Edited Transcript of NH earnings conference call or presentation 7-May-20 8:30pm GMT

CULVER CITY Jun 5, 2020 (Thomson StreetEvents) — Edited Transcript of Nanthealth Inc earnings conference call or presentation Thursday, May 7, 2020 at 8:30:00pm GMT

NantHealth, Inc. – CFO

NantHealth, Inc. – COO

Ladies and gentlemen, thank you for standing by, and welcome to the NantHealth 2020 First Quarter Financial Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Robert Jaffe, Investor Relations for NantHealth. Sir, the floor is yours.

Welcome, everyone, and thank you for joining us today to discuss NantHealth’s 2020 First Quarter Financial Results. On the call today are 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 playback will be available for 3 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 of 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 U.S. generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review NantHealth’s press release announcing its full 2020 first quarter 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 press release issued earlier today.

In a moment, Ron will provide a brief overview of the quarter and discuss the business, followed by Bob, who will discuss the financial results in more detail. We will then open the call for questions.

With that said, I will now turn the call over to Ron Louks. Ron?

Ronald Allen Louks, NantHealth, Inc. – COO [3]

Thanks, Robert. Good afternoon, everyone, and welcome to NantHealth’s 2020 First Quarter Financial Results Conference Call. We hope all of you and your families are safe and well. These are highly unusual times with COVID-19 impacting all of us.

I’d like to begin with some heartfelt thanks to our employees who have responded with resilience and dedication to the challenges related to COVID-19. Our employees have put forth extraordinary effort to make sure our business continues to operate. To aid that effort, we have focused on our employees’ well-being. We follow CDC guidelines and implemented processes and procedures for virtually all of our employees to work remotely. As a result of these efforts, the COVID-19 impact on our employees and business state has been relatively minor.

With that, let’s take a close look at our 2020 first quarter. During the quarter, we completed the sale of our Connected Care business for more than $47 million. The divestiture of this business significantly strengthened our balance sheet, further streamlined our operations, and along with the sale of our home and health care services business last June, allows us to focus our energies and resources on our primary SaaS business. For reference, the financial results of our Connected Care business are now classified as discontinued operations for the current and prior periods. Having said that, and for those interested, the Connected Care business generated sales of approximately $1.2 million for a portion in Q1.

Our financial results for our continuing operations in the first quarter of 2020, total revenue was $18.2 million, of which SaaS revenue was $18.1 million, representing a 2% increase over the prior year quarter. Gross margins increased substantially to 60% of net revenue compared with 49% of net revenue in last year’s first quarter. We also made excellent progress reducing operating expenses, especially SG&A.

Regarding our leadership, we strengthened our Board of Directors with the addition of Deanna Wise. Deanna brings extensive clinical information technology experience in the hospital and health care industry. Her expertise will be particularly helpful in shaping our future product strategy and strategic direction.

Turning briefly to our balance sheet. At March 31, our cash position was $47.5 million, which increased substantially as a result of the sale of the Connected Care business.

Now let’s discuss the software and service business. In our clinical decision support division, we presented Eviti Connect real-world data on treatment patterns for patients with advanced colorectal cancer, CRC, at the 2020 Gastrointestinal Cancer Symposium, sponsored by the American Society of Clinical Oncology, ASCO, in January. The ability to identify treatment patterns through data analysis can provide unique and critical information to pharma, payers and provider networks to optimize treatment strategies. Also in January, we signed a 3-year renewal agreement with one of the largest nonprofit rural health plans in the U.S. We expanded an agreement with a leading U.S. health insurance company to roll out Eviti Connect across their Medicaid population to additional states. We deployed significant workflow and database enhancements to the Eviti platform. These enhancements include warning notifications, which allow users to configure a warning and/or deviation notification to alert the submitter when a drug does not comply with the preferred drug program. This saves review cycle time and ensures patients receive correct care. Payer-customized messaging, which allows users to indicate when specific data is required in order to complete patient insurance ID field, reducing submission delays.

With regard to our NaviNet payer engagement solution, in January, we added the Health Plan as a new customer. The Health Plan is a community health organization servicing members in Ohio and West Virginia. 5-year agreement includes NaviNet Open as a key component of the Health Plan’s payer-provider collaboration strategy. We launched significant enhancements to the NaviNet Open platform, including an all — a new AllPayer self-service subscription management workflow. This new storefront enables the provider office to quickly create and manage subscriptions for our AllPayer offerings, allowing providers to expand their NaviNet access to nearly all health plans.

