Renalytix Plc (NASDAQ:RNLX) Q2 2023 Earnings Call Transcript

Renalytix Plc (NASDAQ:RNLX) Q2 2023 Earnings Call Transcript March 30, 2023

Operator: Good morning and welcome to the Renalytix Conference Call to review Second Quarter and First Half Fiscal Year 2023 Financial 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.

Peter DeNardo: Thank you, Michelle. Good morning and welcome to the Renalytix conference call to review second quarter and first half fiscal year 2023 financial 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. Thank you all for participating in today’s call. Joining me today from Renalytix to provide formal remarks are James McCullough, Chief Executive Officer; Thomas McLain, President; and James Sterling, Chief Financial Officer. In addition, Fergus Fleming, Chief Technology Officer will be on hand to join us for the question-and-answer session. Before we begin, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Any statements made during this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements. Examples of these statements include without limitation, the potential benefits, including economic savings of KidneyIntelX, the potential for KidneyIntelX to receive regulatory approval from the FDA, the commercial prospects for KidneyIntelX including whether KidneyIntelX will be successfully adopted by physicians and distributed and marketed, our expectations regarding reimbursement decisions and the ability of KidneyIntelX to curtail cost of chronic and end stage kidney disease, optimize care delivery, and improve patient outcomes, trends in our market and potential benefits of government policy change, the impact of COVID-19 and other world events on our business, our expectations for hiring, product development, strategic partnerships and collaborations, reimbursement decisions, clinical studies and regulatory submissions, our business strategies and future growth including plans, expectations, and opportunities for financing our operations, and revenue projections and guidance.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our Annual Report on Form 20-F that was filed on October 31, 2022 with the Securities and Exchange Commission. All forward-looking statements made on this call are based on management’s current estimates and various assumptions. Renalytix disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements whether because of new information, future events, or otherwise.

This conference call contains time sensitive information and is accurate only as of the live broadcast today, March 30, 2023. I’ll now turn the call over to James McCullough. James?

James McCullough: Thank you Peter. Good morning or good afternoon. Since our last quarterly report Renalytix has made several fundamental advances including completion of $20 million capital round with significant new institutional investors, reaching the next prime points for our results on the KidneyIntelX real world evidence study, expansion of insurance coverage for KidneyIntelX, the transition to a permanent, long-term commercial insurance payment model at Mount Sinai Health System, execution of a cooperative research and development agreement with the U.S. Veterans Health Administration, and further progress towards FDA de novo marketing authorization of KidneyIntelX. Tom McLain will speak to these finer points in his prepared remarks.

In the March quarter we have completed the milestone of transitioning to a permanent long-term commercial insurance payment model for patients tested at the Mount Sinai Health system. This transition is taking place with the expected expiry of the exclusive coverage contract with Mount Sinai, established with $6 million of KidneyIntelX testing as part of the real world evidence study program which began in 2021. Key to this transition was our ability to secure a diversity of commercial insurance for KidneyIntelX for a significant portion of the diabetes and kidney disease population in New York City. This transition would not be possible without established payment from Medicare, Medicare Advantage and other large New York City concentrated payers.

This includes a recently disclosed coverage contract with the second largest nonprofit payer in the United States with 3.2 million members and another coverage contract secured with a large value based care insurer covering 1.8 million members. We are now experiencing a high rate of payment across both public and private insurance carriers in the New York region at or above our established Medicare pricing of $950 per reportable result. This model is being successfully replicated in other major regional markets for KidneyIntelX such as Illinois and the Carolinas. We continue to receive payment from the National Government Services for Medicare claims under the individual claim review process. Our coverage, determination application for a local coverage determination is under review by NGS and has been updated to incorporate the real world evidence data from Mount Sinai.

For the remainder of 2023, we expect to report expanded progress on our long term stated primary business goal of insurance coverage with State Blue Cross Blue Shield programs, Medicare, Medicare Advantage, Medicaid and other for profit and not-for-profit payers. We continue to believe and have seen a growing number of demonstrations that investment in our real world evidence data generation is helping to drive insurance reimbursement, physician use, and will eventually support the road for inclusion and clinical guidelines. As a reminder, KidneyIntelX real world evidence result was first published in the Journal of Primary Care Community Health on November 28, 2022 showed that KidneyIntelX was influencing clinical behavior in favor of early therapeutic intervention and timely referral to specialists.

Most importantly and what we didn’t expect to see so soon was that patients tested by KidneyIntelX showed improvements in two long time standard metrics HBA1C levels for diabetes health and UACR or urine albumin to creatinine ratio for kidney health. We expect that if the trend continues the potential for KidneyIntelX to change these two metrics and other measures of kidney health in such a short time period can have enormous impacts on healthcare costs and reduction in patient suffering. We are currently writing up results from the next real world evidence time point at 12 months, which will be publicly released as early as this summer. A real world evidence data development for which there is no shortcut in time or money continues to showcase the value of KidneyIntelX particularly in the hands of primary care physicians practicing preventative medicine.

