Sera Prognostics, Inc. Q3 FY2022 Earnings Call

Good afternoon, and welcome to the Sera Prognostics conference call to review Third 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. 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.

Thank you, Danielle. Good afternoon, everyone. Welcome to Sera Prognostics' third quarter fiscal year 2022 earnings conference call. At the close of the market today, Sera Prognostics released its financial results for the quarter ended September 30, 2022. Presenting from the company today will be Greg Critchfield, Chairman, President, 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've not had a chance to review our quarterly earnings release, it can be found on our website at seraprognostics.com. This call can be heard via live webcast at seraprognostics.com, and a recording will be archived in the Investors section of our website. Please note that some of the information presented today may contain projections or other forward-looking statements about events and circumstances that have not yet occurred, including plans and 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 from time to time 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 on 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, everyone. Today, I'll review some highlights on our execution during the quarter and give some expected upcoming releases of clinical data and other developments. Sera Prognostics' vision is to deliver pivotal and actionable information to pregnant women, their physicians, and health care payers to significantly improve maternal and neonatal health and to meaningfully reduce health care costs. Towards that end, we are establishing a new paradigm in the care of moms and babies with our first-of-its-kind preterm test to determine the risk of spontaneous preterm birth so that proactive steps can be taken to improve health outcomes. The ability to improve these outcomes while decreasing escalating health care costs is particularly attractive to forward-thinking individuals and organizations who are seeking to find new methods to solve big health care problems. A word on commercial progress on early adopter systems. Over the last couple of quarters, we've communicated that early adopter systems are a strong focus for us and that we have aligned our sales structure to pursue contracts cost-effectively with these types of organizations as a means to efficiently establish revenue while reducing these customers' financial burden for prematurity. We expect revenue growth to accelerate as we implement commercialization in these organizations during 2023 and later. One important example of organizations that tend to be early adopters is integrated delivery networks, IDNs, and our strategy is beginning to pay off. We recently announced teaming up with Banner Health to make Sera's preterm test available to its University Family Care Access Complete Care members as part of the routine prenatal care they receive. Through its integrated delivery network, Banner serves more than 300,000 Banner Health Access members in 10 Arizona counties and has a strong commitment to reducing the adverse consequences of preterm birth. Banner is also respected nationwide as an innovative leader in new health care models to optimize members' health and reduce costs. The beauty of working with an integrated delivery network is that there is a focus on making sure that all aspects of care for members are tightly coordinated, philosophically, administratively, operationally, clinically, and financially. Such organizations are committed to providing cost-effective solutions for health care services. Incentives can be more readily aligned to achieve that goal in such organizations. Given the health and financial consequences of prematurity, these kinds of organizations are well situated to take advantage of the preterm test and treat paradigm. As you can imagine, as preterm testing is deployed across these organizations, communications must take place with key stakeholders, for example, obstetricians, individual physician office staff, IT administration, accounting, laboratories, and patient outreach services in order to enhance the effectiveness of rolling out Sera's life-changing preterm strategy. We believe that these efforts we are putting in place should accelerate revenues in the quarters and years to come, and the lessons learned in the early implementations can be applied to other systems. The Banner Health opportunity is also reflective of our keen desire to help solve health care inequity and disparities among lower-income and/or underserved populations. This is an important initiative, which I'll touch on more in a moment, but specifically, a large number of Medicaid patients are covered under Banner's program, thus enabling these patients to have access to our preterm test and evidence-based preventive care. Key analyses by outside parties continue to show the profound value that our test and treat strategy provides, as illustrated by our announced collaboration last month with Sonrava Health, a national family of health and wellness companies, which includes Western Dental; and Cerebrae, recently renamed Accorded, an innovator in pricing and measuring the financial value of health care. Cerebrae, Accorded, is a leader in utilizing its technology platform that leverages actuarial and data science to accurately forecast financial risk and monitor health care solutions performance. Working together, the parties were able to forecast a financial return on investment that inclusion of the preterm test for Sonrava's employees and their growing families is expected to provide. The result was the inclusion of our test in their comprehensive maternity benefits package. This serves as another strong endorsement of the clinical utility of the preterm test and the ability to reduce immediate and long-term treatment costs associated with premature birth when compared to routine care. Our commercial focus then is on early adopter systems, which include integrated delivery networks, managed care Medicaid plans, self-insured employers, hospital systems, and selected large physician practices. These organizations are keenly aware of the fact that there are far too many babies born prematurely with significant short and long-term health challenges and costs. In this early period of commercialization, while we focus our sales efforts on these large early adopter organizations, we will be making selective announcements as permitted. But we're now on health care disparities. I'd like to highlight aspects of Sera's long-term commitment and work to address health care disparities. From the earliest days at Sera, we have ensured proper representation of underserved members of society across multiple U.S. and foreign sites that were involved in our studies to discover and validate world-class prediction and impact for preterm birth. The goal has always been to be inclusionary of disadvantaged populations of patients suffering health disparities to ensure that our biomarker predictions would have outstanding performance for those that need them the most. Early on, we made contact with the Gates Foundation, knowing that creating cost-effective biomarker solutions for preterm birth in low middle-income countries would also be very informative and helpful for the broadly diverse U.S. population. We have subsequently conducted validations of biomarker prediction for preterm birth in populations located in the U.S., Europe, Asia, and Africa. In our PRIME Study recruitment efforts, we are currently including sites where preterm birth rates may be as high as double the average U.S. prematurity rate in order to better evaluate the extent of this problem and demonstrate the value of more proactive care solutions to underserved segments of U.S. populations where the consequences of prematurity are most severe. A rigorous clinical utility economic analysis on applying preterm testing to a diverse population was recently completed. We believe the data in this model will illustrate the clinical benefits and cost-effectiveness of the test-to-treat strategies across individuals with diverse racial and ethnic backgrounds. This work is undergoing scientific review prior to its publication, and we will announce the results publicly when they are available. As a consequence of all these efforts, Sera's preterm test is ideally suited to help make a difference in underserved patients who experience health care disparities here in the U.S. Our company is proud to have worked to create and now to commercialize the preterm test that we believe can have substantial value in addressing the adverse consequences of prematurity in these populations who need it the most. Now over on PRIME Study recruitment. As a reminder, the PRIME Study is a multicenter, randomized controlled trial across 15 U.S. sites to demonstrate the impact of the preterm test and treat strategy on the consequences of prematurity. As enrollment continues, we are confident of having sufficient numbers of subjects across sites to enable the interim look analysis to take place in 2023. Now some color on our pipeline and sample collection improvements. Beyond our growing list of contracted payers, we continue to make progress in developing new tests that will expand our robust biomarker pregnancy pipeline. We have successfully validated prediction for preeclampsia for blood samples drawn at the same time as our preterm test. We are looking forward to the public release of preeclampsia validation data before year-end. Sera's pregnancy prediction pipeline is on track with validations of other biomarker signatures as well. We believe that additional validated proprietary biomarker signatures will further demonstrate the value of our technology platform and be the basis for future products to benefit moms and babies. Over time, we expect that this growing body of pregnancy products will support our growth in the years ahead and our reputation as the pregnancy company. We are also pleased now to have successfully validated an ambient temperature blood collection transport system for preterm testing, which is expected to facilitate a larger number of sites where patients can have blood conveniently collected and sent to Sera's lab. This should also reduce our cost of goods sold by eliminating the requirement to use dry ice.

