Quotient Limited
Q1 2022 Earnings Call Transcript

Published: 8 Aug 2021

[Operator:]

Good day, and welcome to the Quotient Limited First Quarter Fiscal Year 2022 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Peter Buhler. Please go ahead, sir.

[Peter Buhler:]

Thank you, Cecilia. Good morning everyone and welcome to Quotient’s earnings conference call for the quarter ended June 30, 2021. Joining me today is Manuel O. Mendez, Chief Executive Officer of Quotient. Today’s conference call is being broadcast live through an audio webcast and the replay of the conference call will be available later today at www.quotientbd.com. During this call, Quotient will be making forward-looking statements including guidance and projections as to future operating results and expected development and commercialization timelines. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in Quotient’s filings with the U.S. Securities and Exchange Commission as well as in this morning’s release. The forward-looking statements, including guidance and projections provided during this call are valid only as of today’s date and Quotient assumes no obligation to publicly update these forward-looking statements. With that, I would like to turn the call over to Quotient’s Chief Executive Officer, Manuel.

[Manuel O. Mendez:]

Thanks, Peter, and good morning everyone. Thank you for joining us today. We've accomplished a lot in the last couple of months. Consistent with our last earnings call, today, we'll be updating you on three pillars

[Peter Buhler:]

Thank you, Manuel. Fiscal first quarter product sales were $9 million, an increase of 1.3% from last year's fourth quarter – first quarter, sorry. Alba by Quotient sales increased by 2%, while sales of MosaiQ COVID-19 antibody tests decreased versus prior year. Within the Alba by Quotient business, OEM sales represent 65% of all product sales and reached $5.9 million, a decrease of 5.3% versus prior year. This decrease is mainly related to a lower number of shipments to one large customer in Q1 of FY 2022 versus prior year. Direct and distributor sales of $3.1 million increased 20% year-over-year, and represent 35% of product sales. Sales of the MosaiQ COVID-19 antibody test decreased versus prior year, driven by a lack of market demand for antibody testing. In the first quarter, gross margin on product sales was 41%, an increase of 39% in Q1 of last year. The improvement is in line with the trend observed over the last few quarters and driven by a better sales mix. In the first quarter, we recorded an operating loss of $22 million compared with $19.7 million last year. In the quarter, operating expense were $25.8 million, an increase of $2.5 million over the prior year. Research and development expense were $12.5 million, an increase of $1 million year-over-year. This increase is related to the start of our expanded IH field trials in Europe and to a write-off of R&D raw materials. General and administrative expense were $10.8 million, an increase of $1.3 million compared to prior year. Included in G&A is stock compensation expense has increased from $1 million to $1.8 million year-over-year. The increase in total G&A cost is mainly driven by cost related to leadership changes. Sales and marketing expense of $2.5 million increased $250,000 from the prior year's first quarter reflecting a continued scaling up of the commercial group in view of the launch of our first commercial menu for donor labs. In the first quarter, depreciation and amortization were $1.4 million versus $2 million one-year ago. Depreciation and amortization decreased due to changes in the estimated useful economic lives of certain operating equipment. Net other expense were $2.4 million, compared to $5.7 million in the first quarter of last year. Net other expense consisted of interest expense of $600,000, $2 million expense related to change in fair value of the convertible loan derivative and $200,000 foreign exchange gain compared to interest expense of $5.9 million and a foreign exchange gain of $200,000 in the last year's first quarter. Interest expenses were lower in the first quarter of FY 2022 due to a decrease in accrued royalties. The decrease in accrued royalties