Quotient Limited
Q4 2017 Earnings Call Transcript

Published: 23 May 2017

[Operator:]

Greetings and welcome to the Quotient Limited Fourth Quarter and Fiscal Year 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief 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. Chris Lindop, Chief Financial Officer for Quotient Limited. Thank you Mr. Lindop, you may begin.

[Chris Lindop:]

Thank you, Latanya and good morning everyone, and welcome to Quotient’s earnings conference call for our fourth quarter and fiscal year ended March 31, 2017. 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 the future operating results and expected development in 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 US 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 and Quotient assumes no obligation to publicly update these forward-looking statements. With that, I’d like to turn the call over to Quotient’s Chairman and Chief Executive Officer, Paul Cowan.

[Paul Cowan:]

Thanks Chris. Tremendous progress continues to be made towards the full commercial launch of MosaiQ in Europe later this year. The initial manufacturing system for MosaiQ Microarrays is now commissioned and validated and working with our partner STRATEC, we’ve now taken delivery of the first commercially ready MosaiQ Instrument. Internal validation studies are now underway for the initial MosaiQ applications, with European field trials scheduled to commence early in the third calendar quarter of 2017. We look forward to sharing the results of the internal validation studies and the European field trials when they are completed later this summer. In parallel with a strong progress made on the MosaiQ project we successfully completed an equity fund raising in early April, a key element of the company's strategy to secure funding through to profitability. Assay performance for both the initial blood grouping and disease screening applications continues to meet expectations. After further analysis of the data for the antibody detection assay we decided to take some extra time over the past four weeks to further optimize both the assay pathway on the MosaiQ instrument and the spot recognition algorithm with the aim being to more closely align the performance of MosaiQ to predicate technologies in terms of the antibody detection. The MosaiQ instrument is flexible enough to allow such changes to be implemented very efficiently. We have completed the planned changes to the assay pathway and are now finalizing adjustments to the spot recognition algorithm in advance of running the blood grouping assay of our internal validation studies. We have now commenced formal internal validation studies for the MosaiQ IH Microarray. These studies are designed to mimic the subsequent field trials for MosaiQ and completion of the studies are currently scheduled for July 2017. While continuing to make strong progress on the commercial scale up of MosaiQ we look forward to delivering against a number of key regulatory and commercial milestones for MosaiQ over the coming quarters, including commencing European field trials in the third quarter of 2017 filing for regulatory approval in Europe during the second half of 2017, undertaking the full commercial launch of MosaiQ in Europe during the second half of 2017, following receipt of required regulatory approvals, commencing US field trials in the second half of 2017, and filing the US Regulatory approval around the end of 2017 with commercial launch in the US expected in early 2019. We are continuing with our commercial efforts in Europe to support the launch of MosaiQ later in 2017, including responding to a number of invitations to tender issued by major donor collection organizations in Europe. We expect these tenders to be awarded in the middle of 2018. Participations in invitations to tender at this early stage reflects our commercial efforts to date and the interest in MosaiQ that has been generated among potential customers. We have focused on educating potential customers on the capabilities of MosaiQ and the advantages it can offer in terms of reducing cost and improving patient outcomes. Customer feedback continues to be very positive across the board. In addition to responding to invitations to tender, we continue to work with a number of key target customers both in Europe and in the US to establish and quantify the financial benefits of adopting MosaiQ in a donor testing environment. This work continues to support our initial conclusion that MosaiQ will deliver major efficiencies and cost savings when adopted in terms of less complex workflows, simplified consumable requirements, reduced waste, and quicker turnaround times. Very importantly it is well understood that MosaiQ will offer improved patient outcomes at no extra cost to the healthcare system, particularly by allowing for the better matching of donor and patient blood across all patient groups, not just key at-risk patients. We will continue to work diligently to advance MosaiQ through its final validation process and remain on schedule to complete European field trials for the initial blood grouping and disease screening applications in the third quarter of calendar 2017. Turning to the conventional reagent business, the reagent business generated record results in terms of revenue and profitability during fiscal 2017 with total revenues growing 20% year-over-year. Despite maintaining a strategy to deliberately exit the lower margin parts of the reagent business we continue to generate growth in product sales and gross profit of 12% and 11%, respectively during fiscal 2017. We are targeting a continuation of solid growth and profitability for this business in the coming fiscal year. Construction of the new bio campus facility for the reagent business has progressed to plan and we expect to take delivery of the building in the third quarter of 2017. Plans for the transfer of our existing reagent manufacturing operations to the new facility are also well underway and we expect to complete this transfer by the end of 2018. Plans to complete the sale and leaseback of the new bio campus facility are also progressing. With that, I’d like to hand back to Chris who will present the financial overview.