Thanks, Greg, and good afternoon, everyone. Today, I'll briefly review our financial results for the third quarter and provide some general commentary for our view through year-end. For the third quarter of 2022, we reported revenue of $87,000 compared to $23,000 for the third quarter of 2021. While it is encouraging to see such a year-over-year increase, we believe that the early adoption and traction Greg noted earlier will have a more significant impact next year. Total operating expenses were $11.3 million and up from $9.5 million for the same period a year ago. Research and development expenses for the third quarter of 2022 were $4.2 million compared to $2.1 million for the prior year period due primarily to increased laboratory operations and clinical study costs. Selling, general and administrative expenses for the third quarter of 2022 were $7 million, up slightly from $6.7 million for the prior year period due primarily to increased headcount as we scale commercial operations and general corporate infrastructure as well as increased costs related to operating as a public company following our IPO in July 2021. Selling, general and administrative expenses for the third quarter of 2022 significantly decreased from $8.5 million from the prior quarter due to steps we took to streamline our sales force during the quarter and focus our commercial strategy on early adopter systems. It is noteworthy that this significant decrease in SG&A did not negatively impact our revenue during the quarter. Net loss for the third quarter of 2022 was $10.7 million compared to $9.9 million for the third quarter of 2021. As of September 30, 2022, the company had cash, cash equivalents, and available-for-sale securities of approximately $111.2 million. We continue to believe this gives us an adequate runway into 2026 to pursue our strategy without raising any additional capital. As we approach year-end, we continue to believe that full year revenues will be less than $500,000, particularly given that December tends to be a slow month for testing. That said, while keeping an eye on controlling costs and what we view as improved testing volume in 2023 as we implement our early adopter system strategy, we anticipate accelerating revenue and lower cash burn over time.

