Pacific Edge Limited (PEB) Earnings Call Transcript & Summary

Good day, and welcome to the Pacific Edge First Half Interim Results and Presentation. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. David Darling, Chief Executive Officer. Please go ahead, sir.

Thank you. Thank you very much. Good morning, everyone, and thank you for joining us today. With me on our call today is our CFO, Grant Gibson; Simon Wilson, our VP, Corporate Finance and Investor Relations; Anatole Masfen, a Director from our Board of Directors; and online from Australia, Chris Gallaher, our Chairman of the Board of Directors. If we can start at Slide 3 of the results presentation which was provided to the NZX this morning and will be on the screen in front of you, the 6 months from April to September 2020 has been a transformational half-year for Pacific Edge. Despite the initial negative impact of COVID-19 on our test volumes, we have reported a significant increase in operating revenue, a reduction in operating expenses, a reduction in our monthly cash burn and an improvement in our bottom line. Our first half-year has been defined by 3 main events: Firstly, the COVID-19 pandemic, which has had a significant impact on our test volumes as patients were unable to access medical centers for testing and care. Secondly, the inclusion of Cxbladder into the local coverage determination or the LCD in the U.S. in July, which has enabled reimbursement for tests for patients that are being treated and managed by the centers for Medicare and Medicaid services, or known as the CMS. And thirdly, reaching commercial agreement with Kaiser Permanente. On the back of these 2 significant commercial events and supported by our strengthened balance sheet following the extra capital investment of $22 million by ANZ New Zealand Investments in July, we've started the planned scale-up of our commercial operations in the U.S. to drive further growth. We began seeing the initial impact of the COVID-19 pandemic on our business in March this year, with the restrictions on patients accessing medical care and testing, and urologists who are struggling with the management of bladder cancer patients, nearly all of whom are deemed COVID at-risk patients. By the end of May, our test volumes were down 43% for the first 2 months of the half-year. During this time, there was a dramatic increase in the use of telehealth globally by physicians, including urologists. The FDA lowered the barrier to unencrypted health communications, and the CMS increased the reimbursement for teleconsultations. This has all fueled a strong resurgence in teleconsultations and any products that support telehealth. Accordingly, the benefit of our Cxbladder patient in-home sampling system, PIHSS, to enable at home management of urology patients became very clear. By way of response in New Zealand, 3 public health care providers commenced in-home sample collection during the half-year period, and 2 others added another Cxbladder product to their mainstream commercial use, enabling even more patients to be managed outside of the clinic at home. Pacific Edge has also seen increased sales activity with other health care institutions in the U.S. as they embrace telehealth and seek alternative methods to safely and accurately treat their patients remotely. Some health care providers are citing increases from 25% pre-COVID-19 to 95% post-COVID-19 of their health care consultations being teleconsultations. We saw a strong recovery in our test volumes from June to September following the easing of COVID-19 restrictions and the growing use of telehealth. Our New Zealand business has been quick to return to normal trading in the U.S. while still largely under the influence of COVID-19, has been making good progress on its return to normal. Despite this pandemic operating environment, we have continued to grow our revenue. We continue to operate as an essential business during the COVID-19 restrictions in both New Zealand and the U.S. All our staff were retained across the company, and we took actions to preserve cash and also received financial support in the form of COVID-19 relief packages from the governments in New Zealand, Australia and the United States. While many of our laboratory staff already work in a highly controlled environment, health and safety for all employees was a priority. The COVID-19 pandemic has had a transformational effect on traditional health care, and there has been a dramatic increase in the use of telehealth, which the health care industry expects will continue post-COVID-19. Our Cxbladder in-home sampling system plays an important enabling role in this new telehealth environment, allowing patient evaluation and assessment to be managed remotely. There is significant IP involved in our test collection system, and it provides another strong point of difference for our products that we are now able to reap in ways not previously conceived. The second major event, which was defined in the first half-year, was the inclusion of Cxbladder in and CMS local coverage determination. This has enabled reimbursement for the many CMS patients that utilize Cxbladder Monitor and Cxbladder Detect at the national CMS reimbursement price of USD 760 per test. These 2 Cxbladder tests made up 94% of the U.S. commercial test volume in the first half, with 67% being for CMS patients. The LTD inclusion has resulted in a positive change in our U.S. revenue recognition. CMS tests performed after 1 July 2020, are now able to be recognized on an accrual basis. Previously, this was a cash basis. Tests for other non-CMS providers will remain on a cash basis. The half-year result includes 2 months of cash contribution from CMS tests as well as an NZD 800,000 accrual for tests, which have been performed, but not yet paid as of the 30th of September. The negotiations