ATOS - NASDAQ

Scott Gordon - President, CorProminence Steven Quay - Chairman of the Board, President, Chief Executive Officer Kyle Guse - Chief Financial Officer, General Counsel, Secretary

Marc Steinberg - Dawson James Securities Grant

Good afternoon, and welcome to the Atossa Genetics Earnings Conference Call for the First Quarter Ended March 31, 2015. 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 also note that today's event is being recorded. At this time, I would like to turn the conference call over to Mr. Scott Gordon, President of CorProminence. Sir, please go ahead.

Thank you, Jamie, and thank you for joining today’s conference call to discuss Atossa Genetics' corporate developments and financial results for the first quarter ended March 31, 2015. 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 quarter ended March 31, 2015. 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 reduce the number of breast cancers by finding women with precancerous changes, changes that occur years before they developed into cancer and treating those changes with local administered pharmaceuticals that we intend to develop. We aspire to do that through 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 the NRLBH. Before I provide an update on our products and services, Kyle will summarize our first quarter ended March 31, 2015 financial results.

Thank you, Steve. Good afternoon, everyone. Revenue for the three months ended March 31, 2015 totaled $1.9 million consisting mainly of pharmacogenomics testing compared to $24,000 in revenue in the same period in 2014, from additional cash collections on NAF cytology tests. Total cost of revenue for the three months ended March 31, 2015 was $1.2 million and consisted of costs related to pharmacogenomics testing services compared to zero for the same period in 2014. Gross profit for the three months ended March 31, 2015 was $665,000 attributable to pharmacogenomics testing compared to $24,000 gross profit in the same period in 2014. Total operating expenses were $3.9 million for the three months ended March 31, 2015, consisting of general and administrative expenses of $2.6 million, R&D expenses of $797,000 and selling expenses of $547,000, representing an increase of $1.5 million or 62% from $2.4 million for the three months ended March 31, 2014, which had consisted of G&A expenses of $1.8 million, R&D expenses of $423,000 and selling expenses of $238,000. Selling expenses for the three months ended March 31, 2015 were $547,000, an increase of $309,000 or 130% from the $238,000 for the three months ended March 31, 2014. The increase in selling expenses was mainly due to increases in compensation expenses, travel and advertisement as a result of our ForeCYTE and FullCYTE launch and commercialization in Europe and the United States. We expect that our selling expenses will continue to increase during 2015 as we build our sales force both, inside and outside the United States to support the launch and commercialization of the ForeCYTE and FullCYTE Breast aspirators and our laboratory service offerings. Selling expenses may also increase as we market and sell the services offered by the NRLBH, including NAF cytology tests, pharmacogenomics test and potentially other tests. G&A expenses for the three months ended March 31, 2015 were $2.6 million, an increase of $830,000 or 47% from $1.8 million for the same period in 2014. G&A expenses consist primarily of personnel and related benefit costs, facilities, professional services, insurance and public company related expenses. The increase in G&A expenses was due to increased compensation expenses, professional fees and recruiting fees as we hired additional headcount to support the launch of our new products and an increase in bad debt expenses as a result of significant increases in revenue. We expect our G&A expenses to continue to grow as we hire additional administrative and manufacturing personnel to support the increased sales and operating activities as we commercialized the ForeCYTE Breast Aspirator and FullCYTE breast aspirator, our pharmacogenomics testing and other products and services under development and as we incur additional costs associated with being a publicly traded company. R&D expenses for the three months ended March 31, 2015 were $797,000, an increase of $375,000 or 89% from the three months ended March 31, 2014. The increase in R&D expenses was due to additional R&D expenditures on the development of our new products and tests and the pipeline, including the FullCYTE microcatheters and FullCYTE Breast Aspirator. We expect that our R&D expenses will continue to increase throughout 2015 as we add additional full-time employees and incur additional cost to continue the development of our products and services under development, including the development of the potential pharmaceutical and conducting one or more clinical studies. Finally, we grew our cash resources in the first quarter ended March 31, 2015, with cash and cash equivalents of approximately $9.7 million. Our cash was grown by drawing on our facility with Aspire Capital, and importantly through the significant growth in our pharmacogenomics test. This concludes my comments. Now I would like to turn the call back over to Steve.

