Quotient Limited
Q3 2018 Earnings Call Transcript

Published: 6 Feb 2018

[Operator:]

Greetings, and welcome to the Quotient Limited Third Quarter Fiscal Year 2018 Financial Results Conference Call. [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 of Quotient Limited. Thank you. You may begin.

[Christopher Lindop:]

Thank you, Donna, and good morning, everyone. And welcome to Quotient's earnings conference call for our fiscal third quarter ended December 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. Because such statements deal with the future events, actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in Quotient's filings with the U.S. Securities and Exchange Commission as well as in last night's release. The forward-looking statements including guidance and projections provided during this call are valid only as of today's date, February 6, 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 Chairman and Chief Executive Officer, Paul Cowan.

[Paul Cowan:]

Thanks, Chris, and good morning, everybody. I'm very pleased to announce the successful completion of the planned modifications to the MosaiQ manufacturing process announced in early January. These modifications were designed to further improve the performance and reliability of MosaiQ, which is being demonstrated with our latest performance evaluation data. In the next several days, we expect to resume the verification and validation studies for blood grouping, which as you know, is the final step prior to commencing European field trials. Having established the need to modify the MosaiQ manufacturing process, the principal area of focus has been on performance of the antigen typing array. As set out in our press release, in studies to date comparing results generated using MosaiQ following the process modifications with predicate technologies, performance of the antigen typing array has shown improvement across the board. Specifically, these studies have demonstrated significant and consistent improvement in the performance of the little C assay, with concordance results at levels never seen before in MosaiQ. It is clear that this assay was particularly sensitive to the condition of the preservative layer highlighted in early January. We expect the planned changes to the MosaiQ manufacturing process to positively impact the performance of the antibody detection assays and the disease screening assays as well as performance of the expanded antigen typing assays to be incorporated into the MosaiQ IH II Microarray. These assays are currently being transferred from development to manufacturing. The short delay impacting the move of the MosaiQ IH Microarray to field trials has permitted the ongoing work of the initial MosaiQ SDS Microarray to be completed and for that product to catch up in time for U.S. field trials -- sorry, EU field trials. The latest data available on performance of the initial MosaiQ MDS Microarray is also very encouraging. Reflecting as it does, 100% sensitivity, so no false negatives and specificity above 99.4%, comfortably in excess of the performance of current predicates. When approved for the market, MosaiQ will be uniquely placed to deliver the benefits of high throughput automation with the ease of use and cost efficiency of a single universal testing platform that provides the capability to fully characterize and screen donated blood in a single testing event. Turning now to the conventional reagent business. It continues to perform very well, with strong revenue growth being generated by all key categories of that business. Both the OEM and the U.S. direct business had another very strong quarter, with year-over-year growth in product sales and gross profit from product sales of 17% and 49%, respectively. Visibility on future product sales remains high with 76% of product sales from standing orders in the latest quarter, compared with 75% for the same period last year. In addition, the reagent business recently hit an important milestone with the completion of our BioCampus project. This -- the practical completion of this state-of-the-art reagent manufacturing and development facility now permits the commencement of the validation of existing manufacturing processes in the new location as staff relocate from multiple rented facilities in the surrounding area. As previously disclosed, during the quarter, we completed a $40 million equity funding through a private placement mechanism. The combination of these funds, together with the planned sale and leaseback of the BioCampus facility, provides the necessary funding to bring us to the next milestones in our near-term funding plan, including a further $36 million drawdown on our senior debt facility and the potential inflow of up to $49 million of capital resulting from the exercise of warrants sold in conjunction with our Q3 equity funding. With these elements in place, we anticipate being fully funded through early commercialization as the major development funding and capital requirements of recent years moderate. With that, I'd like to hand back to Chris, who'll present the financial overview for the quarter.

