Quotient Limited
Q1 2019 Earnings Call Transcript

Published: 13 Aug 2018

[Operator:]

Greetings, and welcome to the Quotient Limited First Quarter Fiscal Year 2019 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 turn the call over to your host, Mr. Chris Lindop, Chief Financial Officer of Quotient. Please go ahead, Chris.

[Christopher Lindop:]

Thank you, Kevin and good morning everyone. And welcome to Quotient's earnings conference call for our first fiscal quarter ended June 30, 2018. Joining me today is Franz Walt, 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 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 August 7, 2018 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 Chief Executive Officer, Franz Walt.

[Franz Walt:]

Thank you very much Chris. It has been a little over four months since I stepped in first as the Interim CEO and then as the permanent CEO for our company. So many people have asked me why I decided to accept the permanent appointment when board offered it to me in May. So the short answer of course is that it became personal. I got to know the people at Quotient work so hard for so long to bring MosaiQ to the market and also to better understand the potential of the technology and its place in the wider diagnostic market. I have always been fascinated by the prospects of microarray based multiplexing and know that auto set right in the past and field. So when I saw how close this company to achieving that vision, I could not resist the challenge to help the team bring it to its full realized full potential. I think I have complementary skills and experience to help the team to do it and I thought, yes, let's get it done. So the initial market that the team selected, transfusion diagnostics has many characteristics, which makes it as the B-chat [ph] for this technology. As our prospective have said when they participated via video, in our recent Investor Day last month and I quote here “the market is characterized by a lack of true innovation. They also said, every increasing demand for their customers due to an ageing population and complexity which is compounded by having multiple instrument platforms in their laboratories and the need to perform a lot of manual testing” end of the quote. So these factors when combined with an ever more critical shortage of trained technicians, our old catalysts for the foundation to our fully automated blood flow solution delivering comprehensive characterization from a single low volume blood sample. I truly believe that at this point most of the development risk is behind us. When I came on board I asked myself three questions, will the technology work in the hands of the customer? Will regulators approve it for use and lastly will customers actually buy it? Well, we've answered the first of the three questions with our recent EU field trial results. The remainder of this year is all about our initial CE Mark submission, which will help us to answer the second of my question. But with respect to my third question, what we have heard from potential customers is that they've many of yet unmet needs aligned very well is the features and capabilities of MosaiQ. So one of my key inputs after taking my CEO responsibilities was that we should focus to ensure success. This requires a sequential approach to development. In the past we were simply trying to take on too many things in parallel and not being very successful with any of them. The first of the three priorities we set was completing the initial IH Microarray verification and validation process to permit us to ender the European field trial. We focused and as a result we were able to get the VNB completed and move to the field trial and then subsequently report field trail concoction state on timelines, which were in line with the expectation. Expectations I and the team has set after my arrival. Now, the key focus is on the initial SDS Microarray, this is important because once we completed it, it will demonstrate our microarray technology operating in the very large Serological Disease diagnostic market. Today's announcement that we have entered the critical verification and validation phase of development, the last step before commencing our European field trial for this microarray is very important. So the next six to nine months are shaping up to be very exciting time for Quotient. Firstly, we expect to submit for the CE Mark of our initial IH Microarray offering and if successful, we will be able to place devices with customers, so they can begin their own evaluation and change management process planning during 2019. Secondly, with the field trial of our initial SDS Microarray, we hope to demonstrate disease screening in a multiplex format in the hands of potential customers with the specificity and sensitivity required to meet the needs of the market. Our internal status tell us that we can actually do this. And lastly, we plan to successfully expand our initial IH Microarray to encompass an additional 14 clinically relevant antigens that will make MosaiQ the must have technology in the donor transfusion diagnostic market. So we're developing a strong, disciplined and collaborative approach to the sequential execution of our development goals to ensure we do everything we can to deliver a successful outcome on each of these projects. Of course, while we're doing everything that we can to ensure success, there can be no guarantees about the outcome of any regulatory review. We also made good progress on other fronts since the last conference call. We've successfully executed two key elements of our long-term funding the drawdown of the second portion of our senior note facility and more recently with the issuance of shares up on the exercise of outstanding warrants sold in connection with our private placement last October. So we totaled roughly $85 million of cash flows to the company in the last two months. In addition, our base business in liquid reagent for blood typing continues to grow robustly recording record revenues and strong double digit growth in both its direct as well as in the OEM business lines even as managed a transition from our original location to the newly constructed Biocampus facility. So I feel very positive about the progress our team is making and about our prospects for the future. So with that let me hand over the call to Chris Lindop, our CFO. Chris?

