Bionano Genomics, Inc. Q2 FY2020 Earnings Call

Greetings. And welcome to Bionano Genomics Inc. Second Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ashley Robinson of LifeSci Advisors. Thank you. Please go ahead.

Thank you, Donna, and good afternoon, everyone. Welcome to the Bionano Genomics second quarter financial results conference call. Leading the call today will be Dr. Erik Holmlin, CEO of Bionano. After the market closed today, Bionano issued a press release announcing its financial results for the second quarter 2020. A copy of the release can be found on the Investor Relations page of the company’s website. Before we begin, I would like to remind everyone that certain statements made during this conference call may be forward-looking, including statements about our strategic and commercialization plans, 2020 sales pipeline, anticipated benefits or improvements to the Saphyr system, and the advantages of the Saphyr system over current technologies, our expectations regarding timing and content of study results and anticipated benefits of these studies in driving adoption of the software system. Such forward-looking statements are based upon current expectations and there can be no assurances that these results contemplated in these statements will be realized. Actual results may differ materially from such statements due to a number of factors and risks, some of which are identified in our press release and our other reports filed with the SEC. These forward-looking statements are based on information available to Bionano today. And the company assumes no obligation to update statements as circumstances change. An audio recording and webcast replay for today’s conference call will also be available online in the Investors section of the company’s website. For the benefit of those who may be listening to the replay or archived webcast, this call is held and recorded on August 13, 2020. With that, I will turn the call over to Erik Holmlin. Erik?

