Joel Ackerman - Chief Executive Officer.

Analysts:.

Operator:.

Good afternoon. I'm Joel Ackerman, the CEO of Champions Oncology. Thank you for joining us for our quarterly earnings call. I'll start the call today with highlights and updates since our last call on issues of strategic importance for the company, then discuss the financial results, and finally open the call up for questions.

Before I start, I will remind you that I will make forward-looking statements during the call and actual results could differ materially from what is described in those statements. Additional information on factors that could cause results to differ is available in our Forms 10-Q and Form 10-K.

Reconciliation of the non-GAAP financial measures that may be discussed on the call to GAAP financial measures is available in the earnings release. Before I get into the specifics, I believe that this quarter was a real turning point for Champions.

We’ve been building this company for five years now with a goal of demonstrating the power and potential of patient derived xenografts and the unique approach Champions has pursued in building our platform. The path we took was both risky and expensive.

It resulted in significantly higher R&D expenses and cash burn than we would have incurred had we decided to just build a preclinical CRO business.

We pursue this path because we know the difference and value that can be achieved by building and growing scientifically-driven platforms with sustainable competitive advantages as compared to even the best service businesses.

Over time, companies with unique technology platforms generate higher revenue growth, better profit margins and larger multiples and this is what we said have to achieve.

We believe the accomplishments of this quarter represent a series of significant milestones in demonstrating our progress and differentiation as a truly unique company serving a huge unmet need and a billion dollar market potential.

I will highlight these on the call today and also recommend you read the two press releases we issued today along with the earnings release. With that backdrop, let me talk about some of the specific highlights of the quarter. The first highlight is the signing of our first large co-clinical study with a top-20 pharmaceutical company.

This is a major accomplishment for the company and the culmination of more than a year’s worth of efforts by our medical affairs team.

We have known for many years that to drastically change the available market size for patient derived xenograft studies with the pharma and biotech industry, we would need to get access to the budgets for compounds that are already in clinical trials.

The nature of drug development is such that before a company had decided to move a drug into the clinic and file an IND, the budget available for testing is typically limited to a few million dollars per year. In this context, there is a cap on how much a customer can spend on pre-clinical studies of any kind including PDX studies.

For this reason, a typical PDX study for a preclinical compound is between $50,000 and $250,000. This calculus changes dramatically when drugs enter clinical trials. Annual budgets are then measured not in millions of dollars, but in tens or even hundreds of millions of dollars per drug.

And despite the fact that a drug is being tested on human patients, many questions still remain about the compounds. After all, if there were no questions left to be answered, the success rate of oncology drugs in human trials would be higher than single-digits.

While drugs are in Phase I and even Phase II, companies are still learning about the efficacy of their compounds in different tumor types, in different sub-populations, in different doses and regimens and in different combinations with other drugs.

Answers to these questions are crucial to optimizing the clinical trial strategy of a compound in human trials and in maximizing the speed and likelihood of the successful outcome. It is in this context, that Champions has sold its first co-clinical study.

In this study, we will build PDX models from biopsies that come from the patients on a single clinical trial. The trial sponsor, our customer is a top-20 pharmaceutical company conducting a Phase I b study for a new compound. The study includes multiple tumor types and is being conducted at close to a dozen centers across the country.

We expect to build dozens of models for them from the patients that enroll in their clinical trial. These models will be genetically characterized and then used for extensive PDX studies.

We expect these studies will enable our customer to better understand the underlying mechanism of action of their compounds and answer a variety of important clinical questions.

For example, how would the patients on this trial have responded to standard of care regimens thereby giving the company a controlled data set against which to compare the response data they are seeing in the clinic.

We will also be able to test the study compound in combination with standard of care drugs or other novel compounds thereby enabling the customer to inform the question of combination therapy for a subsequent Phase II study.

We believe this co-clinical study will dramatically increase the amount of information our customer will be able to derive from the patients on study and will clarify critical issues that can fundamentally change the development path and likelihood of success of a multi $100 million investment that is typically required to get drugs through clinical trials and on to the market.

From a financial standpoint, this is by far the largest study we have ever sold. It is bigger by multiples and the second largest study we ever sold previously which was more than $1 million. I would also note that previous study included multiple experimental compounds while this study includes only one.

I hope it is clear that this study demonstrates a customer’s willingness to invest millions of dollars in a PDX study for one compound with hundreds of oncology drugs in clinical trials at any given time, we think this is a clear demonstration of a potential market for PDX that is more than $1 billion.

It also proves the value of selling to the clinical teams which in the drug development world and is an important validation of the investment we have made over the last few years in our medical affair teams and our POS capabilities.

We are the only PDX provider that has a high powered Chief Medical Officer that is talking to clinical teams in pharma on a peer-to-peer level and demonstrating the possibilities of PDX in a co-clinical setting.

Also, the fact that this study requires organizing, training, collecting and transporting tissue across almost a dozen sites spread across the country and then centralizing the model development and testing in one lab proves that the capabilities that Champions and only Champions has developed through our POS business is a differentiating feature and true competitive advantage in our goal of revolutionizing the development and use of oncology drugs through PDX.