[Christopher Lindop:]

Thanks Franz. Well, I'm happy to report that first product sales was $7.9 million an increase of 26% from last year's first quarter and exceeding our original guidance range of $6.7 million to $7.3 million. The increase in product sales is attributable to both OEM customers and to direct and distributor sales. The prior year's first quarter included other revenue of $600,000 earned from the approval for sale in the US, our certain rare antisera developed for largest OEM customer. And those revenues did not recur in the current year. OEM sales of $5.6 million grew 24% year-over-year and represented 72% of product sales, while direct and distributor sales of $2.2 million increased 33% year-over-year and represented 28% of product sales. Product sales from standing orders in the quarter were 65% versus 79% last year. Gross profit on product sales was $3.8 million up 12% compared with $3.4 million last year. In the quarter gross margin was adversely impacted by incremental production related costs of approximately $800,000. These incremental costs result from the temporary requirement to operate two manufacturing facilities during the transfer of manufacturing to our recently completed Biocampus facility. This transition which is subject to regulatory approval is expected to be completed before the end of the fiscal year. As a result gross margin on product sales was 48.3% compared 54.5% last year. But adjusted for the duplicated costs associated with the manufacturing transfer, gross margin was 58.4% in the current year. In the first quarter the operating loss was $18.5 million compared with $16.9 million last year. Operating expenses increased $1.5 million from last year to $22.4 million with the $100,000 decrease in R&D expenses to $12.6 million, a $600,000 increase in sales and marketing expenses to $2.3 million and a $1 million increase in general and administrative expenses to $7.5 million. The increase in sales and marketing expense is attributable to the expansion of the MosiaQ commercial group in anticipation of the MosaiQ launch. The majority of the increase in general and administrative expenses reflects greater personnel related costs as we move towards commercialization of MosaiQ and also costs associated with the relocation of our Scottish manufacturing facility. Stock compensation expense was $1.3 million in the first quarter unchanged from the prior year. In the first quarter, net other expense was $6.6 million compared with $3.3 million in the same quarter last year. Net other expense consists of $3.1 million of interest expense and $3.5 million of foreign exchange loss arising from the revaluation of monetary assets and liabilities denominated in foreign currencies. Interest expense decreased $1.1 million over the prior year as a result of a reduction in estimated non-cash interest expense in the quarter. Overall, our net loss for the quarter was $25.2 million or $0.55 per ordinary share. Now moving to the balance sheet, cash and short-term investments were $40.3 million on June 30, while long-term debt was $112.8 million net of an offsetting long-term cash reserve account of $7.2 million. In addition, through the end of July, we've raised $48.8 million in cash from the sale of 8,414,683 shares of common stock to the holders of warrants which were issued in conjunction with the private placement of equity that we completed in October 2017. The cash balance at the end of the quarter includes $2.2 million from the exercise of 375,000 of those warrants which occurred prior to the end of the first quarter. On June 30, the cash receivable totaled $2.9 million and inventory totaled $15.6 million. Capital expenditures totaled $1.4 million in the first quarter. Now, moving to guidance, despite the strong performance in the first quarter for the time being we're confirming previously provided guidance ranges for product revenues of $25 million to $26 million. Our estimated operating loss of $60 million to $70 million has been revised to include increased investments in our plan development goals. Estimated operating losses include approximately $15 million of non-cash expenses such as depreciation, amortization and stock compensation. Capital expenditure are now expected to be between $5 million and $8 million for the full fiscal year. Other revenue estimates include $1.5 million of product development revenue that is contingent upon the achievement of regulatory approvals for certain products under development. As such the receipt of these milestone payments involves risk and uncertainties. Now, for fiscal second quarter, we expect product sales in the range of $5.7 million to $6 million compared with $5.9 million in the second quarter of fiscal 2018. Now, let me turn the call back to Franz.