[Christopher Lindop:]

Thanks, Paul. So fiscal third quarter product revenues were $5.7 million, an increase of 17% from last year's third quarter. The increase in product sales was mainly attributable to growth in revenues from both OEM customers and incremental direct and distributor sales. OEM sales of $3.8 million grew 9% year-over-year and represented 68% of product sales. The increase was primarily driven by better pricing, increased sales to existing customers and the impact of recently launched new products. Direct and distributor sales of $1.8 million increased 36% year-over-year and represented 32% of product sales. Gross profit on product sales increased 49% year-over-year to $3.3 million compared with $2.2 million last year, as a result of the positive impact of better pricing and greater sales volumes. Gross margin on product sales was 58.9% compared to 46.3% last year. In the third quarter, we recorded an operating loss of $17.1 million compared with $22.4 million last year. Operating expenses decreased by $4 million from last year to $20.9 million, with a $5.3 million decrease in research and development expenses to $11.9 million and a $1.1 million increase in general and administrative expenses to $6.8 million. The decrease in research and development expenses reflects a reduction in payments to our MosaiQ development partners, which included a $2 million license fee payment made in the prior year's third quarter. The increase in general and administrative expenses reflects the increased headcount as we move towards the commercialization of MosaiQ and the relocation of our manufacturing facility in Scotland. Sales and marketing expenses of $1.9 million increased $100,000 from the prior year, reflecting increased attendance at trade conferences as compared to the comparative fiscal quarter. Stock compensation expense was $1 million in the third quarter versus $1.1 million last year. In the third quarter, net other expense was $3.2 million compared with $8.7 million last year. In the quarter, net other expense consisted principally of interest expense. In the third quarter last year, net other expense also included $4 million of deferred debt origination costs which were written off following the repayment of our previous senior debt facility and $600,000 of foreign exchange losses. Overall, our net loss for the quarter was $20.3 million or $0.47 per ordinary share. Net cash used in operating activities totaled $20.3 million in the third quarter of fiscal 2017 compared with $13.8 million in the third quarter of fiscal 2016. During the same period, capital expenditures totaled $5.1 million compared with $5.8 million in the third quarter of fiscal 2016, largely reflecting expenditures in connection with the construction of the company's new conventional reagent manufacturing facility near Edinburgh, Scotland. Moving to the balance sheet. Cash and cash equivalents and short-term investments were $33.8 million on December 31, 2017. At December 31, accounts receivable totaled $2 million and inventory totaled $16.5 million. Moving to guidance. For fiscal 2018, we forecast full year revenue in the range of $24.1 million to $24.6 million, including $800,000 of other revenue. Other revenue consists of product development fees linked to regulatory approvals of certain liquid reagent products totaling $600,000 and $200,000 of revenue from the sale of 2 MosaiQ devices for evaluation purposes to OCD, our MosaiQ hospital market commercialization partner. For the year, other revenue will be $1.2 million lower than previously guided due to an anticipated delay in the approval of certain rare antiserum products previously expected to be received by March of 2018. We forecast fiscal 2018 product sales revenues in the range of $23.3 million to $23.8 million, representing growth of 16% to 18% for the full year. For fiscal 2018, we forecast an operating loss in the range of $70 million to $75 million. Capital expenditures are estimated at $22.5 million for the full fiscal year and relate primarily to the construction of our new Edinburgh manufacturing facility. For our fourth quarter, we expect product sales in the range of $5.5 million to $6 million, representing very strong growth when compared with $4.7 million of product sales in the fourth quarter of fiscal 2017. Now let me turn the call back to Paul.

[Paul Cowan:]

