Quotient Limited
Q4 2016 Earnings Call Transcript

Published: 24 May 2016

[Operator:]

Greetings and welcome to the Quotient Limited Fourth Quarter Fiscal 2016 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. I would now like to turn the conference over to your host, Mr. Stephen Unger, Chief Financial Officer for Quotient Limited. Thank you. You may begin.

[Stephen Unger:]

Thank you, Melissa. Good morning, everyone and welcome to Quotient’s earnings conference call for our fourth quarter and fiscal year ended March 31, 2016. 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 only valid as of today’s date, May 24, 2016 and Quotient assumes no obligation to publicly update these forward-looking statements. With that, I would like to turn the call over to Quotient’s Chairman and Chief Executive Officer, Paul Cowan.

[Paul Cowan:]

Thanks, Steve, and thank you everybody for joining this call today. Quotient continues to make substantial progress delivering MosaiQ for field trials in the next few months and ultimately towards European commercial launch around the end of this year. Three key project milestones have been achieved over the past three months. The initial manufacturing system for MosaiQ consumables has been installed and is undergoing validation at Eysins, Switzerland manufacturing facility. We are now transferring assays from development to final manufacturer. Indeed, the first batch is of antibodies and red blood cells have now been successfully processed for printing onto the MosaiQ consumables, both for field trials and ultimately for commercialization. And finally, we have taken delivery of two MosaiQ instruments, while our instrument development partner, STRATEC Biomedical AG is working with another four instruments. Work on the MosaiQ instrument is now focussed on internal valuation and validation assay integration and final software development. In our view the project now is largely de-risk [ph] its highly complex system where we’ve experienced challenges, nevertheless we have continued to meet and address these challenges successfully, no doubt there will be more challenges as we go through validation but we remain confident that we’ll be able to address them with little or no impact on the timeline. This is a testament to the excellent engineering team that we have supporting MosaiQ, both internally and with our external partners. As reported previously, we’ve now installed all key elements of the initial manufacturing system; the print system is now fully operational and undergoing validation and integration with other elements of the manufacturing system. All print stations are operating and printing both red blood cells and blood group antibodies. Indeed, we’ve now printed red blood cells using the print system and detected corresponding antibodies just as MosaiQ is intended to do, while only a small snapshot, it nevertheless gives us confidence that MosaiQ will work in its most challenging application. The final assembly system is also now installed and undergoing final validation. It’s assembling the final consumables, and it’s loading them into magazines, which is the form in which the customer will receive the product. We are currently very much focussed on final system validation for the initial manufacturing system. This will be followed by the manufacture of blood grouping consumables and the initial disease screening consumables for use in our internal validation study as well as our initial European field trials. European field trials remain on plan to commence late in the third calendar quarter of 2016. Development of the extended disease screening panel for MosaiQ continues to make strong progress. We have established feasibility for each of the assays and are now focussed on integrating the extended panel onto a single consumable prior to undertaking a further substantial internal validation study over the next two quarters. We expect to complete work and transfer all the remaining disease screen assays from development to manufacturing in the second half of 2016 and field trials for the extended serological disease screening panel are plans for the first half of 2017 both in Europe and in the U.S. In parallel with the tremendous advances made for MosaiQ for blood grouping and serological disease screening, working alongside our development partner we’ve also made strong progress against our plan to extend the capability of MosaiQ to include molecular disease screening. Key milestones achieved during the quarter include, demonstrating that MosaiQ or the MosaiQ methodology can be used to detect both DNA and RNA, successfully detecting DNA and RNA for four key molecular disease screening targets, including -- specifically HIV, Hepatitis B, Hepatitis C and West Nile virus and advancing plans around determining the optimal method for sample preparation and amplification for use in conjunction with the existing MosaiQ detection process and sample workflow. Though the progress made to date on molecular disease screening gives us confidence, we have a platform that will offer considerable advantages over existing testing platforms, specifically turnaround times of less than one hour, eliminating the need to pool samples, and ultimately providing a unified platform that will undertake all key testing within the donor testing laboratory, particularly blood grouping, serological disease screening and molecular disease screening. Importantly, the molecular disease screening capability we are developing will leverage our existing manufacturing and instrument capabilities. The MosaiQ methodology from molecular disease screening is also highly flexible which should allow Quotient to quickly and efficiently respond with new assays to detect emerging infectious disease threats, such as the Zika virus. Our methodology is novel and we are currently implementing a patenting strategy to protect the intellectual property that we have been developing. In parallel with the substantial advances made with regard to MosaiQ, the conventional reagent business delivered strong results during the fiscal fourth quarter with product sales growing 16% year-over-year. The business also experienced meaningful gross margin improvement in the fourth quarter. Excluding the negative impact of foreign currency translation, Quotient generated product sales growth of 8% during the fiscal 2016 and we are targeting a continuation of this solid growth for this business in the coming fiscal year. With that, I’d now like to hand back to Steve who will present the financial overview.