Thank you, Kyle. For our new shareholders, let me begin by saying that Atossa Genetics corporate mission is reducing the number of breast cancers by finding women with precancerous changes, changes that can occur years before they become cancer and treating those changes with locally administered pharmaceuticals. We aspire to do this through the development and commercialization of proprietary specimen collection, medical devices, laboratory-developed procedures and pharmaceutical treatments. We began the year with the announcement of four goals of commercialization for our medical devices in our laboratory test and of clinical development for our therapeutic programs for the calendar year 2015. I am pleased to report today the progress we have made in the first quarter. As reminder, our four goals for 2015 are, number one, launching and commercializing the FDA cleared FullCYTE Breast Aspirator in the United States. Number two, launching and commercializing the CE Marked ForeCYTE Breast Aspirator in Europe. Number three, achieving top-line combined gross revenue of $8 million from medical device sales and laboratory services, and finally, initiating pharmaceutical clinical trials in women for the treatment of precancerous proliferative breast disease via the local delivery of proprietary pharmaceuticals. We are pleased to have achieved a number of crucial milestones in the first quarter that represent significant progress in achieving our goals. We announced the launch of the FullCYTE Breast Aspirator in the United States having engaged Thermo Fisher Scientific and Henry Schein Medical as our national distributors, which are two of the largest medical device distributors in this country. We have begun engaging leading healthcare providers in the top U.S. cities to begin implementing the device into their practices. We also launched the ForeCYTE Breast Aspirator the EU and are focusing initially on markets within the Netherlands, Germany, Switzerland and the United Kingdom. We are continuing to implement our commercialization strategies by building awareness of NAF cytology in the medical and patient communities in both, the U.S. and E.U. markets and other markets we may enter. Most importantly, we are advancing our efforts to further lay the foundation for the development of our companion care path, which is intended to improve breast health through a three-step process, using our medical devices to collect NAF, studying the NAF at a laboratory and for patients who test positive for proliferative breast disease, treating those patients with a pharmaceutical that we intend to develop, thus launching our breast aspirators in key markets is a critical step towards developing this companion care path. Now, let me talk about what we are doing to further commercialize in the U.S. and in E.U. In the U.S., we are pursuing adoption of the FullCYTE Breast Aspirator in at least three physician practices each in at least eight strategic cities across the U.S. and through major hospital systems. We are trying to accomplish that through the sales efforts of our national distributors and through our own direct sales force and clinical support specialists. To these ends, we recently announced the addition of biopharmaceutical industry veteran Cindy Atha as our new vice president of sales and marketing, who is leading our efforts to gain market penetration in the U.S., and supporting our efforts abroad. I am also very pleased to report that we also secured an in-network contract with Meridian Health Plan of Michigan, which represents an important step in commercially validating our breast aspirator platform, suiting the needs of their 400,000 strong member base. In the European Union, we are working to engage early adopters of the ForeCYTE Breast Aspirator through direct sales efforts and through distributors in key E.U. markets. We are also working to build physician and patient awareness and adoption by commencing three patient studies in leading breast health centers in the United Kingdom, in Germany and in Israel. Let us now turn to our third key 2015 objective. As you may recall, in October 2014, we launched a new lab test called pharmacogenomics, which is genetic test that helps doctors determine drug tolerance and doses for particular patients based on the patient's own genetic makeup. These tests address a serious medical and financial problem. Each year more than 2 million U.S. patients have adverse drug reactions resulting in more than 100,000 deaths. We believe that many of these deaths could have been prevented by using a pharmacogenomics test to guided therapy. We are very pleased with the continued progress we are making with this new test and are excited to report that with this test, we recognized nearly $1.9 million in revenue in the first quarter of 2015, our first full quarter of promotion of this test. This testing continues to make a meaningful contribution to our working capital requirements in a non-dilutive manner and we expect to continue to grow our revenues and cash flow with this test. Our laboratory achieved a significant validation of excellence this quarter by becoming certified by the College of American Pathologists during the quarter. CAP certification is recognized within the medical community as the highest standard of quality in laboratory medicine. We are encouraged by the continued growth we are experiencing in our PGX testing and believe we are on track to achieve our third key objective, top-line combined gross revenue of $8 billion for calendar 2015. Turning now to our fourth key objective, we continue to make progress towards initiating pharmaceutical clinical trials in women for the treatment of serious breast diseases via local delivery of pharmaceuticals in combination with our devices, potentially reducing systemic adverse events. We remain optimistic that we will identify the drug candidate and begin the work on clinical studies in 2015. That concludes my direct remarks.

