fourth quarter that loss from continuing operations was 11.7 million or $0.11 per share. A significant improvement from 49.2 million or $0.45 per share in the prior year fourth quarter. For the full year 2019 net loss was 52.8 million versus 192.2 million in 2018 representing a 55% improvement year on year.
On a non-GAAP basis net loss from continuing operations was 4.9 million or $0.04 per share down from 9 million or $0.08 per share for the fourth quarter last year. For the full year non-GAAP gap net loss was $0.25 per share down from $0.41 cents per share in 2018 equal to a 39% improvement year on year. Finally, cash and cash equivalents were 5.2 million at December 31st, 2019 compared with 9.3 million at the end of our third quarter representing a net use of cash of 4 million in Q4. The 4 million was primarily used for various semiannual interest payments. Excluding those interest payments that use of cash in the quarter would have been less than $1 million. We remain focused on prudently managing our cash, and we have not drawn on our $100 million line of credit. And with the proceeds from the sale of Connected Care we did not foresee having to use this in the near term. With that, I will now turn the call back over to Robert.
Thanks Bob. Operator, we’ve completed the prepared remarks. We’re now open to questions.
Thank you. [Operator Instructions] Our first question comes from Charles Rhyee with Cowen. You may proceed with your question.
Hi it’s actually James on for Charles. Can you give us an update on the FDA’s review of GPS cancer? Maybe anything you can tell us regarding your dialogue with the FDA and any updates regarding timing?
Dr. Patrick Soon Shiong
This is Patrick, James. I think we’ve announced, I don’t know how long ago we announced the FDA 5-10K approval and where we’re going through now is how long ago was that? November. So that’s been authorized, where are we going through now is getting a CPT code and working on a reimbursement. And that’s where you’re also go ahead James.
Dr. Patrick Soon Shiong
No. So, so the process of applying for the reimbursement is, you know, applying for the code. And our code is the comprehensive tests rather than the targeted therapy test.
Okay. And is there anything you could tell us regarding that process and your expectations on timing on that reimbursement code?
Dr. Patrick Soon Shiong
Yeah, so we personally, I personally went to meet and present ourselves to the authorizing organizations. And we submitted the entire application and that’s going through the review. They have very set committee meeting dates. We’ve met those dates and I think we’re up for the next meeting, which I don’t have the exact day to that next meeting, but I anticipate this to be whatever the timeframe, but they’ve communicated back to us with regard to our application and it looks like we will sit for the next meeting.
Okay. And can we maybe talk about the sales pipeline across Eviti and NaviNet and what that looks like currently?
It’s Bob here, yeah, the sales pipeline is pretty strong. We’ve got significant opportunities that we are working towards through this fiscal year, with the view that the sales cycle for the SaaS business is considerably longer than some of the other sales cycles that we have in some of the past product lines. So ultimately our pipeline is significant as you’ve seen from the announces we’ve made with respect to deals that we’ve just recently closed as, as well as other deals through late last year. And we expect to continue that progress through this year. And like I said, ultimately the pipeline is large it’s just the sales cycle for closing those deals is considerable and therefore we just need to manage accordingly.
Dr. Patrick Soon Shiong
I think the number of covered lives we now had at the Eviti level has now hit. It’s growing. What we expect to get to through this year is in the 30 million range from where we are now of mid to high twenties. So again our covered lives on the Eviti platform is to grow and with all these contracts that we continued to sign through late last year and into this year.
Okay. And can you give some color on maybe what you intend to do with the proceeds from the sale of the Connected Care business?
Hey, sorry. It’s Ron. Jason. So I think right now what we’re doing is we’re looking for your scoring different growth opportunities both internally and externally.
So whether we organically do some things on the software to help grow the SaaS business or we looked at partnering or external.
And just one last question is can you give me some details on some financial metrics of Connected Care just so we can adjust our model for the divestiture?
Well the 8-K was filed early February, so all the information that is available, is available through that filing several weeks ago. So I think you can use that as a leverage to what the business as much as we could because we have one reporting segment is able to what it looks like.
Okay. Thank you.
Thank you. Our next question comes from Brandon Couillard with Jefferies. You may proceed with your question.
Thanks. First one to say rest in peace Kobe. I know you Patrick and he were somewhat close. Bob just in terms of setting our models for ’20 any color you can share with us as far as kind of OpEx expectations, you know, post the divestiture, how you sort of foresee those progressing over the balance of the year.
Well I think in the short term we’re still driving opportunities where we can to reduce those costs. But again, I think we also need to be cognizant that we need to invest in the right areas and right opportunities to ensure that we continue to grow the top line. So in the very near term, I think we’ll still have a bit of a tailwind from the Connected Care business, some incremental costs that you know not amortized over the broader organization. But I would give it somewhat of a flat to up marginally in the short term. And again, obviously in the long term as we stabilize and drive efficiencies, we will continue to drive improvements in reductions. But right now I would ultimately go flat to up slightly.
Okay. Any chance you might be able to split out how much OpEx is consumed for the GPS business?
Again, I think we spoke about this previously where we purposely slowed down the GPS activity until we get the appropriate coverage. And so in the current state, the GPS business isn’t consuming significant amount of costs through late last year into the beginning of this year. But as we move forward with our sales modeling and the whole activity that Dr. Patrick and Bobby referenced with respect to codes and those things that cost will ramp up. But in the current state where we sit with Q4 and early part of 2020, those costs are minimal, less than $1 million.
Dr. Patrick Soon Shiong
So Brandon this is Patrick, first of all those comments about Kobe. But with regard to the GPS, I think we’ve now committed ourselves that until we get this reimbursement in place and make it a sustainable growth business, we’re not going to be continuing the pace that we had before with regard to the tests that we were doing.
Very good. That’s it for me. Thank you.
Thank you. And I’m not showing any further questions at this time. I would not like to turn the call back over to management for any further remarks.
Hi, this is Robert. I just want to say to everyone thanks for joining the call today and sharing, we look forward to sharing our progress on the next company call, thank you again for joining us today.
Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.