Thanks, Chris. So calendar 2018 is setting up to be a critical year in the commercialization of MosaiQ. We're now in a position to resume the V&V study for the MosaiQ IH I Microarray, the final step prior to commercializing -- sorry, commencing field trials. Development efforts for our initial products are essentially complete, and we are more confident than ever about the ability of MosaiQ to perform in a customer setting. As I've said before, the European market is being well prepared for the arrival of MosaiQ, with some customers asking questions already to participate in tender processes in advance of EU approvals to ensure that they do not miss the opportunity to consider MosaiQ for their blood grouping needs when it becomes available in the market later this year. Even as we have worked to perfect the assays, the assays, device and manufacturing systems in connection with our initial blood grouping and disease screening microarrays. Development has been ongoing for the extended menu of assays planned for the MosaiQ IH II Microarray and the MosaiQ SDS2 Microarrays. These additional assays have begun to move from development to manufacturing, allowing us to plan for a more streamlined verification and validation process, followed by moving quickly into field trial processes both in Europe and the U.S. later this year. As MosaiQ progresses towards commercialization, we continue to believe it will transform the field of transfusion diagnostics and will be well placed to disrupt existing and aging testing platforms. MosaiQ will also advance patient care at no extra cost to the health care system. The advantages MosaiQ has to offer continue to be very compelling. It'll be the first fully automated testing platform capable of delivering a comprehensive characterization of donor and patient blood, allowing for the better matching of donor and -- donor blood to patients. It will eliminate the need for routine and expensive manual testing for blood grouping. It will offer a single unified testing platform for blood grouping, serological disease screening and ultimately molecular disease screening, simplifying testing processes and consumable requirements. It will significantly reduce sample volume requirements and waste. And finally, it will allow for a more streamlined processes for matching donor units to patients. MosaiQ has the potential to offer major efficiencies and lower costs for testing laboratories worldwide. The target addressable MosaiQ -- sorry, market for MosaiQ is both highly developed and at over $3.4 billion reagent spend per annum, it is substantial. Near term, we will remain absolutely focused on execution of the remaining steps to bring MosaiQ to market in advance of commercial launch in Europe this year and in the United States thereafter. With that, I'd like to thank all our employees and partners for their tremendous contribution, continued success of Quotient. I'll now ask the operator to begin the Q&A session.

[Operator:]

[Operator Instructions]. Our first question is coming from Brandon Couillard of Jefferies.

[Christian Trigani:]

This is Christian on for Brandon. Just a couple, with respect to the upcoming V&V studies. Would you be able to remind us how many samples you expect to run for both arms? And then secondly, how long, approximately, the study should take to complete?

[Paul Cowan:]

So yes, as we've indicated previously, the head-to-head study will comprise about 1,300 samples in the V&V, sort of head-to-head study. The remaining studies are smaller quantities measured in the low hundreds. As far as how long it will take, again, we've indicated previously that total work on the V&V study will take 4 to 6 weeks. However, in this instance, we've already completed a lot of work. So we don't expect it necessarily to take that long. But then, we're not, at this point, forecasting how long it will actually take. But certainly, it won't be longer than the 4 to 6 weeks previously indicated.

[Christian Trigani:]

Got it. And then, with respect to the EU field trials, could you also remind us how many samples will be run then as well?

[Paul Cowan:]

About 3000 samples in total for the European field trials across three sites, 3000 in total, not 3000 per site.

[Christian Trigani:]

Got it. And then just one on the balance sheet. Could you just remind us the status update on the planned sale leaseback timing and the expected proceeds there, if possible?

[Christopher Lindop:]

Sure. I'd say, imminent as regard timing. There'll be a process of signing. May happen as soon as this week. And in terms of funding, couple of weeks thereafter. And we're targeting about a little over $15 million.

[Operator:]

Our next question is coming from Sung Ji Nam of BTIG.

[Sung Ji Nam:]

Paul, I was wondering, last quarter you had talked about getting invited for European tenders taking place midyear, middle of 2018. Are you still on target for that? And if not, kind of what -- how should we think about those tenders? And can they be extended or are there possibilities of postponements and things like that? Yes.

[Paul Cowan:]

Yes. No, no tender process is carved in stone. Yes, interestingly, the larger of the two tenders we talked about previously, that tender timetable has now been moved back 3 to 6 months. So in the end of the day, the customers recognize the benefits of MosaiQ. Clearly, they're not going to wait forever. But they are sort of keen to ensure that we -- we're sort of involved and that they get an opportunity to fully evaluate the MosaiQ platform given the advantages that it offers. So as I say, the tenders -- there's constant tenders out there. No tender process is written in stone. And indeed, a number are already being delayed, which will benefit our new timetable.

[Sung Ji Nam:]

And then, it sounds like there are couple of customers out there with the MosaiQ platform, Ortho Clinical, I believe, if I heard correctly, being one of them. And was wondering if you might be able to provide any kind of feedback in terms of performance, if your third-party customers are getting results that are comparable to what you're getting internally. It may be early but -- just was curious if they -- if you might have any thoughts there.

