Quotient Limited
Q1 2016 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Hello and thank you for standing by. Welcome to the Quotient First Quarter Fiscal 2016 Financial Results Conference Call. As a remainder, all participants are in a listen-only mode and the conference is being recorded. [Operator Instructions] At this time, I’d like to turn the conference over to Stephen Unger, CFO of Quotient Limited. Please go ahead.

[Stephen Unger:]

Thank you, Joe. Good morning, everyone. 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 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 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, August 4, 2015, and Quotient assumes no obligation to publically 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, Steve. And good morning ladies and gentlemen. And thank you for joining this call to review Quotient’s operational and financial results for quarter ended June 30, 2015. I’m pleased to say that commercial scale-up of MosaiQ continued at a rapid pace during first quarter of fiscal 2016. Conversion of the Eysins, Switzerland facility for the manufacture of MosaiQ consumables is now largely complete and installation of key manufacturing and bioprocessing systems has commenced. Assays to be incorporated on the MosaiQ consumables for both blood grouping and disease screening continue to generate positive performance data, as we begin their transfer to final manufacture. Overall, we remain on track for the commercial launch of MosaiQ in Europe during the second half of calendar 2016. Meanwhile our conventional reagent business progressed largely to plan during the first quarter of fiscal 2016 and began to play a key role in the commercial scale-up of MosaiQ through the production and procurement of reagents for the MosaiQ blood grouping consumable. While the business continues to feel the impact of adverse exchange rate movements on both revenues and gross profits, we expect both growth and profitability to improve throughout the remainder of fiscal 2016. Moving on to slide four of the presentation, we continued to achieve all of our key goals during quarter which are primarily focused on advancing MosaiQ to commercial launch in Europe, during the second half of 2016. Commercial scale-up of MosaiQ is progressing rapidly with conversion of the Eysins facility complete, installation of the final manufacturing and bioprocessing systems now commenced, design of the MosaiQ instrument largely complete and assay development advancing towards the final step of transfer to production. In June, we also showcased MosaiQ at ISBT London where we received a very positive reception from the European donor collection community. Over the same period, the conventional reagent business progressed to plan and started play a key role in the manufacture and procurement of reagent antibodies for incorporation on MosaiQ, particularly on the initial manufacturing lots to be used for field trials and regulatory submission early next year. Slide five is a reminder of the utility of the MosaiQ platform for blood grouping which is unmatched by any single instrumentation or automation platform for blood grouping available in the market today. MosaiQ will undertake the comprehensive characterization of donor and patient blood, with the simultaneous identification of up to 39 blood group antigens and 31 blood group antibodies, avoiding the need for routine manual testing and delivering major operational efficiencies and cost savings to customers. All analyses will involve the use of a single consumable and importantly the need for any of single patient or donor sample. With a known time to result of less than 35 minutes, MosaiQ will offer considerable operational advantages in a patient testing environment. And parallel with the development of MosaiQ’s blood grouping consumable, development of the disease screening consumable -- sorry for donor screening is ongoing and results continue to be positive. We expect to publish the results of our initial feasibility data for the detection of HIV in donor blood towards the end of the summer. Slide six sets out in more detail the menu of assay for inclusion on MosaiQ. As mentioned already, MosaiQ will offer the most comprehensive automated testing menu for blood grouping and serological disease screening. We remain on target to achieve our original objective to deliver a new automation platform capable of undertaking the comprehensive characterization of donor and patient blood, while eliminating the need for routine manual testing. This will deliver major cost savings to our customers while also importantly, delivering major benefits to patients. On slide seven, we talk about the commercial scale-up of MosaiQ. As you can see, it’s well advanced and continuing at a pace. Installation of the key manufacturing of bioprocessing systems are well underway with the first integrated print system now installed in Eysins. The first wet process system will be delivered to Eysins next week. And with this tremendous progress, the manufacturing system is -- validation of the manufacturing system is on schedule for completion by the end of 2015. Also development of the initial high throughput MosaiQ instruments continues to progress positively, and we’ll talk about that more shortly. Strong progress has also continued to be made on the development of individual assay for inclusion on MosaiQ blood grouping and disease screening consumables. We plan to publish results in the coming months of the further internal performance valuation study for the MosaiQ blood grouping assays using the prototype instruments built by STRATEC. We’ll follow this up with a major internal study using final manufactured MosaiQ consumables and the final instruments in early 2016, prior to commencing field trials. Finally for field trials, both for the blood grouping consumable and the initial dieses screening consumable is also well advanced; field trial sites have been selected and the design of the few trials is underway. A pre-submission meeting with the FDA to discuss field trial design is also being schedules. Slide eight highlights the activities currently underway in Eysins to install and validate the initial manufacturing system. We expect this culminate in the manufacture of MosaiQ consumables for both blood grouping and dieses screening for field trials in the first quarter 2016 using the final validated MosaiQ manufacturing system. On slide nine, development of the MosaiQ instrument, we have partner Stratec Biomedical, continues to progress very well. Advanced prototypes have been received by Quotient and have met our expected functional requirements. The current focus is on software development including software integration on the instrument as well as manufacturing scale-up for the instrument. and we continue to expect field trial versions of the instruments to be delivered to Quotient by the end of 2015 which will then be subject to further software upgrades, prior to commencement of field trials. Slide 10, highlights the tremendous progress that has been made on the development of individual blood grouping and dieses screening assays to be included on the MosaiQ platform. Development of the anybody identification and reverse typing assays is now complete and the process of transferring these assays to final manufacture is underway. Development of all key antigen typing assays for European and U.S. markets is now either complete or progressing towards completion. We expect this to be completed by the end of the third quarter of calendar 2015. Where development work has commenced, most of these assays are more relevant to the Asian market and primarily due to not being able to procure a reliable source of antibodies. None of these assays in Quotient are critical to the commercial success of MosaiQ. We will make a decision on whether or not to include these assays on the final blood grouping consumable prior to the end of 2015. And in parallel, work on the dieses screening assay continues to progress to plan. With that, I’d now like to hand back to Steve who will present the financial overview.