Thanks, Jay, and thanks to all of you for attending our call today. While the scaling of our revenue takes longer than we like, we are happy to see some exciting trends among early adopter systems customers, which is a solid proof point for our business. We believe this adoption will accelerate and that our conversations with early adopter systems customers will result in additional contracts being successfully executed. Finally, we're very pleased 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 helps us to achieve our vision, to make a real difference in helping mothers and babies to lead better and healthier lives. And with that, we will now open the line for questions.

We will now begin the question-and-answer session. The first question comes from Patrick Donnelly of Citi. Please go ahead.

Thank you for taking the question. Greg, I have one for you regarding the discussions with insurers. It's encouraging to see a few contracts with self-insured employers. What are your thoughts on the current conversations? How many are waiting to see at least the interim data from PRIME in 2023 compared to those ready to proceed now based on the data available? Could you provide a bit more insight into what the potential inflection point might look like as PRIME is released?

Yeah, that's a great question, Patrick. There are clearly groups now, and we count the IDNs as being in this group, who see the value of implementing clinically what can actually lead to cost savings. And they're convinced this is why we're seeing groups like Banner very receptive to the idea of establishing preterm testing among pregnant populations. But there are a number of them that are waiting to see additional data. And that's been something that we've been aware of for some time. And as readouts occur, as we have additional clinical data, we believe that the data readouts will, in fact, answer any remaining questions that anyone may have about the strategy and its ability to make differences in health and ultimately in economics. So we're on the right trajectory. We see continued growth during next year. And as we focus on systems, systems are in good shape to be able to implement changes, especially those that are more holistic in their outlook and where they're financially responsible for managing the disease conditions and health conditions across populations. Those are the ones that really take an interest because the economics speak to them as a result of improving health.

Okay. That's helpful. And then you guys obviously talked about the cash side a little bit extending that. How do we think about the pace of hiring, where you guys are? How do you balance the need to preserve cash and then obviously kind of continue to drive growth?

You mentioned the right term; it's all about finding the right balance. As we explore opportunities, we assign personnel to areas where we've found potential. This is clearly our approach. In scaling our operations, we focus on regions, systems, and customers that are embracing our offerings. That's where we aim to go, where we see potential. With the hiring we expect, we believe there will be revenue growth achieved efficiently and cost-effectively. Therefore, our initial commercialization efforts are concentrated on these systems, specifically on customer systems that are somewhat integrated. That's where we can maximize our resources effectively.

Okay. And last one for me, just on PRIME. Can you just talk about, I guess, what hurdles are left in terms of things you have to do to execute until we see the interim data? Just trying to think through the timeline risks of slippage and just that catalyst that over the next couple of quarters as we approach it. Thank you, guys.

