Earnings Call Transcript - PRPO Q1 2020

Operator, Operator

Good day and welcome to the Precipio Quarterly Shareholder Update Call. All participants will be in a listen-only mode. 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 include those that are not limited to the matters listed under Risk Factors in our annual report on Form 10-K 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 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.

Ilan Danieli, CEO

Thank you, and good afternoon, everyone. I would like to thank you all for joining us on today's call and also thank those who emailed their questions in advance. On today's call, I'd like to share some insights on our Q1 results and some of the business economics around them. I'd also like to discuss the metrics recently released and what we can learn about our business. I'll also be discussing the product side of the business and where we see it going. First, I'd like to provide an update on our company situation during the COVID-19 period and particularly as it impacts our pathology services side of the business. I’ll begin with the customer and business side and then take a few moments to discuss a few operational perspectives. Our customers are primarily physicians who test their patients for the possible presence of cancer. During COVID-19, hospitals have shifted their focus to COVID patients while any non-urgent patients are asked to delay their visits. In the oncology office settings, physician offices have also scaled down their business with any non-critical patients asked to stay at home. Many of these cancer patients are dealing with immune deficiencies, old age, or both, which places them at high risk of COVID, so they elect to stay at home. However, as one of our clients said, cancer doesn’t stop for anything. This has caused a drop in volume for the overall industry. However, we've been very fortunate to see continued growth in our business, which, given the circumstances, is quite unusual. Q1 saw revenues grow 77%, and we continue to grow with April as our strongest month in company history. The reason for this was the ultra-metric transaction where we absorbed another company's feedback business just in time. If you recall, the transaction was completed on March 16. The next day, the COVID outbreak led to drastic statewide stay-at-home orders to reduce human interaction. Because we were able to complete the acquisition transaction just ahead of the start of these state-wide shutdowns, the former sales team transitioned, and those customers became our customers. Therefore, while the overall industry saw a drop in volume, as did our own customers, we now have an additional customer base that filled the gap and made up for the volume drop in our current customers. From an operational perspective, as for many businesses, COVID presented substantial challenges to lab operations. As an essential business, we remained open and operational 24/7 as we received patient biopsies from our customers for diagnostic services. In the lab, we're used to working in a relatively tight environment with the lab staff constantly interacting with each other to transfer patient materials, share results, review slides, and discuss patient cases. Performing those tasks while adhering to the guidance provided by the CDC to ensure the safety of our employees and maintain social distancing presented tremendous operational challenges. This required rearranging scheduling, limiting staff and their interaction, all while ensuring we retain our service levels and quality standards at all times. April was our strongest month with the largest number of cases received. Our team handled these cases with great care, diligence, and expediency. We have always remembered that on the other side of our work is a cancer patient awaiting a clinical diagnosis. This resulted in continued consistent quality, turnaround time, and service despite these challenges. We are proud of our lab team for their dedication and flexibility during these difficult times. Now let's turn to business economics. In late 2019, we entered into discussions regarding this transaction. In early 2020, when it appeared likely that this transaction would go through, we began to prepare internally, staffing up in anticipation of a volume increase. At that time, the volume was similar to ours; meaning that upon closing the deal, our volume would almost double. This means adding staff in the laboratory and customer service department to ensure we maintain the quality of our service. During the first quarter, we hired and trained additional staff to ensure we hit the ground running and could transition customers, thereby being ready to handle their increase. Given that our lab staff has accounted for as part of variable cost, the increase in staff and headcount would increase costs of goods sold. This happened ahead of the actual transaction because we needed to begin and train the team in advance. Therefore, while there were costs incurred before the volume came in, this negatively impacted gross margins. So you may be asking why our gross margin did not increase with the increase in volume. This is because at the time of the increase in revenue, we were also bringing in new hires in preparation for this transaction. We're already seeing volumes increase as some practices begin to see more patients are reopening. We expect that with the potential growth in those volumes, while the existing staff level remains fixed, our gross margins shouldn’t increase. Next, I'd like to take a few moments to discuss some metrics. Aside from the obvious key metric of revenue growth, there are three key drivers that we focus on. The first is case volume. Our business growth is driven by patient cases being sent to us. Each case sent is a decision by the oncologist to trust Precipio to provide the best, most accurate diagnosis for the patients. Case volume increases when customers increase their usage of our laboratory, as well as when new customers are introduced to Precipio. The next two drivers are related to our customer base growth, comprising two metrics: new customers and recurring customers. We operate in an extremely competitive environment. Each doctor already has a laboratory they are using before we introduce our services. In order to win their business, we need to change their existing habits and adopt a new process, which nobody likes. Our ability to continue