Thank you, Ashley, and good afternoon, everyone. I want to thank you for joining us today for this review of our second quarter results. And after my prepared remarks we'll open the call for a Q&A session. And I just want to say at the outset that we are really amazed and thrilled at the progress we see around the globe in connection with the adoption of Saphyr and its use for really groundbreaking work across genomics. What we're seeing are papers published recently that are showing how Bionano can be a part of creating solutions such as potential treatments and vaccines for COVID-19, possibly even tests used to manage the disease of patients with COVID-19. And all of this progress is happening amongst incredible advances that we're making in driving Saphyr to become the potential new standard in cytogenetic analysis for oncology and genetic diseases. In the business, we are seeing an enthusiastic response to the new go-to-market strategy that we implemented earlier this year. Our goal has been to make it easier than ever for clinicians and researchers to access Bionano data in a way that's going to enhance their understanding and utility of our Saphyr technology. We see that we are gaining traction with significant increases in services projects, consumable sales, and rental programs and system sales that taken together really grow the installed base of Saphyr systems around the world. We are seeing increasing interest in the academic community amongst researchers who are continuing to publish really groundbreaking research and findings that show using our system will advance their understanding of genomics. And we are also seeing publications now that illustrate the acceptance of Saphyr by clinical researchers who are developing assays for cytogenetics, including in areas such as genetic diseases and hematology-oncology. In fact, two very powerful papers were published in Nature journals this quarter. They highlight how Saphyr is important in cutting-edge research. One paper documented the largest study of a genetic disorder using our technology to date. In this study, researchers used Saphyr genome imaging technology to establish one of the largest and most structurally accurate data sets genome analysis for a cohort of affected children and their parents in a study of DiGeorge syndrome, which is the most common disease amongst the class of genetic diseases called microdeletion syndrome. And I can't emphasize enough how incredibly complex this region of the human genome is. To be able to reach the level of resolution that the researchers did in their work is really groundbreaking. That ability to resolve such complex regions of the human genome has implications across all areas of genome research and the clinical applications of genomics, including understanding the genome variants that drive diseases. These results can all potentially play central roles in the development of new medicines and diagnostic tests. The other paper that was noteworthy in nature this quarter was one that was particularly topical, and it highlights how Bionano data combined with other analysis methods can help find vaccines, treatments and diagnostic tests for COVID-19. This work is related to how researchers use Bionano's genome imaging technology to build what we call a reference quality genome. In this case, the application of that work was on bat species, actually six different bat species. Of course, the bat is remarkably timely, and the work has been ongoing, but its implication is remarkably significant now, because it can help explain the ability that bats have to tolerate viral infections. It may play a role in understanding how there can be a transmission of viral disease from bat species to humans, and even potentially lead to other areas of development of new vaccines and treatments. A significant shift in our go-to-market strategy has been toward a reagent rental program. An uptake of this model continues to increase in all geographies. New sites, which were previously inaccessible with our instrument sale only model, are now adopting Saphyr through this reagent rental program and are making large consumable commitments. We have announced some of these key adoptions already with the National Health System in the U.K., Medical College of Wisconsin, University of Iowa, South Korea, Yonsei University Hospital, among several others. These are all adopting and installing our Saphyr system for digital cytogenetic applications. Now turning to our second quarter commercial results, the revenues were $1.2 million for the quarter, which were weaker than the same period of last year of $2.2 million, but that's mainly due to the impact of COVID, which has continued to impact many states and businesses including our current and potential customers. Nevertheless, this level of performance was consistent with our expectations going into the quarter. We see that as a significant accomplishment under the circumstances. While many regions of the U.S. remain nearly shut down or operating at a significantly lower pace than normal, we have seen a significant recovery of our business in Europe. During this third quarter, we believe that the worst of the impact of the pandemic may be behind us. The number of Saphyr systems that were shipped to customers continues to be significant. Six Saphyr systems were shipped this quarter, one of which was a straight instrument sale and five were reagent rental commitments. In the second quarter of last year, eight systems were sold. Considering the pressure of the pandemic, especially in the second quarter where the effects were felt most dramatically, the expansion of the number of Saphyrs adopted is extremely positive. Since the commercial launch of Saphyr in February of 2017 through the end of the second quarter of 2020, there were a total of 87 Saphyr systems that had been installed and there are 19 that were awaiting installation as of the end of the second quarter. As we discussed on our first quarter call, we have added a commercial services component to our product offering. We have done so as a way to serve customers who are either unable to operate Saphyrs already in their lab or unable to adopt a Saphyr for any reason. In a favorable response from the market, we have seen tremendous uptake of our services program. We spoke about this quite a bit a few weeks ago when we were on discussing the first quarter results, but so far on a year-to-date basis, we have run nearly 500 samples, 493 samples year-to-date. It's important to note that, when we compare it to the same period last year, we had run just 212 samples. The response or increase in service projects and samples that we're processing really reflects an increasing awareness and acceptance of our data type and its benefits. We believe that offering the community these services options will increase that data in the field even more and serve as a basis of continuous education of the market as to the power of Saphyr and Bionano data. Consumables sold on a per sample basis were up 189% in the second quarter of 2020 compared to the second quarter of 2019. In this quarter, chip sales resulted in a sale of 1,421 flow cells, which is a per sample equivalent. That's compared to just 490 flow cells sold in the same period last year. Our focus on driving Saphyr adoption through sales of consumables in the form of reagent rental programs, along with our focus on driving utilization in the growing installed base is clearly working. The consumables business is expected to be more profitable over time and it is anticipated to be the primary driver of our business. We believe that this large increase in data generated on Saphyr systems will yield wider visibility of our capabilities and drive acceptance of our data type and its value. These are exciting results and we're pleased with them; we believe that it reflects significant momentum even in a relatively tough quarter around the world. Regarding the breakdown of these revenues, the $1.2 million was comprised of $229,000 in instrument sales, $711,000 in consumable sales, and $242,000 in services and other. The cost of revenues for the quarter was $603,000, reflecting a 49% gross margin for the second quarter of 2020. This can be compared to a cost of sales of $1.6 million or a 28% gross margin for the same period a year ago. This increase in gross margin is notable and reflects the shift toward the increase in consumables as part of our overall product mix and that's really by design. More consumables