Quotient Limited
Q2 2017 Earnings Call Transcript

Published: 1 Nov 2016

[Operator:]

Greetings and welcome to the Quotient Limited Second Quarter Fiscal 2017 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Stephen Unger, Chief Financial Officer. Thank you sir, you may begin.

[Stephen Unger:]

Thank you. Good morning, everyone and welcome to Quotient’s earnings conference call for our fiscal second quarter ended September 30, 2016. Joining me today is Paul Cowan, Chairman and Chief Executive Officer of Quotient. 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. 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 last night’s release. The forward-looking statements including guidance and projections provided during this call are valid only as of today’s date, November 1, 2016 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 Chairman and Chief Executive Officer, Paul Cowan.

[Paul Cowan:]

Thanks, Steve. Strong progress continues to be made advancing MosaiQ towards commercial launch, both in terms of MosaiQ Microarray manufacturing and also in terms of completion of the final MosaiQ instrument. While we have experienced a delay in completing planned internal validation studies for MosaiQ, the prospects for its successful commercialization remain unchanged. In this regard, I continue to be particularly encouraged by customer feedback regarding MosaiQ following yet another successful showing of the annual meeting of the American Association of Blood Bank held in Orlando in late October. Let me update you on the progress we continue to make on the commercial scale-up of MosaiQ. Internal validation and verification of the MosaiQ instrument has also progressed meaningfully and is nearing completion. In parallel, MosaiQ IH Microarrays for blood grouping are now being manufactured routinely at Quotient’s Eysins, Switzerland facility. The initial MosaiQ SDS Microarray or the initial serological disease screening Microarray for the detection of CMV and Syphilis is in the process of being finalized and ongoing development efforts are focused on completing the full serological disease screening menu. We remain highly focused on completing internal validation studies for the MosaiQ IH Microarray, which is a final step to be completed prior to commencing field trial. While we had planned to present these results at AABB, completion of the studies was delayed after identified inconsistencies in the results of early study. We’re currently conducting a comprehensive root-cause investigation to identify the reasons for these unexpected performance, unexpected variability. The internal validation studies will recommence following completion of this investigation and correction of any issues identified. Once we have successfully completed the internal validation studies, we will begin European field trial. Completion of the European field trials and the commencement of commercial launch for MosaiQ in Europe is currently planned for the first half of 2017. Field trials in the United States will commence shortly after completion of the European field trials. We are frustrated by the variability in results identified by the initial internal validation studies and the associated delay in MosaiQ field trials and commercial launch. However, I’m no less confident in our ability to successfully move the project forward. I continue to be impressed with and encouraged by the feedback that we received from potential customers. We recently showcased the working MosaiQ instrument at the 2016 AABB Annual Meeting and had over 75 delegates from more than 40 donor collection agencies and hospitals, mainly located in the U.S., during the instrument and receiving a progress update on the advancement of the MosaiQ platform. As mentioned, feedback continues to be overwhelmingly positive from both donor testing customers and patient testing customer. This feedback focused on a number of key areas including the comprehensive automation package offered by MosaiQ, the breadth of testing menu offered by MosaiQ, particularly its ability to offer both extended antigen typing for donor and patient samples, and a fully automated antibody identification capability for patient testing. And finally, the opportunities offered from laboratory efficiencies offered by MosaiQ, particularly its ability to unify multiple testing regimens such as blood grouping and donor disease screening under a single instrument platform. From discussions with key target customers, there remains considerable dissatisfaction with existing testing platforms for transfusion diagnostic. MosaiQ clearly represents a novel solution when compared with existing platforms and will allow for the first time donor and patient testing laboratories to be transformed delivering major cost savings and efficiencies for our customers. In parallel with the substantial advances made with regard to MosaiQ, the conventional reagent business again delivered strong results in our fiscal second quarter. During this period, strong revenue growth was generated by all key categories of our conventional reagent business as product sales grew 13% year-over-year, despite continued rationalization of lower margin products and revenue line. Our U.S. direct business had another exceptional quarter with product sales growing 29% year-over-year, driven by the impact of recent product launches and expanding customer base for our reagent red cell products and better pricing. With that, I’d now like to hand back to Steve who will present the financial overview.