continue with the CMS for reimbursement of the previous 22,000 tests done for CMS patients as of the 30th of June 2020, but there is no certainty of whether these tests will be reimbursed or at what price. This is a long process, and there is no guarantee that we will be successful. However, we will treat any retrospective payment for any previously bought tests as upside. The LTD inclusion is generating additional revenue and is expected to result in significant commercial growth in 2H '21 and beyond from direct tests on CMS patients and as validation and leverage for more adoption with other scale customers and payers. Kaiser Permanente. The third major event was our commercial agreement with Kaiser Permanente that were 1 of the USA's largest nonprofit health care providers to commercially use all of our Cxbladder data products nationwide, starting with Cxbladder Monitor, for the monitoring of recurrence of disease in their patients. More than 800,000 people are regularly monitored for the recurrence of bladder cancer in the U.S. And Kaiser Permanente, with their 12.4 million members, manages approximately 2% of these patients who will present to the clinic for evaluation annually up to 4x a year for 5 years. This provides a large pool of patients and a significant commercial opportunity for Cxbladder Monitor. The advent of the COVID-19 pandemic has seen a significant shift in the use of telemedicine. Pfizer, pre-COVID, have reported that approximately 25% of their patient consultations were teleconsultations. And since COVID-19, more than 95% of COVID -- Kaiser's appointments are now telehealth, providing an opportunity to utilize the Cxbladder patient in-home sampling system. For the past 4 months, we have been working with Kaiser Permanente to integrate Cxbladder entities systems, along with a focus on Pacific Edge's supply chain logistics and banking of the PIHSS business to ensure that all systems are in place to provide our gold standard service for urologists and patients. This is all now being completed, and commercial testing is underway. We expect to see early benefits of this in the second half of the year as usage scales up across the organization. Combined, the Kaiser Permanente agreement and the LCD inclusion are driving a step change in the growth of the U.S. business. Commercial operations have been scaled up with a strengthened leadership team from the addition of David Levison, who stepped down from the Board of Directors to join the U.S. Executive team, providing significant molecular diagnostic sales experience. We have now added an extra 5 sales representatives in new territories, a medical affairs person to provide more clinical input to urologist customers, and last but not the least, the addition of further in-house customer liaison managers to help with the expected increase in our patient in-home sampling system, PIHSS, to drive further growth. Our focus remains on encouraging commercial adoption of Cxbladder by large health care organizations such as Kaiser Permanente, and gaining coverage and inclusion from private payers or the insurers. The U.S. Laboratory has the design capacity to process 260,000 tests per annum, which is sufficient to support the expected increase in test demand for some time yet. A growing number of large health care organizations are now using or evaluating Cxbladder, and we will continue to work with them to gain commercial adoption of our products. Some may take longer than others to gain significant penetration and adoption of Cxbladder. However, this will be significantly easier with the added validation that comes from having both the inclusion in the CMS' LCD and a commercial relationship with Kaiser Permanente. These are the 2 largest validation customers in the U.S. Now moving on to our financial results for the 6-month period. In summary, it was transformational half year for our company. Despite the negative impact of COVID-19 on our test volumes, we have reported a significant increase in operating revenue, a reduction in operating expenses, a reduction in our monthly cash burn, and an improvement in our bottom line. COVID-19 impacted significantly on test volumes, particularly in April and May. And total Laboratory Throughput for the group was down 16% to 6,864 tests for the period. A strong recovery was seen from June to September, but year-on-year growth achieved in both June through September. Of the tests -- total tests processed, 81% were Commercial Tests, consistent with the prior year. You can see on the graph, the major impact COVID has had on our average commercial tests in April and May this year compared to our average tests last year. Strong recovery has been seen since June, with Commercial Tests numbers ramping back up to be 11% higher in September than the same month last year. The U.S. remains our primary market, providing 72% of total Lab Throughput, 71% of Commercial Tests volumes and 87% of operating revenue. New Zealand is the primary contributor to our rest-of-world results, with Southeast Asia and Australia at earlier stages of their commercial journey. Our suite of 4 Cxbladder products continues to be a major competitive advantage for us. The ability for our tests to be used across the entire clinical pathway to match the needs of individual customers, multiple tests, the consistent performance and the ease of transfer of urine samples from patients to the lab, all enhance our competitive advantage. The volumes of each test processed in each market annually are relative to the time when they were launched into the market. As you would expect, our first product, Cxbladder Detect, still represents the largest volume of tests with growing use of Cxbladder Monitor in Triage. I'll now hand you across to Grant Gibson, our CFO, to walk you through a summary of our 1H '21 financial performance. Grant?

