Earnings Call Transcript - CDNA Q3 2020

Operator, Operator

Greetings and welcome to the Care, the third quarter earnings conference call at this time. All participants are in listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would like to turn the conference over to your host, Mr. Greg Chodaczek, management director. Please go ahead, sir.

Greg Chodaczek, Management Director

Thank you. Good afternoon and thank you for joining us today. Earlier today, KTXA released financial results for the quarter ending September 30th. The release is currently available on the company's website. Peterman's Chief Executive Officer Reg Sisso, president and Chief Business Officer, and Michael Bell, Chief Financial Officer, will host this afternoon's call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including without limitation or examination of historical operating trends, expectations regarding coverage, decisions, pricing and enrollment matters and other future financial expectations and results are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and descriptions of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission. The information provided in this conference call speaks only to the live broadcast today, October 29th, 2020. Target disclaims any intention or obligation except as required by law to update or revise any information, financial projections, or other forward-looking statements, whether because of new information, future events or otherwise. This call will also include a discussion of certain financial measures that are not calculated in accordance with generally accepted accounting principles. Reconciliation to the most directly comparable gap financial measure may be found in today's earnings release.

Peter Maag, CEO

Thanks, Greg, and good afternoon, everyone. I'm excited to talk to you today about our outstanding third quarter results and the great work our company is doing to improve the lives of transplant patients and caregivers. Before I get to our quarterly results, I would like to thank every member of the Kennedy team. Once again, we have asked a lot from our team during these trying times and they continue to bring their A game. Their tireless work and dedication to transplant patients is driving our company to record financial results. In the third quarter, we reported revenue of fifty-three point four million, an increase of fifty-eight percent compared with the third quarter of 2019. Once again, our year-over-year growth primarily came from our testing services, with revenue of forty-five point five million. Product revenue for the quarter was five point four million, and digital and other revenue added point two point five million to the top line. We have shown that our strategy to lean in and to expand our team has never been stronger. It is a pleasure to have seen Reg grow into the CEO position in this long-planned transition, which we announced earlier today. You have seen us executing a successful business strategy to become a leader in precision medicine, combining patient impact, incredible growth, and building a valuable, profitable company. The same has been true for our people strategy. Reg has worked closely with me, the board of directors and the management team to set the company's strategic direction. Reg has also led the Commercial Clinical, Manufacturing and research and development organizations over the past two years, which has significantly and positively impacted the company's performance. Reg has also been instrumental in cardiac arrest evolution and has successfully executed multiple major initiatives, most notably the acceleration of the penetration of Alisher in his new active role as executive chairman. I'm looking forward to continuing to work together with Reg in the years to come to build Kodiak into an incredible powerhouse in transplant care and beyond as we accelerate the growth from our existing platform. Over to you, Reg.

