Sera Prognostics, Inc. Q2 FY2022 Earnings Call

Good afternoon and welcome to the Sera Prognostics’ Conference Call to review Second Quarter Fiscal Year 2022 Results. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s call. And as a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Peter DeNardo of CapComm Partners for a few introductory comments. Please go ahead, sir.

Thank you, Cole. Good afternoon everyone. Welcome to Sera Prognostics’ second quarter fiscal year 2022 earnings conference call. At the close of the market today, Sera Prognostics released its financial results for the quarter ended June 30, 2022. Presenting for the company today will be Greg Critchfield, Chairman, President and CEO; and Jay Moyes, our CFO. During the call, we will review the financial results we released today, after which we will host a question-and-answer session. If you have not had a chance to review our quarterly earnings release, it can be found on our website. This call can be heard live via webcast and the recording will be archived in the investors section of our website. Please note that some information presented today may contain projections or other forward-looking statements about events and circumstances that have not yet occurred, including plans or projections for our business, future financial results, and market trends and opportunities. These statements are based on management’s current expectations and the actual events or results may differ materially and adversely from these expectations for a variety of reasons. We refer you to the documents the company files with the Securities and Exchange Commission, specifically the company’s Annual Report on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections and other forward-looking statements. As a reminder, a webcast replay of this call will be available in the Investors section of our website. I will now turn the call over to Greg, Sera Prognostics’ Chairman, President and CEO. Greg?

