Atossa Therapeutics, Inc. (ATOS) Q4 2014 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Atossa Genetics 2014 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Scott Gordon, President of CorProminence. Please go ahead, sir.

Thank you, Laura, and thank you everyone for joining today’s conference call to discuss Atossa Genetics corporate developments and financial results for 2014. With us today are Dr. Steven Quay, Chairman, CEO and President; and Mr. Kyle Guse, CFO and General Counsel. At 4:01 PM Eastern Time, Atossa released financial results for the year ended December 31, 2014. If you have not received Atossa’s earnings release, please visit www.atossagenetics.com. Before we begin, I would like to note that comments made during this call may include forward-looking statements regarding future events or the future financial performance of the company. Such statements are predictions only and actual events or results could differ materially from those made in any forward-looking statements due to a number of risks and uncertainties, including assumptions about future events based on current expectations, plans, business development efforts, near and long-term objectives, regulatory actions, potential new business, strategies or organizational changes, changing markets, future business performance and outlook. Please see Atossa’s most recent filings with the SEC, including without limitations Forms 10-K, 10-Q and 8-K. I will now turn the call over to Dr. Quay.

Thank you and good afternoon. We are the breast health company. Our mission is to improve breast health to the development and commercialization of proprietary specimen collection, medical devices, laboratory developed procedures and pharmaceutical treatments. Our laboratory procedures are being developed and commercialized by our subsidiary, the National Reference Laboratory for Breast Health or NRLBH. Before I provide an update on our products and services, Kyle will summarize our 2014 financial results.

Thank you, Dr. Quay, good afternoon everyone. Revenue for the year ended December 31, 2014, totaled $526,000, mainly from our pharmacogenomics testing. Total revenue for the year ended December 31, 2013, was $633,000, primarily consisting of our NAF cytology tests and sales of the ForeCYTE Breast Aspirator from January through September 2013. Cost of revenue was $341,000 for the year ended December 31, 2014, compared to $346,000 in the same period in 2013. For the year ended December 31, 2014, gross profit totaled $185,000, compared to $137,000 in the same period in 2013. Operating expenses for the year ended December 31, 2014, were $14.8 million consisting of G&A expenses of $8.6 million, R&D expenses of $2.6 million, selling expenses of $1.3 million, and $2.4 million in impairment of intangibles which represent an increase of $4 million or 36% from the $11 million in the same period in 2013, which in 2013 consisted of G&A expenses of $8.6 million, R&D expenses of $1.1 million and selling expenses of $1.3 million. G&A expenses increased primarily as a result of lower capital raising commissions, lower recall expenses, lower consulting fees, lower advertising and marketing fees and lower bad debt expenses, all offset by higher legal and regulatory, and higher salaries, director fees and employee benefits. Selling expenses for 2014 were consistent with 2013. R&D expenses increased primarily as a result of increased expenditures on the development of our new products and tests in the pipeline, including the NextCYTE Test and FullCYTE microcatheters. We evaluated and reprioritized our R&D pipeline based on recent business strategies, and as a result we have delayed plans to develop and invest further in patents and technologies we acquired from Acueity in 2012 for at least another year. Because of these changed business plans related to this Acueity asset we concluded that the assets are partially impaired and recorded a $2.4 million in impairment. We expect that our G&A and selling expenses will increase in the future periods as we hire additional administrative and sales personnel to commercialize the ForeCYTE Breast Aspirator and FullCYTE Breast Aspirator, and our pharmacogenomics test, and our other products and services in the pipeline. We also expect that our R&D expenses will continue to increase since we add additional full-time employees and incur additional costs to continue the development of our products and services, including our planned clinical trials involving a pharmaceutical for the potential treatment of serious breast health diseases. Finally, we ended 2014 with cash and cash equivalents of approximately $8.5 million. Our cash is being supplemented now our revenues from our new pharmacogenomics test. That concludes my comments and I'd like to turn it back over to Dr. Quay.

