Quotient Limited
Q3 2021 Earnings Call Transcript

Published: 1 Feb 2021

[Operator:]

Greetings and welcome to the Quotient Limited Third Quarter Fiscal Year 2021 Financial Results Conference Call. Please note that this conference is being recorded. I will now turn the conference over to Peter Buhler, Chief Financial Officer. You may begin.

[Peter Buhler:]

Thank you, Walt. Good morning, everyone and welcome to Quotient’s earnings conference call for our third quarter of fiscal year 2021. Joining me today is Franz Walt, 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.

[Franz Walt:]

Thanks, Peter, and good morning, everyone. Since our last earnings call in early November, the second wave of the global pandemic has adversely impacted business activities in Europe. Government travel restrictions and lockdowns imposed in response to the second wave seriously affected our operations in Europe and the UK. I am happy to report that notwithstanding this environment, our reagent manufacturing operations in Edinburgh continue to function well as we continue to supply reagents to our customers.

[Operator:]

Ladies and gentlemen, please stand by. We’re experiencing technical difficulties. We’ll resume in one moment. Thank you for standing by ladies and gentlemen. You may continue, gentlemen.

[Franz Walt:]

Yes. I don’t know exactly when the cut off was, but I will start from the beginning with my prepared remarks here. So thanks, Peter, and good morning to everyone. Since our last earnings call in early November, the second wave of the global pandemic has adversely impacted business activities in Europe. Government travel restrictions and lockdowns imposed in response to the second wave seriously affected our operations in Europe and the UK. I am happy to report that notwithstanding this environment, our reagent manufacturing operations in Edinburgh continue to function well as we continue to supply reagents to our customers. As you will hear in a moment that success in our reagent business was reflected in its operating results. Unfortunately, COVID’s impact on our MosaiQ business was more significant. We continued to make good progress on MosaiQ, but it was not as rapid as I would have liked. The field trials we have been conducting were especially impacted. Travel restrictions made it difficult or impossible for our teams to spend time on-site and lockdowns meant field trials kept stopping and starting. And travel restrictions and lockdowns limited our ability to hold the collaborative get-togethers that are important to our R&D and product development. Finally, COVID-related travel restrictions and lockdowns have affected the regulatory approval process for our products. For example, in many parts of Europe, at the moment, regulatory bodies are not performing site inspections of manufacturing facilities. So if you need a site inspection for an approval, your approval cannot proceed right now. COVID also appears to have delayed the timing of tenders by potential customers for our immunohematology product. I am proud of the entire Quotient team who continue to focus on execution through this difficult period.

[Peter Buhler:]

Thank you, Franz. Fiscal third quarter product sales were $8.7 million, an increase of 14% from last year’s third quarter. Alba by Quotient sales for the quarter are reported at $8.4 million, a year-over-year increase of 9.8%. Sales to OEM customers increased by 9.2%, while direct sales increased by 11%. Within direct sales, we see a continued strong increase in sales to customers in the U.S. Sales of the MosaiQ COVID-19 antibody test reached $358,000 for the quarter compared to $567,000 in the second quarter of the current fiscal year and $111,000 in the first quarter. On a year-to-date basis, total product sales increased by 9.9% to $26.2 million and 69% of our year-to-date product sales are related to standing orders. Total year-to-date revenues, also includes the $7.5 million upfront milestone payment received from Ortho Clinical Diagnostics in September 2020. Gross margin on product sales was 43.1% in the third quarter of financial year 2021 compared to 40.6% last year. The improvement versus last year is primarily due to improved product mix and pricing increases and the lower level of materials cracked. On a year-to-date basis, gross margin on product sales was 43.2%, while it was 42.9% a year ago. In the third quarter, we recorded an operating loss of $21.7 million compared with $22.4 million last year. On a year-to-date basis, operating loss reached $54.5 million versus $59.2 million in the 9 months of fiscal year 2020.

[Franz Walt:]

Thank you, Peter. Looking forward now, I would first like to share upcoming plans for the next few quarters. Our Alba by Quotient business will have started the process to extend the certificates to 2024, which includes renewal under IVDD as well as generation of the additional data for the first batch of products that must be IVDR certified by May 2022. We expect to submit to the notified body in June 2021, so we will be ready on time to transition from IVDD to IVDR. On the MosaiQ platform, our plans are the following

[Operator:]

Thank you. And our first question is from the line of Josh Jennings with Cowen. Please proceed with your question.