Thank you, Peter, and good afternoon. Today, I will provide an overview of key business highlights during the second quarter and discuss some upcoming developments. First, on commercial progress. We placed a strong focus on early adopter systems. During the last quarter, we aligned our sales structure to better emphasize pursuing contracts with early adopter health systems that have various degrees of integration in ways they provide healthcare services to pregnant women. These systems can be excellent early adopter candidates that we target to incorporate preterm testing into their existing pregnancy services. Several examples of these include university systems, with as many annual deliveries as 8,000 per year where clinical and administrative leadership see the value of comprehensively managing the risks of prematurity that are inherent yet undetected in the population by traditional methods. Another example is integrated delivery networks or IDNs, some of which have more than 30,000 annual deliveries where the organizations are focused on managing the health of patients with a comprehensive array of services offered in a cost-effective manner. Other examples include self-insured employers who are focused on providing superior pregnancy benefits to female employees in order to attract and retain talent and where the annual number of pregnancies can be in the range of hundreds to thousands. Managed Medicaid is another area of focus, where we are in active discussions with participating payers and state and federal officials with the goal of reducing healthcare disparities. One such state has more than 80,000 Medicaid deliveries annually. In addition, we continue our work with non-profit organizations dedicated to addressing health disparities that occur in pregnancies with Sera’s preterm technology that is well-suited for underserved populations. Other systems of opportunity are certain large geographically concentrated physician networks, which have the ability and desire to lead in the delivery of better care for their patients, where examples include those with 2,000 annual deliveries. Finally, we are also engaging with six large hospital systems comprising more than 71,000 deliveries per year, where tight collaboration with clinical leadership and hospital administrations potentially enables greater uptake of Sera’s strategy. In addition to the benefit of accessing large numbers of pregnancies, the systems approach also allows us to secure more prompt reimbursement with less uncertainty post contract execution. In systems adopting our testing, our emphasis is on training and implementation, with the administrative level and clinical decisions to move forward having already been made. Broad functional operating teams within Sera work efficiently to bring on these customers. These multidisciplinary teams from both the customer and Sera side work to create and execute a comprehensive plan to move faster into implementation. Ultimately, working together, they help to educate the physician practices regarding the clinical prediction performance of the preterm test, logistics of patient identification, requirements for sample acquisition, data integration, reporting, and follow-up. We believe this approach will help us to generate significant revenues earlier in our mid- and longer-term outlook as we penetrate a large asymptomatic preterm testing market with the only broadly validated, commercially available prognostic blood test on the market. Motivated early adopters always see commercial development of new diagnostic products. While we are admittedly early on, the opportunity is quite large, and this focused approach to commercialization is significant since it facilitates the time to bring on systems comprised of multiple customers, potentially driving revenues for our efforts as we build comprehensive implementations. Soon, we will be making selective public announcements of progress on these efforts that will serve as milestones along the highway toward widespread preterm adoption. While we'd like to announce each and every one of these in the interest of transparency, certain systems do not allow publicity of any kind, and some individual systems may be smaller, but we will strive to share important developments. As the first wave of early systems adopters begin using our test, we believe that their experiences will support the decision-making of other payers who prefer a derisked situation where others have done the analysis and decided to adopt. The ability to comprehensively stratify prematurity risk in asymptomatic singleton pregnancy using the preterm test enables proactive steps to be taken to address the higher risk of premature delivery prevalent in large numbers of pregnancies. That capability forms the basis of Sera’s vision to improve the well-being of mothers and babies and, in doing so, reduce healthcare costs. The aggregate potential numbers that I'm discussing today across all forms of these health systems, including self-insured employers, are substantial. Even with mild success in executing agreements with a number of these, we anticipate notable revenue ramp over time. Now for some progress on continued innovation in our pipeline. In May, we announced improvements in the preterm test performance. We demonstrated that compared to traditional methods, PreTRM testing detects five times as many pregnancies that will, in fact, have spontaneous premature deliveries with a sensitivity of nearly 90%. At the same time, the PreTRM test demonstrated a high negative predictive value of 99% in patients whose PreTRM tests are interpreted to be lower risk. This powerful stratification, alongside these performance improvement numbers, allowed the PreTRM test to be validated in an expanded time window for collecting blood from 18 to 20 weeks, facilitating scheduling for physicians. Many practices schedule anatomic ultrasound appointments as early as 18 weeks, so this window enables patients to be evaluated by the PreTRM test without needing a separate follow-up appointment. We've previously spoken of our work to validate the prediction of preeclampsia. That work has progressed well, and we are preparing it for scientific review. Sera's goal is to provide the doctor and the patient with predictions of both PreTRM and preeclampsia risk from a single blood draw taken between 18 to 20 weeks. If successful, we expect to be the only company to have the capability of addressing the two most important adverse outcomes of pregnancy with validated tests for each condition from the same blood draw. This work aligns with Sera’s vision to be the pregnancy company. We also continue to innovate beyond our testing technology. Typically, a blood test sample must be kept cold after it's drawn and as it is transported to the laboratory, posing logistical challenges and added costs. We are currently working to validate a collection transport mechanism without the need to freeze the specimen, significantly expanding blood collection capabilities. This technology is designed to save money while increasing convenience and simplifying processes for our customers. Jay will discuss some other cost-saving measures that are also underway. We look forward to reporting results of clinical and economic studies over the next several months, including validation studies of new biomarker signatures based on our platform and economic analyses of the PreTRM test in new populations. Now, a word on the PRIME study. Our PRIME study is a multi-center prospective randomized controlled trial aimed at further demonstrating the benefit of the PreTRM test-and-treat strategy. While clinical trial enrollment can be challenging due to the pandemic, we are currently on track to enroll approximately 2,800 deliveries in the multi-center PRIME study by year-end 2022. This enrollment is required for the interim look analysis to be performed in 2023. We've taken two significant actions to accelerate enrollment: first, we continue to add study sites to the PRIME study, and second, we utilize the new expanded blood draw window during weeks 18 through 20, increasing the chance to enroll more subjects in practices that conduct mid-pregnancy evaluations as early as 18 weeks. Accelerated enrollment and positive interim look analysis, either improvement in neonatal morbidity/mortality or decreased hospital length of stay, could allow us to stop the trial earlier, reducing costs and providing opportunities to present additional early transformative data to payers and other customers. We are pleased to see progress clinically, scientifically, and commercially at this stage of our development. We have the capital to execute this plan and are deploying it carefully to ensure a long runway without the need to raise cash. I'll now turn the call to Jay for a review of our second quarter financial results. Jay?

Thanks, Greg, and good afternoon, everyone. Today, I'll briefly review our financial results for the second quarter and provide some general color on cost reduction efforts we've undertaken and our high-level view on testing revenue for the rest of the year. For the second quarter of 2022, we reported revenue of $70,000 compared to $20,000 for the second quarter of 2021. Revenue was also up significantly sequentially from $38,000. As Greg noted, we are seeing traction among early adopters, fostering improvement in revenue. Total operating expenses were $11.8 million, up from $7.4 million for the same period a year ago. Research and development expenses for the second quarter of 2022 were $3.3 million compared to $2.8 million for the prior year due primarily to increased laboratory operations and clinical study costs. Selling, general, and administrative expenses for the second quarter of 2022 were $8.5 million, up from $4.6 million for the prior year, primarily due to increased headcount as we scale commercial operations and corporate infrastructure, as well as increased costs relating to operating as a public company following our IPO in July 2021. The net loss for the second quarter of 2022 was $11.5 million compared to $6.3 million for the prior year period. As of June 30, 2022, the company had cash, cash equivalents, and available-for-sale securities of approximately $121 million. On our last quarterly call, we mentioned that we believe we have sufficient capital to implement our strategy into 2025 without raising additional capital. Since then, we've executed cost reduction actions, including streamlining our sales force and focusing our commercial strategy on integrated customer systems to extend our runway further into what we anticipate to be 2026. We are pleased to have the support of our investors to pursue our plans without capital constraints that some companies in our space are currently facing. We have not revised our business outlook that we previously provided for 2022 year-end revenues. As a result of cost reductions and with continued adoption of the pre-term test by payers, we anticipate a reduction in cash burn over time while revenue builds. I'll now turn the call back to Greg.