is due to a shift of expected future revenues to its market outside the U.S. and Europe. Our net loss for the quarter was $24.4 million or $0.24 per ordinary share compared with $25.4 million or $0.32 per ordinary share in the prior year's first quarter. Net cash used in operating activities totaled $32.1 million in the first quarter of fiscal 2022 compared with $24.8 million in the prior year's first quarter. These numbers include interest payments. The increase of cash used in operations is primarily driven by changes in the timing of D&O insurance payments and payments related to changes in senior leadership. Capital expenditures in the first quarter of fiscal 2021 was $1.4 million compared with $800,000 in the prior year. Expenditures mainly include the purchase of MosaiQ instrument and manufacturing equipment. Moving on to the balance sheet. Available cash and cash equivalents and short-term investments at June 30, 2021, were $166.7 million compared to $111.7 million one-year ago. In addition we have 8.3 million restricted cash reserve related to our senior secured loan and rent deposited for our Swiss facility. Our short-term investments include investments into two Credit Suisse supply chain funds. Credit Suisse suspended redemption and announced liquidation of these funds in March 2021. Between March and July, the company received three payouts and the total remaining investment at June 30, 2021, was $28.9 million. These funds continue to be subject to significant valuations and uncertainties, and the company has taken an impairment charge of $2.3 million in March 2021. To date, there is no evidence that would lead to a different valuation and although timing and amounts of further payout is not clear, we believe we will be able to recover the outstanding funds within fiscal year 2022. During the first quarter, the company issued convertible senior notes for the total aggregate principal amount of $105 million or $100.5 million net of cost to issue these notes. The notes carry 4.75% interest and will mature on May 26, 2026, unless converted into equity or redeemed in cash prior to that date. The convertible debt is included in our balance sheet under long-term debt for a total amount of $73 million, while $29.9 million are reflected as convertible loan derivatives. This derivative reflects the value of the call and put option related to potential conversion or voluntary redemption. The value of the derivative will be reassessed quarterly. In addition, Quotient has an outstanding senior debt for the total amount of $133 million, out of which $30.2 million are classified as current portion of long-term debt. This amount relates to principal payments due in October 2021 and April 2022, respectively. As previously announced, we are in advanced discussions to refinance or restructure this outstanding debt facility. With our current strong cash position, at the expected finalization of the debt restructuring we're well financed and do not anticipate any liquidity constraints in the foreseeable future. Accounts receivable totaled $4.5 million and inventory totaled $23.2 million. Compared to March 31, accounts receivable decreased by $900,000 due to seasonality in sales while inventories increased by $1.1 million. The increase in inventory is related to the acquisition of instruments and an increase in raw materials for our conventional reagent business. Moving to guidance. For fiscal 2022, we are maintaining a full year revenue forecast from product sales of our Alba by Quotient reagents in the range of $35.5 million to $36.5 million. No milestone related to other revenues are expected. For the second quarter of fiscal 2022, we expect sales of Alba by Quotient reagents between $8.2 million and $8.7 million. We forecast capital expenditures in the range of $5 million to $10 million. With the acceleration of our MosaiQ field trials, we expect cash used in operations of approximately $6.5 million to $7 million. This amount does not include the service costs or capital expenditures. No guidance is provided on operating loss. We do not expect major revenues derived from MosaiQ through the balance of the current fiscal year. With that, let me now turn the call back to Manuel?