Yeah. As has been the case in all clinical studies, there are challenges because of impacts of COVID. Staff in universities have been reduced. It takes longer to get things done. But I can happily report that we are being very successful in growing the number of sites, and we are on track to reach our goal of having the interim look occur during 2023. You have to remember, in pregnancy, you can enroll patients and draw blood on patients in mid-pregnancy as we do as early as 18 weeks. But you still have to wait for the baby to be delivered to see what the outcomes are. And so we're very confident that with the sites that we have and the additional sites that we're in conversations with, that we'll be able to reach our goal of the interim look readout occurring sometime in '23. And that's the good news. And this is being done in what is a very challenging environment for doing clinical research. Our team has done a great job, and we're happy to see that we are on track.

Appreciated. Thank you, guys.

Yeah. You bet, Patrick.

The next question comes from Andrew Brackmann of William Blair. Please go ahead.

Hi, guys. Good afternoon and thanks for taking the question. Maybe to start here, Greg, I think you mentioned that you should start seeing revenue starting to contribute a little bit more in Q4. And then as we move throughout '23, especially from these IDNs. Not asking you for a specific guidance here, but can you maybe sort of give us some guardrails around how we might be thinking about that revenue progression building throughout next year? Thanks.

Yeah. I think you have to be really careful when you make projections early on as we are in the early stages. It takes time when you sign on a new entity. Let's say we get another integrated delivery system like Banner. You have to talk with the constituents that are there. You have to bring them up to speed, and getting the contract is really the first step. There are a number of things to take place to be able to actually have doctors order the testing and to penetrate the large numbers of patients that are existing in these systems. And so that's the way we think about it. We see revenue growth growing. We haven't given any guidance about the numbers that are there. But it's useful to understand what is the potential size in terms of annual births and then what is reasonable penetration that occurs. It takes several months to penetrate these systems, but once you do with a large number of systems, it can substantially contribute to revenue growth. And that's what we see happening as we move into '23 and beyond.

That's great. And then some encouraging sort of commentary around the health care disparities and some data that it sounds like you're making progress with there. Can you just maybe talk broadly about how you might be starting to use this as you move throughout '23 in negotiations with payers and sort of their receptivity to that? Thanks.

I believe Banner is a great first example. Many members of the Banner University Health System and Banner Access System are Medicaid patients, a group that faces significant challenges. By having a contract and working with these patients, we can start to address healthcare disparities directly. We are also engaged in discussions with other managed Medicaid plans, which is an area we are eager to collaborate with. These discussions are happening currently. Once we start implementing initiatives across Medicaid organizations, it will become a key focus and a significant proof point as we progress over the next few years. I consider Banner to be a strong first step, with many more opportunities to follow.

Okay. Thanks, guys.

Yep.

The next question comes from Tom Stevens of Cowen. Please go ahead.

Hi, guys. Thanks for taking the questions. Just to kind of follow up on Andrew's question on the managed Medicaid plans. I guess, what kind of data do people need to see before you can really enter those kinds of plans? Is that maybe two years post the positive PRIME readout? However, that would be useful there. And then just talking about the number of annual births you could potentially be exposed to today. Where does that sit after this series of IDNs and self-insured employee-insured programs? Thanks.

We previously discussed the significant number of patients at practices within integrated systems, including IDNs and large hospital networks. This number exceeds 200,000. In terms of Medicaid, 42% of births occur among Medicaid patients, which translates to a substantial group eligible for the preterm test. I do not anticipate it will take two years following the PRIME readout. We already have managed Medicaid plans that have shown interest, with one having signed on with us. The implementation of this first plan will serve as a model for others. Therefore, I expect progress to occur before two years after PRIME. After the results are released and further implementations are underway, some integrated networks we are in discussions with will publish their findings on applying the technology, providing additional evidence of the preterm strategy's value in improving health outcomes and economics.

Great. And just to follow up on that doctor education point. I guess as your sales team kind of goes out and speaks to the spec doctors after the implementation IDNs, what's their major sticking point for potentially not ordering the test? And kind of how are you guys addressing that?

