Quotient Limited
Q2 2018 Earnings Call Transcript

Published: 31 Oct 2017

[Operator:]

Greetings and welcome to the Quotient Limited Second Quarter and Fiscal Year 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [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, you may begin.

[Chris Lindop:]

Thank you, Jesse. Good morning, everyone, and welcome to Quotient's earnings conference call for our first second quarter-ended September 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 October 31, 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. Since our last earnings call, Quotient find itself in the strongest position it has been in since its initial public offering in May 2014. We've completed the development phase for the initial MosaiQ IH microarray and the MosaiQ instrument regularly using microarrays manufactured in our validated high throughput manufacturing system. We've proven the capability of the MosaiQ platform publishing positive V&V concordance data for the initial MosaiQ IH microarray last week. 99.8% overall concordance for antigen typing is exceptional for platform of this maturity. MosaiQ also met or exceeded targeted concordance levels for individual antigen typing assays as well as the antibody detection assays. The positive V&V Concordance data for the initial blood grouping microarray, which is a critical milestone in advance of commencing field trials proves that MosaiQ works under condition similar to a fulfilled trial. Additionally, we put in place a critical piece of our funding plan with the issue of up to $89 million of new equity. $40 million of this has been received already and the balance will be received by the end of July 2018 assuming the full exercise of warrants issued as part of the equity issue. This infusion of capital combined with existing cash resources and debt facilities available to be drawn upon successful field trial, receipt of successful field trial data will provide sufficient funding through the commercialization of MosaiQ. With the achievement of these key milestones, the company has been significantly derisked in terms of both project risk and funding risk. On the commercial front, I'm also pleased to say that customer sentiments towards MosaiQ remains overwhelmingly positive. MosaiQ continues to compare highly favorably with the existing testing platforms. Customers fully understand the potential for MosaiQ to simplify their testing needs and to deliver major efficiencies and cost savings in the process. They also understand the clinical benefit MosaiQ can deliver with the better matching of the donor and patient blood. We have active and positive discussions ongoing with many potential European customers, this is a hugely attractive market Quotient with over $250 million of annual business going to tender over the next two to three years. Customers on contracts extending beyond this period have also indicated their ability to accelerated adoption for a new highly differentiated technology platform such as MosaiQ. The revenue and profit opportunity for MosaiQ in Europe and the rest of the world is considerable. Finally, I'm happy to say that we have yet another very successful ABB in San Diego with all demonstrations slots from MosaiQ being fully attended. We continue to work closely with our key target customers in the U.S. Given the commercial potential of MosaiQ and feedback from customers, we continue to believe the company will achieve breakeven and profitability within the next two years. While we've had some setbacks and unexpected challenges, the Quotient team has systematically addressed and solved these problems and in doing so has made the MosaiQ platform and our company stronger and more resilient. The results over the last three months are great example of this. The complexity of the tactical challenges we've taken on and successfully have come with MosaiQ is what gives me confidence in the strong and unsalable position Quotient should enjoy in the transfusion diagnostics market. Every aspect of MosaiQ to design, provides competitive advantage to which it will be hard for market incumbents to respond. It is both low cost and state-of-the-art and will routinely delivered more information at a cost per test that existing platforms will be unable to challenge. Beyond its highly competitive cost, we expect MosaiQ will also radically impact the total cost of the customer's laboratory testing operations through a combination of automation, miniaturization and standardization. The idea of a single platform ultimately meeting the all the needs of donor-testing labs and permitting the replacement of up to four of our platforms will be game changing. Today each of the incumbent technologies are the unique consumable supply chain and calibration and maintenance requirements that will be greatly simplified by MosaiQ. But perhaps most importantly, MosaiQ will deliver these benefits while also reducing countless hours of manual intervention required today to extract the same level of information on each donation that in the future will be delivered routinely by MosaiQ. In parallel with the substantial advances made with regard to MosaiQ, the conventional reagent business continued to deliver strong operating results during our fiscal second quarter with product sales growing 22% year-over-year. This business is the one [ph] for MosaiQ establishing Quotient's reputation for quality and innovation with customers and regulatory authorities alike. The reagent business continued its trend of meaningful gross margin improvements in the second quarter, through the successful introduction of new and innovative products, solid top-line growth the optimization of product mix and a continued focus on manufacturing excellence. Finally, during the quarter, the reagent business began to move into its newly constructed BioCampus manufacturing facility, near Edinburgh in Scotland. This state-of-the-art facility will consolidate three existing Scottish locations and become the hub for both our liquid reagent manufacturing and our MosaiQ R&D activities and allows to further improve the efficiency of our reagent manufacturing operations. With that, I would like to hand back to Chris, who will present the financial overview.