[Manuel O. Mendez:]

Thank you, Peter. Looking forward now, I would like to share upcoming plans for the three key pillars, as I mentioned a few moments ago. Beginning with the MosaiQ solution and transfusion pipeline. The CE marking field trials of our first MosaiQ transfusion modality, the expanded immunohematology microarray are progressing as planned, and we expect the initial European regulatory submission to be completed in the third quarter of the current calendar year. We expect to obtain the CE mark of our expanded immunohematology microarray around year-end. U.S. field trials are expected to start in the third quarter of fiscal year 2022 with an FDA submission anticipated before fiscal year-end. Regarding our second modality, the serological disease screening microarray, we will commence field trials for the initial SDS 510(k) submission in Q3 calendar year 2021, and we expect to resubmit to the U.S. initial SDS microarray around year-end. The R&D team will continue to optimize the performance of the expanded SDS microarray. We expect to start EU and U.S. field trials in Q2 calendar year 2022 with an anticipated European regulatory submission and FDA BLA submission in the third quarter of calendar year 2022. As mentioned before, we plan to include the SDS plasma microarray in the expanded SDS field trials. This will help accelerate the time lines associated with our plasma opportunity. On the patient side, we are developing the patient microarray according to the letter agreement with Ortho and expect a European submission in the third quarter of calendar year 2022. Regarding the outlook of our third MosaiQ transfusion modality, the molecular disease screening microarray, we're currently evaluating alternatives for the instrument set up to integrate extraction and amplification as we already have detection. Shifting now to MosaiQ commercial execution. We will continue to provide customers with insight on how to optimize the workflows with the MosaiQ solution prior to the first European tenders. I'd like to conclude with the MosaiQ solution portion by providing you with all a look into how we plan on leveraging the MosaiQ technology in new market segments. We will continue the investment of the market opportunities and seek additional external partnerships, particularly in companion diagnostics. Additionally, we will dive deeper into this opportunity and provide an update in our Q2 earnings call in early November. Moving on to our second key pillar, Alba by Quotient. The team continues the assessment of opportunities to accelerate sales growth and have identified opportunities to expand our product portfolio and our team is in discussions with potential new OEM customers and will continue to register products in new markets to expand direct business. And finally, to our third key pillar, our financial position, we have a healthy cash position that allows us to sufficient financial flexibility to execute on our plans. We are confident that we can address our outstanding senior debt notes in the near future, which will further improve our cash runway. That brings us to the end of our forward-looking plans. Before we conclude, I'd like to take a moment and to thank Peter for his commitment and contribution to Quotient. Peter joined us a few – 1.5 years ago, and in that time, he's made a significant impact to the business and our company. On behalf of the Quotient family, I want to thank Peter for his value contribution and support to help drive our company and strategic vision. We are in the final stages of our CFO search, and we hope to be able to share a more detailed update by the end of this quarter. As you know, Peter will stay with us until the end of the year, but I just wanted to take the time to thank him for his contribution and the work we've done so far since I joined the company. Now I would like to turn it over to Cecilia to open the Q&A session. Cecilia?

[Operator:]

Thank you. We will take our first question from Josh Jennings from Cowen. Please go ahead.

[Unidentified Analyst:]

Hi, this is Eric on for Josh. Thanks for taking the question. Looking at the preliminary EU field trial data that you reported today, which look very strong. Could you help us understand what the remaining steps are for these results to be finalized? Is there any risk that the correlation of these antigen identification tests could drop in the final analysis? And then are there any other antigens that could be included in the final IH or expanded IH menu? Thank you.

[Manuel O. Mendez:]

Yes. Thanks for the question. I appreciate it. Yes, so we – next steps is basically we are gathering more data in the different – three different sites that we are engaging in our field trials as we continue to consolidate and generate additional data, of course the results will change, but we don't expect them to be any major difference with the specificities that we've outlined. There are more specificities that that are being evaluated, like the reverse grouping and antibody screening. Those will be further analyzed and shared. We could not share the data now as we're sort of gathering additional information on those, but also the performance of those is also looking very good. So, yes, as we continue to do that, we'll continue to share more information and we'll go forward. Anything else you want to add, Peter?

[Peter Buhler:]

I think the additional specificity.

[Manuel O. Mendez:]

Yes, so, yes – so we talked about the additional specificity, so that should be included. So we expect at least to have 18 – 17 to 18 specificities in our submission.

[Unidentified Analyst:]

Great. And then looking beyond the clinical programs and thinking about future commercial traction, if you're able to capture tenders in the coming months, how long do you think it would be for those centers are really able to pick up their utilization of MosaiQ to the point that we're seeing meaningful revenues come through? Are there any other training requirements on the system that we should have in mind as well?

[Manuel O. Mendez:]

Look I think it's going to be a matter of the speed of implementation as they complete the tender process as we participate. And then we'll be trying to accelerate as part of that process. What we have identified is a project manager, let's say, that we would provide as part of those as well as the IT component that we know becomes critical for any type of implementation. So having a team ready to support that process faced approach as we work collaboratively with customers in that implementation. So – but we don't foresee –again, we don't have a specific timeline we've talked about. We will be going at either the speed of the institution or trying to provide resources to accelerate the adoption of those to go live much quicker. So we're looking at different options to be able to do that.

[Unidentified Analyst:]

That's helpful. And then one more if I may. Thank you for sharing all the detail around the tender process. Can you help us understand how many blood centers have experienced with MosaiQ through the hypercare program adoption of COVID-19 antibody testing and through ongoing evaluation programs? Or are all of these centers factored into your comment around 15 customers who have MosaiQ experience? We're just trying to get a sense of how many centers represent the lowest hanging fruit for Quotient once CE mark is hand.

