Quotient Limited
Q1 2018 Earnings Call Transcript

Published: 8 Aug 2017

[Operator:]

Greetings and welcome to the Quotient Limited First Quarter and Fiscal Year 2018 Financial Results Conference Call. [Operator Instructions]. 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, Jessi. Good morning everyone, and welcome to Quotient's earnings conference call for our first fiscal quarter ended June 30, 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. 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 8, 2017 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. Quotient continues to make substantial progress towards its near term goal of delivering MosaiQ's EU field trial results later this year and ultimately obtaining European CE mark. The road we've traveled to get to this point has been long and along the way we've experienced an unexpected setbacks but our progress has been defined by overcoming challenges with creativity and innovation which has made MosaiQ a better and more resilient product. I feel more confident than ever that MosaiQ represents the future of the $3.4 billion transfusion diagnostics market. We've reached the key point in our development partway when we begin to bring together validated microarray's manufactured on our recently validated high volume manufacturing facility to run a head to head comparison on our field trial ready MosaiQ instruments against large numbers of previously tested donations in internal performance evaluation studies. These studies are critical requirement before moving into the highly structured verification and validation phase and have delivered results that with the exception of one antigen type little c confirm the required concordance with predicate technologies. We already have an action plan in place to improve the performance of little c with the correction being achieved by typing the specification or concentration of the agent used in the manufacturing process. Let me take the components of the study data we have and recap what we're trying to achieve from a clinical perspective and specifically how our latest results measure up against the required performance for each element of the MosaiQ testing menu. Starting with the blood grouping microarray and the extended antigen typing panel. In the donor market red cell antigen typing is the most critical element of blood characterization required to avoid transfusion reactions in patient groups that will be the recipient of donated red cells. Today only a small portion of clinically red cell antigen expressions are routinely identified as they move into the supply chain for donated blood product. Recipients of blood transfusions that have been transfused on multiple occasions may however develop one or more blood group antibodies to foreign red cell antigens present on the surface of transfused red cells. A similar risk exists in women of childbearing age who can develop blood group antibodies as a consequence of pregnancy. In both these circumstances and expensive time consuming and labor intensive process is required to identify appropriate antigen specific units to ensure safe transfusion. A significant proportion of the overall cost of donor typing relates to the manual testing required to identify these antigen specific donations. When we set out to develop MosaiQ our goal was to develop a fast automated one step affordable test that provides comprehensive antigen characterization on all donated red cells across a broad spectrum of clinically relevant antigens. By more fully characterizing every donation the information required for safety transfusion can be available with the blood product when it is delivered avoiding costly and time consuming rework or backtracking in the supply chain. The required performance for such a test to enter the market is 99% concordance with predicate technologies currently being employed for antigen being characterized. What our performance evaluation study data has demonstrated is that the extended antigen microarray achieved that standard for all bit one antigen. Actions to improve the performance of the test to detect little c antigen are currently underway and will be completed prior to beginning our planned internal verification and validation studies. The ability to carry out extended antigen typing on all donations is a key differentiator for MosaiQ, the this capability will deliver for our potential customers was underscored during our recent participation at ISBT's Annual Meeting in Copenhagen in June where more than 230 delegates joined us at a symposium to discuss the benefits associated with routine, comprehensive antigen typing with donor blood products a unique capability of MosaiQ. But many of you know blood grouping in the donor center today involves another step and that is antibody detection. Just as patients may have unexpected blood group antibodies so can donors, identification of donor blood that is free of unexpected blood group antibodies is important when preparing donor bloods