We are also encouraged by the pipeline of customers with whom we are planning similar studies for their compounds. Signing the first customer to an innovative product is always the hardest one and we expect to see more of these signed in calendar 2016. We expect to implant our first patient from this co-clinical PDX study in the next few months.

The revenue from this study will take a few quarters to ramp up and will depend on the rate at which the human trial enrolls. However, we have already started billing for this study and the positive impact on cash flow will begin this quarter. The second update for today is the progress we are making in commercializing our ImmunoGrafts.

As a reminder, these are our new models that involved our traditional PDX tumors, implanted in mice that have been implants with human immune systems, also known as humanized mice. We completed our first ImmunoGrafts study last quarter and have been investing considerable resources in building this into a commercial offering.

We now have signed agreements with eight customers for ImmunoGrafts studies. These studies are significantly more complex to deliver than traditional tumor graft studies because of the cost and operational challenges of humanizing mice and the added complexity of coordinating of the timing of the humanization process and the PDX implantation.

Because of the added complexity, the revenue per study now from these studies is typically two to three times higher than the revenue per study from tumor graft work. To ramp our commercial offering, we are working with both purchased humanized mice, as well as mice that we are humanizing in-house.

We had some very exciting results recently with our in-house efforts in terms of engraftment rates and levels in the humanization process. This will give us more control and a better cost structure as we deliver these studies going forward. We currently have one study underway and are pleased with the progress we are making.

Finally, I want to talk about the progress we are making in growing the platform. In addition to adding more models to the bank, we’ve been looking for ways to add new tumor types to our bank without overspending our R&D budget.

To accomplish this, we’ve been talking to customers about their specific needs and looking for alternative ways to develop new capabilities. Based on feedbacks from customers, we’ve been focusing on acute myelogenous leukemia or AML, an area of particular unmet need for customers looking for accurate models for drug efficacy.

To accomplish this, we’ve recently signed an agreement with a top-20 global pharmaceutical company to develop a novel process for establishing hematology models. This process will expand on a previously established techniques to build AML tumor models using peripheral blood, rather than bone marrow aspirates which were typically used.

Peripheral blood is significantly easier to obtain from patients and enables real-time modeling which will dramatically change the paradigm of conducting co-clinical studies in this important therapeutic area. We expect the first stage of this process of this project to result in significant revenue in the next few quarters.

We also anticipate this to be a driver of additional revenue growth in the future as we include this as a commercial offering to all our customers. To continue to build the traditional solid tumor bank, we implanted 102 new patient tumors this quarter, an increase of 7% over last year.

34 of these implants came from our commercial POS offering and 68 implants came from research partnerships and trials. This continues the trend I have talked about in the past of increasing implants from our research partnerships. We continue to focus on growing the bank in a thoughtful way that maps to our overall business goals.

We are narrowing our criteria for accepting implants to ensure that the tumor types and sub-types match the needs of our POS customers. We are also focused on putting in place processes to ensure we are optimizing the take rates of our implants to avoid wasting money on implantations that don’t ultimately grow or have no commercial value to us.

Now let me turn to the financial results for the POS business. POS revenue was $2.5 million for the quarter, a 74% increase over the same quarter last year. This is our third quarter in a row of strong and accelerating revenue growth.

As we have discussed in the past, we continue to see growth in our quarterly bookings which are a leading indicator for revenue as our bookings have grown and the size and durations of our studies have increased, we are gaining confidence in our ability to predict our revenue for the coming quarters.

We are confident that the third quarter of our fiscal year which ends in January will be another quarter of strong revenue growth. As a result of the large co-clinical study we sold, we’ve seen a big increase in our backlog.

The timing of the conversion of this backlog to revenue was hard to predict quarter-by-quarter, but it pertains well for strong revenue growth in future periods. Based on this, we feel better than ever that our next fiscal year will be another year of strong revenue growth.

POS gross margins were 42% for the quarter compared to 33% in the same quarter last year. The gross margins in this business continue to vary quarterly based on timing differences between expenses and revenue as a result of our conservative revenue recognition policy.

That said, we do see a very positive trend in our gross margins as we grow the revenue of the POS business, manage our lab cost very effectively over time, and leverage the fixed cost associated with management, IT and support services in our Baltimore lab.

I’d like to point out that we made some important leadership changes in the management of our lab earlier this year. The new leadership has done an outstanding job of lowering our costs and simultaneously improving our quality.

Our customer service has never been better and the quality of our people, processes and information technology are at an all-time high. These continued improvements are also leading to cost savings and efficiencies that are allowing us to grow our revenue while minimizing the growth of our lab costs.

As a result of these changes, we expect the POS gross margins to continue to improve over the next few quarters and are targeting a range of 50% to 60% gross margin in the next four quarters.

We continue to manage our investment in the patient or POS business to ensure it serves its strategic purpose for Champions while minimizing the cash burn of the business. Revenue for the quarter from POS was $486,000, an 8% increase from last year.

More importantly, the negative gross margins from POS was $80,000 for the quarter, a more than $200,000 improvement from last year. A few quarters ago, we talked about our efforts to drive this business to a breakeven gross margin and this was another quarter of good progress.