[Stephen Unger:]

Thanks Paul. In line with our preliminary results announcement, our fiscal fourth quarter total revenues were $5 million, an increase of 29% from last year’s fourth quarter. Product sales were $4.5 million, an increase of 16% from last year or 21% excluding the negative impact of foreign currency translation. The increase in product sales was mainly attributable to growth in direct sales to customers in the United States and better pricing on sales to existing OEM customers, offset by $0.2 million negative impact of a stronger U.S. dollar relative to the British pound and euro. We also recognized $500,000 of product development fees in this year’s fiscal fourth quarter which did not occur last year. OEM sales of $3.1 million grew 16% year-over-year and represented 68% of product sales, while direct and distributor sales of $1.5 million was up 18% year-over-year and represented 32% of product sales. Direct sales in the United States increased 29% year-over-year, which was mainly attributable to recently launched new products and growth in sales of our reagent red blood cell products. Direct sales outside of the United States decreased 23% year-over-year, given our decision to rationalize our product offerings in Europe. Product sales from standing orders in the quarter were 77% versus 74% last year. Gross profit on total revenues was $2.5 million growing 66% year-over-year and included $0.5 million of other revenues. Gross profit on product sales grew 33% year-over-year to $2.0 million compared with $1.5 million last year. The increase was attributable to the positive impact of greater sales volumes and better pricing on sales to existing OEM customers. Gross margin on product sales was 43.7% compared to 38.4% last year. In the fourth quarter the operating loss was $12.8 million compared with $9.8 million last year. Operating expenses increased $4.1 million from last year to $15.3 million with a $1.0 million increase in R&D expenses to $6.7 million and $3.0 million increase in general and administrative expenses to $8.0 million. Sales and marketing expense of $0.7 million increased $0.1 million 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 reflected greater personnel related costs, increased facility rental charges and greater corporate costs. Stock compensation expense was $624,000 in the fourth quarter versus $324,000 last year. In the fourth quarter, net other income was $3.3 million compared with $7.3 million last year. Net other income consisted of interest expense of $1.2 million and $4.5 million of foreign exchange gains. Overall, our net loss for the quarter was $9.5 million or $0.41 per ordinary share. Moving to our fiscal year totals, our fiscal year total revenues were $18.5 million, an increase of 1% from last year. Product sales were $18 million, an increase of 2% from last year or 8% excluding the negative impact of foreign currency translation. The increase in product sales was attributable to growth in direct sales to customers in the United States and better pricing on sales to existing OEM customers, offset by a $1 million negative impact of a stronger U.S. dollar relative to the British pound and euro. We also recognized $500,000 of product development fees compared with $750,000 last year. For the fiscal year, OEM sales of $2.2 million was down 2% year-over-year and represented 68% of product sales while direct and distributor sales of $5.9 million was up 11% year-over-year and represented 32% of product sales. Higher product sales volume and better pricing on sales to existing OEM customers were offset by the stronger U.S. dollar relative to the British Pound and Euro, and lower shipments of bulk antisera. Direct sales in the United States increase 17% year-over-year. Direct sales outside of the United States decrease 6% year-over-year given our decision to rationalize our product offerings in Europe. Product sales from standing orders were 73% versus 72% last year. For the fiscal year, gross profit on total revenues was $8.9 million compared with $8.6 million last year. Gross profit on product sales grew 6% year-over-year to $8.4 million compared with $7.9 million last year reflecting higher product sales volumes and better pricing on sales to existing OEM customers, offset by the negative impact of the stronger U.S. dollar. Gross margin on product sales was 46.4% compared to 44.7% last year. For the fiscal year the operating loss was $49.1 million compared with $29.7 million last year. Operating expenses increased $19.6 million from last year to $58.0 million with a $9.6 million increase in R&D expenses to $28.8 million and a $9.7 million increase in general and administrative expenses to $26.1 million. Sales and marketing expenses of $3.1 million increased $0.3 million from the prior year. The increased in R&D expenses reflect incremental costs associated with the commercial scale up of MosaiQ including initial production costs which are currently expensed as research and development. The increased in general and administrative expenses reflect a greater personnel-related costs, increased facility rental charges and greater corporate costs. Stock compensation was $2 million versus $1.1 million last year. For the fiscal year, net other income was $15.2 million compared with net other expense of $29.3 million last year. Net other income consisted of interest expense of $4.2 million and $4.2 million of foreign exchange gains. We also recognized $0.6 million of previous deferred costs as a result of refinancing our credit facility and a $15.9 million unrealized gain-related to the change in fair value of the warrants issued with our IPO. Overall, our net loss for the fiscal year was $33.9 million or $0.73 per ordinary share. Moving to the balance sheet, cash and cash equivalents were $44.1 million on March 31st, while term debt was $28.9 million. Accounts receivable totaled $2.3 million and inventory totaled $12.6 million, capital expenditures were $9.1 million in the fourth quarter and $29.0 million for the year. Moving to guidance, for fiscal 2017 we forecast full year revenue in the range of $30.4 million to $31.4 million which includes $11.9 million of product development fees that we expect to recognize as other revenue in our fiscal third and fourth quarters. These product development fees assume the receipt of milestone payments that are contingent upon achievement of regulated approval for certain products under development including MosaiQ. As such the receipt of these milestone payments involves risks and uncertainties. We forecast fiscal 2017 product sales revenues in the range of $18.5 million to $19.5 million. For fiscal 2017 we forecast an operating loss in the range of $45 million to $50 million, and capital expenditures of $25 million to $30 million, which includes expenditures associated with the replacement of our Edinburgh manufacturing facility. For our first quarter we expect product sales in the range of $4.7 million to $5.2 million compared with $4.9 million in the first quarter of fiscal 2016. I'll now turn the call back over to Paul.