[Stephen Unger:]

Thanks, Paul. Fiscal second quarter total revenues were $6.1 million, an increase of 44% from last year’s second quarter. Product sales were $4.8 million, an increase of 13% from last year or 16% excluding the negative impact of foreign currency translation. The increase in product sales was mainly attributable to growth in product sales revenues from OEM customers and incremental direct sales to customers in the United States. We also recognized $1.3 million of product development fees in this year’s fiscal second quarter, which did not occur last year. OEM sales of $3.4 million grew 24% year-over-year, and represented 71% of product sales. The increase was primarily driven by better pricing, increased sales to existing customers and the impact of recently launched new products. Direct and distributor sales of $1.4 million decreased 6% year-over-year and represented 29% of product sales. Direct sales in the United States increased 29% year-over-year which was mainly attributable to the impact of recently launched new products, new customers for our reagent red cell blood products, and better pricing. Direct sales outside of the United States decreased 50% year-over-year given our decision to rationalize our product offerings in Europe. Product sales from standing orders in the quarter were 73% versus 71% last year. Gross profit on total revenues was $3.4 million, growing 57% year-over-year and included $1.3 million of other revenue. Gross profit on product sales decreased 3% year-over-year to $2.1 million compared with $2.1 million last year as the positive impact of better pricing and greater sales volumes was offset by the impact of product sales mix and abnormally high levels of waste at our legacy Edinburgh manufacturing facility in Edinburgh, Scotland. This aging plant will be replaced by a new facility located outside Edinburgh that is currently under construction. Gross margin on product sales was 43% compared with 50.3% last year. In the second quarter, the operating loss was $17.5 million compared with $13.0 million last year. Operating expenses increased by $5.8 million in last year to $20.9 million with a $6.1 million increase in R&D expenses to $14.5 million and then $0.8 million decrease in general and administrative expenses to $5.1 million. The increase in R&D expenses reflects incremental costs associated with the commercial scale-up of MosaiQ including initial production costs, which are currently expensed as research and development. The decrease in general and administrative expenses reflects the allocation of production overhead costs to research and development following our establishment of specific production department cost centers. Sales and marketing expenses of $1.3 million increased $0.5 million from the prior year. This increase was mainly attributable to the newly formed MosaiQ commercial group. Stock compensation expense was $1.1 million in the second quarter versus $0.5 million last year. In the second quarter, net other income was $153,000 compared with $8.5 million last year. Net other income consisted of interest expense of $1.2 million and $1.4 million foreign exchange gain. Overall, our net loss for the quarter was $17.4 million or $0.62 per ordinary share. Moving to the balance sheet, cash and cash equivalents were $19 million on September 30th while term debt was $29.4 million. On October 14th, we completed a private placement of upto $120 million, a 12% senior secured notes due 2023. We issued $84 million of notes receiving net proceeds of approximately $79 million after expenses and we paid all outstanding obligations under our existing loan agreement with MidCap Financial Trust, which amounted to $33.5 million. As a result, our available cash resources this quarter increased to $64.5 million, which includes $5 million held in a reserve account, representing six months of scheduled interest. We will issue an additional $36 million of these notes to note purchasers upon public announcement of field trial results for the MosaiQ IH Microarray that demonstrates greater than 99% concordance for the detection of blood group antigens and greater than 95% concordance for the detection of blood group antibodies when compared to predicate technologies for a pre-defined set of blood group antigens and antibodies. On September 30th, accounts receivable totaled $4.0 million and inventory totaled $13.4 million. Capital expenditures totaled $2.8 million in the second quarter. Moving to guidance, for fiscal 2017, we forecast full year revenue in the range of $21.7 million to $22.7 million, which now includes $2.1 million of product development fees that we recognized as other revenue, a decrease of $600,000. We recognized $1.3 million in our fiscal second quarter and we expect to recognize the remaining $800,000 in our fiscal fourth quarter. These product development fees assume the receipt of milestone payments that are contingent upon achievement of regulatory approval for certain conventional reagent products under development. As such, the receipt of these milestone payments involves risks and uncertainties. We now forecast fiscal 2017 product sales revenues in the range of $19.6 million to $20.6 million, which is an increase of $600,000. For fiscal 2017, we forecast an operating loss in the range of $60 million to $65 million, an increase of $5 million and capital expenditures of $20 million to $25 million, a decrease of $5 million. Capital expenditures for the remainder of the fiscal year primarily involve items associated with the replacement of our Edinburgh manufacturing facility. For our third quarter, we expect product sales in the range of $4.3 million to $4.8 million compared with $4.4 million in the third quarter of fiscal 2016. I’ll now turn the call back to Paul.