Regarding our operating expenses, the overall picture is one of strong cost management despite the pressures of a growing revenue line. As I’ve talked about in the past, we put the company on a path to cash flow breakeven with a simple formula, grow the revenue while managing the expenses.

We are proud of the progress we have made while improving our quality and customer service. We continue to work hard to hold the line on expense growth such that most of the revenue growth goes for improving our bottom-line.

Looking at the specific expense lines this quarter, year-over-year sales and marketing expenses were down approximately $400,000. The biggest factor driving this decline is the reduction of sales and marketing resources focused on the POS business.

This reflects the overall commercial strategy of the company and is proving to be a cost-effective change for us. We accomplish this by eliminating our PR spending in POS and consolidating the sales and marketing leadership under one commercial leader.

R&D costs were down more than $300,000 over the prior year as a result of unusually high expenses in the prior quarter for genomic characterization of our tumor bank and investments in our ImmunoGrafts program. Reported G&A was up approximately $300,000 for the quarter.

About half of this increase was non-cash expense associated with stock-based compensation. The other driver of the increase was one-time costs associated with the uplifting to NASDAQ that we accomplished in August. Excluding these items, our G&A costs are largely unchanged from last year.

Our cash position at the end of the quarter was $4.2 million, down from $6.8 million at the end of the prior quarter. This was the one disappointment in what was overall a great quarter for Champions. The $2.5 million decline in our cash balance was primarily the result of a cash loss on our income statement of approximately $1.7 million.

This excludes the $750,000 of stock-based compensation that I just discussed before which flows through our GAAP income statement. This $1.7 million includes about $200,000 of one-time expenses, largely from the uplifting. So I think our core burn rate for the – I think of our core burn rate for the quarter is approximately $1.5 million.

It is off to this base burn rate that we are growing the cash collections and lowering the expenses to push to breakeven. During the quarter, we also had our typical swings in certain balance sheet accounts that negatively impacted our cash balance at the end of the quarter.

In particular, our accounts receivable balance increased $0.5 million, which has a temporary impact on cash. This was the result of normal timing swings associated with study in completion and billing cycles and not the results of any bad debt or collection problems. We expect this to reverse itself in the next quarter or two.

Looking forward, we expect the quarterly burn rate to decline dramatically over the coming quarters. Over the short-term, we see four factors contributing to decline in our quarterly cash burn rates. First, continued year-over-year revenue growth from our POS business will drive higher cash collections and improved gross margins.

Second, continued expense management with some targeted cost reductions. Third, cash collections from the co-clinical studies mentioned above will contribute positively to our cash flow well in advance of the recognition of revenue.

And finally, the reversal of the accounts receivable increase will have a positive impact on cash flow for the next two quarters. The combined impact of these factors will be significant.

For the third quarter, which we are currently in and ends on January 31, 2016, we expect our cash burn rate to be well below $1 million for the quarter and potentially as low as $500,000.

Looking forward a few quarters, continued revenue growth in the core POS business and the revenue impact of the co-clinical studies will allow us to drive our cash burn rate down even further. We continue to invest significant dollars each quarter in R&D and infrastructure to build our platform and our company for future growth.

Our goal is to walk a fine line that allows us to continue to invest in our success over the long-term without incurring excessive dilution to our current shareholders. As you know, the management team and the Board of Directors include many of the larger shareholders of the company and are impacted by dilution as much as other shareholders.

As a result, we are keeping a careful eye on these investments for the future and looking to find the right balance between long-term investment and short-term needs. In summary, this was a great quarter for Champions.

We proved that PDX is a tool that can generate multi million dollar studies and the market potential for our platform should be measured in billions, not millions. We’ve built on the success of prior quarters to deliver strong growth and improved financial results.

We also have more visibility on the future than ever before and believe our prospects for next year are very strong. These are the ends of my prepared remarks. I will now open up the call for questions..

[Operator Instructions] And your first question comes from the line of Tom Shelton. Mr. Shelton, your line is live..

Great. Congratulations. It sounds like you are making really good progress..

Thank you..

I just got one question. A little curious that one is, our potential programs going forward is studying AML? I have seen some recent – really good results at ASH on some compounds on AML, but I am curious as to your appeal is to lives of interest in that AML is a fairly slow market.

Is it because of some blood cancer and you can see results quickly or what are the distinguishing are that make that so much interest?.

I think it’s a good question and I don’t know to try about – a tremendous amount of insight on the issue. I think the reason of primary interest for our customers right now is that it is a disease, it is a subset of cancer where there is very little that can be done in terms of animal modeling today.

And adding to their capabilities to model the disease I think will be a huge step forward relative to the current availability of models and I think that has been the primary driver of the interest from our customers. It is still at the level of unmet need from other in-vivo modeling capabilities. .

Okay, great. Thank you..

You are welcome. .

[Operator Instructions] And at this time, there are no questions. Thank you. .

Great. Well, thank you everyone. I appreciate your calling in. We look forward to updating you next quarter. Thanks. .

This concludes this afternoon’s teleconference. You may now disconnect your lines..