Pacific Edge Limited (PEB) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Pacific Edge FY '20 Financial Results announcement. Today's program is being recorded. At this time, I would like to hand things over to Mr. David Darling, Chief Executive Officer. Please go ahead, sir.

Good morning, everyone, and thank you for participating in our year-end presentation and call. I'm here on line today with Chris Gallaher, our Chairman; Sarah Park, our Audit and Risk Committee Chairman; and Grant Gibson, our CFO, who joined Pacific Edge at the end of last year. If we can start at Slide 3 of the results presentation, which was provided to you at the NZX this morning. We made good commercial progress in FY '20 with increased revenue in Laboratory Throughput and a growing number of urologists using our Cxbladder test. The key metrics that we use to measure our progress are operating revenue, Laboratory Throughput and Commercial Test volumes. These all increased year-on-year. Clinical evidence is an essential part of being considered for adoption, and 3 additional peer-reviewed papers were published during the year, which further support Cxbladder's outperformance and critical utility. A particularly important achievement for us was inclusion in the USA's National Comprehensive Cancer Network bladder cancer guidelines, commonly referred to as NCCN. The guidelines inclusion covered patients being monitored for recurrence of urothelial cancer. This is a pivotal commercial outcome, with the NCCN guidelines widely recognized and used as the standard for clinical policy and practice in oncology by clinicians and payers in the U.S.A.. To be considered for review and inclusion requires an extensive portfolio of clinical evidence, a track record of clinical use and broad adoption by physicians. The golden rule is that guidelines follow adoption. The U.S. remains our largest market opportunity, and a growing number of health care organizations and urologists are now using Cxbladder. We remain very focused on concluding the process to gain reimbursement for the many patients that we provide Cxbladder test to, who are insured by the Centers for Medicare and Medicaid Services, or the CMS. To achieve this, we require 3 things: a national product-specific code, a national price and coverage under the CMS' local coverage determination. We have completed the first 2 of these in 2018, and we now have inclusion in the LCD list to complete. To gain inclusion in the LCD requires sign-off on 3 levels of peer-reviewed published evidence covering analytical validity, clinical validity and clinical utility. The first 2 have been successfully signed off, and we have the clinical utility component list to complete. To that end, we submitted an updated dossier of peer-reviewed published evidence for Cxbladder's clinical utility to the CMS' contractor, Novitas, for formal review in August 2019. And in February this year, we were able to add our latest compelling clinical evidence into the dossier that is currently under review, portraying the significant gains in clinical utility from the conventional adoption of Cxbladder Monitor by 3 different public health care providers in New Zealand. A successful LCD decision would result in reimbursement for all CMS patients treated or managed using our Cxbladder test at the already determined national CMS price for Cxbladder of USD 760 per test. Currently, 43% of our U.S. Commercial Tests are for CMS patients. At the time of LCD inclusion, we will also seek reimbursement for the 21,789 Cxbladder tests that have been completed and invoiced to the CMS as at March 31, 2020. The New Zealand market remains very active and continues to grow. The majority of New Zealand's public health care providers, the DHBs, have now adopted Cxbladder into the standard of care, reflecting the gold stand cystoscopy. And recently, several of these public health care providers have added an additional Cxbladder product to their mainstream commercial use. The clinical trials in Singapore are nearing completion, and the published results from these will follow the basis for a proposed Singapore-wide commercial program. In Australia, we are replicating our New Zealand-proven sales and marketing model to drive our sales. Our stated financial goal for fiscal year '20 was to continue progression to achieving our clinical commercial outcomes with similar net investment. We achieved this goal. Our financial results for the year ended March 31, 2020, include: Laboratory Throughput increased 7% to 16,861 tests, with 81% of these being Commercial Tests. Operating revenue from test sales was $4.4 million, up 14% on last year, with cash