Quotient Limited
Q3 2022 Earnings Call Transcript

Published: 8 Feb 2022

[Operator:]

Greetings and welcome to Quotient Limited Third Quarter Fiscal Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Ali Kiboro, Chief Financial Officer of Quotient Limited. Thank you and over to you, sir.

[Ali Kiboro:]

Thank you, Vikram. Good morning, everybody and welcome to Quotient's third quarter fiscal year 2022 financial results as well as the business update. Joining me today is Manuel Mendez, our Chief Executive Officer. Today's conference call is being broadcast live through an audio webcast and a 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 Mendez.

[Manuel Mendez:]

Thanks, Ali and good morning, everyone. Thank you for joining us today for our third quarter fiscal 2022 results and business update. I would like to thank the entire Quotient team for their dedicated support and resilience this quarter despite disruption created by the COVID Omicron surge. Today, we'll be updating you on three pillars

[Ali Kiboro:]

Thank you, Manuel. Fiscal third quarter product sales were $10.2 million, an increase of 16% from last year's third quarter. Alba by Quotient sales increased by 21% year-over-year, while MosaiQ COVID-19 antibody test decreased by 96% versus the prior year. Within the Alba by Quotient business, OEM sales of $7.2 million represented 71% of all product sales. Year-over-year, OEM sales increased by $1.6 million or 30% versus prior year. Direct and distributor sales of $2.9 million increased 5% year-over-year and represented 29% of product sales. In the third quarter, gross margin on product sales was 22% compared to the gross margin of 43% reported in the third quarter of the prior year. Excluding the impact of a $2.5 million impairment of MosaiQ inventory, gross margins would have improved to 47% versus 43% in the prior year. Year-to-date, total product sales of $28.5 million increased by 9% versus prior year, with Alba by Quotient sales increasing by 13%. Gross margin on product sales year-to-date is $10.9 million or 38% compared to $11.3 million or 43% for the prior year-to-date comparison. The difference is mainly due to the write-down of inventory in the third quarter. Excluding the write-down, gross margins would have increased by $2.5 million to 47%. In the third quarter, we recorded an operating loss of $31.3 million compared to $21.6 million last year. The difference is driven by higher cost of revenue due to the inventory write-down as well as higher operating expenses. Operating expenses were $33.5 million in the third quarter of fiscal year 2022, an increase of $8.1 million over the prior year. Research and development expenses were $13.3 million, a $1.1 million decrease year-over-year. General and administrative expenses were $17.4 million, an increase of $8.6 million compared to the prior year. The increase in total G&A costs is mainly driven by $3.8 million of banking and legal fees associated with the amendment to the company's senior notes indenture and a $4.2 million of stock-based compensation and transition costs associated with the executive management team. Included in G&A is stock-based compensation expense of $2.3 million which increased by $1.1 million versus the prior year. Sales and marketing expenses of $2.9 million increased $595,000 from the prior year's third quarter, reflecting the preparation of the commercial launch of the company's extended immunohematology IH menu for donor labs. Net other expense was $13.1 million compared to $8.8 million in the third quarter of last year and net other expenses consisted of interest expense of $9.6 million and a $3.3 million loss related to the change in fair value associated with the derivative liabilities and a $0.2 million loss in foreign exchange losses arising on monetary assets and liabilities denominated in foreign currencies. This compares to interest expense of $9.4 million and a foreign exchange gain of $0.6 million in last year's third quarter. Our net loss for the quarter was $44.8 million or $0.44 per ordinary share compared with $31.7 million or $0.31 per ordinary share in the prior year's third quarter. Year-to-date, net losses reached $99.2 million or $0.98 per share compared to $71.7 million or $0.81 per share one year ago. Net cash used in operating activities totaled $96.2 million in the first nine months of fiscal 2022 compared with $56.7 million in the prior year's first nine months. The increase of cash used in operations is driven by a number of factors, mainly the increased level of R&D spend, G&A expenses and movement in working capital. In addition, last year's cash flow was positively impacted by the Ortho upfront payment of $7.5 million. Capital expenditure in the third quarter of fiscal 2022 was $0.6 million compared with $1.5 million in the prior year. In the first nine months, capital expenditures totaled $2.3 million, primarily related to the purchase of manufacturing equipment and information technology. Moving to the balance sheet; available cash and short-term investments at 31 December, 2021 was $103.8 million compared to $111.7 million at the start of fiscal year 2022. In addition, we held $8.3 million restricted cash reserves related to our senior secured loan and rent deposit for our Swiss facility. Our short-term investments include investments in two Credit Suisse Supply Chain Finance funds. As previously discussed, Credit Suisse suspended redemption and announced liquidation of those funds in March 2021. During the third quarter of the fiscal year, the company received a payment of $2.2 million. The total remaining investment as of December 31, 2021, was $21.4 million. These funds continue to be subject to valuation uncertainties and the company has therefore, maintained an impairment of $2.3 million on the outstanding amount. Now turning to guidance; for fiscal 2022 we are increasing the full year revenue forecast from product sales of our Alba by Quotient reagents to the range of $36 million to $37 million. No milestone related or other revenues are expected. Capital expenditures for fiscal year 2022 are expected to be in the range of $5 million to $8 million. We estimate that cash used for operations for the fourth quarter of fiscal year 2022 will be in the range of $6.5 million to $7.5 million per month, excluding debt service costs and capital expenditures. We are not providing guidance on the size of the operating loss that we expect to report for the current fiscal year. And with that, let me now turn the call back to Manuel.

