Foundation Medicine’s (FMI) CEO Michael Pellini on Q2 2014 Results – Earnings Call Transcript

Except as required by law, we have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Before I turn the call over to Mike, I’d like to let you know that we will participate in the Wedbush Life Sciences Conference in New York City tomorrow August 13, as well as Morgan Stanley Global Healthcare Conference in New York City on September 10. For those of you unable to attend, we encourage you to listen to the webcast presentations, which will be available through the Investor Relations section of our website.

With that, I’d like to turn the call over to President and CEO, Mike Pellini, for his opening comments. Good afternoon, Mike.

Michael Pellini – President and Chief Executive Officer

Thanks Khaled. Good afternoon everyone and as Khaled said, thank you for taking the time to join us for our call today.

For those of you that may be new to the Foundation Medicine story, we are a molecular information company that is fundamentally changing the approach to evaluating and treating patients with cancer, both in academic medical centers and community practices as well as in pharmaceutical companies.

We are the first to put validated comprehensive genomic profiling of cancer into the hands of practicing oncologists. Our comprehensive information-based approach is enabling precision medicine for patients with virtually all types of cancer today. The molecular information generated by our testing, whether from the clinic or in the study setting contributes to a growing knowledge base of information about human cancer that is enabling a paradigm shift in its treatment.

As for our second quarter, it was a very strong one, with positive momentum across virtually all commercial metrics. I’d like to highlight a few of these metrics and Jason will provide more financial details a little later in the call.

Total revenue grew 145% compared to the same quarter last year and 27% compared to Q1 this year. Clinical testing revenue alone grew 233% compared to the same quarter last year and 32% compared to Q1 this year. Revenue from our pharma partners grew 65% compared to the same quarter last year and 18% compared to Q1 this year. 60% of our tests were reported to community oncologists, driven largely by repeat ordering physicians. And finally our knowledge-based genomic data grew to over 21,000 patient cases.

As the numbers indicate our business remains robust, resulting in strong sales and volume growth in a range of positive operational successes. Further our pharma volume and related revenue showed strong gains, which reflects Foundation Medicine’s broadening role within the pharmaceutical development process. The team continues to execute well against our goals and our financial results speak to that fact.

We remain very pleased with the rollout of FoundationOne Heme which as you recall was launched in December of last year. The strong uptick in quarter-over-quarter growth underscored the growing validation of Foundation Medicine and our market-leading platform. We’re also very excited about the launch of our updated FoundationOne assay for solid tumors as well as the receipt of full approval for our two assays from New York State.

Another important update for the quarter is a significant number of new studies released that support the clinical use of Foundation Medicine’s assays. We presented 17 abstracts authored or co-authored by Foundation Medicine at ASCO in early June which provides further evidence of the clinical application of our products to help inform the treatment of patients in the aid and the development of targeted therapies.

I would like to highlight two abstracts in particular. First, our decision IMPACT [ph] study conducted in the US oncology network showed that testing with Foundation One resulted in an altered therapeutic choice by treating physician in 28% of advanced solid tumor patients, highlighting the current broad applicability of Foundation Medicine’s approach.

Second is the study of patients with no or light smoking history diagnosed with lung adenocarcinoma, the most common type of lung cancer. This study conducted in collaboration with Memorial Sloan-Kettering Cancer Center used FoundationOne to identify alterations in approximately two-thirds of patients where previous molecular testing At Memorial was negative.

Notably around two-thirds of patients had accessible and guideline-based treatment options not identified without the testing. In these patients with negative prior testing, FoundationOne uncovered alterations matched to FDA approved on-label therapies in one-third of them and another one-third of patients with alterations matched to clinical trials enrolling at Memorial at the time of testing.

Also 70% of patients needed repeat biopsies to perform the initial in-house testing, highlighting the issue of tissue scarcity and added cost to the system. A study published in the Oncologist in early May is also important to highlight. In the article entitled “Enabling a Genetically Informed Approach to Cancer Medicine — the Vanderbilt-Ingram Cancer Center evaluated a hotspot based testing approach versus FoundationOne. FoundationOne identified potentially actionable alterations in 83% of these previously tested advanced cancer patients and therefore identified additional therapeutic options and facilitated clinical trial enrolment. These independent data are nearly identical to results previously reported by Foundation Medicine.

There are a handful of examples among others that we are working on of our company generating evidence of clinical utility in novel patient populations even beyond our initial six clinical indications through perspective clinical studies. On the regulatory front, the FDA recently announced plans to publish a risk-based oversight framework for Laboratory Developed Tests or LDTs and we welcomed the adoption of rigorous standards while life-altering treatment decisions can be made based on the results of this test.

From the early days our company has been working in anticipation of an increased FDA oversight of LDTs. While some questions remain, we developed FoundationOne and FoundationOne Heme on the basis that tests per patients with advanced cancer should be fully comprehensive, thoroughly validated and backed by peer-reviewed publications.