Thank you, Kyle. For our newer shareholders, let me begin by saying that Atossa Genetics is focused on breast health, and more specifically developing and commercializing a suite of medical devices, laboratory developed procedures, and therapeutics, all with a goal of improving breast health. We own a college of American pathologist certified and clear certified laboratory called the National Reference Laboratory for Breast Health or NRLBH located here in Seattle, Washington, which is developing and providing the laboratory developed procedures. Separate from our laboratory developed procedures, we are also developing medical devices to collect specimens from breast and we intend to develop pharmaceuticals to treat various breast health conditions, including the treatment of precancerous hyperplasia conditions. Ultimately, we plan for our devices and laboratory developed procedures to be used as companion diagnostics to the pharmaceuticals that we intend to commercialize. So there are three distinct aspects to our business; medical devices, laboratory developed procedures and pharmaceuticals, again, all targeted at breast health. Next, I'll review some highlights from 2014 and then I'd like to spend the remainder of our time talking about our key objectives for 2015. 2014 was truly a pivotal year for us. We announced the decision to commercialize our ForeCYTE Breast Aspirator in the EU, and further to that we received ISO Certifications as a medical device company, and in October 2014 a CE-mark for the device which allowed us to begin preparing for a launch in key EU countries. In 2014 we also advanced the introduction of our FullCYTE Breast Aspirator to the US market, and continued the manufacturing and validation work on that product. Finally in the fourth quarter of 2014 we launched a new test in pharmacogenomics. We saw immediate demand for this new test performing 527 tests during the fourth quarter, and we recognized revenue of $526,000 in 2014 primarily from this test. Turning now to our 2015 key objectives and the progress we are already making towards them. The four key objectives are; number one, launching and commercializing the FullCYTE Breast Aspirator in the US; number two, launching and commercializing the CE-marked ForeCYTE Breast Aspirator in the EU; number three, achieving top-line combined gross revenue of $8 million for our medical device sales and laboratory services including our pharmacogenomics test offering; and finally, initiating pharmaceutical clinical trials in women for the treatment of serious breast diseases via local delivery of pharmaceuticals, potentially reducing systemic adverse events. Let me go into each of those in some detail. Our first key objectives surround FullCYTE. Last week we announced the launch of the FullCYTE Breast Aspirator in the US. Leading up to the launch we engaged Thermo Fischer Scientific and Henry Schein Medical as our national distributors, which are two of the largest medical device distributors in the country. We will be engaging leading healthcare providers in the top US cities to begin implementing the device into their practices. Our second objective surrounds ForeCYTE. Over there in March we announced the launch of the ForeCYTE Breast Aspirator in the European Union focusing initially on The Netherlands, Germany, Switzerland, and the United Kingdom. Our goals of launching our breast aspirator devices are three fold; number one, to build awareness of NAF cytology in the medical and patient communities, in both the US and EU markets and other markets we may enter. Number two, most importantly, to further lay the foundation for the development of our Companion CarePath which is intended to improve breast health through a three step process; using our medical devices to collect NAF, studying that NAF in laboratory, and for patients who test positive for a breast health condition, treating patients with pharmaceuticals that we intend to develop. Launching our breast aspirators in key markets is a critical step towards developing this Companion CarePath. And finally, number three, to help improve breast health in a patient population that is demanding better options in managing their breast health. Now let me talk about what we will be doing to achieve these three goals in the US and the EU. In the United States, we plan to gain adoption of the FullCYTE Breast Aspirator in at least three physician practices each, in at least eight strategic cities across the US, in at least three hospital systems. We plan to do that through the sales efforts of our national distributors and through our own direct salesforce and clinical support specialists. In the EU we plan to quickly engage early adopters of the ForeCYTE Breast Aspirator to direct sales efforts and through distributors in key EU markets. We also plan to build physician and patient awareness in adoption by commencing three patient studies in leading breast health centers in the UK, in Germany, and in Israel. Our third objective around laboratory sales, in October 2014 we launched a new lab test called pharmacogenomics testing, which is a genetic based test that help doctors determine drug tolerance and doses for particular patients based on the patients genetic makeup. These tests address a serious medical and financial problem, each year more than 2 million US patients had adverse drug reactions resulting in more than 100,000 deaths. We are very pleased with the continued progress we are making with this new test and are excited to report that the NRLBH processed and reported 527 pharmacogenomics test in 2014 for which we recognized $526,000 in revenue. This testing is making a meaningful contribution to our working capital requirements in a non-diluted manner, and we expect to continue to grow our revenues and cash flow with this test. Finally our fourth objective, in 2015 we plan to begin a clinical study using the pharmaceutical to treat serious breast health conditions in combination with our devices. I would emphasize, like I have in the past, that we have evaluated many opportunities for partnerships in licensing and we will not move forward until we find the right opportunity. We are optimistic that we will identify the drug candidate and begin the work on clinical studies during this calendar year 2015. In terms of corporate developments, let me end by again highlighting our recent important corporate developments. When we launched the ForeCYTE Breast Aspirator in the EU and the FullCYTE device in the US, we received initial orders for these devices and look forward to reporting progress as we commercialize them in these and other potential markets. Number two, we received quality registration certificates, i.e., ISO 13485:2012, the Canadian equivalent, and ISO 9001. In conjunction with the ISO medical device company registration certificates, we received the CE-mark for the ForeCYTE Breast Aspirator. Next, two of the world’s leading medical device distributors, Henry Schein Medical and Thermo Fischer Scientific are now offering Atossa Genetics FullCYTE Breast Aspirator in the US. Working with such well recognized companies provide strong validation for our FullCYTE device. Next, our subsidiary, the National Reference Laboratory for Breast Health received accreditation from the College of American Pathologist. And lastly, we have achieved continued growth in pharmacogenomics testing with 527 specimens processed and reported in 2014. Finally based on all the progress that I just outlined, we are confirming that we remain on track to meet or exceed our 2015 top line gross revenue projections of $8 million. I will now take questions.