[Manuel Mendez:]

Thank you, Ali. I would like now to share our upcoming priorities for the three pillars I mentioned a few moments ago. Beginning with the MosaiQ solution and transfusion pipeline; we believe the expanded immunohematology microarray is on track to receive the CE mark in the first quarter of calendar 2022. We are locked, loaded and ready to commercialize. Regarding our serological disease screening microarrays, we continue to focus on panel development, completion of field trials and targeted submission for CE marking and FDA approval in the second half of the current calendar year. The SDS program continues to cover both the expanded SDS donor microarray as well as the plasma microarray. On the MosaiQ commercial execution, we will continue to monitor tenders and look forward to participating in more than 20 upcoming tenders over the next 18 to 24 months. We look forward to expanding our distribution network by closing the commercial contracts in process to expand into rest of the world markets accepting CE marking. Regarding the MosaiQ solutions manufacturing and operations priorities, we finalized the decision on a second manufacturing line based on the market access and anticipated market demand. We aim to have the second manufacturing line operational within the next 18 to 24 months. On our scientific and medical affairs priorities, we will continue to drive our scientific medical studies and publication initiatives. Our focus will be on value creation with clinical outcomes and workflow. Next, in clinical diagnostics; we'll continue to drive internal product development with the support from external partnerships to accelerate our MosaiQ menu development. Moving on to our second pillar, Alba by Quotient. We'll continue to leverage commercial execution and geographical expansion opportunities. On to our third and final pillar, finance. We'll continue to drive growth in Alba and support our R&D priorities and commercial launch efforts for the MosaiQ solution. Lastly, I'm optimistic about our MosaiQ expanded immunohematology CE marking approval and commercial launch efforts to continue to bring value to our customers. Now, I'd like to hand it over to Vikram to open the Q&A session.

[Operator:]

Our first question comes from the line of Josh Jennings from Cowen. Please go ahead.

[Josh Jennings:]

Hi, good morning. Thanks, Manuel and Ali. Congratulations on the update from the Notified Body. Maybe it would be great to start on that topic and just ask. It seems like the CE marking process has been almost fully derisked. I just want to make sure I'm interpreting this correctly. What are the remaining steps before you have CE mark approval in hand? Is it just the European Commission taking this recommendation from the Notified Body and stamping the approval? Or are there any further steps that are required on your side or on the Notified Body side?