[Manuel O. Mendez:]

Yes, those are included in the 15 that we've referenced in our – in our – in my remarks so far and that's basically mainly between Europe and the U.S. And certainly our goal is as we move forward with the evaluations, as I mentioned, the 12 – to complete five of those, and then we're looking at additional workflow analysis, which may or may not include an instrument installation. So our goal is to get the MosaiQ in the hands of our customers, because the feedback that we've received every time is so positive that – so we're going to be working with that in the next months to come and be aggressive in those evaluations or even lean assessments to be able to continue to drive that adoption. And then the other piece that I would add, which maybe sort of additional to your question is also as I mentioned in my remarks, we're looking at distributor models for countries that receive CE markings to ensure that there are opportunities in those countries. Once we get CE marking that then we don't perhaps not even have to participate in tender process, but that could be an interesting opportunity for us going forward as well.

[Unidentified Analyst:]

Understood. Thank you.

[Operator:]

We will now take our next question from Brandon Couillard from Jefferies. Please go ahead.

[Brandon Couillard:]

Hi, thanks good morning. Manuel, in terms of sort of the pre-market detailing activity, you talked about some workflow assessments, which I think is a new strategy. You sort of explained the difference between the valuation in workflow assessment. Will those be the same customers? And how does the workflow assessment help lead to a MosaiQ installation?

[Manuel O. Mendez:]

Yes. Thanks, Brandon. Good to hear from you and thanks for the question. So, basically, a workflow assessment is – or a lean assessment as we call it is really help – to help the customer understand as they go through a transition process maybe or even before then, what are some of the inefficiencies related to the operations of a laboratory or a donor location. And so, it's really understanding inefficiencies from a staff perspective, from a space perspective, turnaround time. So there's all these different factors that we find and we have tools to be able to say, hey, you can gain efficiency and effectiveness with how they're running a laboratory. So we have the skill set in our teams and then that leads into opportunities being generated, because if we can then help a customer understand those inefficiencies, then we say, hey, by the way those inefficiencies can be helped addressed by introducing the MosaiQ solution. So it's sort of a way to help customers understand how they can be better. And then on top of it, as you justify, the MosaiQ opportunity, then you say, okay, well, I can help save X percent on your current operations because of this solution. So then not only does it help efficiencies on the way they operate, but then going forward, what the MosaiQ solution can help address to justify the investment they would make on our system, our solution, and then even have savings beyond that, which I think has been referred to by our friends, my predecessor, is a 20% savings in operations even before while the MosaiQ solution has been implemented. So that's the goal. And that versus an evaluation may not be as deep as the lean assessment, but in our target, we would try to see if we can combine both. But some of the evaluations are part of a tender process, which may or may not include a lean assessment, but our goal would be to sort of include that because it will clearly help address some of the efficiencies and effectiveness that they can gain with our solution.

[Brandon Couillard:]

Okay. That's helpful. And you alluded to review of the cost structure that seems somewhat preliminary. When do you expect to be in a position to sort of elaborate on those plans? And will this exercise lead to net cost savings or more of a reallocation of current spending? And where do you see, like, I guess the…

[Manuel O. Mendez:]

Yes, it's a combination of both. I mean, I'll have – yes, thanks for the question. I think it's going to be a combination of both and I'll have Peter comment on that. But as I was coming in, we – I started looking at different functional areas of spend, how are we spending against benchmarks, one for an established business like an Alba business and one for are we investing for growth for our MosaiQ solution. And from that standpoint, we've looked at some potential efficiencies that we see. One, there's reallocation opportunities. Also there are some savings opportunities. So we're going to be looking at both. So again, I think, it's – as we transition to commercial phase, there are some things that are pretty obvious to us as we look at the different distribution, but Peter, do you want to comment?

[Peter Buhler:]

Yes, no, I think it's indeed both. So it's – we basically just took a step back and had a fresh look at our cost structure and where we allocate our cost especially as they grow as well. And then how would we reallocate those as we get into commercial and also making sure we continue to properly fund the Alba business to make sure we can support the future growth there versus, of course, investing into the MosaiQ opportunity. So a lot of it will be rebalancing, especially external spend, but then also, of course, making sure we get more efficient and get better value for the money we spend.