receipts from customers up 19%. Operating expenses were $24.1 million up 5% on the prior year, primarily due to the foreign exchange impact of a softer NZD to the USD. As at 31 March 2020, Pacific Edge had $14.8 million in cash and cash equivalents following the $20.1 million capital raising completed during the year. Net operating cash flow was $15.4 million, a 12% improvement on the prior comparative period. The company reported a net loss after tax of negative $18.9 million. Laboratory Throughput is the commercial measure of the overall adoption of Cxbladder products and includes Commercial Tests as well as the user programs. Since commencing commercial sales in 2015, Laboratory Throughput has grown at a compound annual growth rate, or CAGR, of 34%. In FY '20, Laboratory Throughput increased 7% year-on-year. Commercial Tests are tests that have been analyzed by Pacific Edge for a specific customer, including the user programs run by customers as part of their adoption process by excluding tests run for clinical studies. Commercial Tests increased 7% and comprised 81% of the total Laboratory Throughput. Commercial Tests also improved due to CMS patients, which are all invoiced to the CMS, for which revenue is not yet recognized or cash payment received. CMS-related tests accounted for approximately 43% of the U.S. Commercial Tests in FY '20. And as at 31 March 2020, we had cumulatively completed and invoiced a total of 21,789 tests for CMS patients, for which we are yet to be reimbursed. We will seek reimbursement for these tests when we achieve inclusion in the Local Coverage Determination. The U.S. remains our biggest single market, with 79% of Laboratory Throughput. This is a slightly smaller proportion than last year due to the growing commercial use of Cxbladder in New Zealand, which now makes up 17% of the Laboratory Throughput and is growing. Cxbladder test usage in the respective markets depends on the length of time a specific product has been available in market and a specific clinical issue that the urologist or institute is interested in. We have a rollout strategy, where new tests are first launched in New Zealand before being progressively rolled out in the U.S.A. and other markets. This can sometimes take many months before broad coverage is achieved. In the U.S., Cxbladder Detect was the first product launched in 2015. And as expected, it has the highest adoption, followed by Cxbladder Monitor. However, in New Zealand the Cxbladder Triage test has the highest usage followed by Cxbladder Monitor. New Zealand is a great example of what our tests can achieve in terms of better patient care, better outcomes and better use of limited health care resources. The actions being taken here and the demonstrable benefits are being watched carefully by large health care institutions and leading urologists around the world and another step towards gaining wider adoption for Cxbladder. The majority of New Zealand's national health care providers are now under contract and using Cxbladder commercially in their regions with a combined coverage of more than 65% of New Zealand's population and growing. In Q4 '20, 2 of the New Zealand's DHBs added an additional Cxbladder product to their mainstream commercial use. In some of these public health care providers, Cxbladder has also been added into the clinical guidelines, replacing the gold standard cystoscopy in both the evaluation of hematuria and in the monitoring for recurrence of urothelial cancer. So we're starting to see our technology, Cxbladder, operating right across the clinical pathway depending on the respective institute's desire or demand. The New Zealand Laboratory Throughput increased 13% year-on-year, with revenue increasing 11%. The New Zealand market has delivered a compound annual average growth rate of 69% in revenue over the last 2 years. U.S. throughput increased 6% year-on-year with growing momentum, and we saw a strong uplift of 14% in throughput in the final quarter of this year compared to last. Our commercial focus in the U.S. remains on achieving inclusion in the Local Coverage Determination for the CMS. And as just stated, that review is currently underway. As the increase -- we increased the number of sales reps to our planned quota of 16 at year-end to help drive the growth in this market. We have a targeted list of institutions in the U.S. that are currently using or evaluated Cxbladder, which includes some of the most highly recognized health care organization -- organizations in the world, such as Johns Hopkins Medicine. I would now like to pass you across to Grant Gibson, our CFO, to walk you through the financial performance.