Thanks, Jay, and thanks to all of you for attending our call today. While the scaling of our revenue is taking longer than we'd like, we are pleased to see exciting trends with our early adopter integrated systems customers, which is a solid proof point for our business. We believe this adoption will accelerate, and our conversations with integrated customers will ultimately bring forth successfully executed contracts. Finally, we are grateful, given the current macro market conditions, to have sufficient cash to execute our plans over the years due to the excellent support of our investors. This enables us to achieve our vision of making a real difference in helping mothers and babies lead better and healthier lives. And with that, we'll open the line for questions, operator?

Thank you. We will now begin the question-and-answer session. Our first question today will come from Patrick Donnelly with Citi. Please go ahead.

Hi, I’m Lizzie on for Patrick Donnelly. Thank you for taking my questions. First, I was just wondering, I think last quarter you provided a month-to-month update sequentially on how orders increased. Did you see any similar patterns in the prior three months as well? Thanks.

Yes. We saw increases in the prior quarters compared to what we reported for the last quarter here. And we're anticipating seeing that trend continue, and we're very excited about it. The traction we're getting with integrated systems is already beginning. We have contracts signed that have not been disclosed publicly, and that's something that happens because many organizations don’t allow public disclosure. But what we can tell you is we are making progress, and we're excited to see growth in orders and ultimately in revenue.

Great to hear. And then just one follow-up. Are you quantifying physician reorders or any numbers around there? Thanks. That's all from me.

We've not really given guidance on physician reorder rates, but we can tell you that the source of our growth is both new physicians coming on and existing physicians continuing to order more tests. We see both happening.

Great. Thank you.

You bet.

And our next question will come from Brian Weinstein with William Blair. Please go ahead.

Hey, guys. This is Dustin on for Brian. Along the lines of the last question regarding orders per physician, could you discuss any pushback you might be receiving or, conversely, positive feedback when your sales team is attempting to sell this test to early adopters?

Yes. The early adopter strategy is something we've been actively working on in the last couple of quarters. We've seen very positive trends in that. When a physician orders a test and the result comes back positive, there are certain actions that physicians take because the pregnancy is flagged as being at high risk. Given the performance characteristics of the test, it is favorable, and physicians pay attention to that higher risk. One question raised is how to implement changes in strategies. The systems approach allows us to augment existing capabilities. We find it easier to implement once decisions to move forward have been made, and individual physicians, though they have exceptions, often have access to services to streamline patient care.

Got it. Okay. I understand the systems approach you're taking. Can you remind us how your sales force is configured to maximize these large system opportunities? I noticed mention of changes in the sales force from last quarter. How has that impacted order rates going forward?

Yes. The order rates are increasing. What's important to note is that we've focused our sales team on integrated systems. We have metrics to select targets based on size, opportunity, and connections, and we've assembled a target list to pursue these systems. There is great interest in moving forward with implementation, and once we announce more details, we believe it will showcase progress.

Got it. Okay. Just one more for…

One other point I'd like to emphasize is that gaining entry into organizations requires higher-level discussions. Leadership of the organization collaborates on the opportunity before making a decision to proceed. Once that occurs, we shift into implementation mode to work together across various disciplines to ensure a seamless effort. This is what takes time, but the benefits of converting single physician practices into broader integrated efforts are substantial. Thus, we anticipate the notable future revenues as a result of this approach.

Got it. I appreciate that. I know you briefly mentioned additional data besides the PRIME study coming out. Can you elaborate on what that data might be?

Yes. There will be data on preeclampsia coming out. We have already posted information on preeclampsia, and our commitment is to work towards validating predictors of preeclampsia this year. Currently, we are preparing the information for submission to scientific journals for review. We are incredibly excited about this work, as preeclampsia and preterm births are the two most critical conditions during pregnancy. Being able to provide doctors with information on both conditions from a single blood draw during that time window of 18 to 20 weeks is a great advantage. We will also share additional information regarding predictions of timing of birth and other relevant details in due course as we progress further in the upcoming years. This year, our goal remains to validate our work.

Got it. Okay. And finally, you mentioned other payers coming online or expected to do so. What is necessary to highlight the benefits of this test to them? Clearly, the PRIME study is a key factor, but are there other aspects?