[Manuel Mendez:]

Yes. So, first that -- thanks, Josh. Good to hear from you. So look, I think where we stand at this point is that we've had conversations with them regarding the status of the submission. We've answered all the questions. They have all the information that they need in order to put the recommendation for approval. So we've cleared this language with them. We feel very comfortable in that regard. Next steps are, they put the recommendation and then it should follow by the CE marking stamp of approval. So we look forward to that completion in the next couple of weeks. Again, we don't have a specific timeline. All we know is that it certainly -- it's a completion of this report that will be submitted. And then once that's submitted, then the stamping should follow. So again, we don't have any further information on that. But again, we're very optimistic and we believe that, that is certainly going to be as we've committed in the past within the next couple of weeks.

[Josh Jennings:]

Excellent. And then it's my understanding that your clinical team have been focused on this CE mark submission. And will the team now focus on the U.S. field trials? And any, I guess, update on when the U.S. field trials could be initiated and timelines for submission?

[Manuel Mendez:]

Yes. So thanks for the question. Yes, certainly, our teams have been very focused on this EU submission and completing all the necessary steps through that. And now that, that's behind us, the team has been focusing on the U.S. submission and clinical trials. So that's ongoing. So we do expect to have that completed within the next -- within the first six months of this year. So that will be a product that is serving the U.S. market which will include additional specificities that we believe are important for that market. And then again, the team is very excited with the possibilities also to continue to drive continuous improvement in the different products that we offer. So that's very exciting for us.

[Josh Jennings:]

Excellent. And then, just one last follow-up on just commercialization. Once CE mark is in hand, a number of positive updates on the distributor front and with the tenders that your team is tracking, is there any, I guess, way to break down near-term tenders? I mean, within calendar 2022, do you expect to be participating in tenders? And you talked about ordering additional MosaiQ instruments for the second half of this year to fulfill initial customer demand. Are you -- can you help us understand how many systems you may have ordered? And just thinking about modeling and thinking about potential MosaiQ revenues in calendar 2022 versus calendar 2023 when, clearly, there'll be a bigger bolus of MosaiQ-driven revenues.

[Manuel Mendez:]

Yes. Thanks, Josh. No, look, I think that there's going to be tenders that are going to be starting as soon as March, for example, or just shortly thereafter which we are ready to participate. And our teams are working, assuming on the assumption that we get this approval like we said in the next couple of weeks, that we will participate in those tenders. So we're not waiting, the team is mobilizing very quickly. Some are going to happen in the first half of this year and some are going to happen in the second half. There's, like I said, more than 20 of them that we've identified. Some large ones are going to be in the -- towards the first half of the year. And then there's a couple of other large that are going to be in the second half. We'll be sort of in conversations as to what is the right moment to share specifically countries, locations and so on. I think, again, we have all the details and the team is really prepared. So on the tender front, I think that's looking -- we're very excited about that and we're very well prepared. Likewise, on the distribution front, as I continue to emphasize, that's also moving forward very nicely. And we expect those two, at the right time, we'll communicate what does that mean in terms of revenue for this year and the timing of that. So we'll communicate on that front. And then in terms of go-live, I think that different countries, different tenders are going to be a little bit longer or a little bit shorter in their go-live. So we're going to be, again, assessing that as they close the tender process and they get the -- those tenders awarded. And then the go-live varies within '22 and '23 and we'll be communicating those in the weeks to come. We don't want to put -- get too ahead of ourselves to give you information. Because, again, tenders are evolving which is a good thing for us because that means that we'll have an opportunity to participate once the CE marking is received. So I'm sorry that it's a little bit vague and it's not very specific. But in terms of revenue and timing, we're sort of trying to understand what is the right time to communicate. But Ali, I don't know if -- anything you want to add to that?

[Ali Kiboro:]

I think we will have better clarity. And as we've shared previously, we will continue to provide guidance as we're thinking through it. We don't have anything for this quarter, as you can imagine, as we wait for the CE marking to be approved. As we get it and as we then look forward, we will definitely provide some way for us to think of what are the different inputs. So there'll be more to come, not for this quarter, though, as we've said in our remarks here.

[Josh Jennings:]

Understood. Thanks for your intel fellows . Thank you.

[Operator:]

Thank you. We have next question from the line of Matt Sykes from Goldman Sachs. Please go ahead.