[Chris Lindop:]

Thanks, Paul. Fiscal second quarter product sales were $5.9 million, an increase of 22% from last fiscal year's second quarter. The increase in product sales was mainly attributable to growth in revenues from OEM customers and incremental direct sales to customers in the United States. Last year in the fiscal second quarter, we recognized $1.3 million of product development fees associated with the achievement of U.S. approval milestones for new OEM products. While $600,000 of product development fees were recognized last quarter, no such milestone payments were earned in the second quarter of this fiscal year. OEM sales of $4.2 million grew 23% year-over-year and represented 72% of product sales. The increase was primarily driven by increase sales to existing customers and the impact of recently approved new products. Direct and distributed sales of $1.7 million increased 20% year-over-year and represented 28% of product sales. And direct sales in the United States increased to $1.4 million compared with $1.3 million last year, which was also mainly attributable to the impact of recently launched new products and growth in sales of our reagent red blood cell products. Product sales from standing orders in the quarter were 68% versus 73% last year. Gross profit on total revenues was $3.1 million which was 8% less than the previous year, which included $1.3 million of other revenue. Gross profit on product sales however increased 50% year-over-year to $3.1 million compared with $2.1 million last year. Gross margins on product sales was 52.9% compared to 43% last year. As a result of the positive impact of currency, improved product and customer mix, and efficiencies at our reagent manufacturing facility in Edinburgh Scotland. In the second quarter the operating loss was $18.1 million compared with $17.5 million last year. Operating expenses increased by $300,000 from last year to $21.2 million. An $800,000 increase in general and administrative expenses to $6 million was offset by a $1.2 million decrease in R&D expense to $13.3 million. The decrease in R&D mainly reflected reduced expenditures with our development partners as the initial development of MosaiQ near completion. The increase in general and administrative expenses reflect greater personnel related costs, as we move towards commercialization of MosaiQ and the relocation of our manufacturing facility in Scotland. Sales and marketing expenses of $1.9 million increased $600,000 from the prior year, this increase was attributable to the ramping of the MosaiQ commercial group. Stock compensation expense was $1.2 million in the second quarter, versus $1.1 million last year. In this second quarter net other expense was $3.6 million compared with net other income of $153,000 last year. Net other expense consisted of interest expense of $4.2 million and $600,000 of foreign exchange gains. Overall, our net loss for the quarter was $21.7 million or $0.58 per ordinary share. Moving to the balance sheet, the second quarter ended with $19.8 million in cash and other short-term investments. And $78.6 million of long-term debt net of $5 million in an offsetting long-term cash reserve account. On October 24th, we entered into subscription agreements for the private placement of 7,864,683 ordinary shares at $4.64 per share and for 550,000 pre-funded warrants at $4.755 per warrant exercisable for ordinary shares at $0.01 per ordinary share. We also issued 8,414,683 million warrants at $0.125 per underlying warrant each exercisable for ordinary shares at $5.80 per share. The initial sale of ordinary shares and warrants generated approximately $40 million. It exercised the warrants will provide up to $49 million of additional funding before July 31 of 2018. Our near-term funding plans also includes $30 million from the plan sale and lease back transaction and additional $36 million grown on our senior notes upon company management of satisfactory field for our concordance results for the MosaiQ IH microarray and the receipt of $10 million milestone payment from Ortho Clinical Diagnostics a corner seat of the MosaiQ blood grouping CE mark. On September 30, accounts receivable totaled $2.5 million and inventory totaled $15.2 million. Capital expenditures totaled $6.8 million in the second quarter. Now moving to guidance, for fiscal 2018, we're increasing our forecast of full year product revenue to the range of $23 million to $25 million. Product development fees that we recognize other revenue are now expected to be $2 million. We've recognized $600,000 year-to-date with the balance expected in the second half of the fiscal year. This product development fees as soon as they receive the milestone payments that are contingent upon the achievement of regulatory approval for certain conventional reagent products under development. As such the receipt of these milestone payments involves risk and uncertainties. For fiscal 2017, we forecast in operating loans in the range of $70 million to $75 million and capital expenditures of between $25 million and $30 million. For our third quarter, we expect product sales in the range of $5.1 million $5.4 million compared with $4.8 million in the third quarter of fiscal 2017. Now, I'll turn the call back to Paul.