[Josh Jennings:]

Hi, good morning Franz and Peter. Thanks for taking the questions. It sounds like there is lot of challenges from the pandemic you guys are – you are facing and navigating through. I wanted to ask initially on the optimization process that you detailed while you are waiting to submit the CE Mark. Can you help us understand which tests are going to be optimized and what steps need to be taken to optimize those tests?

[Franz Walt:]

Yes. Basically, we made the press release and you saw in the press release that there were three antigen types where the concordance was below 99% PPA transfusion kit and a further data analysis has shown that these values are not improving. But in the internal testing, we have seen the technology to perform better. So we decided then to stop processing the document as it would not be possible right now anyhow to receive the CE Mark because the notified body cannot come for an on-site inspection which would be required as a precondition to process the CE Mark. And also the field force told us there is – there are no tenders right now. And the anticipation is that in November, if everything comes down, will be the first tender. So we decided to use the time, work on the microarray to make it more stable or we think there are a couple of small improvement processes we can implement as we have the extra time. And then we are confident that the test – if the field trial can be conducted like a normal field trial, it will show an even stronger product. The conditions under which we conducted the previous field tile were suboptimal, yes. You basically do a contract with a customer, you do the training, you go, you install everything onsite and then you are ready to go. And then the customer tells us, well, they have a policy because of COVID, they can’t do the testing. Then you have to go and collect everything, you move to a different site, there they can – you redo the entire work. You start and then halfway through they stop it. So it was always stop go, stop go, stop go on various sites that’s just not ideal to get the required results. We could have submitted anyhow and – but we decided to do some because we are confident the technology can do even more and that we get this test values over 99%.

[Josh Jennings:]

Great. And what are the steps that need to be performed in this optimization process? Is it mostly software enhancements or are there reagent enhancements, anything on the disposable microarray? What exactly has to happen for those concordance levels to improve to 99%?

[Franz Walt:]

Yes. So we are not disclosing any technical steps necessary for that. But we have run already the test run actually on Saturday, and the test levels were where we wanted to have them. So we are pretty confident. And we have to have now, of course, customers willing to do the testing. And as soon as we can do that, we will proceed, process it and come with a strong product to the market.

[Josh Jennings:]

Great. And just thinking about the FDA pathway, I know it’s 510(k). The timing doesn’t impact anything on the commercialization front. But can you just help us understand the questions that the FDA got back to Quotient? Are the – is the focus on the specificity of the CMV test or are there...

[Franz Walt:]

No.

[Josh Jennings:]

Issues with the system that the FDA is...

[Franz Walt:]

No, they wanted to have some more data. And what we have to get externally is reproducibility testing, which basically means you should get the same results over multiple machines using multiple operators twice a day with multiple different lots of the assay during 20 nonconsecutive days. So basically, it’s a fully automated process. So if I push the start button, then they want to know if you would have pressed it, would it have been the same result. So we need a customer willing to do that, and we have a customer who gave us the commitment. And the plan is, I think, if I recollected correctly, in about March that we can do this testing and then we proceed with the submission. But it’s anyway, not on the critical path because we still have to wait for the expanded IH to have a commercial combination, which is attractive for product launch.

[Josh Jennings:]

Great. And just how involved is STRATEC in the optimization process for the extended IH menu microarray? Are they involved as a partner working hand-in-hand with Quotient’s team or is this all Quotient’s internal team that is optimizing the ?

[Franz Walt:]

It’s hand-in-hand, and we are really getting fantastic support from STRATEC. We have a team on our side who are dedicated on software improvements and instrument improvements, and they work in collaboration with STRATEC to incorporate that. But it’s continuous improvement. Every time we see something that could be improved, of course, we are building it in, so very good collaboration and working hand-in-hand.

[Josh Jennings:]

Great. And just one last one, just one follow-up on STRATEC, you guys had ordered, I think 20 – I don’t think you quantified the number of systems you ordered from STRATEC last year. Have those systems been received? I know you mentioned in your prepared remarks that antibody testing demand has waned over the course of 2020, but any update on the installed base of MosaiQ’s for4 COVID testing in the U.S. and internationally?