For our sequencing and molecular analysis business, in February (sic) [January], we presented the GPS Cancer data revealing increased opportunities for HER2-directed therapy in colorectal cancer patients at the 2020 Gastrointestinal Cancer Symposium, sponsored by the American Society of Clinical Oncology. The data showed that up to 40% more patients may be eligible for HER2-directed therapies, which have implications for drug development and clinical trials. In January, NantHealth and NantOmics presented an initial report on a novel artificial intelligence, AI, platform for aiding pathologists in image-based lung cancer subtyping at the Society for Imaging Science and Technologies International Symposium on Electronic Image 2020. This novel machine vision software platform accurately subtypes lung cancer pathology and achieves high concordance with analysis performed by trained medical pathologists.

In February, NantHealth and NantOmics announced the publication of a peer-reviewed study in breast cancer research on a novel AI technique in 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 a solid first quarter, especially in light of the challenges associated with COVID-19 compared with last year’s first quarter. SaaS revenue increased and the gross margin rose significantly. In February, we completed the sale of our Connected Care business for $47.25 million. The transaction has substantially improved our cash position and financial flexibility. And we continue to enhance our product offering, add new customers and expand our existing customer agreements.

With that overview of our business, I’ll turn the call over to Bob to discuss our financial results in more detail. Bob?

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Bob Petrou, NantHealth, Inc. – CFO [4]

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Thank you, Ron.

As Ron mentioned earlier, for the first quarter of 2020, revenue was $18.2 million compared to $20.2 million in the same quarter of the prior year. Included in the $20.2 million from the prior year was $1.6 million of home health revenue and $814,000 of GPS revenue. And when we removing such, thus leaving just SaaS revenue, SaaS revenue increased year-over-year by 2% to $18.2 million from $17.8 million. The primary drivers for the improved performance were the addition of key contracts and partners, as mentioned in the previous quarters. Quarter-on-quarter SaaS revenue declined slightly, mainly due to the ending of amortization of services that were occurred in 2019.

Q1 Sequencing and Molecular Analysis revenue was $59,000, down from $814,000 in the same quarter of the prior year. As we have referenced in the past, we expect to continue to see minimal Sequencing and Molecular Analysis revenue impact until we receive a positive coverage determination from CMS.

Our Connected Care business, which we sold earlier this year in February, generated a partial quarter of sales of approximately $1.2 million. As a reminder, this amount is not included in our total revenues as this business is reported as discontinued operations.

Q1 gross profit grew to $11 million or 60% of revenue compared with $9.9 million or 49% of revenue in the same quarter a year ago. The significant gross margin improvement was primarily due to the changes in product mix, specifically the continued growth of our software-related business.

Q1 total operating expense decreased 17% to $16.8 million from the $20.2 million in the prior year first quarter, reflecting our continued cost-management efforts and the removal of costs tied to the divestiture of the home health business. We continue to manage our cost base budget, do intend to invest through this year on new product offerings that will generate future benefits. Accordingly, we expect to see overall OpEx increase modestly through this year.

For the first quarter, net loss from continuing operations was $8.9 million or $0.08 per share, a significant improvement from $19.6 million or $0.18 per share in the prior year first quarter. On a non-GAAP basis, net loss from continuing operations was $6.1 million or $0.06 per share, down from $10.6 million or $0.10 per share in the first quarter of last year.

Finally, cash and cash equivalents were $47.5 million at March 31, 2020, compared with $5.2 million at the end of the fourth quarter. This increase of $42.3 million was primarily the result of the DCX sale. Excluding the inflow of cash from the sale, net cash burn was approximately $5 million in Q1, which includes various closing costs and other front-end loaded costs.

With that, I will now return the call back over to Robert.

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Robert Jaffe, [5]

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Thanks, Bob. Operator, we’ve completed our prepared remarks. We’d now like to open up the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Charles Rhyee.

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Charles Rhyee, Cowen and Company, LLC, Research Division – MD & Senior Research Analyst [2]

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I hope everyone is safe and well here. I wanted to ask about — actually, let me just touch on the last thing about cash here. So if we took in $40 million, it sounds like we had burn about a minus $5 million. If we didn’t have the closing costs and some of the upfront costs related to the sale of DCX, do you have an estimate of what cash would have been? Should you have increased cash? Or can you give me a rough estimate?

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Bob Petrou, NantHealth, Inc. – CFO [3]

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Yes. It’s Bob here. I don’t think we’re in a position yet to say that would increased cash, but I think we would have still burned a couple of million dollars in the early part of the year.

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Charles Rhyee, Cowen and Company, LLC, Research Division – MD & Senior Research Analyst [4]

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Okay. Is there — as we think about the impact of COVID here going forward, what kind of impact are you expecting here in the back half of the year? Obviously, a lot of people not able to get to physicians’ offices. Those offices are closed. Oncology, I think, to some extent, sounds like it’s a little bit less impacted, generally speaking, but still a lot lower level of procedures. And how are you thinking about sort of the outlook here as we move forward?