[Paul Cowan:]

It's not customers. We supply the instruments to Ortho for evaluation by them, not by customers, essentially, to do an audit of the instrument themselves. Feedback across the board was either -- yes, it was known and quite positive. We're pleased with the outcome of that. No, it was primarily for the Ortho, sort of, engineering team to comb all over the instrument, which, again, feedback in general was positive in our view.

[Operator:]

Our next question is coming from Josh Jennings with Cowen and Company.

[Joshua Jennings:]

I just wanted to ask first about your comments that the preservative layer issue has been completely resolved, the manufacturing process to optimize, the dryness and thickness are now optimal and you want to experience performance from the variance going forward, I mean. I guess, the basic question, I mean was this a simple fix? And is this completely in the rearview mirror now?

[Paul Cowan:]

It was a relatively simple fix, yes. So we didn't have to adjust hardware or software. There were just some parameters that we could adjust, which the hardware was sort of set up and designed to allow us to do. And yes, in our view, this is now very much in the rearview mirror. We are moving forwards. We're seeing very good performance on the assays daily, continued, consistent good performance, and we're confident this is now in the rearview mirror.

[Joshua Jennings:]

Great. And I think you've referenced in the initial press release in early January, I think on this call, that the work you did in determining the root cause of the manufacturing process variance and then solving it potentially has led, and we've seen some concordance results here today or in the press release, to more robust and predictable product. Can you just help us understand further, why it seems you have more conviction heading into the -- this latest antigen typing V&V trial and the EU field trials?

[Paul Cowan:]

So it is clear that the little C Assay was one that was being impacted by the sort of physical property of the preservative layer. And you'll recall back in October, the sort of verification and validation head-to-head study had little C at about 99%, which met the target. The latest studies that you all have seen show that now at 99.9%, which is a very strong indication that by addressing that preservative layer we've significantly improved the performance of that particular assay. And indeed, all other assays have improved as well within that data set. So it's really -- the conclusion is drawn on that strong data set and we expect to build on that over the coming weeks.

[Joshua Jennings:]

Great. And I just wanted to -- sorry, if I missed this, but in terms of the U.S. time line, in the press release there was a little bit of a variance. I mean, should we still be thinking about completion of U.S. field trials and regulatory file -- filing for the IH II Microarray and the disease screening microarray for CMV and syphilis in '18 -- calendar '18?

[Paul Cowan:]

Certainly, field trials. The submission is probably going to be around year-end, which is the reason we just pulled it out. It's -- it could straddle here.

[Joshua Jennings:]

Understood. Excellent. And just on the tender process path forward that you mentioned, just to be clear, could we hear of a tender win in the second half of this calendar year or a tender -- or new -- positive news on a potential tender sometime in calendar '18?

[Paul Cowan:]

Difficult to say. I think the key there is just timing of the European field trials. And so once we see that and the results, we'll just have better visibility on that. I'd rather not hang that out as a target for this year. But it is possible that we might see 1 or 2 small wins initially. Some of the bigger contracts we would expect to have more extensive validation processes -- customer validation, which could take a bit longer and could stretch into 2019.

[Operator:]

At this time, I'd like to turn the floor -- sorry, we do have a follow-up going to Brandon Couillard of Jefferies.

[Christian Trigani:]

Just one last one from me. Would be curious to hear maybe where manufacturing yields are today for the blood grouping consumable. And maybe what kind of steps you're taking to lift those up over time.

[Paul Cowan:]

Yes, so actually, in the past six months we've made sort of huge strides forwards on manufacturing yields. Print yields are significantly up and very close to our targets today, and that's reliable and consistent on every print run. So we're very pleased with the sort of evolution of print yields. And then likewise, yield elsewhere in the manufacturing process are equally in line with our expectations. So in terms of overall yield, our overall desire to hit a 60% yield on the system is one that we believe is very achievable and is largely being achieved today.

[Operator:]

At this time, I'd like to turn the floor back over to Mr. Cowan for closing remarks.

[Paul Cowan:]

Thank you, Donna, and thank you everybody for joining us on this call today. And we look forward to updating you on the progress we've made on our fiscal year-end call. We will make further announcements as we progress on the project in the meantime. And thank you very much for your participation on today's call.

[Operator:]

Ladies and gentlemen, thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.