[Paul Cowan:]

Thanks, Chris. I am pleased to report another very successful ABB meeting for Quotient. This meeting is the premier event that healthcare professionals in the field of transfusion medicine and allow them attendees to learn about the latest in the field explore state-of-the-art products and serve products and services and to network. There are over 5,000 U.S. and International attendees at this year's meeting in San Diego. Quotient used the ABB meeting to launch a number of new and innovated reagent products, which were very well-received. We also continue to see the promise of MosaiQ specifically its ability to fully characterized donor and patient blood as well as screen donor blood for unwanted pathogens. Over the three days, we have 80 visitors view the MosaiQ demonstration with feedback very much focus on the uniqueness of the platform and the efficiencies and cost savings it will be able to deliver. Feedback remained overwhelmingly positive and perspective customers were able to see the tremendous progress that are being made on the platform. So, our customers are telling us they are excited about the transformational technology advanced represented by MosaiQ. Over the next nine months, we have a lot to do, we still expect to complete European field trials and file completely for European regulatory approval for MosaiQ during this period. We have effectively commenced the commercialization of MosaiQ in Europe, where we have already received invitations to participate in tender processes, for business to be awarded in the middle of 2018 and where we have a positive dialog with many other customers. U.S. field trials and the subsequent regulatory filling will follow successful completion of European field trial. With that, I'd like to hand back to the operator to start the question-and-answer section.

[Operator:]

Thank you. [Operator Instructions] Thank you. Our first question is coming from the line of Quincey [ph] with BTIT. Please proceed with your question.

[Unidentified Analyst:]

Thanks for taking the question. I was wondering in terms of next steps or outstanding items for starting the European field trial, could you maybe predict some possible or talk about what they might be? And also, if there any changes to kind of the strategy for the field trial from given the outcome of the B2B studies internally? And then also, could you also remind us whether the initial, microarray initial menu will be competitive in terms of, for the tender process next year?

[Paul Cowan:]

Okay, so as far as the V&V study is concerned, we've published a data clearly last week on the head-to-head data. There are number of other studies, still to be completed, most of which relate to shelf life and repeatability studies. These are more label claims or support for label claims than anything else. And we expect to complete that work over the coming weeks. As far as the change in strategy to field trial is there has been no change in that strategy, it will continue to move forward as planned for this product. And then with regard to the commercial launch, this product is absolutely competitive with existing products. What I would say, however is that, we will launch with the current menu early next year as planned. And however, by the time customer will actually start to purchase this product, I would expect that will have the full menu. So, following sort of U.S. field trials, in the middle of next year; no changes in strategy, we continue to progress through the remaining pieces of the V&V studies. And then as I said, the product will be absolutely competitive and then improved upon before the end of the year.

[Unidentified Analyst:]

Thanks for that. Okay, thanks. And then, in terms, I know this might be early but, for the U.S. field trial, could you maybe to the extent possible, could you talk about, whether or not, I think you had mentioned for the European trials, could take anyone from 4 to 8 weeks to complete that process. In terms of the U.S. trials, are the length of time to sample size et cetera are those pretty comparable to the European field trials as well, or do you think there might be in differences?

[Paul Cowan:]

Yeah. Absolutely, yeah, length of field trials in the U.S. report as the same as they're in Europe, and is the structural of the studies themselves. So, I would say 4 to 8-week process to complete the U.S. field trial. And then we'll be submitting, soon thereafter.

[Unidentified Analyst:]

Okay, great. Thank you.

[Paul Cowan:]

Thank you.

[Operator:]

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

[Josh Jennings:]

Hi, thanks Paul and Chris. Just wanted to start with the question on EU field trials, just recognize that your team ensured that the V&V studies would mere the future field trials, I just hope you could help us understand, what is anything will be different in the field trials, whereas those internal verification and validation studies?