[Franz Walt:]

We have we have the instruments in place in case there are COVID antibody testing pickup. They are in place and ready to go if that happens. We have instruments for the upcoming field trials, and we have ordered enough instruments for a successful launch in Europe in a few months from now, and they’re coming in. As we speak over – every week, we receive more. So we will be ready, and we will be ready on time for the market launch. We also have redone internally our business planning and the total value for us internally is exactly the same. There is a delay in launch, but it’s the same cumulative value as before the pandemic.

[Josh Jennings:]

Great. Thank you for taking my questions, Franz.

[Franz Walt:]

Thank you very much.

[Operator:]

Our next question is from the line of Sung Ji Nam with BTIG. Please proceed with your question.

[Sung Ji Nam:]

Hi, thanks for taking the questions. Maybe a COVID test question, just to get it out of the way. Just totally understand that obviously, that’s not the priority, and you don’t anticipate significant revenue generation there. But just would love to get your thoughts on, given the vaccines are being rolled out, and it would make sense that in certain cases or in many cases, you might want to measure the antibodies, right, to see if the vaccines are being effective. And so just kind of curious, is it a function of Quotient, kind of, prioritizing on your core business or do you think that there’s just not going to be the demand for antibody follow-up testing after vaccination?

[Franz Walt:]

So when the whole crisis started, we anticipated or we were expecting once vaccines become available, there won’t be enough vaccines for everyone immediately. And therefore, for a stratification process, which ones – which parts of the population should get the vaccine first in terms of priority versus others, they would use antibody tests to see who has already antibody and is temporarily protected and maybe use the available vaccines for those who have no antibodies. But in reality, all the governments right now have a very different approach. They go according to age and people with underlining conditions. So it’s like here in the Switzerland, 75 and older, and then they go down the categories. They’re not using antibody tests to separate those which are currently immune and vaccine the others first. But nobody saw that coming, yes, and it’s very difficult to speculate in beforehand because we have never seen a crisis like this. But it’s more or less the government who are deciding or the health care authorities in the countries who are deciding on the strategy to deploy vaccinations.

[Sung Ji Nam:]

Gotcha. That’s very helpful. And then just kind of curious, going back to the U.S. FDA resubmission, just hearing from others that the FDA is not reviewing anything that’s not COVID related at the moment. So just kind of curious in terms of your timing or your target timing of second quarter resubmission, do you think that’s – have you gotten any additional indication from the FDA in terms of when they – if that’s a feasible time line? Or is it just kind of your estimate in terms of when they might be available?

[Franz Walt:]

Yes. I think the – yes, what we have to do is to get this extra data, and we need a customer who is doing this reproducibility study with us. And we have a customer and we have a commitment, but it can’t just not be done right now. So we’re waiting for this and then we submit. And we anticipate for our 510(k) because this one is a 510(k) about 6 months approval time. But as I said before, it’s not on the critical path because the IH expanded is a BLA and a BLA takes longer, 18 months, and we need that microarray, in addition to the initial SDS for available product for the customers then to launch.

[Sung Ji Nam:]

Got it. That makes sense. And then just lastly for me. Sorry if I missed it, but in terms of other programs, other R&D developments underway, kind of curious for your molecular testing capabilities and others, are those also kind of delayed as well currently given the pandemic?

[Franz Walt:]