[Stephen Unger:]

Thanks, Paul. Looking at slide 11, for our fiscal first quarter, total revenues and product sales were $4.9 million, a decrease of 18% from last year’s first quarter. The decrease was attributable to a $500,000 negative impact of the stronger U.S. dollar relative to the British pound and euro and lower shipments of bulk antiserac OEM customers. During the quarter, biomanufacturing capacity traditionally available for OEM production was allocated to the production of reagent antibodies for incorporation as assays on the MosaiQ blood grouping consumable. We also recognized $650,000 of product development fees in last year’s fiscal first quarter which did not recur these year. OEM sales of $3.4 million, represented 71% of product sales, down 10% year-over-year while direct and distributor sales of $1.4 million represented 29% of product sale, down 3% year-over-year. OEM sales growth was impacted by the stronger U.S. dollar relative to the British pound and euro and lower shipments of bulk antisera, which was expected. Direct sales in the United States increased 16% year-over-year while direct sales outside of the United States declined 38% year-over-year as a result of the stronger U.S. dollar and our decision to rationalize our product offerings in Europe. Product sales from standing orders were 74% in the quarter versus 71% last year. Gross profit on total revenues was $2.1 million compared with $3.5 million last year. Gross profit in our fiscal first quarter of last year included $650,000 of product development fees for which there were no associated costs. Gross profit on product sales was $2.1 million compared with $2.8 million last year. Gross profit on product sales was impacted by the stronger U.S. dollar as well as higher shipping costs and incremental manufacturing costs. Gross margin on product sales was 43.3% compared to 53.5% last year. In the first quarter, the operating loss was $10.5 million compared with $4.4 million last year. Operating expenses increased $4.7 million from last year to $12.6 million with a $3.1 million increase in R&D expenses to $6.8 million and up $1.6 million increase in general and administrative expenses to $5.1 million. Sales and marketing expenses of $0.7 million reflect from the prior year. the increase in R&D expenses reflects incremental costs associated with the commercial scale up of MosaiQ including initial production costs which are currently expensed as research and development. The increase in general and administrative expenses reflects a greater personnel related costs, increased facility rental charges and greater corporate costs. Stock compensation expense was $337,000 in the first quarter versus $226,000 last year. In the first quarter, net other income was $0.3 million compared with $1.8 million last year. Net other income consisted of interest expense of $0.8 million and a $1.8 million unrealized gain related to the change in fair value of the warrants issued with our IPO, which we are required to mark-to-market as a balance sheet liability. We also recognized a foreign exchange loss of $0.6 million. Overall our net loss for the quarter was $10.2 million or $0.60 per ordinary share. Moving to the balance sheet, cash and cash equivalents were $21.3 million on June 30th, while term debt was $15.3 million. Yesterday we entered into an amended agreement with MidCap Financial to extend our existing secured term loan facility from $15 million to $30 million. MidCap also agreed to make available additional credit facilities, totaling $20 million, subject to certain conditions. We received net proceeds in the aggregate amount of $14.8 million, which will be used for working capital purposes including the replacement of our conventional reagent manufacturing site in Edinburgh, Scotland. We also have an additional $35 million of potential funding from the exercise