bring in more gross margin for the company and bring more Bionano data into the field. Our work in supporting COVID research has also deepened this quarter as the search for a solution to the virus continues on a global basis. Bionano's Saphyr system is capable of providing solutions that researchers are facing when a virus elicits different responses to patients who otherwise have similar risk profiles. Analyzing the structural variation of the genome can help lead researchers and investigators to solve these challenges, and we believe the Saphyr system, which is being utilized as part of several major initiatives around the globe will lead the way in structural variation analysis. Something I want to mention in particular and it's something we've announced to the field and we're very proud of and extremely excited to be a part of. That is the COVID-19 Host Genome Structural Variation Consortium which was started by Dr. Ravi Kolhe at Augusta University. The stated mission of this consortium is to look for the structural variations in or near genes that play a role in infection, as well as the genes connected to the immune response among many other factors of the host response. The hope is to explain the variation we see in disease severity and progression. This project is getting underway. There have been about 30 samples run to date, but the goal is to map 1,000 genomes on Saphyr systems in sites around the world. So far, preliminary results have yielded some promising insights, but we all recognize there’s still very much to be learned, and progress continues. The consortium has been growing and includes more than 50 participating institutions that have joined forces with the consortium in Germany at the University of Hannover. There’s a truly global team coming together here in investigating structural variations' role in the host response to COVID-19. In addition to that important consortium, we have a significant research project underway in China. We've talked about that recently as well and while that was the first project that we had actually set up and established, the access and ability to process samples was something that was tightly controlled in China and we have continued to work through the logistics. That study at GrandOmics, which is a Bionano service provider in Wuhan has expanded. It now includes another center in Shanghai and we are now processing the initial samples there. That research program continues to move at a much quicker pace than originally after it was first formed. The urgency to find a solution has led to this incredible rise in testing and response globally, and we feel honored to be a part of these programs. I would also note that they are making contributions to the health of the business. While many researchers have seen their projects put on hold as focuses on COVID-19 testing have taken over, COVID-19 research, especially in regard to the host response, is now something that is picking up. Hopefully, it can fill a gap that has formed there. Now I want to turn the page and look at the various activities that are ongoing designed to validate Saphyr as a replacement for traditional cytogenetic and genetic disease testing. Remember, Saphyr offers the opportunity to consolidate three and even four traditional methods into a single assay running on our platform. We've seen multiple presentations at scientific conferences over the course of this year despite the challenges in the second quarter. Those conferences include the European Society of Human Genetics, the Cancer Genomics Consortium, and others. Presentations made, including the webinars and others have demonstrated that Saphyr is 100% concordant when compared to its ability to find the clinically relevant structural variations that standard cytogenetic methods find. This concordance is so important because it gives confidence to cytogenetics laboratories seeking to streamline their workflows and replace traditional methods with a much more digital approach that Saphyr offers, which is streamlined and faster. This concordance gives them confidence to do that. A European consortium led by Laila El Khattabi from the Cochin Hospital in Paris, France; and Alexander Hoischen from the Radboud University Medical Center in the Netherlands published data from the first extensive validation of Saphyr for constitutional genetic disorders. They, too, along with studies published in hematology oncology, represent a milestone in the validation of Saphyr. This study published extremely positive results showcasing a 100% concordance with standard cytogenetics in constitutional genetic diseases. When you consider Saphyr adoption throughout the cytogenetic community, we're now seeing the validation extend to constitutional genetic disorders, which is remarkably significant. These papers describe the resolution of clinical cases of longstanding undiagnosed diseases. This is truly important because the standard of care for testing is quite antiquated and relatively cumbersome. Saphyr streamlines that, and it not only streamlines it but Saphyr is better because it allows for the resolution of diseases that would typically not be identified with traditional methods. This is especially happening in leukemia, where we're discovering novel fusion proteins and other areas of genetic diseases. The impact of these results on our business moving forward should not be overlooked. Our internal data has long convinced us that Saphyr cannot just replace, but can improve upon the three major cytogenetic testing methods. These published results now show that we have an independent clinical validation, which is beginning to build this critical mass of evidence in the cytogenetic communities in Europe and North America, where we are expecting a publication imminently following a substantial presentation from the Columbia team recently on their study. We're witnessing what we believe to be a rapid change in the perception of Saphyr as a tool for cytogenetic analysis. Adoption by Saphyr is occurring at a much quicker pace than our typical sales cycle, reflecting the increase in validation and acceptance. Decisions are now being made more frequently based on the increasing published results, reducing the need for internal demo studies. A few other key financial metrics to mention: operating expenses in the second quarter increased by about $550,000 to $8 million compared to $7.5 million last year. It's important to remember that we have had a significant increase in sales and marketing as we’ve intensified our focus on driving Saphyr adoption and the support teams that are needed for this growth. While this increase in expenses is modest, it has been offset by salary reductions we implemented temporarily starting in April of 2020, as well as a decrease in discretionary spending and other costs. As of June 30, our cash was $17.2 million. Following the end of the second quarter through August 12, we have received about $14 million in cash from warrant exercises. We believe our current cash and cash equivalents are sufficient to fund operations well into the first quarter of 2021. If you're following our filings, you'll see that we have filed a universal shelf registration statement on Form S-3, which includes an aftermarket sales perspective. These filings should not be interpreted as a reflection of any imminent financing. Instead, we believe it's prudent and good corporate practice to have our house in order and be prepared to raise financing when the need arises. In closing, I want to express that we are extremely encouraged by the results we're seeing. Q2 has been a difficult quarter around the globe. Despite those challenges, our teams have been incredibly focused on pushing the company forward. Our customers have been responsive and supportive as we've shared Bionano's message across various online venues. These events have seen record attendance and are tied to our efforts to establish Saphyr as a potential new standard in cytogenetic testing. We believe this will lead to Saphyr replacing traditional genome analysis methods and usher in a new era of broad, accessible, reliable structural variation analysis that can create new drug targets, leading to new medicines and new diagnostic biomarker signatures, thus paving new pathways for patient management. We're excited about initiatives like the bat genome assembly project as well as the first telomere-to-telomere assembly of the X chromosome. Now with that, I would like to open up the call for Q&A.