[Manuel O. Mendez:]

And then the last thing I would add on that is as I look at also – so we need to make sure we deliver on the here and now on the transfusion. And so that's, of course, the main focus for us on the MosaiQ solution. But additionally, as I mentioned, in my remarks, we believe that some low hanging fruit, as I would say, on the plasma and in the clinical market that we need to be able to also fund and perhaps even accelerate because we think that the MosaiQ could be a really great solution in some of these clinical areas. As you guys probably saw in our 8-K, I think we released Dr. Hausmann has joined us starting Monday, this past Monday. And so we're already in discussions on how we can leverage his expertise in clinical diagnostics across our business. So I'm not saying that we're going to destruct ourselves now and not deliver on transfusion because that's the here and now we are fully committed to do that. But I think there's other opportunities that I think as a team, we believe would be very interesting for us to pursue.

[Brandon Couillard:]

Right. And then last one, just on the U.S. field trials for the expanded IH menu. It sounds like you've got most of the pieces in place. Kind of what's left to do before you can start the trial?

[Manuel O. Mendez:]

Well, frankly speaking, it's now we're completing the CE mark trials. So we're – actually, to be honest with you, some runs that we have to do from a manufacturing perspective that are scheduled in there. That's pretty much it. The team is working on some smaller tweaks in some of the specificities that we want to be able to do for the U.S. market. But I think from a clinical trial or a field trial perspective, all the things are in place for us to be able to deliver on that. So it's a matter of just shifting some of the resources there from the CE mark field trial to the U.S. But again, nothing should be in the way for us to be able to do that at this point.

[Brandon Couillard:]

Right. Thank you.

[Manuel O. Mendez:]

And again, we're excited with the – look – I'm sorry, I wouldn't say we're very excited with the field trial data on the CE mark. Again, it's a place that the teams are excited because we haven't been there before at the level of quality of the results. So I think it's super encouraging, again, and everybody's kind of pumped internally for that. Cecilia?

[Operator:]

We will now take our next question from Matt Sykes from Goldman Sachs. Please go ahead.

[Matt Sykes:]

Thank you, and thanks for taking my questions, Manuel and Peter. Appreciate it.

[Manuel O. Mendez:]

Hey, Matt, how are you?

[Matt Sykes:]

Hey, I am great. Just maybe on plasma. You kind of hinted at last quarter and now you're going to leverage your clinical trial sites for that. How should we think about the time line for plasma? Has this been accelerated a little bit? Or is this going to – how do you think about the time line for plasma?

[Manuel O. Mendez:]

Yes. So I think you will follow – so it's been pulled in because I think previously we've communicated that to be in 2023. So as we run them in parallel then with our SDS for U.S., I think we'll be more in parallel with what we have there. So in terms of launch. So I would say maybe a couple of quarters in, let me look at Peter and see do we have, I mean…

[Peter Buhler:]

No. We haven't really finally determined the exact time line for the submission. What we said is we're going to bring it into the SDS field trials, right? And then I think the submission, we still need to figure out exactly how we sequence that.

[Manuel O. Mendez:]

But I think, look, it looks like it's a couple of quarters in at a minimum, Matt, I'm pushing for this one site that we have, which is going to be sufficient for us to then take this data and then submit for approval. So Again, I would say at least two quarters or six months prior to where what we had it originally or maybe more like – I would say it mimics the SDS approval for the U.S. and CE marking the same. So it matches the SDS expected approvals that we see instead of lagging it by those that time.

[Matt Sykes:]

Okay. That's really helpful. And then just on Alba, you mentioned a couple of things in terms of expanding the product portfolio, expanding out of the geographies I know we're going to get more details on the cost structure and – but I'm just wondering how those investments in Alba fit into how you're thinking about sort of the future capital allocation within the company?

[Manuel O. Mendez:]

Yes. So what we're saying is, look, I'll give you some little simple things. I mean, we didn't have the product registered in my opinion, key countries in Europe. So that doesn't take a lot of investment, but we're going to get a nice return. Even outside of Europe, like there's opportunities in Asia that we were not really going after, which we are now. So that doesn't take a lot because it's more tender based. So it's just a margin in a discussion with – through a distributor in specific countries. So I think, again, in terms of product portfolio a huge investment, it's just we can absorb that within the allocation that we have currently for R&D and development in the Alba business. So it's not like a huge investment on the Alba. So I would say for Alba, it's very minor investment, if any incremental to what we have allocated there. But it's going to give us a big return. So it's more on those big return. So it's more on those sides that we were commenting. So I hope that answers your question.