Thanks, David. Right. I'll take you through operating revenues first. So if we're looking at operating revenue in more detail, the group operating revenue, that's the revenue we achieved from our test sales, increased 14% year-on-year to $4.4 million. Our U.S. operating revenue increased 15% on the prior corresponding period. And in U.S. dollars, that's up 9%. And U.S. operating revenue accounted for 86% of the group operating revenue for the financial year '20. Just as a reminder as well, under IFRS 15, revenue in the U.S. is recognized on a cash-only basis, and it excludes tests in the U.S. before the cash payment has yet to be received, and it also excludes tests completed for patients covered by CMS. Rest of the world operating revenue increased 14% year-on-year, and that's mainly driven by the increase in adoption in use by New Zealand DHBs. If we look at operating cash flow. We've continued to focus on disciplined cash management, and that saw our net operating cash flow reduce by 12% year-on-year to $15.4 million for the year. And we're continuing this downward pressure over the financial year '21. Cash receipts from customers increased 19% year-on-year to $4.4 million. The introduction of national product-specific CPT code for Cxbladder Detect and Cxbladder Monitor in the U.S. from January 2019 has had positive impacts on our cash collection rates in the U.S. and the payment terms, which currently average around 5 months from completion of a test to when we receive payment by the relevant U.S. payer, the insurer. As at 31st March 2020, Pacific Edge had $14.8 million in cash, cash equivalents and short-term deposits following a successful $20.1 million capital raising completed during the financial year. When we look at operating expenses, our expenses were $24.1 million, which is up 5% on the prior year. And as David mentioned, that was primarily due to the foreign exchange impact of a weaker New Zealand dollar compared to the U.S. dollar. So the impact of that on our expenses was $0.7 million just in foreign exchange EBITDA. U.S. operating expenses account for 60% of the total operating expenses and in local currency, were down 2%, but when compared to New Zealand dollar, were up 3%. In the fourth quarter of 2020, the U.S. business increased the number of sales representatives selling Cxbladder to 16 individuals compared to the 11 at the start of the financial year. What I would like to do now is pass you back to Dave Darling, the CEO, to close out with a few comments on the forward outlook.