Thank you. Our first question is coming from Kevin DeGeeter of Oppenheimer. Please go ahead.

Hey, guys. Thanks for taking my question. Erik, appreciate the really thorough update. A few things. Appreciate the disclosure regarding flow chips. I think you said about 1,200 in the quarter. Is that still overwhelmingly research? Or are you beginning to see some pull-through from cytogenetics customers? And I suppose the related question is, do you have visibility as to whether or not a customer is using this for sort of a research project versus cytogenetics at this point?

Yeah. We have pretty good visibility because we're engaged in the selling process. There’s a deep discussion as to the applications. I would underscore for everybody that the Saphyr is for research use only and not for diagnostic purposes. Labs will develop and create clinical diagnostic assays that they offer as laboratory-developed tests according to regional regulatory requirements, such as throughout Europe. When a customer intends to develop clinical assays on the system, we're generally aware of that. At least half of the flow cells, about 1,400 sold in the quarter, are going to sites developing assays for clinical settings. Many of those projects and adoptions are through the reagent rental program, which is predicated on a volume of chips upfront for these assay development projects.

No, that's very positive. It's good to hear. If you were to characterize uptake for some of this use potentially in a clinical setting in Europe versus the U.S., are you seeing any geographic variation in terms of uptake for applications outside of the traditional research market?

We do, and it's difficult to disentangle the remarkably complex macro environment we’re in right now. The facts are that Europe has accelerated in its adoption of Saphyr for cytogenetic-oriented applications. One would need to figure out whether that reflects Europe’s relatively progressive state regarding an exit from pandemic shutdown versus the situation here in the United States or if it's something structural about the European health economic system. I think both factors are at play. But the facts are that Europe is really doing incredibly well and showing leadership at least in our company about adopting this cutting-edge technology.

Great. And maybe one last one for me, then I’ll get back in the queue. The service revenue did see what looks like a nice sequential uptick, which I think is consistent with what some of us hoped we would see with the new commercial model. If we think about that $240,000 revenue, is that a base we should think about as continuing to grow through the balance of the year? Or were there specific service contracts, perhaps larger one-off contracts in Q2 that may not be representative of a trend in service revenue?

I believe that this figure reflects what to expect overall. Yes, I would note some other revenues tied to warranty service contracts. But this is not dominated by any one event.

Great. Understand. Thanks for taking my questions. It’s actually a pretty nice quarter. Thank you.

Thank you.

Our next question is coming from Jason McCarthy of Maxim Group. Please go ahead.

Hi, everyone. Thanks for taking my questions. It's Adheip on the line for Jason. Just looking beyond COVID-19, given that tumor heterogeneity presents a considerable impediment to therapy in many cancer indications, do you see the Saphyr platform playing an increasingly central role in drug research? Do you see this becoming a larger revenue stream?

I believe our ability to see adoption by drug-developing firms, such as pharmaceutical companies, biotech companies, and the partners that serve them like CROs, is set to improve. There have been enhancements in our portfolio that will help drive this, including the release of solid tissue DNA isolation kits aimed at solid tumor research. Our product portfolio is evolving. When you couple that with Saphyr's ability to identify pathogenic events, even present in extremely low abundance, it becomes a powerful tool for uncovering novel events that may be druggable targets. We anticipate that pharma research will initially focus on basic research settings, eventually extending into clinical trial enrollment and other patient testing forms, creating significant opportunity.

This brings us to the end of our question-and-answer session. I would like to turn the floor back over to Mr. Holmlin for closing comments.

Thank you very much, operator. I want to thank everybody who has joined the call. I wish you all the best. We are excited about the future of Saphyr and our progress within Bionano. Thank you very much.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines or log off the webcast at this time. Have a wonderful day.