[Paul Cowan:]

Thanks, Steve. While we have hit some unplanned hurdles in recent weeks as advance MosaiQ towards commercial launch, we are absolutely focused on resolving these issues as quickly as possible and progressing towards commercialization. We remain confident in our ability to achieve our near-term objectives of MosaiQ. The team working on MosaiQ has performed remarkably, successfully resolving and overcoming many technical challenges to-date and I am confident that we will diagnose and resolve these recent challenges as well. The customer reaction to MosaiQ remains very positive, both for donor testing laboratories and for patient testing laboratories. We continue to believe MosaiQ is a transformative solution for a substantial market and we are confident that prospects for its successful commercialization remain unchanged. Meanwhile, our conventional reagent business, which has had yet another very strong quarter, continues to execute exceptionally. With that, I would like to thank all of our employees and partners for their tremendous contribution towards the continued success of Quotient and MosaiQ. I will now ask the operator to begin the Q&A session.

[Operator:]

Thank you. [Operator Instructions] Thank you. Our first question is coming from the line of Brandon Couillard with Jefferies. Please proceed with your question.

[Brandon Couillard:]

Thanks, good morning. Paul, in terms of the internal validation study delayed, can you give us any more detail exactly what went wrong with the initial testing activities? And to what extent are you confident that you’ve identified the factors thus far as they contributed to the erroneous result and in particular what steps have you taken to mitigate the risk going forward?

[Paul Cowan:]

So, it’s clear from the early investigations, there are multiple factors here. It would be sort of remiss of me to say what they are; specifically, I don’t want to bias the outcome of the root-cause analysis. All I would say is that we are well-advanced on that root-cause investigation. And once we know the results of that and once we know the cause of the variability that we saw, we’ll take the necessary action. But, I don’t want to bias the outcome of that by identifying specific items at this time. We will complete the study and rectify the issue accordingly.

[Brandon Couillard:]

But from your understanding, I mean does it relate to any extent…

[Paul Cowan:]

It’s multiple issues. And yes, I’d say it’s multiple issues and we’ll get to the bottom of each and resolve them and then repeat the work.

[Brandon Couillard:]

Okay, do you have any type of…

[Paul Cowan:]

What I would say Brandon, what we know today is again we remain confident that we will be able to identify and rectify the problem.

[Brandon Couillard:]

Okay. Any type of timeline you could share with us in terms of how long you think the investigation will take and then the process of restarting the internal studies, do you think those can kind of be complete by end of the year? So, when you go into 2017, we’re sort of talking about beginning EU field trials, so do you think that extends perhaps longer than that?

[Paul Cowan:]

Yes. At this point in time, we expect the root-cause analysis to be completed within a number of weeks. Really until we know what the root cause was, it’s difficult for us to predict how long it will take for us to remediate any problems or any specific issues. But nevertheless, our feeling at this point in time is that we can still get this through field trials in the first half of next year, European field trials in the first half of next year.

[Brandon Couillard:]

And then coming out of AABB, can you share with us a little bit of the customer feedback and more specifically did you feel that they’re [ph] at the show and to what extent is are the large donor labs sensitive to the menu or is it more limited menu rollout when you first launch the system? Is that enough to drive MosaiQ adoption in your view?

[Paul Cowan:]

We, our target menu is more than sufficient for donor testing. And even if we would cut back on elements of that, we are confident that we would cover everything that’s necessary. I think one of the delegates at the conference in the session that we sponsored, referred to it as the meat and potatoes. We’re very confident that we can deliver against the meat and potatoes menu and that that will have minimal impact on the commercial success of the product, should we decide to truncate the menu for an initially launch and then come back with a more complete menu subsequently. So, at this point in time, certainly for the U.S., our expectation is that since we are doing U.S. field trials later, we should have sufficient time to ensure that we’ve got the maximum possible menu available to us at launch.

[Brandon Couillard:]

Just one for you, Stephen. First off, did I hear you right that basically as of today, you effectively have $65 million of cash on hand post that deal? And then secondly, curious as to how much CapEx is specifically left related to the new Edinburgh facility and if and when, do you think the sale leaseback might still be back on the table?

[Stephen Unger:]

Sure. So, from cash perspective, yes. You heard correctly that we have post that offering roughly $65 million in cash available to us. That does include $5 million of cash that was deposited in an interest reserve account. And then secondly, as far as CapEx is concerned, as far as this year, expenditures for the Edinburgh facility is in the range of $15 million to $20 million, and we’re half way through the year.

[Paul Cowan:]

And we continue to expect the realization -- our target there is the end of the financial year.

