Precipio, Inc. (NASDAQ:PRPO) Q3 2020 Results Conference Call November 19, 2020 5:00 PM ET
Ilan Danieli – CEO
Conference Call Participants
Good day, and welcome to the Precipio Quarterly Shareholder Update Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that the conference is being recorded.
Statements made during this call contain forward-looking statements about our business. You should not place undue reliance on forward-looking statements as these statements are based upon our current expectations, forecasts and assumptions and are subject to significant risks and uncertainties. These statements may be identified by words such as may, will, should, could, expect, intend, plan, anticipate, believe, estimate, predict, potential, forecast, continue or the negative of these terms or other words or terms of similar meaning.
Risks and uncertainties that could cause our actual results to differ materially from those set forth in any forward-looking statements may include but are not limited to the matters listed under Risk Factors in our annual report on Form 10-K and for the year ended December 31, 2019, which is on file with the Securities and Exchange Commission as well as other risks detailed in our subsequent filings with the Securities and Exchange Commission. These reports are available at www.sec.gov. Statements and information including forward-looking statements speak only to the date they are provided unless an earlier date is indicated and we do not undertake any obligation to publicly update any statements or information, including these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Now, let me hand the call over to Ilan Danieli, Precipio’s CEO. Please go ahead, sir.
Thank you very much. Good evening, everyone. I would like to thank you all for joining our Q3 2020 shareholder call.
During this call, I’ll provide a business update on the progress that our Company has made and what we expect to see in terms of development in the near future. Since this will be our last shareholder call for 2020, I’ll also end with a few words on how we see this year wrapping up or things we can expect to see for next year.
Let me begin with a recap of our quarterly report on Form 10-Q that was filed at the end of last week. As you saw, we made great progress in our core business of pathology servicing, growing the top line, almost threefold from $0.6 million in Q3 of last year to $1.6 million in this recent quarter. Just to bring that number to life, in the first nine months of 2019, we tested slightly under 1,200 patient cases, whereas in the same nine months period in 2020, we already eclipsed 2,500 and still have Q4 to complete. This equates to an average of 16 cases per day, up from less than 8 per day.
Our customer count has more than doubled during this time with repeat customers increasing proportionately as well. And while this additional case volume translates into increasing staffing needs, we’re also starting see the economies of scale of our operations.
For the first nine months in 2019, our gross margin went from essentially 0% to 20% for the same nine months in 2020. It’s great to start seeing the impact of our focus on growing our top line while keeping a keen eye on costs and improving efficiencies that produce the jump in gross margin. As we move through Q4 and into 2021, we project lab operation metrics to continue to yield improvements. Overall, our business growth will continue to generate gross profits, reducing our dependence on external capital.
Now, let’s move to our product side. We continue to make great progress with our two flagship products, IV-Cell and HemeScreen. For IV-Cell, we’ve now launched the beta site of our new IV-Cell media in labs in the U.S. and Europe, and initial results are very promising. This isn’t surprising since we’ve been using the media in our own lab for several years now. Knowing that we are not only an inventor of IV-Cell, but also the user of this product in our own lab gives us the credibility needed to have discussions with some of the most prominent labs in the world. This credibility and our own experience is a key factor in building customer confidence and steering these labs from moving away from the product they’ve used for years to try our product.
At this point, I’d also like to recognize and thank our partner, ADS Biotec, who have done a terrific job of bringing us into some of their customers and facilitating this phase of testing of our products. We hope to achieve two important outcomes from this beta phase. Number one is gaining new customers. These laboratories will see the benefit of IV-Cell as compared to the existing product and adopt ours. Number two, we’ll gain reputable reference points. As I’ve mentioned before, this is a small industry. Everyone knows each other. And getting the thumbs up from some of these reputable and highly regarded laboratories as our customers will be an immediate door opener to many other customers. As we continue to make progress, we will share that progress to the public, including the completion of the testing phase and the on-boarding of new labs, who will begin using IV-Cell.
On HemeScreen, we continue to make strong progress on-boarding more customers. Just this week, we completed training of several new customers in our lab and have a strong pipeline for this and next quarter. As our client base builds, we will begin to see the impact of this high margin, recurring revenue business.
Operationally, by the end of this year, we will complete the building of our entire backbone to support the product side of our business from manufacturing to supply chain, inventory management, and a complete online ordering system, making it easy for our customers to manage their orders and products. We’re also working on several strategic partnerships to broaden our reach to HemeScreen — of HemeScreen to community oncologists nationwide.
What does this mean for the Company strategically and financially? From a strategy perspective, we continue to add more data points to prove that our model works. We have our core pathology services business, which provides superior diagnostic services to our customers and to their patients. As we operate a lab, we’re privy to that weaknesses of the current products used by labs and we’ve leveraged our knowledge and expertise to create competing technologies. After testing these proprietary technologies extensively in our lab, essentially becoming the first customer to use them clinically, we can then move to commercialize those technologies into products.
So, we moved from laboratory services to the identification of new technologies, to the conversion of those technologies into proprietary products, then purchased by other labs. Both sides of the business are key to our growth and success. Our pathology services are where we create immense value physicians and their patients by providing a uniquely, highly qualified — high quality service focused on diagnostic accuracy. But the laboratory way to provide services is also a playground of sorts for our R&D team to create new technologies.