[Chris Lindop:]

Thanks Paul. Fiscal fourth-quarter revenues were $5.5 million, including $800,000 of product development milestones. In the quarter, product sales were $4.7 million, an increase of 4% from last year's fourth quarter. The increase in product sales was mainly attributable to growth in sales to OEM customers and incremental direct sales to customers in the United States. OEM sales of $3.4 million grew 9% year-over-year and now represents 71% of product sales. This increase was primarily driven by better pricing, increased sales to existing customers, and the impact of recently launched new products. Direct and distributed sales of $1.4 million decreased 7% year-over-year and represented 29% of product sales. Direct sales in the United States increased 4% year-over-year, which was mainly attributable to the impact of new product launches and the expansion of our customer base. Direct and distributor sales outside of the United States decreased 20% year-over-year consistent with the ongoing rationalization of our product offering in Europe. In the fourth quarter, gross profit on product sales increased 18% year-over-year to $2.3 million, compared with $2 million in the prior year, due to the positive impact of better pricing, higher sales volumes, and product sales mix. Gross margin on product sales was 49.4%, compared to 43.7% last year. In the fourth quarter, we recorded an operating loss of $17.7 million, compared with $12.8 million last year. In the quarter operating expenses were $20.9 million, an increase of $5.5 million over the prior year. Research and development expenses were $13.6 million, a $6.9 million increase year-over-year and general and administrative expenses were $6 million down $2 million, compared with a prior year. The increase in research and development expense 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 cost to research and development following our establishment of specific production department cost centers. Sales and marketing expenses of $1.3 million increased $600,000 from the prior year's fourth quarter, reflecting the scaling up of the MosaiQ commercial group and cost of attending trade conferences. Stock compensation expense was $1.1 million in the fourth quarter versus $600,000 last year. In the fourth quarter, net other expenses was $2.6 million, compared with net other income of $3.3 million last year. Net other expense consisted of interest expense of $3.4 million and $800,000 of foreign exchange gain. Overall, our net loss for the quarter was $20.3 million or $0.69 per ordinary share. For the fiscal year, total revenues were $22.2 million, including $2.1 million of product development milestones earned. In the year product sales were $20.1 million, an increase of 12% over the prior year. For the year gross profit from product sales was $9.3 million, an increase of $900,000 or 11%. While gross margin on product sales was 46.1%, essentially flat year-over-year. For the year operating expenses increased $27.5 million to $85.4 million, due to a $28.3 million increase in research and development spending incurred to prepare MosaiQ for field studies, which are planned to commence this summer. In the fiscal year, net other expense was $11 million, compared with net other income of $15.2 million last year. Net other expense consisted of interest expense of $9.9 million and $1.1 million of other items, which comprised $2.9 million of foreign exchange gains offset by $4 million of differed debt cost expense. Overall, our net loss for the year was $85.1 million or $3.02 per ordinary share. Net cash used in operating activities totaled $13.4 million in the fourth quarter of fiscal 2017 compared with $4.3 million in the prior year's fourth quarter. During the same period, capital expenditures totaled $4.9 million, compared with $9.1 million in the prior year, largely reflecting expenditures in connection with the construction of the company's new conventional reagent manufacturing facility near Edinburgh, Scotland. For the full-year, cash used in operating activities totaled $56.2 million, compared with $47 million in the prior fiscal year and capital expenditures totaled $20.2 million, compared with $28.9 million in fiscal 2016. Moving to the balance sheet, cash and cash equivalents, and short-term investments were $20.8 million on March 31, 2017. Following our private placement of 12% senior secured notes due 2023 in October 2016 term debt totaled $80.7 million at the end of the fiscal year and we held $5 million in an offsetting long-term cash reserve account. Under the terms of the private placement, we plan to we plan to issue an additional $36 million of notes following the announcement of positive field trial results in Europe for the MosaiQ IH Microarray. Subsequent to the end of the fiscal year, we sold 8,050,000 shares in a public offering generating net profit proceeds of $45.2 million targeted to fund the ongoing commercialization of the MosaiQ technology. At March 31, our cash receivable totaled $2.6 million and inventory totaled $13.6 million. Moving to guidance for fiscal 2018, we are forecasting full-year revenue in the range of $33 million to $34 million, including approximately $12 million of product development revenue with product sales revenue expected to be in the range of $21 million to $22 million. For fiscal 2018, we forecast an operating loss in the range of $63 million to $68 million, including non-cash charges for depreciation, amortization, and stock compensation expense of approximately $15 million. Capital expenditures are expected to be between $25 million and $30 million in fiscal 2018. With that, let me now turn the call back to Paul.