Reginald Seeto, President & Chief Business Officer

Good afternoon, everyone. Firstly, I want to thank Peter for his dedication and leadership in building KTXA on its IPO to where it is today. It truly is a special place to help shape and build. Secondly, I'm deeply honored that the board has placed their faith and trust in me to lead KTXA as we accept this next chapter of growth and evolution. And thirdly, I'm extremely fortunate with Peter staying on as executive chair to continue this journey together in a seamless fashion. As many of you know, he has been my mentor for more than 20 years. With that said, this is such an exciting growth opportunity. We've been very successful in our response to covid-19. We provided over twenty-one thousand eight hundred kidney and Alami pot patient results in the third quarter, an increase of sixty-five percent year over year when the number of covered cases began to accelerate. Here in the U.S., we made a strategic decision to go on the offensive and invest in areas that would drive growth and create new long-term shareholder value. As we mentioned during our second quarter call, we look to allocate our capital wisely to position our company for robust growth. Some of these investments are already bearing fruit. The first of these investment areas is our direct-to-patient capabilities. Over the past several months, we have built our nephrology outreach team. As a reminder, community nephrologists provide care for transplant patients once they are safely discharged from the transplant center. Through a newly formed group, we will encourage patients and their caregivers to continue to utilize Alisher to manage the health of their transplant. Also, as part of our outreach program, we recently launched our mobile app. This patient-centric resource was designed to help transplant patients better manage their medication adherence, coordinate scheduling with patient care messages, and measure health metrics. We believe this comprehensive app will bring simplicity to the complex care regimen of maintaining long-term health post-transplant. Another area of investment continues to be our remote track offering, which allows transplant patients the ability to have their blood drawn without the need to leave their homes. To date, approximately 150 transplant centers are offering remote track to their patients, and over 5,000 kidney, heart, and lung transplant patients have enrolled for the service. The third area of our strategic investment is continuous development and communication of new clinical data in support of peer-reviewed publications. Earlier this month, we announced the publication of positive clinical data for Alisher Lung from the Multicenter Ligers Study. The study demonstrated that Alisher alone could identify patients with acute rejection, a critical need for lung transplant patients whose only other option to detect rejection is an invasive bronchoscopy. We believe having a noninvasive surveillance tool like Alisher can be a game changer for improving the lives of lung transplant patients. We expect to hear reimbursement news from Goldex before the local coverage becomes effective in mid-November.

Michael Bell, CFO

Thank you, Reg. Turning first to the income statement, total revenue for the third quarter was fifty-three point four million, a year-over-year growth of fifty-eight percent. Our top line growth was driven by accelerated penetration this quarter. As a result, testing services revenue in the third quarter increased sixty-one percent year over year to forty-five point five million. Product revenue increased to five point four million, and our digital and other revenue was two point five million. For the third quarter, the gross margin was sixty-eight percent, compared to a gross margin of sixty-six percent in the same period of 2019. The non-GAAP gross margin for the quarter was seventy-one percent, compared to sixty-nine percent in the third quarter of 2019. On a sequential basis, the gross margin recovered by approximately 300 basis points compared to the second quarter, primarily due to the significant increase in lab testing volume supplemented by the slight decrease in the proportion of tests originating from remote patient phlebotomy services. For the third quarter, the net loss was 2.8 million, compared to a net loss of 1.8 million in the same period of 2019, a net loss per share of six cents for the quarter compared to a net loss of four cents in the third quarter of 2019. Non-GAAP net income was five point one million in the third quarter of twenty compared to non-GAAP net income of zero point nine million in the same period of 2019. Our net income per share in the third quarter was ten percent compared to non-GAAP net income per share of two cents in the same period of 2019. We recorded positive adjusted EBITDA of five point six million, which is an adjusted EBITDA margin of ten percent compared to adjusted EBITDA of zero point eight million and a margin of two percent in the third quarter of 2019. Our operating cash flow was positive at five point two million in the third quarter. We closed the third quarter with $240 million in cash. We are extremely pleased that in the third quarter, we were able to get our gross margins back on track after the impacts of remote tracking in the second quarter and that we were able to deliver such a strong adjusted EBITDA margin and positive operating cash flow despite the continued investments that we've made across our operating expense line. We will continue to allocate capital with a focus on top-line growth by developing our pipeline and expanding our sales and marketing efforts beyond transplant centers.

Peter Maag, CEO

In closing, the third quarter was another record quarter for KTXA despite covid-19 affecting all aspects of our employees' lives. We continue to develop and deliver new and unique solutions to improve the lives of transplant patients and their caregivers. Over the past several months, our company has shifted into a higher gear and we will continue to keep our foot on the accelerator here. He has built a platform in transplantation which may shape the future of this exciting therapeutic area in many ways. Finally, I would like to congratulate Reg on his appointment to CEO, and I look forward to working closely with him as well as the rest of the organization to continue to build KTXA into a powerhouse in transplant care. Thank you all for joining. We will now open the call for questions.

Operator, Operator

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation would indicate that your line is in the question queue. Please hold while we call for questions.