[Franz Walt:]

Thanks Chris. So over the next 12 to 18 months, our regulatory on commercial milestones include European field trials for our initial Serological Disease microarray, which we expect to have completed by around the end of this year, permitting us to file promptly for European regulatory approval. This will be a major proof point for the viability of our strategy to incorporate disease training into our solutions set and opens up many other locked market to the MosaiQ technology beyond transfusion diagnostics. We also anticipate submitting for CE Mark for our initial IH Microarray during the second half of this year and while no guarantees about regulatory approval timeline should be impaired, we hope to be able to respond to tenders post approval in the first half of 2019. This would permit us to seat the donor market in Europe with the MosaiQ device even as we continue to expand this menu. Menu expansions include our expanded IH Microarray which we plan to move to US field trials in the first half of 2019 and to a submission of EU CE Mark in the second half of 2019. So the combination in Europe of an expanded IH Microarray with the initial SDS Microarray should give us a very attractive menu by the end of 2019 to expand our offering in the installed base and to attract new customers to the MosaiQ platform in 2020 and beyond. In addition, during this 12 to 18 months period we plan on bringing forward third proof point for our molecular disease screening capabilities and potentially for other disease panel opportunities. Initially, we plan to do this with, firstly, a working a prototype of a commercial version of our normal [ph] PCR approach, which operates today only as a blood block [ph] in the laboratory and secondly, through an independent study of the sensitivity and specificity of our MosaiQ MDS Assay of our unique universal microarray platform. So to sum this all up, we have an exciting agenda supported by the strongest balance sheet in this company's history. In 12 to 18 months from now we expect to have further derisk in MosaiQ vision significantly having an answer - definitely the question, first of all does it work? Secondly, will it get approved and thirdly, will anyone going to buy it. Even as we expand the menu and open up exciting new market areas, our recent Investor Day committed to share with all you the voice of the donor center customer. Base on their input, we're confident than ever that MosaiQ has the potential to transform the field of transfusion diagnostics and will be well placed to disrupt existing technological platforms. MosaiQ has been designed to advance transfusion diagnostics while at the same time providing cost savings to the healthcare system. So the advantages it has to offer remain very compelling and include, firstly, the ability to comprehensively play - characterize all donor and patient blocks allowing for the matching of donor block to patient. Secondly, the elimination of routine manual testing for blood grouping, also a single unified testing platform for blood grouping Serological Disease screening and ultimately for molecular disease screening, simplifying testing processes and consumable management. Furthermore, a significant reduction in sample and testing volume requirements, also a significant saving in labor, handling and consumable costs and last but not least streamline processes for matching donor units to patients. So I think MosaiQ has the potential to offer major efficiencies and lower costs for best testing laboratories worldwide. So the initial target, addressable markets for the MosaiQ is both highly developed and at over 3.4 billion of reaction spent annually is substantial. And I believe that the capabilities which make this unique and valuable for transfusion diagnostics, we will also have tremendous potential for other very large diagnostics screen applications in the future. So we intend to update you on our plans to go beyond the transfusion diagnostics market early in 2019. Near term, we will continue to be absolutely focused on the execution of the remaining steps to bring MosaiQ to the market in transfusion diagnostics in advance of the commercial launch in Europe. With that I'd like to thank all 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. Now we'll be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Brandon Couillard from Jefferies. Your line is now open.

[Brandon Couillard:]

Thanks, good morning.

[Franz Walt:]

Good morning, Brandon.