One important aspect to focus on is equipping physicians to follow up with patients who have positive tests. There are effective methods being explored by both Integrated Delivery Networks and physician groups. A common question from physicians is how to integrate this process into their workflow. We are identifying implementable strategies, and we will provide examples in future announcements. The field of prematurity is complex, but our stratification can identify higher-risk patients. Almost 90% of spontaneous preterm deliveries are detected by our tests, and proactively managing these cases has proven beneficial. There is a demand for publications demonstrating that interventions can make a significant difference. Our first randomized controlled trial has already shown positive results, and we will announce outcomes from additional trials soon. As this data becomes available, we believe that the value of proactive identification will become more apparent to those currently hesitant.

Good stuff. And then just one more kind of, I guess, modeling point, talk about kind of next year. Have you given a number on the number of annual births you would currently be exposed to just given the lives covered in the plans you have online today?

No, we haven't done that. I'll just give you the top line numbers. There are approximately 3 million pregnancies that are candidates for our preterm tests, slightly over $3 million. As we look at it, this will provide a helpful modeling tip. The U.S. birth rate is about 12 per 1,000 individuals. So if you know the organization's size in terms of insurance, you can make rough estimates of the number of pregnancies that occur annually. It's important to remember that once a contract is signed, it takes time to fully penetrate and utilize that contract. This gives you an idea of the sizes. Some organizations we've spoken to are willing to allow us to publicize their contracts, while others prefer not to. However, from those we've mentioned, you can get a sense of the annual number of pregnancies, which helps in modeling this accurately.

Got it. That's very helpful. I'll get back. Thank you.

Yeah. Thanks, Tom.

The next question comes from Francois Brisebois from Oppenheimer. Please go ahead.

Hi, this is Dan on for Frank. Thanks for taking the question. Just a question on the early adopter systems that are coming on board like Banner and Sonrava. Are you starting to see an uptick in interest from peers as you anticipate the ramp-up in '23? Are you seeing any commonality possibly? Any color on that.

Here’s some insight. As you know, the pandemic and current economic challenges have led to intense competition for skilled employees. Offering advanced pregnancy benefits is a strategy to attract and retain talented women. Payers, particularly self-insured employers, are aware of this trend. Approximately 64% of U.S. companies utilize some form of self-insurance. With increasing announcements and visibility around these benefits, conversations with self-insured employers are growing. They recognize the advantages of providing exceptional care for pregnant women. There's a tendency for companies to follow each other's lead, while some aim to be pioneers, which is why we choose to implement these initiatives first. It's clearly something of value for them.

Great. Maybe just another one on PRIME. You mentioned 15 centers. Just wondering how the enrollment has been going. Do you still need to hit the target of 2,800 by year-end for the interim look in '23?

Yeah. The key was to have approximately 2,800 by year-end. And what I can tell you is the real important part of that was sufficient to enable the interim look to take place in '23, and we are on track with that, and we're excited about that.

Great. Just one more question about the pipeline. Could you provide some insights on the ambient temperature blood sample that you mentioned?

The initial goal of our early work was to develop a predictor for advanced spontaneous preterm birth without knowing which biomarkers would be effective. We collected specimens meticulously, freezing the serum sent to the lab. In the beginning stages of Sera, this has also been the method for commercial samples. The process entails centrifugation, followed by freezing and shipping. We are now implementing a new method that we are very excited about. We have confirmed that this collection process is effective and yields equivalent results. This is thrilling because it will reduce costs, especially since dry ice is less available than it has been, largely due to the pandemic. By shifting to ambient temperature collection, we can increase the number of offices able to draw blood, make the process more efficient, and lower expenses. We are looking forward to this rollout, and you can expect to see a significant expansion of this technology in 2023 as it becomes the primary method for sample collection.

Great. Thanks for taking my questions.

You bet.

This concludes our question-and-answer session. I would like to turn the conference back over to Peter DeNardo for closing remarks.

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