[Paul Cowan:]

Thanks, Steve. We continue to execute successfully against our development in commercial scale, our plans for MosaiQ. We are confident that MosaiQ will transform the field of transfusion diagnostics and we'll be well placed to disrupt the current aging testing platforms in use, and at the same time advanced patient care, no extra cost to the healthcare system. The advantages offered by MosaiQ are compelling including the comprehensive characterization of donor and patient blood which will allow for the better matching of both -- of donor blood to patients. The elimination of routine manual testing for blood grouping, a single unified testing platform for blood grouping serological disease screening and molecular disease screening, significantly simplifying testing processes and consumable requirements, substantial reduction in sample testing volume requirements and finally a more streamline procedure for the matching of donor units to patients. In summary, MosaiQ will offer customers worldwide major efficiencies and lower costs and this additional the target addressable market is both highly developed and it's over $3.4 billion annually a substantial market. Near term, we will remain absolutely focused on execution of the remaining steps to bring MosaiQ to market in advanced of commercial launch in Europe prior to the end of 2016 and in the United States in early 2018. With that, I'd like to thank all of our employees and partners for their tremendous contribution towards their continued success of MosaiQ. I'll now ask the operator to begin the Q&A session.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Brandon Couillard with Jefferies. Please proceed with your question.

[Q –Unidentified Analyst:]

Hello, good morning. This is Sachin [ph] in for Brandon.

[Paul Cowan:]

Hi.

[Unidentified Analyst:]

Paul, with respect to the internal validation study, you expect to complete prior to launch field trials. First, how many samples do you expect to run for those? And is same for both the blood grouping and initial disease screening assays?

[Paul Cowan:]

So, in terms of field trials volume.

[Stephen Unger:]

Validation study.

[Paul Cowan:]

Validation study, where we would expect validation study to be between 5 and 10,000 samples for blood grouping, and similar number for the initial disease screening, so quite a substantial study, internal study.

[Unidentified Analyst:]

Got you. And what would you view as a success? What level of concordance when you just feel okay before moving to field trials?

[Paul Cowan:]

Well again the purpose of doing the validation study is to ensure that we go into field trials with the product that we're highly confident is going to work. So we're wanting to come out of that validation study achieving 99% concordance level requirement for antigen typing, and 95% concordance for antibody identification, and similarly on the initial disease screening panel. And one of the advantage we have and one of the reasons for doing it is, if one of the more [Indiscernible] specificity if doesn't achieve that we can always just drop it off and then come back with the follow-up of consumable later, but we remained confident that we'll achieve the levels over the targeted or required levels of concordance across the board [ph].

[Unidentified Analyst:]

All right. And could you speak to the initial yields you're seeing from the manufacturing process thus far? Any color you can share on the manufacturing yield from the blood grouping assay?