Thanks, Grant. You'll remember that all of our customers in the U.S.A. are insurance providers. Yes, there are many health care providers who prescribe the use of Cxbladder. However, it's the insurance companies that provide us with our reimbursement so we need to convince the health care providers that they need to use Cxbladder on their patients and also convince the insurance providers to reimburse us for the tests used on the customers, the patients. In all cases, we need to have publication of peer-reviewed clinical evidence. The generation of clinical evidence to meet these needs is expensive and time-consuming. However, it is the key to gaining insurance coverage, positive reimbursement decisions and inclusion in the guidelines, which drives greater and more widespread adoption of Cxbladder. We have generated in excess of 10 years of accumulated evidence on more than 6,000 patients showing the outperformance of Cxbladder. This has been a significant and time-consuming investment for the company, and we're now seeing the fruits of this investment in the reimbursement milestones achieved in the U.S.A. and increasing adoption in all of our markets and inclusion in the New Zealand and U.S.A. guidelines. There were 3 additional peer-reviewed papers published in the last year demonstrating the strong clinical utility that Cxbladder provides to physicians. As we have outlined previously, this level of published evidence is the trading currency for positive reimbursement decisions and recognition by industry guidelines. We have provided NZX announcements on each of these, so I won't go into the detail again today, but I'm happy to discuss them with you further outside of this call. In all 3 peer-reviewed publications, Cxbladder demonstrated significant outperformance and clinical utility for physicians and patients alike. This has driven the milestone outcomes, including inclusion in the NCCN guidelines, national CPT codes and a national price for Cxbladder, all of which are vital for a strong and growing revenue for Cxbladder. Based on these compelling clinical publications and milestone outcomes, several of Zealand's public health care providers have integrated Cxbladder into their routine clinical diagnosis of bladder cancer and surveillance of patients for recurrence of bladder cancer. So now to our outlook. Pacific Edge is in a unique global position with a first-mover advantage, a large addressable market, a proven commercial model and products with compelling and repeatable performance. Cxbladder products are disruptive. And today, many urologists now no longer practice urology the way they used to practice 12 months ago. So the opportunity for our company is significant and growing as we increase the awareness and utilization of the multiple Cxbladder products, a one-stop shop for urologists. During COVID-19, we continued to operate as an essential business in both New Zealand and the U.S.A. While March test numbers remained strong across our markets, we felt the impact of COVID-19 in the first 2 weeks of April post the period end, with urologists struggling with the conflicting demands of COVID-19 restrictions and managing bladder cancer patients, all of whom are deemed at risk patients for COVID-19. And this led initially to lower test numbers as patient visits were deferred and clinicians moved to telehealth options, with test numbers approximately 51% of prior year levels in April for both New Zealand and the USA. An uplift was seen in the second half of April and New Zealand following the move to Level 3, and we expect to see a similar trend in the U.S. as restrictions ease. May is very strong for New Zealand and growing. The company has been able to reduce costs to offset income reductions and also -- and received financial support in the form of COVID-19 relief packages from governments in New Zealand, Australia and the United States. During this period, we have seen an increase in telemedicine, with some organizations reporting up to 90% of the consultations being teleconsultations, up from around 30% pre-COVID-19. Cxbladder's unique sample collection device was recognized by physicians in both the U.S. and New Zealand as an enabling device that would help drive and sustain the shift to telemedicine for bladder cancer patients. Cxbladder's sample collection system is being sent to patients at home for an in-home sample collection, and they're collected by a courier for delivery to a Pacific Edge laboratory, providing the diagnosis and insurance even when the face-to-face consultations are not possible. Given that many urology patients are in the plus 65 years age bracket and therefore, at higher risk from COVID-19, it also helps to maintain social distancing, removing the need to visit busy medical centers or collection points. The precedent is now being set, and we expect that teleconsultations will become more common practice going forward. In line with this, in-home sampling is also expected to become an accepted option for patients and physicians even once the COVID-19 restrictions are eased. The U.S. remains our primary commercial focus with an estimated annual market opportunity for our Cxbladder products of approximately USD 1.2 billion. Our tests are being used for the more than 3.4 million people in the U.S.A. who are evaluated for bladder cancer each year and more than 800,000 who are returning to the clinic 3 or 4 times a year and as -- living with the disease and require regular monitoring. This gives rise to an approximate 3.2 million further clinic visits and opportunities for Cxbladder. Approximately 4 million cystoscopies were performed in 2018, many of which are replaceable with Cxbladder. Integration into and scale adoption by large health care institutions remains a primary commercial objective for Pacific Edge in all of our markets, particularly in the United States. Momentum is growing. And while the commercial negotiations are taking longer than initially anticipated in some cases, the new contracts that will result from these have a significant positive impact on our financial position when concluded. This has been a very successful model in New Zealand. As we have learned, the adoption process in the United States can be time-consuming and requires substantial resource. We are conscious that achieving our ambitions is taking more time than we originally anticipated when we started on this journey, and we remain focused on realizing the opportunity that exists for Cxbladder. There are still no commercial alternatives that have launched at molecular diagnostics in the world today. We are progressing in a number of key areas, which will help us achieve our goals of growing our global reach, building and strengthening our customer base and increasing sales and adoption, all of which will drive greater cash revenue. We have identified opportunities for growth in all our target markets, and we'll be directing our resources towards achieving commercial contracts with large institutional health care customers and growing sales to our existing customers. In the U.S., we continue to work closely with Novitas to gain inclusion in the LCD. When this occurs, it will unlock access to the CMS revenue, which represents approximately 40% of Pacific Edge's current commercial sales in the U.S. and is expected to positively impact on demand from other health care organizations as well. In New Zealand, we are looking to bring the remaining public health care providers under contract and expanding the use of Cxbladder tests at -- available to existing customers. The focus for Southeast Asia is to complete the user programs in Singapore and transition these institutions into commercial customers as well as progress discussions with potential strategic partners for reach across Southeast Asia. Clinical evidence remains key, and we will continue to build out the evidence portfolio to drive further positive reimbursement decisions. Cash management remains one of our key focal points, and we expect FY '21 total operating expenses to remain in line with FY '20. The benefits and value our Cxbladder tests offer and the opportunities for our company are huge. As we progress with our key objectives, we expect demand and commercial use of our tests to gather pace. It's very clear to us all that our journey of clinical evidence development, reimbursement and regulatory approvals have been massive milestones. They underpin any successful commercialization of med tech products. To do this in one market is challenging and time-consuming so we'd like to thank you for your continued patience and ongoing support as we continue to progress towards realizing our full commercial potential. Thank you for your continued support as we grow Pacific Edge and your time and listening to our FY '20 financials and outlook presentation. I will now pass you back to the operator to manage any questions that you may have.