Also in the current quarter, we were pleased to build a fresh infusion of 20 million into our capital base made-up of new and well-funded institutional holders. While we continue to look for opportunities to reduce expenses and optimize capital deployment, this remains a delicate balance as we need to maintain the necessary fixed overhead for our product and commercial model going forward in the highly regulated U.S. clinical diagnostic market. Finally, the Incredible March report from the World Obesity Foundation predicting that over half of the world’s population will be obese or overweight by 2035 means that kidney disease, obesity and diabetes, all of which run hand in hand will continue to be one of the largest and costliest medical conditions in history.

The report further indicated that failure to improve prevention and treatment of obesity would have a total negative economic impact of over $4 trillion or nearly 3% of the global GDP. More than ever, we will need the early and accurate prognosis that KidneyIntelX offers to identify which patients are at highest risk for uncontrolled kidney disease progression, kidney failure and dialysis. And most importantly, who should be treated early to prevent the majority of the downstream disease effects. I will now turn over to Tom McLain, our President to discuss FDA and our commercial progress. Good morning, Tom.

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Thomas McLain: Thank you James, good morning. I would like to take a moment to provide some additional details on our progress towards securing Food and Drug Administration de novo marketing authorization. First some of you have asked what exactly is de novo marketing authorization? In the FDA’s own words, a de novo request provides a marketing pathway to classify novel medical devices for which there is no marketed predicate. Since there is no FDA predicate for our pioneering KidneyIntelX test, a de novo marketing authorization request was the agreed pathway during our initial with FDA in 2018. We were subsequently granted a review process under breakthrough device designation, which is allowed for more frequent discussion with FDA reviewers for complex, novel medical devices.

As noted in the Securities and Exchange Commission filing we submitted on March 21st, the review process with FDA for KidneyIntelX continues at an advanced stage. In conjunction with a successful outcome of this review, the FDA will prepare a reclassification order and pursue certain internal activities for KidneyIntelX prior to communicating a final decision. In effect, the reclassification order will set standards and controls for the first time for this novel class of tests. The FDA has indicated to the company that in order to provide sufficient time for the completion of this process, FDA is working towards a decision date by the end of Q2 2023. It is important to point out that we have responded timely and comprehensively to all questions the FDA has submitted to Renalytix.

The FDA has a dedicated team of experts working on our request, reflecting the novelty of KidneyIntelX and the extensive set of information submitted for their review. This information includes relevant data on the KidneyIntelX clinical application in kidney disease, the inclusion of novel biomarkers in combination with health record data and machine learning models, and supporting software and cybersecurity controls. With this complexity in mind, we can appreciate the care and thoroughness that FDA is exercising during this interactive review process, knowing that KidneyIntelX is a breakthrough technology that can potentially have an impact for a long period of time in 10s of millions of patients in the United States and internationally. While there are no guarantees of a marketing authorization, we remain optimistic and we are working diligently with the FDA towards a successful outcome.

Next, in regard to our commercial progress, we’ve begun to experience the benefits of establishing permanent long-term commercial insurance payment and publication of successful KidneyIntelX real world evidence developed within a system as large and influential as the Mount Sinai Health system in New York. We’ve pushed this all without discounting KidneyIntelX test pricing below the Medicare and General Services Administration established pricing of $950 per test when expanding our insurance coverage. The transition to commercial payment for testing at Mount Sinai that James mentioned earlier will have a short term negative impact on testing volumes predominantly for the month of March. This will be reflected in a revenue reduction for the full quarter ending March 2023.

Further, as is customary when diagnostic products move to scaled commercial billing, the average selling price for KidneyIntelX will now also include a minority percentage of discounted testing for patients qualifying for financial assistance and for out of network testing. Turning briefly to the VA, in January of this year we announced completion of an agreement with the Veterans Health Administration to integrate KidneyIntelX test ordering and reporting across all VA electronic health records systems making KidneyIntelX eventually accessible to the approximately half million veterans with diabetic kidney disease. This integration will streamline operations to overcome a significant adoption hurdle and enable access to KidneyIntelX for this large at risk patient population.