of ordinary share warrants issued with our IPO, which are currently in the money and expire on October 25, 2015. Accounts receivable totaled $2.2 million and inventory total $5.0 million while capital expenditures totaled $6.9 million in the first quarter. Moving to slide 11 and our updated guidance. Our outlook for 2016 is unchanged from last quarter and reflects the stronger U.S. dollar relative to the British pound and euro which we expect to have a meaningful negative impact on product sales relative to the prior year. Our revenue forecast currently assumes an exchange rate of $1.55 per British pound and a $1.10 per euro. For fiscal 2016, we forecast full year revenue in the range of $19 million to $20 million, which includes $1.9 million of product development fees. We anticipate product sales revenue in the range of $17 million to $18 million, which includes a $1 million or 5% drain on growth from the stronger U.S. dollar. We forecast an operating loss in the range of $50 million to $55 million, which includes R&D expenses of $35 million to $40 million. However, we expect R&D expenses to be meaningfully lower in fiscal 2017, as MosaiQ production costs currently included in R&D expenses are expected to start being recognized as cost of goods sold as we begin commercial production in our fiscal third quarter. For fiscal 2016, we forecast capital expenditures of $30 million which includes an additional $10 million associated with the replacement of our Edinburgh manufacturing facility, this is being funded by our -- the extension of our MidCap facility and the proceeds related to that. For our second quarter, we expect product sales in the range of $3.7 million to $4.2 million compared with $4.5 million in the second quarter of fiscal 2015. This includes the 10% or $0.4 million drain on growth from the stronger U.S dollar. I would now like to reiterate our comments from last quarter, regarding our intermediate term outlook, which encompasses, both fiscal 2017 and 2018. In terms of forecast expenditure, we are now more than halfway through our plan for the development and commercial scale-up of MosaiQ. We remain on target for the commercial launch in Europe for both the MosaiQ blood grouping consumable and the initial MosaiQ disease screening consumable during the second half of fiscal 2017. In fiscal 2017, we are anticipating a significant reduction in our reported operating loss with [Audio gap] activities for MosaiQ in the middle of that year. Our preliminary forecast for fiscal 2017 includes total revenues in excess of $45 million, which includes revenues related to MosaiQ in excess of $25 million. MosaiQ revenues include product sales starting in the fiscal fourth quarter and milestone receipts with respect to our agreement with OCD. Achievement of these revenues will be contingent upon CE Marking and the subsequent commercial launch of MosaiQ in Europe. Provided this occurs, we would expect to generate a modest operating profit in the third and fourth quarters of fiscal 2017. In fiscal 2018, we are planning for total revenues in excess of $100 million and a positive operating profit for the full fiscal year. Our preliminary forecast for fiscal 2018 includes revenues relating to MosaiQ in excess of $75 million including product sales in Europe and the United States and further milestone receipts with respect to our agreement with OCE. MosaiQ milestone and product sales revenues in the United States will be contingent upon MosaiQ being licensed for sales by the FDA and the subsequent commercial launch of MosaiQ during fiscal 2018. Given the anticipated timing of the achievement of milestones, we would expect to generate a modest operating loss in the first and second quarters of fiscal 2018which would then be more than offset by operating profits in the third and fourth quarters. I’ll now turn the call back to Paul.