Ladies and gentlemen, at this time, we will begin the question and answer session. [Operator Instructions] Our first question comes from Marc Steinberg from Dawson James Securities. Please go ahead with your question.

Good afternoon. In your remarks, you stated that some of the costs this past quarter came from advertising costs. Can you give us a little light on what kind of advertising and where and what the advertising plan is.

Marc, thank you for the question. This is Kyle. I will respond to that. Advertising during the last quarter consisted primarily of what I will call attendance at tradeshow and medical conferences, so those costs are costs of exhibiting and presenting at booth and ancillary sales material and also preparing for those activities as we go into the second quarter here. That is the majority of the advertising costs, costs that we did not incur in the prior year, because we were not on the market then.

Do you have any plan for any kind of advertising campaign? I mean more in line with what I think people think of when they think of advertising?

You know at this time, I would have to say we do not Marc, we do not envision selling our devices or laboratory tests through more traditional advertisement mode like magazines or television or Internet marketing. We think it is more appropriately marketed directly to the physician at this point.

All right. Thank you.

[Operator Instructions] Our next question comes from granting from Grant

Hi, guys. Hi, guys. Congratulations on the great quarter.

Thank you, Grant.

I was really excited about revenue growth from the pharmacogenomics. When I come to the medical device revenue, I have a question about this; both FullCYTE and ForeCYTE were launched end of March, so my question is that can you give us a little bit color on initial ramp for these two devices?

Thanks for the question, first. We are not providing guidance on our ramp that we are seeing at this point. As you noticed, there is really nominal revenue associated with the devices for the first quarter and that is because we launched very late in the first quarter and also because we are selling the devices using temporary promotional pricing to get the devices out there at low cost to encourage adoption, so I hope that answers your question. We are otherwise not providing guidance on our ramp up for the device sales.

I just wanted to get some sense how can we model revenue for this medical device second quarter, but I am really excited about pharmacogenomics revenue growth.

Yes. Thanks, Grant. As I said, the guidance we have given is $8 million in combined revenue and at this point we have not broken that out.

I had a question about the gross margin for the pharmacogenomics, when I look at the gross margin, looks like it is about 36%, right? Going forward, how do you - gross margin in coming quarters?

Yes. The gross margin is affected by a number of things, partially by the cost of providing the service, but also by the revenue that we are generating on a per test basis, so given that we have only been on the market for one full quarter it is hard to predict whether our margins will hold steady, go up or down for that matter, because again it is driven by cost. We have a fair amount of comfort around the cost, but the revenue side of the equation does vary quite a bit by insurer and also various - depending on whether that the payor is Medicare or commercial payor private pay for that matter. Also, the test does vary patient-to-patient and depends on the patient's condition and potential medications that are being prescribed, so there is quite a range patient-to-patient, doctor-to-doctor on that exactly the type of test that is being requested. On the one end of the spectrum we have a full panel with whole range of CPT codes for which we have receive good reimbursement on the other end of the spectrum, the doctor might only order one panel for one potential medication for which we had receive reimbursement much lower than for the full panel.

Congratulations.

Yes. Thank you, Grant. Thank you for the questions.

[Operator Instructions] Our next question comes from Bob Wasserman from Dawson James Securities. Please go ahead with your question.

Hi, Steve. Hi, Kyle. Congratulations on the launches and the good quarter. I have a couple of questions, and I think they may be related to the 10-Q, but first is Aspire Capital, you mentioned on the 10-Q that you had completed your agreement in the last quarter. Are you planning on finding a new agreement with Aspire or a similar agreement with some other bank? Thank.