[Operator Instructions] And we'll take our first question.

It's Chelsea here from Forsyth Barr. I guess if I can start on the U.S. market and perhaps get an update on Kaiser. And I noticed it's not really mentioned at all in your text. It'd be quite interesting to kind of understand where that process is at. And then secondly, on the LCD, have you actually had a response back from CMS or your contractor, I should say, yet? Or are you still waiting on that?

Thanks, Chelsea. Great to hear from you. Those are very good questions. Yes, we continue to progress our relationship with Kaiser Permanente. Kaiser has made some massive strides in their move into telemedicine over this COVID period, and they see Cxbladder as a key enabler for their telemedicine. So we're hopeful that we will be able to get to some definitive endgame with those products in the near future. So as always, it's a long cycle with Kaiser. They're a very big organization, but the prize is huge. They now have 12.4 million lives under coverage. They recently announced to the public that their pre-COVID telemedicine consultations were approximately 30% of their consultations. And during COVID, that's lifted to 90%. So they remain the single biggest customer that we focus on in the United States that's not CMS. With regard to LCD, no, we have not heard anything back from the Novitas, the contractor who was reviewing our portfolio right now. We've been very fortunate to have them accept some extra clinical evidence into that portfolio post the start of their formal review. Their formal review started on December 15 after the submission and acceptance in early August. So they have no defined time window to complete that process other than a drop deadline of 12 months from the receipt of that dossier pack. So we expect in -- our contractors in the U.S. to help us with this process, expected that we would hear sometime around the March-April period based on other previous outcomes that the test has worked on. So we wait anxiously for that outcome but are very happy that we have been able to submit some very compelling clinical utility evidence that's Level 5 clinical utility evidence showing outstanding performance for Cxbladder Monitor. I hope that answered your question.

Okay. Yes, that's helpful. And then just second area of question, just in terms of the unrecognized revenue in the annual report. You've got a contingent asset there of $3.15 million this year, which I think from memory last year was just over $7 million. So I'm just trying to understand in relation to the private insurance receivables, what's changed or what's going on in that side of things.

I'll pass it across to Grant.

Yes. Thanks for that. So when we're looking at contingent assets, there's a large number of things that we look at. So it's the best estimate that we've got, and there's a whole range of things that we look at. It's the number of tests that are outstanding, the age of them, what the average expected revenue we're going to get from each test and what the percentage of payments we expect. So we do it at a pretty granular level. And what we've looked at is we've erred on the side of conservatism this year. So we've looked at each of those inputs and actually gone on what we consider the low side. So that's why there's significant reduction. There's been no fundamental change in the underlying business, the underlying nature of the tests. We've just decided to adopt a slightly more conservative approach to the assumptions that we've got on the contingent assets. Did I answer your question?

Yes. I appreciate that. I might pick up some of the mechanics later. But just lastly on the sales rep front. Obviously, you've lifted the numbers to 16 from 11, but you're signaling cost guidance for the year ahead to be flat or maybe slightly down. Just trying to understand -- or reconcile the 2 statements. Is there some cost savings coming elsewhere? Or how should I be thinking about that?

Yes. Thanks, Chelsea. We're continuing our pressure -- our downward pressure on costs. Obviously, the upside coming from the rollout of our plan, which is the attainment of our LCD, which is going to have a significant positive impact on our financials along with a long anticipated integration of some of these large institutional health care providers, are going to give us the upside to the cash flow. And when we look at our performance over the ensuing, I guess, 24 months, we've vacillated between 16 reps and 11 reps, and we've been able to sustain our test numbers, and we've actually increased the efficiency of our sales reps. So we're looking closely at those numbers. They're very expensive people to operate in the field, and they -- the total cost contribution to our expenses for the U.S. is around 60%. So if we can make some changes to how we deploy those sales representatives, that will have a big impact. If you add on top of that this strategic move by the company to focus on institutional accounts that we find so successful in New Zealand, they are a long cycle to develop and get underway. But once you get them underway, your input in terms of costs to maintain and grow the test volume on those institutional accounts is significantly lower. If you take, for example, the Canterbury District Health Board public healthcare provider, they -- when they kicked off their program under contract, they gave us a target number. They went to that number over that 12-month period. We spoke to them twice during the year. And then the following 12 months, they were 2 weeks up on the expected throughput of tests, and we still only spoke to them twice during the year. We now no longer have a sales rep in New Zealand. We took that one rep and put that person in Australia. So we are looking to manage the same sort of strategy in the United States. It won't be a single sales rep, but it will be a significantly lower level of exposure to our selling cycle in the U.S. I hope that helps you, Chelsea.