Brandon Couillard, Analyst

Hey, thanks. Good afternoon. Just curious to elaborate on why now is the right time for this transition. I would be curious to know if you have any potential changes in strategy or approach around the company that you might like to pursue.

Peter Maag, CEO

Thank you so much for the question, you know, I was joking a little bit with the team about transitioning from overtime to full-time on this position. I'll continue to focus on KTXA. I'll be working closely with Reg on the next phase for the company, which I think is incredibly exciting.

Reginald Seeto, President & Chief Business Officer

Thank you for the question. Peter and I have worked very closely over the last few years on the strategy and the growth of the organization and I've managed to cross all business lines. I don't expect there to be any significant changes in the strategy in terms of corporate development.

Brandon Couillard, Analyst

Curious just if you could quantify the initial impact from those new hires and really how you think about potential utilization of these rates or productivity either by tests or surveillance or centers as they continue to mature over the next few quarters.

Reginald Seeto, President & Chief Business Officer

We see the patient care managers as a strategic asset, which has played a key role, particularly during covid-19. When our patient care managers actually schedule the patients, we see a much higher adherence than when the centers do it themselves. At the same time, we're seeing benefit from them having a direct relationship with the patients. So really, it has been a strategic asset for the organization.

Michael Bell, CFO

Yes, throughout the year, we've continued to invest, and for Q4, we expect our operating expense to increase again, as it did in Q3.

Steven Mah, Analyst

Congratulations, Peter. It's been a great run. Congratulations for all you've done to build KTXA to where it is now. Do you have any indication on the heart care pricing?

Michael Bell, CFO

We are expecting to get the reimbursement news on the pricing by mid-November, but as yet, we have no additional information.

Steven Mah, Analyst

On kidney care, could you remind us again on the timelines and when you're going to submit for Medicare reimbursement?

Peter Maag, CEO

We're still continuing with kidney care as part of Okura, so it's part of an ongoing clinical study that we're conducting at this stage.

Reginald Seeto, President & Chief Business Officer

We expect to be around the 40 percent mark for our steady state strategy in response to covid, with the uncertainty leading to more remote track usage as well. We've seen an increase in adherence with the use of remote track, especially when we schedule patients through outpatient care managers compared to what the centers do themselves.

Michael Bell, CFO

We're feeling really comfortable that we can get to 75 percent gross margins in the future as long as the volume continues to increase.

Alex Nowak, Analyst

What is the most beneficial investment that you saw during Q3 generating the highest profit in the quarter?

Reginald Seeto, President & Chief Business Officer

The most significant investment we made is in the patient care managers as we build that connectivity within the patients, and that's been key to our response to remote track. We're beginning to see some early benefits in our strategy. Doubling of the organs within five years is the stated goal, and we have seen transplant centers already back to full swing, which presents a lot of opportunity. The ability to respond, react to the needs of transplant centers has been really important for us to serve different organs, from kidney to heart and lung.

Andrew Cooper, Analyst

Just as we think about the European markets and the competitive environment, how should we be thinking about access there?

Reginald Seeto, President & Chief Business Officer

We've shifted to a virtual process similar to what we've done in the U.S., and this has enabled us to build strong interest in our offerings.

Sung-Ji Nam, Analyst

Could you remind us what the market opportunity in lung transplant is? How many bronchoscopy procedures do patients undergo for rejection monitoring?

Reginald Seeto, President & Chief Business Officer

We find that lung transplant patients have a more frequent monitoring need, and there is an opportunity for further innovation in that space.

Michael Bell, CFO

On Owasso, similar to the previous quarter, revenue is less than $100,000, so still early days for ourselves.

Yi Chen, Analyst

Which factor contributed more to increasing patient results this quarter?

Reginald Seeto, President & Chief Business Officer

Both contributed at different levels, but the hallmark has been driving protocols, and we continue to see growth with new patients.

Peter Maag, CEO

We are building a tremendous powerhouse in transplantation. Thank you very much for joining us, and I look forward to future discussions.

Operator, Operator

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.