[Paul Cowan:]

Well the manufacturing – well, at this point in time that's part of the validation work that's been undertaking, so we don't have specific yield data. What we do know however with the running of the print system to-date we're comfortable with our initial yield assumption and we'll become more specific as and when we complete the validation process.

[Unidentified Analyst:]

Got it. And Steve, could you give us some qualitative guidance around OpEx for the year and would that front end loaded since this would be compensating STRATEC for delivery of the final instruments?

[Stephen Unger:]

Hi. So, as far as operating expense for fiscal 2017, I would say there's no – we have mostly ramped up our staffing levels associated with the MosaiQ manufacturing facility in Switzerland. So, I would say, expenses will generally run in the range of $10 million to $12 million per quarter and give or take when those STRATEC development payments hit, you might see an additional million or so in a quarter.

[Unidentified Analyst:]

Got it. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Josh Jennings of Cowen & Company. Please proceed with your question.

[Josh Jennings:]

Hi. Good morning, gentlemen and congratulations on the continued progress here.

[Paul Cowan:]

Thanks, Josh.

[Josh Jennings:]

I just wanted to follow-up – absolutely. Can I just follow-up on the question on the validation study. Would those results be made public or should as you move into field trials we just assume that you've achieved the concordance rates that you outlined there, Paul?

[Paul Cowan:]

No. We will make them public or we publish on indeed or we will publish and indeed we want to go the big to AABB this year with this data and publish it for AABB as well, but I would expect that we'll publish the results of the validation data in advance the field trials.

[Josh Jennings:]

Okay. Excellent. And then just on the instrument development it appears that the software element is the last remaining step and just how close this STRATEC, clearly they were almost at the finish line, but how should we thinking about the risk in this final step or should we be thinking it all the previous development work to date is really de-risked the software element that represents, what I believe is what are the step to getting instrument ready for..?

[Paul Cowan:]

Yes. We have a working instrument, so the software is there for that. A lot of the software development at the moment is about adding features that we hope we want to have on the instrument for field trials. So, as far as operational software is concern that's now largely behind us, we clearly still have assay integration work to do and that will come out of running the platform, running the system. But this as you sort of indicate, I agree with your most of that is really I would put in a low risk category and we're now very much in the final weeks of receiving this software version for field trials, that software will continue to evolve, but nevertheless it will be sufficient for us to move into field trials with it.

[Josh Jennings:]

Okay, great. You talked about marketing at the end of the year in Europe before CMark [ph] can you just talk about that effort and any updated thoughts on pricing of the consumable for the MosaiQ instrument itself?

[Paul Cowan:]

Our commercial team is now sort of coming together. We've got individuals in place then the team is coming together for the European launch. We are focusing initially on relatively small number of target geographies in Europe to start with, and with sort of a number of countries identified as Tier 1 and then a number of countries identified as Tier 2 backups to the Tier 1. As far as pricing is concern, it’s a little earlier for us to be talking about that, but we are remained confident in sort of levels that we had anticipated and indicated previously.

[Josh Jennings:]

Okay, great. And just last question on just heading into next year thinking about the initial commercial launch and adaptive curve in Europe, with those initial marketing trends, can you help us think about how we should be forecasting the initial ramp in calendar 2017 in Europe?

[Paul Cowan:]

That's a bit of a difficult one of us to do at the moment, because there is so much uncertainty. We are – how would I answer this. We in our internal focus expecting revenues to coming in the latter part of the year, first revenue is to come in the latter part of the financial year with three, six months adoption period or sale cycle, but at this point in time I can't be any more specific on that because its 12 or 15 months away.

[Stephen Unger:]

I think Josh as the year progresses we'll be able to create some more clarity for you as we put together our launch plans in advance through the field trials.

[Josh Jennings:]

Understood, understood. All right. Thanks for the answers.

[Paul Cowan:]

Okay. Thanks Josh.

[Operator:]

Thank you. Mr. Cowan there are no further questions at this time. I'd like to turn the floor back to you for any final concluding remarks.

[Paul Cowan:]

Thanks, Melissa, and thank you everybody for joining us on the call today. Quotient continues to make considerable progress on the commercial scale of MosaiQ and we look forward to its initial commercial launch in 2016. And we also look forward to reporting successfully against our forecast milestones over the next three to six months. Thank for joining us.

[Operator:]

Thank you. This concludes today’s teleconference. You may disconnect your line at this time. Thank you for your participation.