All right. Thanks, David. Okay, this has been a strong half year for us. You can see on the slide, which shows a comparative of our key financials compared to the prior period, with strong growth on our metrics. Operating revenue has increased 46% to $3.3 million. Operating expenses reduced 8% to $11.2 million. And we reported a net loss after tax of $7.1 million, an improvement of 25% on the prior year. Cash receipts from customers were up 9% to $2.6 million, and we have net operating cash outflow of $7.7 million, up slightly on the last year. Cash on hand at 30th of September was $29.3 million, and that included the $22 million investment from ANZ investments during the period. The strong revenue growth has been primarily driven by CMS reimbursement of Cxbladder Detect and Cxbladder Monitor test, and a quick recovery in our New Zealand market. Total operating revenue increased 46% year-on-year to $3.3 million, with the benefit of LCD inclusion from 1st of July 2020 being offset by the impact of COVID-19, particularly in the [indiscernible]

[Technical Difficulty] I'm sorry. Pardon the interruption. We are having some distortion on the line, and we're unable to hear you.

Is this better?

Yes, it is.

Great. Okay. I'll carry from [indiscernible]

[Technical Difficulty] I'm sorry, it's cutting out again. I think we should just try to reestablish the line. [Operator Instructions]

So the strong revenue growth has been primarily driven by CMS reimbursement of Cxbladder Detect and Cxbladder Monitor test and a quick recovery in our New Zealand market. Total operating revenue increased by 46% year-on-year to $3.3 million, with the benefit of LCD inclusion from 1st of July 2020, being offset by the impact of COVID-19, [indiscernible] The first half of the year included a 3-month contribution of tests completed to CMS patients from July to September. This was made up of [indiscernible] for tests completed in July and August and an accrual of 800,000 for tests performed, but which -- for which we have not payment by 30th of September. The commencement of reimbursement from the CMS was the primary driver behind the U.S. business, delivering 3 consecutive months of record revenue from July to September. The successful LCD coverage for Cxbladder Detect and Cxbladder Monitor from 1st of July 2020 has allowed Pacific Edge to start recognizing revenue under the New Zealand IFRS 15 accounting standard for all tests that were performed on CMS patients, which are Medicare and Medicare Advantage, in the U.S. Tests for CMS patients performed after the 1st of July are now able to be recognized on an accrual basis. We previously recognized these on a cash basis. We continue to recognize revenue on a cash basis for our other U.S. customers who are not yet in contract, and we will continue to review this regularly. U.S. operating revenue increased 46% on the prior corresponding period to $2.9 million and accounted for 87% of all our operating revenue. Average U.S. operating revenue for the 3-month period from July to September, which included CMS, increased 117% on the prior corresponding period, with average cash receipts for August and September up 87% on the prior corresponding period. This strong revenue growth has continued into the second half, with a further record sales month reported in October 2020. Rest-of-world operating revenue increased 40% on the prior corresponding period to $0.4 million, driven by strong growth in New Zealand market following the lifting of COVID-19 restrictions. The continued adoption and increase in test use by New Zealand public health providers, the DHPs, is driving this growth momentum and is expected to continue into the second half, with a focus on growing the number of Cxbladder tests used by existing customers and converting the remaining public health care providers into commercial customers. We've seen a strong reduction in our monthly cash burn this half year. Partly, this is due to the cost management during COVID-19 lockdowns, but the most significant impact has been the growing cash receipts following the LCD inclusion. Overall, the cash burn in the first half was down 6% from the prior corresponding period, with the average monthly cash burn in the second quarter down 23% on the prior corresponding period, driven by CMS reimbursement. One of the other major impacts now of the LCD has been the reduction in the time to payment. The CMS payments are now received in approximately 30 days, and most of the other U.S. providers average 1 to 3 months for the payment. Cash receipts from customers increased 9% to $2.6 million despite the significantly reduced test throughput in April and May, and reflects only 2 months contribution for CMS for test performed in July and August. Strong cash receipts have continued into the second half and have supported the [indiscernible] revenue for the period ending 30th of September. I'll now hand you back to David Darling, our CEO, for his comments on the outlook.