[Paul Cowan:]

Thanks Chris. Development of MosaiQ for the initial blood grouping and serological disease screening applications is now complete. We have commissioned and validated the initial manufacturing system allowing us to manufacture or make MosaiQ Microarrays. We also now have taken delivery of the first commercially ready MosaiQ Instrument. In essence, all of the pieces are now in place to allow us to move MosaiQ through internal validation studies and field trials in advance of full commercial launch later this year. We still have a lot of process to complete, but we can be very confident we can deliver against our original objective to introduce a transformational and highly disruptive automation platform to address the $3.4 billion transfusion diagnostics market starting later this year. The case for adoption of MosaiQ by our customers is compelling and we are already starting to see that with our early commercial discussions. MosaiQ will also advance patient care and drive costs out of the healthcare system. In return, Quotient can secure long-term and highly profitable revenue streams. We remain absolutely focused on execution of the remaining steps to bring MosaiQ to market later this year. With that, I’d like to thank all of our employees and partners for their tremendous contribution towards the continued success of Quotient. I will now ask the operator to begin the Q&A session.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Brandon Couillard with Jefferies. Please proceed with your question.

[Brandon Couillard:]

Thanks, good morning.

[Chris Lindop:]

Good morning, Brendon.

[Paul Cowan:]

Good morning, Brandon.

[Brandon Couillard:]

Paul, with respect to the optimization efforts that you’ve undertaken over the past several weeks, could you elaborate on the level of I guess performance improvement that you have seen with antibody detection assays and what are kind of the next steps to finishing the spot recognition? And does that contribute to the, I guess somewhat extended period that you have given yourself to complete the internal study, will that be in July?

[Paul Cowan:]

Yes. We just, as we mentioned previously, we demonstrated what was a very, very sensitive assay compared with the predicate technology when we reported our previous quarter's earnings for as it relates to MosaiQ. We sort of stood back and looked at and felt that we should just in terms of risk mitigation go back and take a look at those results. We were seeing mixed results in terms of essentially the strength of signal that we were getting, and so we took steps a, as mentioned to modify the pathway and those steps have now all been completed. And then we are now finalizing the spot recognition algorithm, which is the final piece. That work will be completed in the next 1 to 2 weeks and then as you say that sort of has held up the initial work on the internal validation studies. But again primarily linked with deciding to sort of minimize the risk of going into field trials and our confidence levels are that we will see concordance levels consistent with our clinical target, which is 95%, compared with predicate technologies.