for delivery to a hospital and as such antibody detection represents an important step in the testing process undertaken by donor collection agencies. Our design concept for MosaiQ also encompasses a fast automated one step affordable test that flags unexpected blood group antibodies present in donated blood and which is run simultaneously with the extended antigen typing array. This approach minimizes the number of technologies required to be available and maintained in a donor testing laboratory while substantially reducing the amount of skilled labor and complex reagents that must be paid for and manage in order to get the desired result. The required performance for such a test to enter the market is 95% concordance with predicate technologies currently being employed. Internal performance of evaluation testing using the same market ready MosaiQ instruments and microarray is manufactured on a validated manufacturing process demonstrated that our blood grouping microarray achieve that threshold for antibody detection. Lastly turning to serological disease screening, in every donor market in the developed world there is a requirement to test donated blood for an array of high risk infectious diseases that could be transmitted through transfusion of contaminated blood product. Detecting disease specific antibodies or antigens present in the donor's blood serological is one method that is performed. Today separate vendors with different testing platforms from those used for blood grouping provide this testing technology. Once again MosaiQ is an automated platform leveraging microarray technology that is designed to fulfill all the needs of donors [indiscernible] customers for serological disease screening with a one-step affordable test. It has been developed to have the capability to perform both blood grouping and serological disease screening simultaneously using a single low volume donor sample. The most recent performance evaluation study for our initial serological disease screening panel using known positive samples designed to test the limits of assay performance demonstrated 96% sensitivity and 100% specificity with the detection of syphilis and 97% sensitivity and 100% specificity for the detection of CMV. This level of performance meets or exceeds the performance of predicate instrument. Based on the results of our most recent performance evaluation studies for antigen typing antibody detection and initial serological disease screening panel we feel confident about our ability to complete an EU field trial later this year and then to deliver MosaiQ to compete for this exciting market opportunity. Today the established market for donor blood grouping and serological disease screening is $1.2 billion annually. The spend reflects the cost of testing reagents but does not include the labor, consumables and other indirect costs required to be incurred while relying on the processes and technologies that donor reference labs operate today. It is a market that has been characterized for the last 20 years by a lack of real game changing innovation. The remainder of the $3.4 million transfusion diagnostic market is split evenly between patient blood grouping and molecular disease screening of donated blood for unwanted pathogens. Once approved our partner, Ortho Clinical Diagnostics will commercialize MosaiQ in the patient testing market. Ortho is the current market leader in this $1.1 billion global patient testing market. With respect to donor molecular disease screening early feasibility work gives us confidence that we should be able to deliver an innovative molecular disease screening solution for donor testing permitting Quotient to add a faster, lower cost molecular disease screening solution to the MosaiQ platform mainly over the next 3 to 5 years thus revolutionizing the $1.1 billion molecular disease screening market for donor testing. The value of MosaiQ as a testing platform is that market acceptance does not require either establishing a new market or changing norms for the parameters of the required test results. The market exists and our challenge whilst complex has mostly been about formulating and optimizing existing test, design and engineering. MosaiQ can deliver comparable results at a highly competitive price point through a state of the art automation while greatly reducing workflow costs and the cost of ownership of our perspective customers that is why we consider it to be the most exciting business opportunity in diagnostics that exists today. In parallel with the advances we're making with regard to MosaiQ, our conventional reagent business continues to perform very well. This business which provides us with our core expertise and credibility in the area of blood grouping has enjoyed good success in the quarter recording record revenues and probability while successfully licensing several new antisera products for sale in the U.S. market. With that I'd now like to hand back to Chris who will present the financial overview.