[Matt Sykes:]

Hi, good morning, Manuel and Ali. Congrats again on the CE mark -- pending CE mark. I just wanted to ask about the commercial agreements. It seems like you've been able to kind of loop in Alba as well with some of your commercial agreements. And as you expect that to take place, is that an acceleration that could occur when MosaiQ is sold? Or could you see an additional acceleration from those agreements earlier than that for Alba?

[Manuel Mendez:]

Yes. So for Alba, I think, again, as we put those contracts in place, it doesn't require CE marking. It's just going to be automatic for them to take both on. So we are again, expecting that increased access to give us some level of incremental sales, of course, in those geographies, of course.

[Matt Sykes:]

Great. And then, just any update on COVID-related impacts. You mentioned at the outset, it still remains an overhang, maybe in the U.S. or other areas. Just any commentary on that and what the environment is like at this point?

[Manuel Mendez:]

Yes. I think we've seen it as of late, just -- and through the last week, there was a lot of people. I mean, it just seems like every day, if somebody has it or their kids have it and then four or five people are out. So they did impact us in the last quarter and then now. But we see, hopefully, that some of these things are going to improve in the next few weeks. I think we see the cases going down. But it certainly did impact people presence in some of the areas of our business in different functions. So that's why, again, I thought again, despite of that of those interruptions, our teams sort of continue to drive on. So yes but I think again, we're -- it did impact some of the timelines there, particularly the U.S. and then the SDS, some delays there. But look, we've already reflected that in my commentary, in my remarks. We don't anticipate that going forward any further impact. But certainly, it was not convenient for anyone.

[Matt Sykes:]

Great. And just my last question just on supply chain. It sounds like you're anticipating demand and ordering ahead which will probably be helpful. But just any supply chain-related issues in terms of the instrument manufacturing?

[Manuel Mendez:]

No, not at all. We're in conversations with our partners traffic on that. We believe, again, that we've already told them our needs from an instrumentation perspective. So that should be on track. We don't expect any disruption there. And then also regarding other areas of our business, I think supply chain and manufacturing team, operations team, they do a nice job in making sure that we have all the things we need in order to meet the anticipated market demand for the MosaiQ immunohematology products.

[Matt Sykes:]

Great. Thank you very much for the color. I appreciate it.

[Manuel Mendez:]

Thank you, Matt.

[Operator:]

Thank you. Our last question comes from the line of Brandon Couillard from Jefferies. Please go ahead.

[Brandon Couillard:]

Hey, good morning guys. Just in terms of following up on Josh's questions, kind of around the commercial box. Can you help us understand, so the initial 20 IH tenders that you talked about for market, does that account for maybe how many donations do these labs process a year? And would it be your expectation that these are just primarily IH customers and that kind of the initial SDS panel won't necessarily be part of that conversation, that would interpret it?

[Manuel Mendez:]

Yes, Brandon. Thanks. So look, I think, again, when we look at the tenders, what we're discussing is really immunohematology-specific tenders. These are not joint tenders for any of the other modalities which is good for us because then that gives us an opportunity to enter into these other blood centers through other modalities in the future. So that's just to clarify that. In terms of the tenders and timing, we -- again, we have a list of all the tenders. We have a spreadsheet that's really clear, what are the donations? What do we expect? What is our capture rate? What is again, the go-live that we expect? So all these specific details I've reviewed and discussed with the team. We're hesitant to share those things currently just because we don't want to set the expectations and then sort of be slated to those. And so we'll be communicating those in the near future when we have some specific participation and then we can start communicating the progress we're making there. Also, again, it depends on the CE marking approval in the next couple of weeks. So -- but again, we're very focused on it. The teams are ready to go and we're preparing for those tenders as soon as March. There's a couple of tenders that we expect to participate, assuming we get the CE marking. So then the go-live determine that afterwards once those tenders then get evaluated, awarded and then have conversations when they want to go-live. I mean, I hope that answers your question or do you want something again, maybe you have a follow-up on that.