[Operator:]

Thank you. Our next question is coming from the line of Josh Jennings with Cowen. Please proceed with your question.

[Unidentified Participant:]

Hi there. Actually this is Shanxi [ph] for Josh Jennings. I do have two questions. First is that, actually Josh went to AABB and I think the management provided some more color regarding the root-cause and possibly identified the misformulation of antibodies as one of the possible root causes that they still hope to or you identified additional possible root causes. Sorry for pressing on this?

[Paul Cowan:]

Yes. That was one of the early items identified. It’s one of a number of items is what I would say and really it’s remiss of us to start concluding on that until we’ve actually completed the root-cause analysis.

[Unidentified Participant:]

So, if it is -- the misformulation of antibody, it is a possible root cause. Is it easy or a time efficient to fix that potential error?

[Paul Cowan:]

Correct, yes. Because clearly as it’s going through development, there has been a fixed formulation and it has been misformulated. We will just produce antibodies and reformulate it correctly.

[Unidentified Participant:]

And one last question and I think is it possible for you to walk us through some decision making process about the potential customers and what are the most important factors for them to adopt the MosaiQ going forward?

[Paul Cowan:]

Well, the most important factor really for them is the performance of MosaiQ compared with the existing testing platform to cut out. As you will be aware today, there are four instrument platforms used and plus there is considerable manual testing around blood grouping as well. We are looking to unify initially three of those instrument platforms and lastly eliminate routine manual testing. So, there are key decisions to be made around performance of that, performance of the platform and ultimately the efficiencies that would be gained by their lab following the implementation of MosaiQ.

[Operator:]

Thank you. [Operator Instructions] Thank you. We do have a question coming from the line of a Hilary Shane [ph] a private investor. Please proceed with your question.

[Unidentified Analyst:]

What gives you so much confidence that you can fix the problem? I guess there is a lot of confidence, you speak of confidence, yet I don’t know the science behind it but you’ve mentioned that you are very, very confident. So, what is the science behind why you have so much confidence?

[Paul Cowan:]

Yes, we have jumped into a process where everything works as expected within a development lab and that now has been transferred to production and yes, we’re seeing this varied -- or we have seen this variability. We don’t expect that the science remains the same. Our expectation is that there are some subtle differences between what happens between -- or how things are progressing within the development lab compared with how things are manufactured, those are some subtle changes there which are unexpected which is what we are…

[Unidentified Analyst:]

What is the biggest difference? That’s what I am trying to get my handle on is what is the difference between the development lab and what you are actually doing now?

[Paul Cowan:]

Well, first of all, the development lab is at very small scale and now we’re in very high scale, and that’s the principal difference. I can’t comment on what the subtle difference are really though until I complete the root-cause analysis but -- or we complete the root-cause analysis. But what gives us confidence is that this has been a robust assay throughout development or group of assays throughout development. And what we now need to do is identify those subtle differences and rectify them where necessary in order to arrive…

[Unidentified Analyst:]

Is it getting the reagent right? I mean that’s what I am confused because that’s sort of what gives bread and butter.

[Paul Cowan:]

Yes. I think the reagent is not -- unless there is a misformulation or something like that, it’s not bound to the reagent -- it’s not bound to the assays, it’s something more subtle than that within manufacturing and the instrument, and it’s complex; it’s complex integration.

[Unidentified Analyst:]

Okay.

[Paul Cowan:]

But the underlying science…

[Unidentified Analyst:]

Because there you are talking about how you thought you did not have enough antibodies in the reagent at AABB.

[Paul Cowan:]

That was a single reagent as far as I know, a single spot where it was over-diluted and therefore it’s been over-diluted, we’re not presenting enough antibodies to the final assay. So, if that is the case, then that will be resolved quite easily, but as I said, that to be one of a number of factor.

[Unidentified Participant:]

Okay.

[Stephen Unger:]

Do you have another question, Hilary?

[Unidentified Participant:]

No. Thanks.

[Stephen Unger:]

Thank you.

[Paul Cowan:]

Thanks Hilary.

[Operator:]

Thank you. [Operator Instructions] It appears we have no additional questions at this time. So, I would like to pass the floor back over to Mr. Cowan for any additional concluding comments.

[Paul Cowan:]

Thanks Stacy. I’d like to thank you all for joining the call today. We remain absolutely focused on our near-term goals for commercialization of MosaiQ and we’ll report back to investors in due course. Thank you very much.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.