From a financial perspective, the pathology surfaces is what will pay the bills, but the high margin products are what will really grow the top and bottom line of the Company.
Now, let’s move to discuss our COVID projects. I’d first like to again reemphasize that COVID is not part of our core business. It is however a major opportunity to harvest the technology of the test we have and bring it to market. I’m pleased to announce today that we have completed the studies necessary to file with the FDA for both chronic care testing, as well as at home. As we stated before, we cannot publicly share the results of those studies or the process of approval with the FDA. However, it is our view that the study results and our product meet the threshold and level of scrutiny we believe the FDA requires for approval.
So, those of you who’ve been following the news, this week the FDA provided the first EUA for at-home virus test kits. This is not a competing product to ours. The kit that received the EUA test for the presence of the virus, whereas our product tests for the presence of antibodies developed after the person has been infected with the virus. This is however a very exciting and promising development for us. I think, there’s clear consensus on the need to extend the testing market beyond laboratories and medical facilities, to enable people to take the test within the safety of their home. The big question was how long would it take for the FDA to get comfortable with the notion of untrained individuals conducting the tests themselves. This week’s announcement clearly indicates that the FDA is ready to take that important step forward.
As of today, the FDA has approved only one antibody test for point of care use and has not yet approved any antibody test for at-home use. Some of you may have seen the recent announcement by Costco for a rapid at-home test. If you read the details, however, it turns out this is a sample collection kit, which then gets sent to the lab, which with results received two to three days later. So, this is neither an at-home test, nor is it at least in our opinion, given it takes two to three days to get the results, rapid. I do appreciate that it’s very easy to get confused with all of these different products and definitions, particularly when it’s surrounded by this pandemic.
One question that was raised was will the point of care testing essentially eat into the in-lab business. And I would tend to agree with that notion. After all, if a doctor could do the test in their office and get immediate results, why send it to a lab. From our perspective, we actually prefer and welcome that model. First of all, it’s better patient care. Second, it basically reduces our operations to selling the kits, as opposed to distributing the customers, having blood tubes collected, shipped back to our lab where we then need to have an entire operation to receive and store samples, run the test and report results to our customers. The financial and margins strongly favor the sale of kits to point of care versus running an in-lab operation.
The granting of the first EUA by the FDA for an at-home COVID virus test is an exciting step forward. It’s a strong signal of the FDA’s recognition of the need to make these tests available to the masses. Although it’s impossible to predict the timeline required by the FDA to review — to complete the review of our results, we believe that it is within our reach and that our product produces strong results and are the right fit for the public health needs.
Some of you asked whether the presence of vaccine will render our tests unnecessarily first, let me say that in our opinion, we are at least six months away from full deployment of the vaccine to the broad population. Secondly, the vaccine is intended to generate a response in the body that will cause our immune system to develop antibodies.
How will we know if the vaccine is successful? How will we know if antibodies have developed? And how will we — how long will the vaccines effects last. All those questions will be answered through an antibody test. We believe there’s still a huge potential for this test and that the availability of the vaccine doesn’t hamper the opportunity. In fact, we believe the presence of the vaccine will generate increased demand for ongoing testing to ensure that the person indeed still has the antibody and that the vaccine is still effective.
A recent smart comment from one of our shelters also suggested that the antibody tests can be used as a screening for vaccine eligibility. The rationale behind this idea is that given that there’s a limited vaccine production and huge demand, to the extent the person has already been infected with the virus and has developed antibody, they are less likely to need the vaccine. This is a very interesting idea that will undoubtedly be explored as the vaccine becomes available.
In summary, what does next year hold for us? In reviewing the various areas of our business, here’s what we expect to see. For the pathology services, we expect to continue to see rapid growth and steady increase in margin to get our business to cash flow breakeven. For IV-Cell, we expect to see the completion of the beta study and the adoption of the media by several prominent labs followed by a global rollout with our partner ADS Biotec. The media business will be a nice growing, recurring revenue, high-margin business that we anticipate to generate significant contributions to the bottom line. For HemeScreen, we anticipate building a large customer base of physician office laboratories who will adopt the HemeScreen platform. This will give us an installed base of oncology sites, all running our reagent assays. The Reagent Rental program is a four-year commitment plan, generating strong margins and an expected projected and growing cash flow for the business.
With the expected success of these businesses, we would see a substantial, positive financial impact for our Company and the gradual reduction of reliance on outside sources of capital. We believe it’s within our reach to approach breakeven. We have the team, the strategy, the products, and the market demand for those products.
For a Company of our size of 60 or so employees, we’ve got a lot going on. Despite the many challenges our society and our economy have faced this year, we’ve demonstrated that we’re strong enough to weather the storm, and actually we’ve shown the best — our best growth results in our Company’s history so far. As many companies reinvent themselves and figure out their business model and strategy, so we, and I think we end this year poised for a dramatic steps for us in 2021. I very much look forward to sharing with all of you, our successes.
I want to thank everyone for your ongoing support and wish you and your families, health and safety, and a happy holiday season. Have a nice evening. Thank you.
End of Q&A
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.