[Brandon Couillard:]

Okay, that’s helpful. And then could you confirm for us, again how many samples you intend to run in that internal study and will you read those results out before you start field trials or should I interpret your comments to mean you will read those results out concurrently after field trials have already begun?

[Paul Cowan:]

No. The number of samples will be in excess of 3,000 and we will issue a press release setting out those results in advance of commencing field transfer.

[Brandon Couillard:]

Okay super. And then one more on, as far as your dialogue with a handful of European customer is exploring tenders for the mid next year, could you elaborate on how many labs you have had a dialogue with so far the potential size of these customers and how should we think about the ASPs for initial adopters in Europe relative to what you see as the follow-on customer base?

[Paul Cowan:]

We’ve had discussions with pretty well all of the key customers in Europe and a number of those discussions more advanced than others at this point in time, particularly as we look to fill in the commercial infrastructure in Europe. The invitations to tender that we have received are from major donor collection labs with your annual donor collections in excess of three quarters a million units a year, and we continue to progress those discussions. As regards to the ASPs, actually the work that we’ve undertaken to date has confirmed our original assumptions of being reasonable around pricing in Europe, particularly for blood grouping. And likewise they have also confirmed what we see as the cost saving opportunity and so we remain confident that our original thesis around average selling prices is a reasonable if not slightly conservative assumption.

[Brandon Couillard:]

Okay and then one last one Paul in light of the context of the progress you have made in the last weeks and months, [indiscernible] things to find a validation, what do you see as the biggest risk, the biggest swing factors that could influence the timeline, positively or negatively from here?

[Paul Cowan:]

It is largely down to process now. A lot of that process is well planned. We progress through it. What could knock the timetable really are unknown to us at this point in time. We expect the assay to continue to work very well in the validation studies. The instrument is working very well. The manufacturing system is working well. So, I would say that as far as the things that could knock us off schedule those are all very much unknown at this point in time. All of the assays are working and working well, and so we are confident about that and the key is that we will progress those over the next 4 to 6 weeks and we will give a strong message once we announce the results of the internal validation study.

[Brandon Couillard:]

Super. Thank you.

[Paul Cowan:]

Thanks for your questions.

[Operator:]

The next question is from Karen Koski with BTIG. Please proceed with your question.

[Karen Koski:]

Hi guys thanks for taking the questions and congrats on the progress. First one for me, just a follow-up and press a little bit further on Brandon's first and last questions, other than finalizing the optimization of the spot recognition algorithm are there any other changes even if relatively minor that you’ve perhaps thought about making, but have decided not to make that you might bring back to the table between now and when the European field trials commence?

[Paul Cowan:]

No, antigen typing has performed very strongly and consistently. We don't envisage any changes there, yes, it is really no just down to that final optimization on the spot recognition algorithm and running a decent data set, against that algorithm confirming that it’s valid and then just moving out straight into the internal validation studies. So, there are no other changes anticipated to the assay pathway, the instrumental, or the algorithm.

[Karen Koski:]

Okay. And then can you remind us how many, I guess, commercially ready MosaiQ instruments have been built at this point and then what the timing is around kind of physically distributing them to field trial sites in Europe and the US, and then what kind of timing you are expecting to train the field trial sites for these instruments?

[Paul Cowan:]

The last report I had was, we have our first instrument now, we’re literally going to take one instrument a week for the coming weeks. We’ve got 10 instruments on order. 10 of the, what we call pre-series instruments. Those are going to come into our facility and will be essentially a validated setup worked so that when we deploy them out to field trial sites we will know that they are working and working consistently with the assay. We would expect to start deploying them to the field trial sites in Europe. In the middle of July, we would expect 1 week to 2 week training - installation and training period. And then as far as US field trials that will just follow as and when the start date for the US field trials is settled.

[Karen Koski:]

Okay. That's all I had. Thank you so much.