Thank you, Grant. Our growth catalysts and our outlook. All our markets, our key objectives remain as follows: Achieving commercial contracts with large institutional health care customers; growing sales through existing customers; gaining stronger inclusion in guidelines; and targeting private payers for coverage inclusion. Our recent progress and commercial achievements underpin our future growth, and we are now starting to see the benefits of the significant effort and resources that have gone into the commercializing our Cxbladder -- our bladder cancer technology. And our business model and strategy are now well-proven. We believe this is just the start of a strong growth trajectory for our company. Our main priority is to leverage the recent commercial milestones in the U.S. to increase adoption and commercial use of our products. Agreement with Kaiser Permanente and the coverage under the CMS' LCD will not only drive direct sales with those organizations, but will also help us capture other large health care institutions and convert them into commercial customers. We have a targeted list of institutions that have large-scale commercial urology programs in the U.S. that are currently using or evaluating Cxbladder, and we will focus on getting these to emulate the successful commercial outcome that we have now achieved with Kaiser Permanente, albeit on a faster time frame. We will also be working to add further large institutions to the list and to grow their commercial use. Concurrent with all of this, we will be putting a team of skilled negotiators to work on gaining in-network, and in some cases, in-contract status with the many private payers that are currently reimbursing us for Cxbladder and the others that we have targeted to provide reimbursement coverage. We've expanded our U.S. executive team, our specialist sales and our customer services teams to take full advantage of the expected increase in adoption that comes from attainment of the inclusion in the CMS' LCD, a great endorsement from our agreement with Kaiser Permanente and to maximize the growth opportunity in the U.S. We will continue to invest in clinical evidence to support our adoption and gain inclusion in guidelines, and where we are already included in guidelines, better inclusion language. Accordingly, we are planning to launch our fourth product, Cxbladder Resolve, into the U.S. market following the publication of the validation study early next financial year. In New Zealand, we are looking to bring the remaining public health care providers into contract and expand the use of Cxbladder tests by existing customers. This is mostly now an administrative and budget-related issue for New Zealand's large public health care providers. The focus for Australia and Southeast Asia is to transition the public health care providers from their clinical studies to a commercial customer model as well as progress discussions with potential strategic partners in Southeast Asia. Right now, these countries are still struggling with the COVID-19 pandemic and may take some time to return to normality. We are delighted to have the significant support of the Urology Society of Australia and New Zealand, or USANZ, to help us with our endeavors in Australia following the very successful integration of Cxbladder into the New Zealand standard of care. We have a strong growth outlook for the second half of FY '21 and beyond as we leverage the very successful validation that accrues from the CMS' LCD coverage and the commercial relationship with Kaiser Permanente. The global COVID-19 pandemic has had a profound impact on the delivery of health care, and this is expected to continue to impact through 2H '21 and beyond. Despite this, we expect continued growth in test volumes, albeit at a rate that may be slower than could otherwise be expected in a COVID-19-free operating environment. Our short to medium-term focus is on generating growth in Commercial Tests volumes and revenue, particularly in the U.S. The positive trend seen in the first half of the year is expected to continue through the second half, with increasing numbers of CMS tests and as Kaiser Permanente urologists commence Commercial Tests ordering. Our strong growth momentum has continued into the second half, with revenue for October and November to date reaching record levels. Further growth in test volumes is expected, with more resources in the U.S. directed towards achieving commercial contracts with large institutional health care customers, growing sales to existing customers and private payer coverage inclusion. The New Zealand market also remains important, with a goal to extend commercial coverage towards 100% of all public health care providers. We're currently sitting at 65%. And to grow the number of Cxbladder tests used by each of these providers. Both Southeast Asia and Australia are an earlier stage of their commercial journey, with the goal being to transition the public health care providers from clinical trials to a commercial customer model. Escalation of Commercial Tests sales is now front of mind and is expected to have a positive impact on our operating revenue and operating cash flows going forward. We now have the major reimbursement and clinical milestones in place to enable us to scale up and position Cxbladder as the first choice for urologists evaluating patients for bladder cancer. Our strengthened balance sheet, our improving operating cash flow position has operated us to accelerate our global growth initiatives, including the scaling up of our U.S. commercial operations. We are now well positioned with experienced, motivated people capable of maximizing the substantial growth opportunities in front of us. And so I'd like to take this opportunity to thank the Pacific Edge shareholders for their continued faith and support, and the Pacific Edge team across the globe for all their hard work and delivering us such a positive result, one that we've all been waiting for, for some time. Thank you all very much, and we'll proceed to questions.