[Brandon Couillard:]

Franz could you walks through this the steps that are remaining, the boxes that are left for you to check prior to submitting the initial CE filing for the initial IH Microarray in Europe. And then on the molecular side in the pipeline any time line parameters you can share with us this year where we might see some early proof of concept data?

[Franz Walt:]

Yes. So for the - let me start with the CE Mark submission steps. I think I shared that with you in the Investor Day that our strategy is to submit the dossier in staggered [ph], so that we would gain some time and get maybe already questions before the final dossier is submitted. But it's basically the strategy and the good news is that the first step the submission of QMS as well as the label NIFU [ph] then manufacturing for the IH quantum magazine [ph] and risk management related to the quantum magazine has already been submitted on July 19. So the first leaf is already in, so now we working on the second step that's the CMV clinical trials usability and risk management and we will submit as soon as we are ready and very last and the final stability date. So we always communicated that we will file in the second half of this year and base where we are now, we are confident that we are able to do this as promised. Now for the MDS, the timelines we indicated these days we will move forward over 2019 and the technology we are using for MDS will be - what we call an universal microarray. So what you need for that technology out actually three components, you need reaction, you need an Universal Array and you need a Sample and all works on our Proprietary MosaiQ Amplification Technology. But basically the concepts involved - that the reactions they're consisting of a target detector connects to an Oligo, so an Oligo is a synthetic DNA established already in IVD, easy to combine and this will bind to make a complementary or target Oligo printed on to the microarray. So when that target, let's say for instance HIV is present in the sample of amplification multiplies survival RNA, so that sufficient copies exist to make the spot visible on the microarray, sounds very simple, it's an unique approach and well behalf for the IP protection on this. But this makes it extremely flexible to expand into molecular disease application, but also into other applications typical let's say for the disease panels. These works on the bench and our opportunities now to prove in the next 12 to 18 months to demonstrate that it is actually scalable and we can industrialize these product. I hope this answers your question Brandon.

[Brandon Couillard:]

That's very helpful. Thank you. And it's nice to see the initial SDS Microarray moving into V&V in front of the CMV studies. Can you just remind us of the performance hurdles that are needed for the initial targets to achieve regulatory approval? When might you expect to read out the results of that internal CMV study and then just remind us of kind of the number of samples you're planning for both the internal study and the European field trial?

[Franz Walt:]

So I mean what I can share with you at this stage today is the day today is that we actually produced already an SDS1 Microarray here in Eysins, so next to Geneva. We shift it over to our facility in Edinburgh and they tested it, so that's a normal part of our process validation. And that happened in February, actually February 5, 2018 and they have two pathogens on the SDS1, the one is CMV and the other one is Syphilis. So regarding the sensitivity both of them record 100% and the specificity was 99.5% for CMV and 99.4% for Syphilis. We think this is at least an equivalent if not better than other things in the market. So this will actually be sufficient to take the hurdle, but now of course we have to go through all the other steps we went through with IH I and we will of course the update you as we go along and I hope that maybe in the next meeting I can give more insight. For those who don't know what the difference is between sensitivity and specificity, so sensitivity is basically a person has the disease how often will the test be positive and if the test is highly sensitive and the result negative you can be nearly certain that the disease is not there. So sensitivity helps to ruling out the disease and in this case it was 100% two times. Then specificity is if a person does not have the disease, how often will the test be negative? If a highly sensitive test is positive you can be nearly certain that the disease is actually there, so it helps ruling inner disease, so these are the two things we need, sensitivity ruling out, specificity ruling in and we performed excellent on both. And I would just have to be patient and go through all the necessary steps and with the necessary care to make it a success. I'm pretty much confident.

[Brandon Couillard:]

Bigger than the last one for you Chris, could you just elaborate on the expanded operating loss outlook for the year, I think you pointed to some investments in plan development goals, just elaborate on what exactly it is and then your revised cash burn expectations for the year?