Thanks Bob. It's nice talking to you. We did complete the agreement with Aspire in the last quarter, drawing down the remaining available shares from them in the first quarter. I cannot comment though at this point on future financing plans, but I can confirm that we did fully utilize the facility with them.

Okay. The other question related to Medicare reimbursement for the pharmacogenomics test. You mentioned that that is changing in May and I am wondering if you also reiterated the $8 million revenue target for this year. Can you comment a little bit about how you expected the sales; the $2 million in the first quarters was great. That is an $8 million run rate, but can you comment maybe how you expect that to play out for the rest of the year or will be the product device sales kind of make up for that as the year progresses?

Yes. I mean, I think the revenue numbers we generate obviously are product of the number of tests and the reimbursement. As Kyle alluded to earlier, Medicare is one of many, many payors and we have a number of private payors and each one has different policies around reimbursement of pharmacogenomics. I mean, a general comment that is not specific, but the private payors that pays for this test are reimbursing at a good level, a level that is nicely sustainable, is not the change that Medicare is looking at, so one of the strategies that other sections of the country that have already experienced the Medicare change is simply the laboratories sort of pivot a little bit and focus on patients and doctors that have the private insurance that covers the test and levels above the Medicare rate, so it is a bit a moving target, but again we have stayed firm with our $8 million top-line number. You will begin to see contributions from the other parts of the business as the quarters go forward.

Okay. Well, thanks for answering my questions and congratulations again.

Thanks again, Bob.

[Operator Instructions] Our next question comes from Robert Cher [ph]. Please go ahead with your question.

Nice talking to you. Thank you very much for the information. I am an investor and I have a couple of very basic questions, but I would be appreciated if you can pinpoint my answers. Number one, could you tell us the difference between FullCYTE and ForeCYTE?

Yes. They are both breast aspirators, they collect a specimen from the nipple of non-lactating woman that specimen is then shipped to a laboratory and cytologists before, which is the process of staining the specimens and then looking into the microscope and looking, having a trained a specialist or doctor diagnose the conditions of the cells as to normal atypical hyperplastic or cancers based on their professional guidance. The ForeCYTE devices is CE marked in Europe and is a device that collects specimens at least historically at about 87% to 90% of women - the ForeCYTE is cleared in the U.S. The ForeCYTE devices cleared in Europe through the CE mark process. Historically has collect specimens in a larger number of women about 99%, but the specimens are very similar and the process done in the laboratory is similar in that cytology is the process that is performed on the specimen.

Thank you. Another question please since I have got the floor. Could you please indicate what the progress of ForeCYTE is at this time in the United States, involving the FDA and any timeframe and what difference might that make in the sales and marketing of the products?

Yes. At this time, the ForeCYTE is not cleared in the United States, based on a decision they brought the FDA in the fall, and we have not given guidance about if and when we will take that back to the FDA. As we make progress on that, we will keep you updated.

You can continue business with the FullCYTE device, ForeCYTE in Europe, and this would not interfere with revenues. Am I hearing that directly?

I am not sure, you heard a question, there but if maybe you could reframe it.

Yes. I will. If the ForeCYTE is approved in the United States, can that be a significant benefit to the company relative to sale?

Yes. Well, I think as I indicate on this call, the ForeCYTE products the FullCYTE Breast Aspirator is FDA-cleared in the U.S. and is being distributed by our partners Thermo Fisher and our partner Henry Schein. These two distributors are among the largest in the country and we have spent a great deal of time in the first quarter by educating their respective sales force on attributes of the product and designing financial programs for them to distribute this for them to make money on the distribution, for us to make money on the distribution, so we seem to be in a good position to further the commercialization of this product in the U.S. as we have indicated it is one of our major goals.

[Operator Instructions] Ladies and gentlemen, that concludes our question-and-answer session. At this time, I would like to turn the conference call back over for any closing remarks.

Well, first of all thank you for your questions and your attention here this afternoon. In closing, we are excited with our steady progress and achieving our 2015 milestones and look forward to additional opportunities to update you on important activities. We appreciate your patience and thank you for your continued support.