Yes. There are a few factors at play. Publications demonstrating clinical utility and economic benefits are crucial for all payers. We anticipate readouts that will be beneficial during our conversations with payers. The PRIME study, a multicenter study, has seen increased enrollment, and we believe this will play an important role, as payers will want to see successful outcomes from their investment. Additionally, demonstrating demand among other payers and systems that are adopting the test will be influential. The more we can share those positive results and experiences, the greater the impact on increasing revenues for those who are still undecided on the timeline for adopting our services.

Okay. Thank you, Greg.

You bet.

Our next question will come from Dan Brennan with Cowen. Please go ahead.

Thanks for taking the question, guys. Maybe just starting with the PRIME study; I think at the end of July, ClinicalTrials.gov had you still recruiting for the PRIME study. Are you still on track for completion by October? When can we expect interim readout?

The goal for this year, Dan, is 2,800 deliveries before year-end, and we're on track for that. The increased enrollment sites and the expanded blood draw window will drive this growth. However, pregnancy brings a unique timing element. Depending on when enrollment occurs during pregnancy, it will take additional time to determine the outcomes. We expect the interim look to be able to occur in 2023 once sufficient pregnancies have been enrolled. If positive results from the interim analysis occur—either improvement in neonatal morbidity/mortality or decreased hospital length of stay—we could stop the trial earlier, which would result in reduced trial costs and allow us to present transformative data to our payers and other customers sooner. We are aiming for those outcomes.

Got it. Regarding the ability to collect blood from 18 weeks to 20 weeks versus the earlier time window, does this introduce risk, given the more extensive collection timeframe? Is your lab analysis validated adequately?

No, there isn’t any risk at all. We have studied this very carefully. Our recent publication analyzed performance from 18 to 20 weeks, and we confirmed our excellent results. The sensitivity of nearly 90% stands firm in this expanded window, with specificity slightly increased and negative predictive values holding high. Detecting risk a week earlier allows for proactive interventions and can be beneficial. Our findings affirm the robustness of our capabilities over the extended collection window.

Understood. If the PRIME study fails, what implications would that have for the business? What’s the value of the test if the PRIME isn't successful?

That’s an insightful question. The stratification itself works. We've validated it across diverse populations, and our biomarkers perform well across other geographies. If we were to fail, we would need to examine the reasons behind it. It could be due to inadequate patient interventions or ineffective treatment success. We do not expect failure; we anticipate that it will continue to demonstrate value, supported by the data we’ve gathered, which shows significant reductions in hospital length of stay and morbidity and mortality, as evidenced in prior trials.

Got it. About the cash runway; you've extended it another year. How many sales personnel were actually reduced? What impact does that have on current traction of the test?

We are not disclosing exact numbers at this time. What I can say is we are progressing early, focusing on sales geographies and opportunities. Our hiring strategy relies on identifying success in various locations before full-scale expansion. In the diagnostic industry, it’s critical to penetrate the market before increasing sales force size. The ultimate OB/GYN sales force size is around 250 based on my experience. We have approximately 18,000 OB/GYN physicians in the U.S., and increasing sales personnel will rely on achieving milestones with our ongoing efforts.

Even with reductions, we have seen order volume grow. Additionally, we’ve increased our internal sales force size. Rather than focusing on a specific reduction, we aimed for recalibrating and maximizing benefits from each of our sales team members.

Got it. Regarding your 2022 guidance, it was pulled due to challenges related to COVID and lack of access to offices and doctors. Has that situation improved? Any commentary on expected revenues for the back half of the year?

Yes, the revenue guidance remains unchanged. As we progress further into the year and see more success, we will evaluate accordingly and signal changes as necessary. For now, there has been no revision to the guidance.

Understood. Consensus expects revenues to reach about $13 million next year, with $30 million the year after. Keeping in mind the outcome of the PRIME study, how do you foresee the ramp-up occurring after that? Likely a 2024 event, right?

This is speculative, and confidence varies regarding timelines. If the interim results are positive in 2023, there would still be time required for publication and understanding the benefits demonstrated. We will continue to work intensively with our integrated systems and drive growth alongside the market. We must not forget the potential candidate pregnancies for our tests amount to over $3 billion annually in the U.S. Capturing even a small fraction can lead to significant long-term revenues, which remains our primary focus.

Great. Thank you.

You bet. Thank you for your questions.

This will conclude our question-and-answer session. I'd like to turn the conference back over to Peter DeNardo for any closing remarks.

Thank you. This concludes the call, and we look forward to providing an update on our business when we report our third quarter 2022 financial results. Thank you, and good afternoon, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.