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Ronald Allen Louks, NantHealth, Inc. – COO [5]

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So it’s Ron, Charles. So obviously, with Q1, we had no material financial impact due to the virus, and so it’s a bit early to tell on the longer term. We feel comfortable sort of where we’re at as a company for the year. But as you know, it’s difficult to see. I think the longer you go out and with closing of deals, and — so you can’t actually do larger deals over the phone. The smaller deals we’ve been able to do. And I think as time progresses, we’ll have a better understanding of this. And if we can actually be able to do it without having to be face-to-face with the customer, so.

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Charles Rhyee, Cowen and Company, LLC, Research Division – MD & Senior Research Analyst [6]

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Okay. Maybe can you give us a sense of what sort of the backlog cushion you think you have that will help to the extent that we have some delays in closing deals? Just can you remind us sort of the — how long it takes to implement? And how much of that when we have to kind of carriers do that?

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Ronald Allen Louks, NantHealth, Inc. – COO [7]

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Well, that is one good thing, I think, as far as the implementation goes, and a lot also depends on the customer and their readiness on implementation. But the nice thing about us is that we can actually implement virtually with the products, both Eviti and NaviNet. And so that’s actually worked out well for us, obviously, during this period, being able to do that. Obviously, customers, I still think prefer — in a normal situation, would prefer on-site and sort of that face-to-face interaction, especially around training. But in this case, we’ve been able to continue with installations with the customers. So I think from that part, we’re in good shape. Pipeline is still strong for Eviti in particular. We have several deals in progress. We may see some time lags in our ability to close those deals given the locations of certain prospects as well as the radius as customers refocusing right now on the shorter-term priorities. But the overall interest is still really strong, I think which is a testament to the ROI of our solutions. And so — and back to my previous point earlier, on the COVID impact for the year. We still have good expectations that we’re going to close some of these larger deals even though we’re not face-to-face with the customer.

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Bob Petrou, NantHealth, Inc. – CFO [8]

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And sorry, just to — sorry, it’s Bob. Just to expand. Again, I think the long-term strategies and prospects are still fairly good. I think short term, we will see a small impact in Q1 — sorry, Q2.

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Ronald Allen Louks, NantHealth, Inc. – COO [9]

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Q2.

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Bob Petrou, NantHealth, Inc. – CFO [10]

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We did see — yes, we did see a small impact at the onset of the COVID tied to the providers in the network and offices being closed, et cetera. And we’re also doing some things internally along with our providers and providing support to them. So we will definitely see an impact in Q2. And I envision revenue to be flat to down from a Q2 perspective. So I just want to give that highlight just to make sure it’s clear.

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Ronald Allen Louks, NantHealth, Inc. – COO [11]

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And then, Charles, just to add to that with Bob. One of the things that we did as part of the COVID, and we felt the responsibility to the community and our customers is that we’re providing the AllPayer for free right now to our customers. And so we expect to have an impact on the revenue in Q2 based on that, so.

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Charles Rhyee, Cowen and Company, LLC, Research Division – MD & Senior Research Analyst [12]

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Is that charged on a just kind of a transactional basis then? So you’re able to just kind of provide it for free for now…

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Bob Petrou, NantHealth, Inc. – CFO [13]

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Yes.

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Ronald Allen Louks, NantHealth, Inc. – COO [14]

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Yes.

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Charles Rhyee, Cowen and Company, LLC, Research Division – MD & Senior Research Analyst [15]

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Yes. Okay. My last question then is, as we think about the model then. So we should be thinking about modeling down — flat to down second quarter. Third quarter, is it because of a lag on delays? Should third quarter be the same? Or if, let’s say, you listened to a lot of other companies, just thinking of a — 2Q being the worst in terms of procedure volumes. But then 3Q starting to see a recovery going into 4Q. Is the timing for your business similar that we would see that measured? I’d imagine on the NaviNet side, perhaps because of transactions being — because of things being scheduled or Eviti? Maybe give us a sense for that and how we should be thinking about…

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Ronald Allen Louks, NantHealth, Inc. – COO [16]

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I think we’re similar to the other companies that you referenced in the same guidance.

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Operator [17]

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There are no questions at the moment. Please continue.

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Robert Jaffe, [18]

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Thanks, Charles. Thanks, everybody, for joining us today. We look forward to sharing our progress on our next scheduled conference call. Thanks again for joining us today. Have a good one. Be safe.

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Operator [19]

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Thank you again for joining us today. This concludes today’s web conference. You may now disconnect. Have a great day.

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