[Chris Lindop:]

Thanks, Paul. We're happy to report that first quarter product sales were $6.2 million, an increase of 9% from last year's first quarter and exceeding our original guidance range of $5.7 million to $6 million. The increase in product sales was mainly attributable to growth in sales to OEM customers. In addition other revenue of $600,000 recognized in the quarter reflects milestones earned from the approval for sale in the U.S. of certain rare antisera developed for our largest OEM customer. OEM sales of $4.6 million grew 16.6% year-over-year and represented 73% of product sales while the ranked [ph] in distributors sales of $1.7 million declined 7.9% year-over-year and represented 27% of product sales. Direct sales in the United States only increased 2% year over year due to the impact of an extra red cell regent shipping cycle in the first quarter last year. Normalized for this effect U.S. direct sales grew 9% reflecting an increase in the average value of each red cell reagent shipping cycle year over year. Non-U.S. direct and distribution sales decreased 22% as we continued to rationalize less profitable products and customer groups. Product sales from standing orders in the quarter were 79% versus 76% last year. Gross profit on product sales was $3.4 million up 29.2% compared with $2.6 million last year, a little less than half of this increase was attributable to currency reflecting the relative weakness of the pound with the balance of the improvement due to the positive impact of greater sales volumes and improved product and customer mix. Gross margin on product sales was 54.5% compared to 45.9% last year. In the first quarter the operating loss was $16.9 million compared with $16.4 dollars last year. Operating expenses increased $1.9 million from last year to $20.9 million with a $900,000 increase in R&D expense to $12.7 million, a $600,000 in general and administrative expenses to $6.5 million and a $400,000 increase in sales and marketing expenses to $1.7 million. The increase in R&D expenses reflects incremental costs associated with a commercial scale up of MosaiQ including initial production costs which are currently expensed as research and development. The majority of the increase in general and administrative expenses reflects increased non-cash stock compensation related to performance grants tied to the achievement of MosaiQ milestones. The increase in sales and marketing expenses attributable to the expansion of MosaiQ commercial group. Stock compensation expenses $1.3 million in the first quarter versus $900,000 last year. In the first quarter net other expenses was $3.3 million compared with net other income of $143,000 last year. Net other expenses consisted of $4.2 million of interest expense and $900,000 of foreign exchange gains. Interest expense increased $3 million over the prior year as a result of incremental borrowings under the of October 2016 senior debt facility. Overall our net loss for the quarter was $20.2 million or $0.55 per ordinary share. Moving to the balance sheet, cash and other short term investments were $40.7 million of June 30 while long term debt was $77.1 million net of an offsetting long term cash reserve account of $5 million. In addition to available cash and short term investments other near term non-dilutive sources of liquidity outlined in our two year funding plan include a drawdown under our existing senior credit facility upon successful completion of the blood grouping field trial the sale leaseback of our Scottish bio campus facility and the first OCD milestone due upon successful CE marking, which together total $60 million. On June 30, accounts receivable totalled $2.8 million and inventory totalled $14.8 million Capital expenditures totalled $5.4 million in the first quarter. Now moving to guidance despite the strong performance in the first quarter for the time being we are confirming previously provided ranges for total revenues of $33 million to $34 million operating losses of $63 million to $ 68 million and capital expenditures of between $25 million and $30 million for the full fiscal year. Total revenue estimates include $12 million of product development revenue that is contingent upon achievement of regulatory approvals for certain products under development. As such the receipt of these milestone payments involves risks and uncertainties. For our fiscal second quarter, we expect product sales in the range of $5.2 million to $5.5 million compared with $4.8 million in the second quarter of fiscal 2017. I will now turn the call back to Paul.

[Paul Cowan:]

Thanks, Chris. We continue to execute successfully against our development and commercial scale up plan for MosaiQ. Over the next 12 months our regulatory and commercial milestones include completion of European field trials which we expect before the end of 2017 permitting us to file promptly for European regulatory approval. We have already commenced the commercialization of MosaiQ in Europe where we have received invitations to participate in tenders to be awarded in the middle of 2018. U.S. field trials and subsequent regulatory filing will follow this successful completion of European field trials. As MosaiQ progresses towards commercialization we continue to believe that it will transform the field of transfusion diagnostics and will be well placed to disrupt existing testing platforms. MosaiQ has been designed to advance transfusion diagnostics while at the same time providing cost savings to the healthcare system. The advantages it has to offer remain very compelling and include the ability to comprehensively characterize all donor and patient blood allowing for the better matching of donor and patient blood, eliminating routine manual testing for blood grouping, offering a single unified testing platform for blood grouping, serological disease screening and ultimately molecular disease screening simplifying testing processes and consumable management, significantly reducing the sample testing volume requirements, also significantly saving in labor, handling its consumer costs while streamlining processes for matching donor units to patients. MosaiQ has the potential to open major efficiencies at lower costs for testing laboratories worldwide. The target addressable market for MosaiQ is both highly developed and over $3.4 billion of reagent spend annually, it is substantial. Near term we will continue to add to be absolutely focused on execution of the remaining steps to bring MosaiQ to market in advance of the approval for commercial launch in Europe. With I'd like to thank all our employees and partners for their tremendous contribution towards the continued success equation. I will now ask the operator to begin with the Q&A session.