[Matt Sykes:]

Yes. This I helpful. And this is the last one for me. Just given COVID and the resurgence we're seeing. How are you factoring this into to your plans? And obviously, it's incredibly uncertain, so it's hard, but just how are you thinking about potential resurgence in COVID and access going forward as we go into the back half of the year?

[Manuel O. Mendez:]

Yes. We don't authorize. So right now Matt, we don't anticipated any impact from Covid into the projections that we have, whether it's on time line or our ability to continue with our path that we've described during this call. So in terms of business restruction, we don't see that today. On the contrary what we've seen is the UK just open studying past Monday, where you don't have to quarantine. So for the first time, I'm going to be able to visit our Edinburgh site because I wasn't allowed to go. So I think what we've seen is sort of going the other way. What we have seen is that I think you've also read it in the news that even people who have been vaccinated because of the Delta virus, they're getting infected, which we had a consultant that came to visit us experienced that. So again, we don't foresee anything, any major impact to our operations or our business, but we are keeping a close look on how that – we're going to be managing that from a company standpoint and our employees going forward.

[Matt Sykes:]

Thanks, very much.

[Manuel O. Mendez:]

Yes.

[Operator:]

We will now take our next question from Sung Ji Nam from BTIG Research. Please go ahead.

[Sung Ji Nam:]

Hi. Thanks for taking the question. Just a few questions for me. Maybe starting out with the 25 distribution contracts targeting 40 countries. Sorry, if I missed it, but what's the addressable market there outside of Europe?

[Manuel O. Mendez:]

Yes. We have not really communicated on this yet. I think again the team is working on that Sung Ji, and we'll be looking at releasing some of this data in the near future. So I'd rather not comment on that right now, but what we can foresee is that it can be a significant opportunity, both from an instrument as well as the reagent standpoint for us to participate in these alternate markets. Again, we're going to be providing a little bit more color on revenue targets, not just for distribution for Europe in the coming weeks. Because I think, again, we realized it's a little bit hard for some of you guys out there to plug into your sort of projections. So Peter and I have discussed that we need to, sort of, come out with a little bit more clear what is our revenue expectation, what are the assessments, et cetera. So we'll be sharing a little bit more of that in the future.

[Sung Ji Nam:]

Got you. And then on the molecular testing side, the partnerships that you're establishing, would you mind characterizing the types of partners there? Are they largely – large global IVD players? Kind of, curious...

[Manuel O. Mendez:]

I'd rather not comment on that because we have not put out any comments on this. I think – I'm sorry, I would love to share more, but I will – as soon as we're ready to make this public, we will. The idea here is, again, we believe there are opportunities for us to accelerate on the instrument side, and there are opportunities for us to accelerate on the assay development side. So again, we're going to be looking at then how that's going to then help impact our time lines and then come back with a more detailed communication on that in the future.

[Sung Ji Nam:]

Okay. No worries. And then lastly on plasma testing and the inclusion in the expanded SDS trials. Kind of just to clarify, does that just expand the number of samples you're analyzing? Does it – or does it also potentially impact the time line for extended SDS trials and submissions?

[Manuel O. Mendez:]

Yes. No, it shouldn't. Just – we're adding one site, one additional site that will then generate the data that we need in order to get a plasma claim. So it should have no bearing or impact on our SDS submission – field trials or submission for that matter. So we'll ensure that, that doesn't happen, and again, it's planned this way.

[Sung Ji Nam:]

Okay, got you. Thank you so much.

[Manuel O. Mendez:]

Thank you. Good to hear from you.

[Operator:]

As there are no further questions in the queue at this time, I would like to turn the call over to Manuel for any additional or closing remarks.

[Manuel O. Mendez:]

Well, I just want to thank everyone for joining us today on this call, and we look forward to updating you on our progress during the next quarterly earnings call. And great to hear from you. Have a nice day, guys. Take care

[Operator:]

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.