I think we made progress across the board, but not as fast as we like to have seen it, yes? It’s difficult to get people together. Our scientists and development people are from Switzerland, France, UK and the UK different parts from Scotland to Ireland to Wales, and everybody has different jurisdictions and different guidance. So it was not possible to get them together and work together the way they could have like under normal circumstances. So at any given point in time, about 50% of the workforce was on the location. So, especially the second wave with significant and strict lockdowns has impacted us significantly and 50% of the workforce, in essence, are coming from France, and they have to cross-border every day forward and backward, and everybody needs a special certificate in order to be able to do that. And over the last – since the pandemic, we had 162 cases where individuals had to go for imposed self-isolation for 10 days. So it’s continuous interruptions and everybody tries to do everything as good as possible, but you can’t do everything by phone. So we made progress, but not as fast as we wanted. And – but the underlying value of this business proposition has not changed and the technology is really unique. It’s also externally recognized with the BIG Innovation Award that this is a unique and a creative solution. And we think our business plan value is the same, but it’s just a little bit late. I think last time during the earnings call, I mentioned that we are intending to have the commercial launch in Europe in Q2. Now it’s Q4. And the underlying hypothesis for that is that the restrictions will be lifted and that we go back to a more normal towards mid of this year. That’s what we factored in. So if you listen to the different recommendations from the government or policies from the government, right now, everything is in complete lockdown. There should be some relaxation by end of February. And most authorities have given a signal that they expect that a big portion of the population will be vaccinated by midyear. So that’s why we assume that in the next couple of months, we will go back maybe not to normal, but to a much better situation than today. And based on that, we have adjusted the time line from Q2 to Q4.

[Sung Ji Nam:]

Got it. That makes a lot of sense. Thank you so much.

[Franz Walt:]

Thank you for your questions.

[Operator:]

Our next question is from the line of Brandon Couillard with Jefferies. Please proceed with your questions.

[Brandon Couillard:]

Hey, good morning, Franz.

[Franz Walt:]

Good morning.

[Brandon Couillard:]

Just to start off, you’ve referenced a number of times the inability of regulators to be on-site physically for site inspections. Just curious, which of your sites still requires an inspection? I was under the impression that was already behind us at this point. And do you have any visibility on a time line for that type of practice.

[Franz Walt:]

Yes. So we had – it’s Eysins. We are talking about Eysins because the expanded immunohematology microarray will be produced in Eysins. We had in Eysins already an inspection. That was in order to get the ISO certification, and we pass this inspection without any observation, so no problem at all. And – but as we are submitting now, this expanded IH microarray, they have to come and conduct an additional on-site inspection as part of . For the COVID-19 semi-quantitative antibody test, this was not necessary. That was an improvement – software improvement over an existing test, and this was not required. In Germany right now, they say they will loosen the restriction in February. We don’t know exactly when, mid-February, end February. But then it also depends on the policy of the notified body, which in this particular case is TUV SUD in Munich. I don’t know what they are going to have – what kind of policy they are going to have in place. And then it also depends on the situation in Switzerland, how risky is it for them to travel to Switzerland. So, all these have to come together. I think we were careful with our assumptions here. As I said before, we assume towards mid-year, everything will be back to a new normal and that we can process everything and that we can launch in Q4. So Q4 should be a careful estimate.

[Brandon Couillard:]

Okay. And then also curious how you communicate this revised time line to customers. I mean, because to some extent, even those who have had tenders that are coming up may have been, sort of, holding them back a bit to be able to evaluate MosaiQ. And now sort of talking about the end of the year, how do you sort of communicate this time line customers?

[Franz Walt:]

So our sales force is in continuous dialogue with the customers. And I think also the customers when the whole start, they had no clue how long this will last. And you remember maybe in the very beginning, we saw maybe 3 months, but now we are already a full year into this. And then customers told us in the beginning, they will postpone their tenders for a couple of months. But right now, there is no tender in sight. I think the – what we think is going to happen is that the first ones will come up in November this year. There is a certain backlog. So we expect in the first 24 months after our product launch in Q4 that we will have such participate in about 25 tenders. So tenders have been postponed, customers couldn’t tell us – well, they don’t tell anything. They will be public as soon as the tender is activated. But based on their signals we get the intelligence we have, it’s about November. And because of the backlog, it might be then more intensive from Q4 onwards.

[Brandon Couillard:]

Okay. Thank you.

[Operator:]

Thank you. At this time, we’ve reached the end of the question-and-answer session. I will now turn the call over to Franz Walt for closing remarks. Franz, if you want to add anything?

[Franz Walt:]

Okay. Yes. Thank you, Rob. So thank you, everybody, for joining us in this call today, and we look forward to updating you on this progress we expect to have made by the time of our full year fiscal 2021 conference call. So thank you very much. Stay safe, everybody. Bye-bye.

[Operator:]

Thank you to everyone. And this concludes today’s conference. You may disconnect your lines at this time. We thank you for your participation.