The program will be implemented on a phase basis. Turning to health systems, we are working with Atrium Health to expand beyond the real world evidence program to make the test widely available across their health system. This is enabled by our progress towards significant regional payer coverage. We expect to launch primary care education programs in our fiscal Q4 and we’ll also work with Atrium to expand EHR integration beyond their Wake Forest Baptist clinical sites. Success here could also create the opportunity to expand this program to Illinois and Wisconsin. Atrium Health merged with Advocate Aurora Health in 2022 and the combined entity Advocate Health is now the fifth largest health system in the United States. Our sales force outside of Mount Sinai is focused on direct sales in the primary care practice using our MyIntelX portal.

In the current quarter, we’ve seen a significant ramp up at testing based on the publication of real world evidence demonstrating that based on KidneyIntelX risk assessment, care improves both Type II Diabetes and chronic kidney disease. We also have established billing practices that assure the test is accessible and affordable for their patients. I look forward to providing updates on these multiple opportunities for test adoption and revenue growth in future quarters. I’d now like to turn the call over to James Sterling, who will discuss our financial results for the quarter. James.

O. James Sterling: Thanks Tom. Today we issued two financial reports. First is our six-month interim report under IFRS accounting, and the second is our quarterly SEC filing under U.S. GAAP that included three and six months financials. Both reports are for the periods ending December 31, 2022, which corresponds with our second quarter of fiscal 2023 and our half year results. Figures I will discuss here are based on our GAAP financials and quoted in U.S. dollars, which is our reporting currency. For the quarter, we recorded total revenue of approximately $1.2 million compared to about $600,000 we reported for the second quarter of the prior fiscal year. Our revenue in the quarter comprised of about $1 million of testing revenue, and $200,000 pertaining to services.

Operating expenses were $10.1 million on a GAAP basis, down from $14.1 million for the prior year period. This reflects in part the success of actions we announced in August 2022 to lower annual expenditures by over $12 million through program, vendor, and employee reductions. Net loss for the second quarter of fiscal 2023 was about $10.4 million or $0.14 per share. This was down from approximately $15.3 million or $0.21 per share for the second quarter of fiscal 2022. We ended the quarter with $23.8 million in cash as of December 31st. This cash figure does not include the fundraise of approximately $20 million we closed in early February. Operator can we now please open the call for questions.

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Q&A Session

Operator: . Our first question comes from Dan Arias with Stifel. Your line is now open.

Daniel Arias: Hey, good morning, guys. Thanks for the questions. James, maybe just digging in on test volumes here, 1300 tests I believe this quarter, which is up a bit from 1200 last quarter. What came from Mount Sinai versus the other institutions? And then for the non-Mount Sinai portion of this makeup Wake Forest, Utah, St. Joe’s, what should we think about those kicking into gear and starting to ramp volumes? And the overarching question is, under the assumption that you have for the FDA and reimbursement, what’s sort of your working projection for a sequential ramp in volume over the course of the year regardless where the volumes come from, I mean, it sounds like we’re going to take a step down here in 3Q so I guess, where’s the confidence that by the end of the calendar year, you’ll be materially higher on volumes than you are now?

James McCullough: Thanks Dan and good morning. A couple of things to unpack, the majority of the testing volumes coming from Mount Sinai. That is starting to change. So we are seeing Green Shoots, for example, with direct to primary care physician sales which is a completely different channel and that’s through the MyIntelX portal. That is something that we are focusing on now and starting to build. The other thing that’s happening is where we’re effectively making the transition to full commercial pay models across the board, so the key thing is can you get reimbursement across a broad enough population in a region. I’ve referred to it before, a supermajority coverage. We call it greater than 70% of patients in a region who have some form of insurance coverage for KidneyIntelX.

That is, when you can start to drive commercial testing volume. We saw that emerge person first in Illinois, where we have I believe, now close to 90% of patients indicated use — KidneyIntelX indicated use for kidney and diabetes with some form of insurance coverage. That’s quite an achievement. And so therefore, we’re pushing for direct to PCP sales in the Illinois region, and we’re also moving towards integrating with different hospital systems there as well. So revenue growth out of Mount Sinai is now available for us with that super majority coverage in Illinois. We expect that same dynamic to be occurring shortly, in other regions of the United States, including New York City. The commercial, the conversion to a commercial contract with Sinai is quite a milestone, we had to have full data.

With the real world evidence it had to be successful. We had to have independent physician review using KidneyIntelX in the wild in the Mount Sinai Health System. And I think everybody should expect some additional news coming out of the Mount Sinai Health System about how that transition is going to take place. And again, because we’re able to execute on a number of payer contracts in the New York City, we’re now in a position to make that transition. As part of that transition, yes, that will impact revenue for the March time period as we make that shift. But it is a critical milestone to get off of the original contract with Mount Sinai, we could only have done it with a number of different payer contracts in place. So the timing was actually quite exquisite, that we’re able to get to the point where we can jump off the Sinai contracts for payment into the diverse full commercial model which is required.