to grow our customer base and increase the customers who use us repeatedly is an indicator of how we match up against the competition. In other words, it measures the stickiness of our service and our customer loyalty. Since there have been a few questions about the ARPU, the average revenue per unit, I'd like to take a moment to reiterate the decline in this number for the quarter. Each case received by us is always unique because of the patient. It's also unique from a revenue perspective as each case is triaged and worked up in a customized manner that reflects the clinical circumstances. Therefore, there is no single uniform revenue amount for a case. In general, revenues for our whole biopsy or for bone marrow biopsies can range from $2000 to $5000 per case. What we saw in Q1 is that as we continued to introduce our assays, more clinicians began sending us samples for those tests. The revenue for these assays is around $600, which is substantially lower than for the whole biopsies received. However, it is a good margin business and not only contributes to our profitability but also provides outstanding clinical care to our patients. We anticipate that the drop in ARPU as we continue to see this assay more broadly adopted and an increase in these lower revenue screen cases will impact the case mix and ARPU. For anyone involved in any merger or acquisition, the biggest challenge is ensuring customers aren’t lost during this process. Our commercial team has done a great job at completing the transition without a hitch, ensuring that we were able to keep customers during the process. The successful completion of this transaction combined with our strength and quality accuracy driven by our vision of patient care gives me confidence that this trend of growth should continue. Next, I'd like to spend a few moments discussing the product side of our business. The challenges our laboratory faced during COVID-19 were not unique to us. Along with the decline in volume, every laboratory faced similar challenges of managing workflow in the new social distancing environment, and the larger the laboratory, the greater those challenges became. The product side of our business sells to these very large laboratories. I know many of you have been waiting to hear about major labs adopting our proprietary technology. The truth is that, like us, those customers have put the evaluation of new technologies on hold under the current circumstances. They lack the capacity and bandwidth to onboard new technologies, and even if they did, they’re not allowing any outside vendor into their facilities, making onboarding impossible. Let me reiterate what I said before; none of these customers, not one, has said that they are aborting the process. They've all expressed interest in our product and expressed frustration that they have to delay onboarding these technologies. I am confident that this will happen. For many businesses, the timing of COVID-19 couldn’t be worse. However, even during these unconventional and extremely difficult times, we did not stop and used this time to find opportunities or, as I like to say, making lemonade out of lemons. So let me share two of these lemonade initiatives with you. The first is our HemeScreen physician office program. As we recognized that our product sales to major labs were going to take a hiatus during COVID, we asked ourselves who else could use our technologies? The HemeScreen physician office program was born out of three factors. First, The equipment required for HemeScreen is a single relatively simple and inexpensive machine. Second, it's effective for staffing; the training needed to operate the assay is manageable for virtually any customer with a small in-office laboratory. Third, most of our target customers already have the necessary licenses to run these assays. Keeping these factors in mind, we developed a very attractive business model that can help our customers not only provide better care but also generate revenue. Many physician offices not only have the bandwidth now to consider these opportunities during the slowdown, but also the various decline in revenue provides a strong incentive for them to embrace a new source of revenue such as this program. We launched it in mid-April, and a month later, we obtained our first customer. This is a very exciting program that I believe should create a strong customer base for our HemeScreen technology. This will not only be financially beneficial for our company but also give our commercial team a powerful tool to engage new customers. Another initiative we've been working on is our next version of IV-cell. We received a lot of feedback from the customers who tested and tried the technology. Given the situation with those large laboratories, we decided to take this time to improve our product using the feedback to design an improved version of IV-cell. While this is still in R&D stages, initial results are promising, and we believe that we will come out of this period with an even stronger product that is more attractive to our customers. We'll have more on that as we move the development into the production phase. In summary, despite the challenges of today’s world, we are fortunate to continue moving forward, which is more than we can say for many businesses out there. As you may know, many companies have made the decision to lay off staff, contributing to the 35-plus million unemployed in the US. We made a different decision to take care of our own during this challenging time. As one of many cost reduction measures, we've issued a company-wide favorable induction plan to help preserve cash during these times. This decision was taken not only because we realized it was the right thing to do for our team, but we also believe that it is a prudent business decision. Laying off newly hired laboratory staff seems short-sighted and would make it difficult to rehire once business increases. I am confident we have the team and resources to get through this and emerge on the other side stronger. Our customers have never received better service. Our products continue to improve, and the business opportunities created should be beneficial for us going forward. I want to thank you for your ongoing support and wish you and your families health and safety. Have a nice evening and thank you for joining us.

Operator, Operator

Thank you. The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.