[Chris Lindop:]

The protocols are very, very similar. There is not really going to be any different other than the fact that the field trials clearly held customers sites. There will be three customer sites. But in terms of lighting the sample, preparing the sample, yeah, there will be no material difference, in the way the trial is carried out relative to the internal V&V studies.

[Josh Jennings:]

Great, and can you provide an update on the build-out of the EU commercialization team?

[Paul Cowan:]

Yes, we have been building and hiring folks on the commercial side, consistently over the past 12-months. I think at the moment we stand of about 16 people in Europe. I don't expect that to grow much beyond sort of 20-25. But, yeah, we now have account exes in all the key territories. And they are working with and in constant dialogue with prescriptive customers. And then, in addition to that, some of our central sort of, what I call, commercial marketing groups have been working these customers and the commercial marketing group have also have been working with these customers with doing a number of work flow studies to assess the potential cost savings for utilizing MosaiQ.

[Josh Jennings:]

Thanks for that. And the last question just on this mid-year tender offers that are in process in the EU in that Quotient's participation. I just wanted to be clear just in terms of the timeline of EU field trial completion to CE mark approval. And I understand that the Europe is a different setup than the U.S. You're able to, just to be clear you're able to market MosaiQ obviously in front of CE mark approval. But can you help us understand mechanistically how these centers maybe able to move forward with this process in front of CE mark approval and how those timelines wind up in between MosaiQ getting the CE mark and when that mid-year tender offers also actually occur. Thanks for taking all the questions.

[Paul Cowan:]

So, yes, we can essentially participate in tenders ahead of CE mark approval. The other thing as well is the tender process is a not necessarily fixed time table, so it's not uncommon for them to slip or indeed be deliberately slipped. And then the final point really is that we're going into tenders with I expect that we will be going into the final elements of the tender with field trial data. So that's really around which we will be basing our sort of proposals. And with that data, we'd - to use that data in the tender and move forward. So, as I said the granting ultimately is going to be around the middle of the year. My expectation is that that will coincide with the marketing of the product.

[Josh Jennings:]

That's helpful. Thanks a lot.

[Paul Cowan:]

Thanks.

[Operator:]

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

[Brandon Couillard:]

Thanks. Good morning. Paul, back on the EU field trial, I guess first are the instruments in - can you kind of walk us through the timing of that on. And in particularly with respect to the milestone push out, is it just conservatism that you're baking in in terms of not expecting that milestone to actually get triggered until the second half of calendar 2018?

[Paul Cowan:]

So, it instruments us not yet in place. That will be roughly two-week process as we install and train and validate instruments on the field trial sites. I expect that to take place real quickly after we complete the V&V studies. So that will be taking place before year-end. And then so that's where we stand on that and I would expect that reasonably soon after that we'll start to see the initial results that the field trial had studies coming out. So, it will be becoming available to us. So, for us the milestones are concerned, are clearly we don't expect now to finish the European field trial until yeah, we're starting in December, yeah, we don't expect to finish until in the New Year. So, the push out of the milestone is largely just reflecting the fact that CE market would be around I would expect into the second quarter of the year. And then we just push it out a little bit more just I think that's a little bit more headroom.

[Brandon Couillard:]

Fair enough. And also, curious how you will communicate and specifically which milestones you can communicate with the Street with respect to your upcoming progress as you move through the completion of the internal validation installation of the instruments and the commencement of the field trial?

[Paul Cowan:]

I would expect that we will announce the results of the field trial head-to-head study, once it's available. As you know that in the previous the drawdown of the next study $6 million of our senior notes. Beyond that, apart from announcing completion of V&V work on the initial disease spreading product I don't expect that there will be any other project related sort of milestones press released over the next two or three months mainly going to be focused on the field trial.

[Brandon Couillard:]

Okay. And what do you perceive as I guess the variable components that that could perhaps shift the timeline plus forward or backwards a month, this led to front of this before we actually move into field trials from here.

[Chris Lindop:]

I am not really aware of any actually, we're in the sort of the later part of the V&V study, it's well understood, it's more process than anything else. So, we don't expect to see - we don't see or anticipate any elements of risk to the timeline leading into the field trial. Yeah, that's ....