[Brandon Couillard:]

I guess maybe shifting gears, I guess, a bit. Can you update us on where your microarray manufacturing yields are today, not necessarily capacity but kind of what the yields are and where you think that will be in the year? And then how much CapEx do you think will be needed to build out the second manufacturing line? And then what do you think yield capacity sort of looks like at that point in time? I think you said 18 to 24 months for now.

[Manuel Mendez:]

Yes. It's difficult to speak about yields because at the end, we are really focused on development runs as well as the clinical trial runs. So it's difficult to assess. What I can say is that when we were developing COVID -- the COVID test that were launched, antibody test in 2020, our yields were greater than 95%. So they were very high on those yields. And the team did a very nice job in that process. So that was a good learning for the team. What I can say is we have, again -- as we communicated in the past, we have with our current line of capacity of $30 million. That's on paper. What we can say is that, again, as we ramp up and scale up, depending on the different microarrays, then we'll learn from that process. But we certainly understand that when we look at the demand, that we believe we can generate in the next 18 to 24 months that we need to invest in this second line, as I mentioned before which, again, we're very committed to doing to ensure that we have satisfying the customer needs in this area. But Ali, do you want to comment on the second line investments or timing? If we want to communicate that now, I'm not sure.

[Ali Kiboro:]

Yes, sure. So I think what we've said is that the second line that we need to put together, we've looked at different options there. We know it's going to cost us -- I think if we look at the first line that we did, it's going to cost us over $15 million. And what we are looking at, just so you understand as well, is how we build it. So we're not building it exactly the same way we did with the first line. We're using a modular approach. We're looking at upgrades to what we currently have. So that's going to give us a range of potential values of how we build it. But we do expect that it's going to cost us over $15 million by the time it's complete.

[Brandon Couillard:]

Got you. Okay. When do you think we'll see some initial commercial distribution agreements? And what's kind of the optimal number of channel partners you ultimately see or envision supporting?

[Manuel Mendez:]

Well, look, we're -- we hope to be closing some of these contracts soon. And I think, again, we're ready with some of these activities as we speak, I mean, so any time now, Certainly, that's all dependent on the CE marking that we get -- receive that in the next couple of weeks. But again, those conversations are not stopping and those contracts should be closed fairly soon. And then in terms of ideal number of distributors, I think it is going to depend on the different geographies around the world. I can tell you we're in conversations with more than 50-some distributors in the right locations that we will prioritize. Again, what's the right number? I think, again, that is going to depend on the different geographies and the access we want to have there. But it could be upwards of -- around where we're targeting 20, 25 distributors depending on timing, not all immediate but throughout the next 12 to 18 months.

[Brandon Couillard:]

Okay. And then just last one. Ali, can you just elaborate a little bit more on the MosaiQ inventory charge that you absorbed in the third quarter kind of what that was generated through exactly?

[Ali Kiboro:]

Sure. So as you know, our inventory, we typically book it at the lower of it's cost towards net realizable value. So now as we're getting close to launching our MosaiQ microarray here for immunohematology, we're required under the accounting rules to essentially do a comparison of whether our inventory is held at the lower value of it's cost or the net realizable value. So when we do that analysis, it requires us to write-down some of the work-in-process that we had because the cost that we have, it was lower than what we expect to realize when we commercialize the product. And really, this is a reflection of the fact, as you can imagine, that our production is still not at scale because we have not launched. And so our cost is higher than what we are expecting to sell those microarrays at. And so we have to write-down the raw materials and inventory that we have here in the quarter. So that's where it is and we have to book that into the cost of sales because we expect to start selling them here pretty soon. So that's what you're seeing flowing through our cost of sales.

[Brandon Couillard:]

Got you. Okay. All right, thanks for the comments. I appreciate it.

[Manuel Mendez:]

Thank you, Brandon.

[Operator:]

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session, and I'd like to turn the call back to Mr. Manuel Mendez, CEO, for closing remarks. Over to you, sir.

[Manuel Mendez:]

Thank you, Vikram. Look, thanks for the questions. We're very excited. I think our teams are highly focused on

[Operator:]

Thank you very much, sir. Ladies and gentlemen, this concludes today's conference call. Thank you for joining us. You may now disconnect your lines.