We have a very good and ongoing transparent working relationship with the FDA, especially through our involvement in the Lung-MAP trial and our work with our former partners. As we stated on our last quarterly call, we are already designing and building our QSR compliance lab, which will support the development and processing of FDA approved tests and is expected to be completed next year. We will continue our work with the FDA to ensure our approach meet the standards of excellence in this field.

Finally, we are confident that FDA oversight in our space will further improve our competitive advantage and differentiation in the market place given the extremely high standards we have already set for comprehensive genomic profiling in oncology.

I will now turn it over Jason and Steve, who will walk through the financial, commercial and operational highlights of the second quarter. Jason?

Jason Ryan – Vice President of Finance

Thanks, Mike. As Mike indicated, we had a strong second quarter in terms of our commercial acceleration and revenue growth. We reported 5,908 clinical tests, a 26% increase from the prior quarter and a 263% increase from the same quarter last year. The Q2 number includes 4,960 FoundationOne tests, which was a 24% increase from the first quarter and 948 FoundationOne Heme Tests, which was a 33% increase over the first quarter.

Total revenue for the second quarter was $14.5 million, a 27% increase from Q1 and a 145% increase from the same quarter last year. Revenue from clinical testing was $9.4 million, a 32% increase from Q1 and a 233% increase from the same quarter last year.

The average reimbursement for clinical tests recognized in revenue in Q2 was approximately $3,600, an increase of about $200 per test from the first quarter. The increase was due to the impact of the higher priced FoundationOne Heme tests and there was no material change in the average reimbursement for FoundationOne tests.

On the Medicare front, we continue to submit claims using a miscellaneous code and consistent with our expectations we’ve not yet received payments on those submissions. While we’re in the process of appealing those claims, we have very conservative expectations with respect to any backlog revenue.

As a sign of steady progress both with Medicare and the number of regional and national commercial payers, we’ve moved beyond what we referred to as the educational phase and onto providing validation and clinical utility data as part of our ongoing dialogue.

Of course we’re engaged in various phases of discussion at any given time, but we continue to make progress as payers become increasingly familiar with our tests, the value they delivering to physicians and their patients and the impact that they can handle overall cancer treatment. Nonetheless despite this progress we still can’t predict the timing of any potential coverage decisions.

Revenue from our pharma partners during the second quarter was $5.1 million, an 18% increase over Q1 and a 61% increase over the same quarter last year. These numbers emphasized our diversified revenue streams and feel very good about Foundation Medicine’s positioning as the integrated solutions provider of choice to support targeted drug development and clinical trial design and to provide molecular information services to pharma.

Moving down to P&L, gross margin for the second quarter was 54%, consistent with the prior quarter. As a reminder that 54% is weighted down by the costs of tests that are not included in revenue such as our Medicare test volume.

Operating expenses in the second quarter were $21.6 million compared to $18.3 in the first quarter. Primary driver of this $3.3 million increase was continued investment in our commercial infrastructure and in R&D. And our ending cash balance at June 30th was approximately $97 million, as compared to $110 million at the end of Q1.

On the commercial front, we ended the quarter with a U.S. sales team of 47 accounting executives and sales managers, up from 43 at the end of Q1. We continue to make strong inroads in community practices as Mike mentioned with 64% of tests reported to physicians in the community, up from 54% in Q1. Importantly, reported volumes from physicians in both the community setting and academic medical center increased over the prior quarter. That said as our volumes become increasingly weighted towards community setting, we still are in the early days of learning about ordering patterns in those practices versus the academic settings. These are all positive results for the quarter.

We see our clinical adoption expanding, our reimbursement discussions progressing in the right direction, our pharma business accelerating and our molecular information database growing. Company is well capitalized and we believe the investments we’re making today will lead to operating leverage in the future.

So with that, I will turn it over to Steve.

Steven Kafka – Chief Operating Officer

Thanks, Jason. This afternoon, I’m pleased to highlight the number of important operations developments for the company. First, we announced last month that we have received final approval from the New York State Department of Health for FoundationOne and FoundationOne Heme. New York, as many of you know, is the only U.S. state that requires an independent regulatory review process and represents one of the most rigorous levels of both technical and clinical validation required for lab developed tests. We believe that this approval confirms the highest standard of validation established by our assays and furthermore we expect this approval to have a positive impact as we continue our reimbursement dialogue with payers.

As Mike noted earlier, we have now launched an updated version of FoundationOne for solid tumors. The assay has been expanded to interrogate the entire coding regions of 314 genes and select rearrangements in 29 genes capturing the latest clinically relevant developments in the biological understanding of cancer. This content which was last updated in December 2012 is informed by the evolving scientific literature, our pharma partners and the key opinion leaders with whom we collaborate regularly.