[Paul Cowan:]

Thanks, Steve. We have an established presence in transfusion diagnostics with over 30 years experience in developing, manufacturing and commercializing transfusion diagnostics products worldwide. MosaiQ represents a clear advance in the field of transfusion diagnostics, delivering a highly disruptive and transformative solution for our customers. MosaiQ is also on a advanced stage of commercial scale up with initial markets -- with initial markets to be addressed by Quotient being the $2 billion plus donor testing market where 20 customers account for the testing of over of 38 million donations annually. Our partnership with OCD validates MosaiQ, both technically and commercially and we plan for European commercial -- we plan to achieve the commencement of European commercial launch for MosaiQ in the second half of 2016 with U.S. commercial launch one year later. With that, I’d like to thank everyone at Quotient for their continued efforts. I’ll now ask the operator to begin the Q&A session.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question today is coming from Josh Jennings with Cowen and Company. Please go ahead.

[Josh Jennings:]

Thanks gentlemen and good morning. Congratulations on the progress and thanks for this thorough update. I guess just two question from me, the first, and then I have a follow-up but just, can we talk a little bit about how you expect these field trials to be -- I know we have talked a little bit in past but if you could give U.S. an update on expectations for Europe and the U.S. field trials and any color or details in terms of numbers, samples et cetera that you could update U.S. on?

[Paul Cowan:]

Sure. So, at this point in time, we are designing field trials around three field trial sites in Europe and four field trials sites in the U.S. with two donor centers and two hospitals in U.S. and two donor centers and one hospital in Europe. We are very familiar with the field trial process given what we have being doing, developing our liquid reagent products. Total samples of each geography, we expect to be about 5,000 although that still subject to further discussion with the regulators. But we wouldn’t expect there to be a sort of a material increase there. And as you know, the purpose of the field trials are to establish concordance versus establish technologies. So, our expectation is we will kick off -- we plan to kick off in Europe first. We would expect the field trials themselves to take six to eight weeks and then a further six to eight weeks of write up and final submission preparation and then similarly in the U.S. as well, six to eight weeks of field trial on physical sites with six to eight weeks of write up for the final submission. And then, in the background, we mustn’t forget that when you look at the overall dossier, both in Europe and in the U.S., the field start -- the field trial site is -- sorry, the field trials is probably 2,000 pages of -- by way of example of 25,000-page dossier. The remaining 23,000 pages so to speak are well advanced and being prepared at this point in time, will be populated as the move towards a validation and et cetera, et cetera.

[Josh Jennings:]

And you had some details on the development efforts of the manufacturing system for the consumable side. Just, maybe, can you give U.S. just an update on timelines for having manufacturing scale-up for the actual MosaiQ instrument and then build-out of capacity on the instrument side?