[Brandon Couillard:]

Okay, thanks. And then the couple for Chris, Paul mentioned an expectation like even the profitability in the next two years, does that assume any contribution from a U.S. launch and adoption and what does that contemplate in terms of annualized revenue run rate?

[Chris Lindop:]

You know very little from the United States in that timeline. Most of our drive to breakeven will be in Europe and we breakeven at about a $100 million of revenue which when you combined that with the run rate and the reagent business which is doing very well represents sort of less than $10 million microarray annual run rate or cohort in volume. Does that answer your question?

[Brandon Couillard:]

Yeah, that's helpful. And then one more, in terms of the recent hike. Could you share your thoughts in terms of the sizing of that raise and how you perceive the runway in terms of the balance sheet from here in terms of the duration that it gives you with all the available components including the debt funding and the sale leaseback component?

[Chris Lindop:]

Yeah, it gives us a lot of runway frankly through the end of 2018, and that's what we were looking for, I mean it's hard to begin these discussions with customers as we plan to do in mid-18 without having a reasonably robust balance sheet, so we are hopeful that the warrants will be in a condition to be exercise by their - essentially before their termination date, providing another $49 million of capital. We're confident about our ability to access the senior debt and the sale leaseback. And we will continue to monitor our situation as we move forward and make sure that if there are opportunities to access other, let's say non-dilutive sources of capital, we will do that too. But this is a good I think very satisfactory start, to sort of a few will breaking the back of our near-term funding strategy. And it gives us …

[Brandon Couillard:]

Thank you.

[Chris Lindop:]

Thank you.

[Operator:]

Thank you. The next question is coming from the line of Chris Pascal [ph] with Hybrid [ph] Capital. Please proceed with your question.

[Unidentified Analyst:]

Hey, morning guys.

[Paul Cowan:]

Hi, Chris.

[Unidentified Analyst:]

Congrats again on the recent progress, that's great to see kind of the positive results from the internal validation last week. I like to have a few questions here but, one can you just take you step back, can you guys give us a little bit of background color, the difference between performance valuation and the internal validation study, kind of what additional work - when it - kind of that perform all task, that you guys did recently?

[Paul Cowan:]

The V&V study is undertaken relative to a very formal protocol, with a great deal of definition what it needs to be done, how many tests need to be done for instance, et cetera, et cetera. So, it's primarily the relative protocol whereas the performance valuation studies it's again - the same but not under the same level of strict protocol.

[Unidentified Analyst:]

And then all that testing the information that you guys hear that all that gets built into the CE marketing package, right?

[Paul Cowan:]

Right.

[Unidentified Analyst:]

Okay, that's helpful. And then next, is this going into kind of the MosaiQ, I know you guys said that you're going to begin the ship out the equipments soon to all the field trial sites and that will go through kind of the validating process. Are you guys running kind of blood samples test on the machine to make sure it's calibrated before it goes into the field trial. So, you have an idea that the machine is reading accurately here?

[Paul Cowan:]

Yeah, we expect to go to field trials with the instruments that we're using already in the V&V study, we will just ship them around and we use those constantly. It's not so much a calibration step as any time you install an instrument, this is just again a very formal process of installation, validation proving it works before you're actually start the formal studies and then training people to use this as well. That's but yeah, the key is that the instruments we're using today are the instruments we planned to ship to the field process.

[Unidentified Analyst:]

That's great to hear. And my last question and if I missed it earlier, but how many tests are you guys going to be completing in the field trials?

[Paul Cowan:]

It will be around 3000 marks across really 3 sites. So, we split across these sites.

[Unidentified Analyst:]

Okay. Perfect, that was helpful. Thank you again and congrats on the progress here.

[Paul Cowan:]

Thanks, Chris.

[Operator:]

Thank you. There are no further questions at this time. So, I'd like to pass the floor back over to Mr. Cowan for any additional concluding comments.

[Paul Cowan:]

Thanks Jesse, and thank you everybody for joining us on this call today and for your continued support of our company. Quotient continues to make considerable progress towards the commercialization of MosaiQ and my thanks go out to all our employees and partners, who work so hard every day to deliver this high quality and transformational solution for the transfusion diagnostics market. I'm proud to be part of the Quotient team, I am very proud of what we've achieved together to-date. Thank you very much.

[Operator:]

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.