Thank you. [Operator Instructions] And our first question will come from Bob Wasserman of Dawson James.

Hi Kyle, hi Steve, congratulations on the good year and well, it looks like it could be a good year for 2015 as well. Just a couple of related questions, maybe you could go over a little bit and add some color on the various economics of the FullCYTE and the ForeCYTE test, specifically having seen some revenues coming in the international, maybe you could comment a little bit of on how you expect to get revenues and how the pricing is going to be for those different products.

Thanks for your questions Bob, I appreciate your comments about the successes we're having. I'm going to give that to Kyle, let him give you a little color on that.

Yes, keep in mind that with devices we're looking at revenue stream from the device sales themselves, either sales to our distributors or sales directly to the physician practices. We have published retail prices for those devices but we don't have enough experience yet actually generating sales to say with any degree of accuracy, exactly what we're going to be receiving, so I guess I'd rather not go into the sales prices are expected, revenues for those devices. But the other part of the picture is that our laboratory here in Seattle is also receiving NAF cytology specimens collected with our device or for that matter any other device, and so we expected revenue in our laboratory will also start to pick up here. Now that our business develops and again, as a reminder, the laboratory revenue has historically been higher for NAF cytology than it has been, for example, for sales of the devices themselves. So I'm not sure if that answer your questions Bob but it's – I guess to summarize a little early in the launch to talking too much detail about the exact number.

Okay, that's fine. And also a follow-up, Steve you commented about your US launch and trying to get eight clusters or key cities, is that for this year or is that going forward or when do you expect to have those eight markets identified, and up and running?

Yes, that is for this year Bob and to take you down to the weeds a little bit, last year we had a continuing medical education program that responses around breast health and precancerous lesion in about a dozen cities, and so it's out of that roster and that experience where we touched thousands of doctors actually in a program that was very well received, that we selected eight cities to focus on and to kind of go back. So the thinking is that 2014 was an educational year around what is a precancerous lesion, how do you find them, what you do about them, and then make sure we can go back to that into those same cities and try to however some of the learning that we created last year.

I know that a couple of years ago with ForeCYTE you had some success in certain markets, I think the Southwest US, Texas, that area; are you going to kind of re-establish some of your old connections there with the FullCYTE?

Absolutely Bob, I mean – that's on the sure to do, unless it fits on little posted [ph]. Going back to our existing customers and re-educating them around the value proposition and the device and that is immediately ongoing once we announced that it was available in the US.

Okay, great. Thanks for answering the questions and congrats again.

Thanks Bob.

[Operator Instructions] Our next question will come from Peter Kaplin of Fund Cap Industries [ph].

Yes, hello, please correct me if I'm wrong. The FullCYTE seem to be considered first generation medical device whereas the ForeCYTE as a second generation medical device. Ideally it seems like Atossa would want to be selling the ForeCYTE in the United States, and that the distributors would possibly prefer that, so how do you feel about that? And my second question is, if you're still considering the ForeCYTE in the United States, are you considering going back to the FDA and looking for an approval and if so, what would be the timeline and why it would be any difference from the last few times? Those are basically my questions.

Yes, thank you for your questions, I think I'll address them. So first, the FullCYTE device is a model that is cleared by the FDA and represents as you've indicated the first generation of NIPLAS [ph] for food collection. It has been well studied, or devices like it have been well studied in the field, physicians are familiar with it, it's as easy to use as the ForeCYTE device, it is a disposable, so it's a one-time use product. And you know, with Henry Schein, with Thermo Fischer we spend a great deal of time going with them, going through the product and how you sell it in the value proposition, and they seem genuinely excited about introducing it into the US market. So we're pleased to have it available and we're pleased with having them as partners and we look forward to a nice growth in that product in the US. With respect to the ForeCYTE device which is cleared in Europe as a CE-marked product, we intend to go back to the FDA with a program that we believe will be successful at some point during this year, we're not discussing that at this point in time, if there what could be together with a pharmaceutical program where it's a more understandable story if I call that with the FDA in which we ask them for permission to do clinical work around, the collection of specimens and the analysis of when with hyperplasia, and then the treatment of that hyperplasia with locally administered pharmaceuticals. So at a point in time when we're ready to go down that path and focus on getting the ForeCYTE introduced in the US, we will of course inform the shareholders. At this point in time, we're focusing on growing FullCYTE as broadly and deeply as we can in the US market, and we're encouraged by the early sense that we're getting from the market.

Okay, thank you very much.

[Operator Instructions] And this will conclude our question-and-answer session. I would like to turn the conference back over to Dr. Quay for any closing remarks.

Thank you very much operator and thank you for your questions and your attention here. In closing, 2015 is off to a great start, we've already made significant progress towards our 2015 key objectives. Looking over at Kyle, I will be back in front of you in about 45 days to talk about the first quarter, so we're really excited about that opportunity and of course, if you have questions in interim you can reach out to either of us. Thank you very much for your attention today. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.