[Paul Cowan:]

So, we are working with STRATEC to have the actual hardware for the field trial instruments delivered to us before the end of this year. In parallel with that the software development, software integration is running in parallel with the building of hardware and will sort of move beyond that -- there will be further software upgrades once we receive the hardware itself. We expect to be in a position in sort of February-March of next year to have a field trial instrument with appropriate software for the European field trials; we’ll follow that up with further software upgrades prior to doing the field trials in the U.S. which we would expect to commence sometime in the sort of April-May period of next year. And then as far as manufacturing scale-up is concerned, it’s mainly around procurement at this point in time. And we won’t actually need an awful lot of instruments in the first 12 months of launch. So we’ll have a good smooth ramp up, I would hope on the instrument manufacturing side.

[Operator:]

[Operator Instructions] The next question is from Andrew Peters with UBS. Please go ahead.

[Andrew Peters:]

Hi, guys. Thanks for taking my question and congrats on all the progress, the execution. It seem like it’s going very well. Just wanted to see if you could touch on a couple of questions on the competitive landscape. I know Bio-Rad has been a little bit more active kind of in their discussions of their IH-500 products. I guess that’s more on the consumer side. So just wanted to see if you could update us on anything that you’re seen out of the -- emerging out the competitive landscape. And then just related to that, as you think about some of those related products launching, how should we think about the potential impact to MosaiQ uptake in a couple of years from now, especially in the U.S.?

[Paul Cowan:]

The U.S. market is clearly facing all those existing or incumbent providers in U.S., facing new competition coming from both Bio-Rad and Grifols. It’s important though to understand that what Bio-Rad and Grifols are doing coming to market with the me too [ph] technologies based on gel cards. So, they will be very much competing with the gel card offering of Ortho and solid phase offering of Immucor as well as very, very heavy requirement for the provision of liquid reagents to support that. So, remember that MosaiQ represents step change whereby we are essentially going to provide a full characterization of donor or patient blood on a single consumable and eliminate the need for routine manual testing that runs alongside existing technologies. So in the patient testing market, which again is the market which Ortho will be focused on, we don’t envisage that new competition as being providing meaningful sort of disruption to the launch of MosaiQ. In the donor testing market, again what we’re doing there is just placing multiple systems and we don’t see any replacement or any sort of competitive reaction in that marketplace by existing players that got very limited technology offerings and nothing really that we believe to compare with Quotient’s MosaiQ platform in terms of utility. So, we remain confident that we will be launching into a favorable market in the donor testing market given the existing technology platforms available. Does that answer that question?

[Andrew Peters:]

It does. Thank you.

[Paul Cowan:]

In terms of impact on sales, all I’d say is where there might be impact is going to be on the patient testing side, that’s really on Ortho, we really only take a percentage of net sales there. But I wouldn’t expect there to be material impact on our revenues there in the first five years post launch.

[Andrew Peters:]

And if I could sneak in a question for Steve. I noticed you’ve been a little bit more active just on the capital front. I just wanted to see if that’s reflection of any sort of underlying change in spending plan ahead of the MosaiQ launch or is it really just kind of executing on the plan that you’ve laid out.

[Stephen Unger:]

So, as far as the capital plan Quotient has established, it’s really unchanged since IPO. We have expanded the MidCap credit facility primarily as a funding source for the replacement of the Edinburgh conventional reagent manufacturing site. It does provide us with some near-term working capital as we wait for the warrants to be exercised which we expect to be exercised by the end of October. We did file a shelf registration which is Form S-3 with the SEC. We believe that that’s a good corporate policy that once the company is shelf eligible, it’s prudent to be able to give us the flexibility in case we need to raise additional capital. But at this point, our plans are unchanged.

[Operator:]

[Operator Instructions] There seems to be no questions at this time. I will hand the conference back over to Paul Cowan.

[Paul Cowan:]

Great. Thank you very everyone, pleasure speaking with you today. We’re hugely excited by the great progress that’s been made on MosaiQ and a good solid progress of the conventional reagent business. And we look forward to reporting its continued successful scale-up and move toward to commercial launch in the coming quarters. Thank you very much.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.