[Christopher Lindop:]

Sure. If you look at the 60 to 70 back out the 15 of non-cash items, you're sort of in the $45 million range with less than $1 million per month, I should say of course and then with less than $1 million amounts to CapEx. We trimmed back on some of the CapEx to align it with our ramp expectations. And we expanded some or made plans to expand some headcounts to allow us to get more bandwidth and breath in advancing multiple priorities including funding the MDS foot points that we talked about.

[Brandon Couillard:]

Okay. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question is coming from Sung Ji Nam from BTIG. Your line is now open.

[Sung Ji Nam:]

Hi, thanks for taking the questions. Just a couple of quick ones, in terms of the expanded IH menu development in the US, I was curious as to what are the steps that you need to take in order to initiate the verification validation. Is it just a function of focusing on the initial SDS array first and then moving on to that or are there specific I guess action items ahead of that?

[Christopher Lindop:]

Yeah. I think if I understood you correctly the question was related to IH II, correct?

[Sung Ji Nam:]

Yeah, correct.

[Christopher Lindop:]

So the difference between IH I and IH II is that we have IH I only to test the water so to speak in Europe and IH II is for both US and the Europe that's why the clinical trials have different requirements to fulfill the requirements of the FDA. So what are we going to do is what we do with the field trials in the US and we do a preaching strategy for the EU and submit then both dossiers for EU and for the US? The other way around although legally possible, technically it's not so feasible, so that's why we have to approach, that's the only I think key difference to the IH I.

[Sung Ji Nam:]

Okay.

[Christopher Lindop:]

Another 14 antigens, but - and the other thing that we're busy working on is moving the - if you will, the reagents from a development setting into the full manufacturing setting and printing them on the automation downstairs here in Eysins and that's steps that we'll take prior to a V&V which will precede a field trial and the timing for those are sort of laid out in our expectations which remain unchanged.

[Franz Walt:]

I mean if you wanted to find out where are the risk, where do we see a hurdle I think it generally speaking with the microarray multiplexing technology, the product, familiarity of therapy use [ph] very simply the technology is different from traditional methodologies, so they don't know exactly how to look at it and with what to compare it, so this might take more questions than established of already known technology.

[Christopher Lindop:]

But the other thing I think is relevant about this step in development with IH is that as we've said many times before what we've been doing up until now and up until quite recently was developing this device, completing the developing the manufacturing system and developing the microarray. Now, we've moved into that phase where we're adding additional pass on to the microarray, so the complexity of doing many things are ones each with interdependencies has diminished and now we're really just focused on adding dots.

[Franz Walt:]

And of course whatever we learn now we incorporate in future projects. We are learning organization and the plan to repeat the same mistakes, so it's also initially we have the complexity of doing instruments development, manufacturing infrastructural development and I'll say your microarray development. Now two components are gone. Now it's only more content on the microarray and I think also the concept the longer term beyond transfusion diagnostic with the new microarray approach we have the universal one it's an easier way for with them.

[Sung Ji Nam:]

Great, that's very helpful. And then Chris, quickly - sorry, if I missed it, but in terms of your product margins going forward for the rest of the year, do you expect that to kind of begin to normalize during the - in the fiscal second quarter or do you continue to see that - some margin pressure from the parallel sites that are money [ph?

[Christopher Lindop:]

I think it's appropriate to estimate I mean - subject to a regulatory approval that will move from the two side model to the one side model in the fourth quarter, by the end of fourth quarter. And so you should start to see relief of some of those duplicate costs in that quarter.

[Sung Ji Nam:]

Okay. Thank you so much.

[Operator:]

Thank you. We've reached the end of our question-and-answer session. I would like to turn floor back over to management for any further or closing comment.

[Franz Walt:]

Yeah, thank you very much. So thank you everybody for joining us on this call today. So Quotient continues to make considerable progress on MosaiQ and we look forward to its initial commercial launch next year. Thank you very much for listening in and wish everybody the very best. Bye-bye. Thank you.

[Operator:]

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