[Paul Cowan:]

Thanks Karen.

[Operator:]

Our next question comes from Josh Jennings with Cowen. Please proceed with your questions.

[Josh Jennings:]

Hi thanks and good morning. So, I just wanted to ask a follow-up on manufacturing capacity and where you guys are being [indiscernible] field trials from a commercial mission standpoint on both the instrument side and the Microarrays side, are there any limitations or any hurdles left to clear from improving the capacity to meet commercial demand?

[Paul Cowan:]

Well to get to field trials, we’ve got sufficient capacity and we are producing and expect to produce sufficient Microarrays to get us through the field trial process and indeed the internal validation process. So, no challenges there. As we look forward to the commercial sort of - where we start to see meaningful first commercial sales and demand for Microarrays, we are at least 12 months to 18 months, if not - around 12 months to 18 months away from that date. We will use that time to further optimize the manufacturing process, we're very confident that we can get it up to the desired and targeted levels of yield for us to deliver 30 million Microarrays from the first manufacturing system and then double that with the installation to second manufacturing system. So, again, we are comfortable with where we are at the moment in terms of production capacity and we are confident that we can drive yields up to where we need them to be to get to the 30 million units of capacity and then post US field trials, I would expect this might be a quick decision to order the second manufacturing line, which will take us to full capacity in the first manufacturing facility.

[Josh Jennings:]

Great. And just a question on EU commercialization, you have been invited to participate in the tenders, will be awarded in mid 2018, and I am - what do you need to - are these discussions progressing in front of internal validation in your field trials, do you need that data to lock in a tender offer or tender to be awarded a contract, I am just curious about the timing of when these contract for tender, the discussions for tenders need to be completed by in order to be awarded the tender for mid-2018 and then I have a follow-up?

[Paul Cowan:]

The nuts and bolts of the tender really will take place early next year in terms of formalizing what is performance, what is your pricing et cetera, et cetera. So if we have got until then to complete European field trials, and then at that point in time also we have pricing discussions, so we are confident that we will be able to meet that target.

[Josh Jennings:]

And just in terms of how we should be thinking about the commercial opportunity about the tender channel versus non-tender channel, I believe where you can break that down for us in terms of these contract wins and [indiscernible] what percentage seem to go through this tender process and what percentage will be outside the tender process [indiscernible]?

[Paul Cowan:]

It is difficult to say at this point in time, I would say that predominantly in Western Europe it is primarily tender driven, but we have received indications that if we can substantiate the benefits of MosaiQ there is always going to be the possibility that a customer will move outside of its classic tender timeline, but we have undertaken a detailed review of tenders coming up over the next 3 to 5 years and we are confident that there is plenty of capacity in terms of future demand as those standards relate to drive our revenue line and revenue build, we will forecast revenue build over the next 3 to 5 years. That won’t inhabit us, there is a lot of tenders coming up for renewal over the next 2 years to 3 years.

[Josh Jennings:]

Okay. And then my last question is just as you are making progress, going to complete the internal validation and look forward EU field trial, is there anything else required before you start US field trial independent of the activity that are moving forward, European field trials? That’s my last question. Thanks a lot.

[Paul Cowan:]

So we are using the time between now and the US field trials to transfer the remaining antigen typing assays to production and so that will complete in the next three months to 4 months, and then we go to US field trials with a complete antigen typing menu. So apart from that there’s nothing else. The instrument clearly will be validated and proven by that point in time, it is just really bringing these final analysis to the Microarray, nothing more than that. And development of those assays is completed. It is really just in the process and formality of transfer to manufacturer.

[Operator:]

Thank you. At this time, I would like to turn the call back over to Mr. Paul Cowan for closing comments.

[Paul Cowan:]

Thank you everybody for joining us on the call today, and we look forward to updating you on progress of the internal validation study and European field trials in the coming months and thank you very much and we look forward to speaking with you in the not too distant future.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.