[Operator Instructions] We'll go ahead and take our first question. Caller, please go ahead.

It's Chelsea here from Forsyth Barr. Just maybe a couple to start with. Just wanted to unpack the sort of COVID impact a little bit more, if I may. I guess, maybe if you could give us a little bit more color on what you're seeing with the whole second wave in the U.S. versus the first wave of COVID and kind of, I guess, the ability of your reps to get access to be able to sell tests, impact on test volumes, all of those type of things. Has there been any major difference this time around? And equally, do you think the sort of, I guess, momentum that you did see in sort of the back end of the half for October, how much of that do you actually think is catch up versus kind of new growth? I appreciate these are pretty difficult things to answer, but just trying to get some context.

Yes. That's a great question, Chelsea. Thank you very much. Yes, it is a difficult one to answer, but we do see quite consistent performances there. What we're seeing in the U.S. is some states start -- open up for free traffic, and so the health care providers open up and we can get more free and easy access to the urologists. However, they are switching from being open to being closed. And what we've been able to do in the U.S. is build a capability around virtual lunch and learns. So lunch and learn is a major means of engaging with the entire office -- urologist office, because it's not just the urologist that makes the decision, but also the supportive decision that goes through ordering and repeat ordering of the test. So bringing the entire office on board is very, very important. So these lunch and learns in a virtual setting have now become the norm. And so we think that's 1 of the key things that's seeing these record revenue months in the last 4 months, and we're certainly looking to do that again in November, in a few days to close out in November. So it's quite sustained in that respect. For sure, some of those states do play the catch-up game. Very clearly, some of those urologists like to bring customers into the clinic. Kaiser Permanente are very clear about the fact that they wish to use Cxbladder in the in-home setting. And remember, for those of you that -- to provide some extra context to that, Kaiser Permanente are the only customer in the world who have actually generated their own clinical evidence by using their Cxbladder tests in the in-home patient setting, so they have a lot of data. So hopefully that answers all of your questions [indiscernible] Chelsea.

Okay. And I guess just while we're on the subject of Kaiser, I appreciate it's still very early into the sort of commercial relationship. But over the past 6 months or maybe even the last couple of months, call it, have you had any sort of kind of key learnings, maybe your sort of initial experience to -- what I'm trying to really understand is how to think about the ramp path in particular, but also the medium- to longer-term opportunity. Has there been any change in terms of, I guess, your thoughts on that opportunity as you scale?