[Operator:]

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

[Brandon Couillard:]

Paul, if we go back to June you described the internal validation study efforts is being underway where at the time expecting to have some data by the end of July. What really transpired kind of like over those six weeks going into the end of July, at what point did you run a batch of samples and realized you needed to go back and tweak some of the chemistry in a couple places, it's tough to understand sort of the timeline of events.

[Paul Cowan:]

Yes so you might recall that at that time our prime focus around optimization was around the antibody detection essay and we went down a plan of action to address that, to resolve that in order to tighten up the performance of that assay relative to the predicate technology. I'll be the first to admit that we took a couple steps forwards and then took a step backwards and that's really what delayed the start of the validation study. We had to reconsider one of the reagents that we used not one of the reagents we print, but one of the reagents that we use on the instruments and that process as I mentioned delayed the project by a number of weeks. The work around antibody detection is now complete, the performance is very good and very much in-line with the predicate technology and we're very pleased with where we are. So that's really what sort of held up the start of the validation study and we had started the validation study on the antigen typing or verification validation study on the antigen typing, our first results showed up this little c which just told us to pull back and we're focused on addressing the little c and we'll just bring the verification and validation study now for the whole microarray back into line in the next short number of weeks or small number of weeks.

[Brandon Couillard:]

Okay, that's helpful and could you elaborate just I suppose in layman's terms is exactly what needs to be fixed and how you go about modifying the little c antigen and if you could give us some better sense of the timeline of the sequence of events from here and perhaps when you might expect to read out the internal validation results once you proceed with the formal run?

[Paul Cowan:]

Yes. So in transferring the test for little c into manufacturing, the specification was over a different a range of concentrations. The material that was printed for the microarrays that we tested in this latest study was at the lower end of range of concentration and we believe and understand that to be the cause of that sort of less or poor than expected outcome. So what we'll do now is we will just narrow the range of that specification, concentrations and move it up to the higher concentrations and then print from here with those higher concentration reagents. Those reagents exist today we've got a lot of flexibility, we don't need to resource the reagents. So we'll just do some further work to optimize ensure in a small performance evaluation study that it is working at the levels that we wanted to be performing at and then just move into the final verification, validation study. I don't want to get into when we're going to stop this, all I would say is that we continue to work as quickly and diligently towards completing the verification and validation study to allow us to move into field trials and complete those field trials before the end of this year and we will report the verification and validation study results as they are available.

[Brandon Couillard:]

And Chris, just to clarify you said in your prepared remarks that the three sources of cash between the sale [ph] leaseback, the milestone and then the second debt tranche would total to $60 million is that right?

[Chris Lindop:]

Yes.

[Operator:]

Thank you. It appears we have reached the end of our question and answer session. So I would like to pass the floor back over to Mr. Cowan for any addition concluding comments.

[Paul Cowan:]

Thank you, Jessi and thank you everybody for joining us on this call today. Quotient continues to make considerable progress on MosaiQ and we look forward to initial commercial launch early next year. Thank you very much. Goodbye.

[Operator:]

Ladies and gentlemen that's concludes today's conference. Again we thank you for your participation and you may disconnect your lines at this time.