The updated version in service we are continuing to deliver the most comprehensive and relevant information to support decision making by physicians are pharma partners and other key stakeholders with a goal of further improving patient outcomes.

As a side note, the completion of the New York State Regulatory Review was the only reason we waited a bit passed the end of Q2 to launch the newest version of FoundationOne.

A critical component of the value that we deliver through our products is the knowledge base of now more than 21,000 patient cases across a wide spectrum of cancers. The scale of this knowledge base enhances the efficiency of our medical interpretation and reporting capabilities. Based on our annual guidance we expect to end the year with at least 33,000 cases on knowledge base and unparalled asset which further differentiates and strengthens our platform by giving us insight into meaningful patterns across not only the most common cancers but also those rare or uncommon cancers which otherwise limit the treatment options.

We remain on track to release later this year a new version of Interactive Cancer Explorer, our physicians’ portal, which will focus on increasing user engagement and approving patient care. The updated product will incorporate important capabilities to capture outcome data and to promote physician networking for improved patient care. So stay tuned for more details later this year.

Shifting to clinical trials, I’m pleased to report that we have started receiving patient samples from the Lung-MAP trial, the groundbreaking collaborative clinical trial that was launched in June. Lung-MAP has now expanded for more than 250 participating sites across the United States helping to maximise the trial’s recruitment efficiency and the patient access to promising targeted treatments. In addition, we believe this expansion is an important contributor to our commercial efforts by giving physician exposure to our tests at these participating sites.

I also would like to touch on one important highlight from our ongoing work with Patient Advocacy Groups namely The National launch in June of the FoundationOne CareLine. This effort which is part of our ongoing partnership with the patient advocate foundation is a program that provides assistance to patients and their families seeking access to targeted cancer therapies by offering personalized case management services to patients who are uninsured, underensured or otherwise faced challenges that impact their access to care. This program by helping to provide appropriate evidence to payers to secure access to treatment is part of Foundation Medicine’s ongoing commitment to enhance physicians’ ability to act on FoundationOne results.

Stepping back to look at this quarter, I’d like to comment just briefly on the strength of our position in the market place. Foundation Medicine has established in its position to maintain our leadership position in comprehensive molecular testing for cancer patients. We do not yet see a comparable commercial offering in the market place.

Fundamental to our advantage is our best-in-class tests, which as Mike emphasized in our last quarter call, address the entire coding regions of all genes known to be alternating human cancer and to detect all classes of genomic alterations in a single assay not just high probability hotspot regions on unselected genes. We do this with high specificity and sensitivity, accuracy that we believe sets a benchmark for other tests. Moreover, we have built an end-to-end product with scalability across not just the laboratory process but also through informatics and medical interpretations and we also build the commercial and client services infrastructure to support our customers’ use of the test results.

We also remain committed to continued innovation in our core assays, in the technology solutions that support them, in novel trials like Lung-MAP, in patient access efforts like FoundationOne CareLine and in building our product pipeline to serve our clients well as the commercial landscape evolves. We believe that all of these factors position us well to continue to lead a transformation in cancer care.

Before we move in now to Q&A, I would like to now turn it back to Mike for his closing comments. Mike?

Michael Pellini – President and Chief Executive Officer

Thanks, Steve. Before we wrap up, I want to share with you a quick case that drives some of the impact the Foundation Medicine has on patient lives.

Recently, we solved the case of a 6-year-old boy whose parents brought him to the doctor because he was coughing and was extremely fatigue. His lab results showed significant anaemia in an underlying inflammatory condition manifested by fever and weight loss. Imaging ultimately revealed a large mass in his left lung and biopsy result indicated an inflammatory myofibroblastic tumor or IMT. IMT is a soft tissue tumor most commonly arising in children, adolescents and young adults. Primary treatment is surgical with limited options for those with recurrent, inoperable or metastatic disease. This particular tumor was so large and inseparable from vital structures it was deemed inoperable and he was referred to an oncologist. 50% of patients with IMT test positive for ALK using ISE testing while standard testing yield no actionable alterations in the remaining 50%. For this patient, the testing in fact came back negative. He was then subjected to sequential enteric therapies with no benefit. The warning systemic therapy, FoundationOne testing was performed and a gene fusion called TFG Rod 1 was identified. Rod 1 fusions are actionable in non-small-cell lung cancer and often effectively treated with crizotinib. Foundation Medicine assisted the clinician in obtaining crizotinib through an expanded access program with Pfizer. Initiation of crizotinib resulted in rapid resolution of coughing, improved energy level, normalization of multiple lab abnormalities and most importantly dramatic shrinkage in the size of the tumor. Today he is again an active and energetic young boy.

These are the human stories that ultimately drive each of here at Foundation Medicine every day. We are proud of the progress and impact our company has made thus far and we also remain focused on continuing to execute during the rest of the year ahead and beyond.

With that, I will turn it over to the operator for questions. Operator?

Question-and-Answer Session

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