I guess the biggest opportunity is the rate at which the CMS tests come on board, at the rate of which Kaiser fire up and get rolling, the rate at which they switch from Cxbladder Monitor to Cxbladder Triage and into the other tests. They all have profound impacts on rate of growth. In some ways, when you look at Kaiser Permanente, we can only see that this has been significantly increased. It's much more a state of mind and current in mind right now. They're very aggressive when it comes to adopting new technology. However, it does take them a long time to implement it, as we found out. So yes, the vision remains the same. We remain very agile in how we grapple with the market. The sales representatives on the ground, the sales management teams have been very creative in finding ways to engage with the customers, including the payers. And the whole world has been [ flipped ] upside down by COVID. So telehealth has been a massive [indiscernible] in the health care environment, and we have yet to see that fully play out. Whilst our patient and home sampling system is -- has been absolutely beneficial in helping us achieve these results, it's not a panacea for all things COVID because these urologists still need to change some of their behavior before we can really get that thing to hum.

Okay. No, I appreciate it. And I guess just last one, kind of maybe taking a sort of a more headline kind of approach here. Would you say over the past 6 months, with Kaiser, in particular, as a customer, now you've worked with them for a little bit of time, you're feeling more confident, less confident, the same, in terms of, I guess, what the price is at the end in terms of kind of how they're taking it up with the sort of, I guess, few weeks of data points that you've got to date?

Yes. Thanks. We're more bullish than ever, Chelsea. And it comes from the engagement with Kaiser. We see escalations through the Kaiser organization. We see Dr. Nancy Gin [indiscernible] citing the technology and the integration into the system. She's the chief -- the Head of the Clinical Quality for the Kaiser Federation, so this escalation has been right throughout the Kaiser Federation. This is what they call the broader Kaiser group. And so when we get involved with Kaiser and we start integrating Cxbladder into the Health Connect, which is the EMR system that provides the data to neurologists in a real-time way, it's a significant investment. There's 10 coders in the United States that are coding right now. They'll be coding through to Christmas. And once you're integrated into the system, that's a big step forward. So we only see upside. We have no real idea about the total size of the project that continues to unravel in front of us. And like all things that we've seen in New Zealand, we only see upside, what has been announced previously with [indiscernible]

[Technical Difficulty] I'm sorry, your audio is cutting out pretty bad again. If you could just repeat that part.

Yes, it must be at the line connection probably, I think. But how is that now?

You're sounding better.

Okay, that's great. So just to close out on the question, Chelsea, very bullish about Kaiser Permanente and the integration that we're seeing inside the organization, the commitment of [ public resources ], the commitment of the individual clinical case manager to apportion the individual urology cases to the urologists, it's all been very positive. So onward and upward.

[Operator Instructions]

Sorry, we have a question online coming in here from Andrew Ott. Andrew, asked the question, are you able to provide any color on the potential timing of the publication of white papers and peer-reviewed studies on Cxbladder? And Andrew, thank you. It's a good question. We have been notified that there is another paper coming out and published -- it's going to be published on the 18th of December. We've had some indication that the results are very favorable, and we look forward to reading that. This is a publication that looks at the sustained use of Cxbladder over another 900 patients in the Canterbury District Health Board setting. Looking back over the technology, and they've been looking at the 22-month follow-on from Cxbladder on patients that have been called negative. We understand the results are very, very good, and we look forward to seeing that publication coming through. There is another publication that we [indiscernible]

[Technical Difficulty] Pardon the interruption. I'm so sorry, you're cutting out again. [Operator Instructions]

Sorry, we can't see those. Here we go. Thanks, guys. Sorry about the technical problems we're having here. So we have some more questions here online. So there is a question here from [ Christian Bell ]. Thank you, Christian. Kaiser. Are you ramping up education and for how long? With regard to Kaiser, yes, we've been working on the Kaiser education over the last couple of years. We've had several training sessions with Kaiser. We'll continue to follow through on educational requirements, and we'll respond to any requests on any of the urologists and any of the clinics with regard to the utilization of the test. So we expect to see some direct questions around recognition of results and interpretation results. It's a normal process for any customers that we start providing service to. Christian, I hope that answers your question. Another question here from Andrew Ott. Will Cxbladder tests done by Kaiser now be accounted for on an accrual basis?