[Operator Instructions] No one else has signaled to ask a question on the phone.

Thank you. We have a couple of questions that are coming online. We'll read out one of those for you. Coming in from Andrew Ott from -- an investor retired from Forsyth Barr. Andrew asks, could you please provide some color on what a net flow is, its relationship with the CMS, how they operate, how PEB interacts with Novitas and what kind of information flow you've seen and received. That's a big mouthful. I think you've got a couple of hours for that one, Andrew. Anyway to briefly summarize that, the [ Max's ] role is, I guess, akin to the same sort of system we see here in New Zealand, where the Ministry of Health provides a budgeted amount and delegated authority to -- just to health boards to operate health care provision. In much the same way, the CMS allocates the review and integration of new technology and the deployment of services and payment for those services out through Medicare contractors. There are 9 regions that they operate in so there are 9 Medicare contractors. And those contractors are -- and we interact with one specific contractor, and it's the contractor in the region in which our lab is operating. In our case, it's Novitas. So we provide Novitas -- it's a very controlled process of interacting with them. You're not allowed to sit down and have one-on-one conversations. You prepare your dossier. You submit your dossier. You're allowed a presentation window for that dossier. And in that presentation, there are 5 medical directors who adjudicate in Novitas. One of those medical directors is allocated directly to the Cxbladder case, and they stay on the case throughout the review of the evidence portfolio. And at the conclusion of that, they want to give you a sustained noncoverage or they provide you with coverage under the existing Local Coverage Determination for molecular diagnostic tests. So as we've said before, they go through 3 levels of evidence requirement: analytical validity, clinical validity and clinical utility. Each of those requires slightly different clinical studies, and they must be peer-reviewed publications, the challenge being it will not even be accepted if it isn't evidenced at least by peer-reviewed publications. But so far, we've had sign-off by Novitas, by our analytical validity and our clinical validity and now we have the clinical utility to complete. We have had one previous dossier submission to Novitas, and they believe that we needed to add further evidence to the dossier. We have far and away completed further evidence, and now we've loaded up the new dossier in August of 2019. It's in review right now, and they have accepted during that review further evidence at -- further Level 5 clinical utility evidence into that dossier. And I'd just like to also add that one of the really interesting pieces of clinical utility that's come to light in the COVID-19 window is the utility associated with being able to utilize Cxbladder's in-home sampling system so that we can leave those patients at home. And we've been fortunate enough to notify them and be able to have that accepted into our review process as well. So we look forward to the conclusion of the review and expectant and hopeful of positive outcome, which will have a significant impact on our bottom line. Thank you, Andrew. I have another question here from Philip Cryer. Thank you, Philip. Is the CMS still able to review applications for inclusion during the COVID crisis? Good question. I presume so. They certainly were accepting -- accepted our extra evidence, which in itself is unusual. But they accepted that evidence in February, and we notified them during the COVID crisis of the utility associated with Cxbladder's in-home sampling process that we're now operating successfully in New Zealand and the United States. Thank you, Philip. I hope that answers your question. That's just from us for online questions. Lisa, back to you.

[Operator Instructions] And there are still no phone questions. Did you have any closing remarks, sir?

I do, indeed. I just would like to share with the audience here today a quote from the CMS that came in yesterday, Thursday, the 28th of May, from the CMS Administrator, Dr. Seema Verma. So they're citing this massive -- it's a revolution that we've seen in the health care industry today -- sorry, over the COVID-19 period, where the industry has moved so massively to telemedicine. And the quote from the CMS administrator is, "CMS' rapid changes to telehealth are a godsend to patients and providers and allows people to be treated in the safety of their home. The changes we are making to help make telehealth more widely available in Medicare Advantage and are part of larger efforts to advance telehealth." It just gives you some sort of an idea as to how they're treating this in the national sense in the United States. And with that, I'll conclude the presentation and the commentary. Please feel free to contact us through our investor line on our web. Thank you very much.

Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation today.