Quotient Limited
Q2 2015 Earnings Call Transcript

Published: 4 Nov 2014

[Operator:]

Greetings and welcome to the Quotient Second Quarter Fiscal 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I’ll now turn the conference over to your host Mr. Stephen Unger, Chief Financial Officer for Quotient. Thank you sir, you may begin.

[Stephen Unger:]

Thank you, Donna. Good morning everyone and welcome to Quotient’s earnings conference call for our fiscal second quarter ended September 30, 2014. 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 call will be available later today at www.quotientbd.com. During this call Quotient will make forward-looking statements including guidance 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 the 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 press release. The forward-looking statements including guidance provided during this call are valid only as of today’s date, November 4, 2014 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. Thank you for joining this call to review Quotient’s operational and financial results for the quarter ended September 30, 2014. We’re very pleased with the strong progress demonstrated by the commercial scale-up of MosaiQ and the continued growth of the Conventional Reagent business. Our product sales continue to grow at a rate well above those of global transfusion diagnostics market, with multiple planned new product introductions underway to provide a boost in calendar 2015 and 2016. We continue to believe MosaiQ represents the most exciting advancement within transfusion diagnostics over the last 20 years and assay development is progressing very positively with delivery of the initial manufacturing system remaining on schedule. In parallel, major advances have been made on the development of the MosaiQ instrument and delivery of the first prototype is now imminent. Our formal process to indentify and select a partner to commercialize MosaiQ in specific global transfusion diagnostic markets is also now well-advanced. Evaluation efforts by three large multinational diagnostic companies are at varying stages of completion and commercial terms are currently under consideration. We remain committed to our goal of selecting a commercial partner by the end of the 2014 calendar year. Let me now provide you with a brief overview of the quarter’s highlights. Commercial scale-up for MosaiQ continued to rapidly progress with all key elements remaining on schedule. As planned, we’ll receive the first prototype MosaiQ instrument from STRATEC this month. We also showcased a model of the MosaiQ instrument at the recent AABB conference to over 50 perspective customers and end-users. Feedback was very positive and there was considerable enthusiasm for the project. We also received a number of recommendations on instrument functionality which we plan to incorporate into the final design. Total revenues for the quarter were in line with our guidance at $4.5 million, year-to-date total revenues amounted to $10.4 million. Meanwhile, product revenues year-to-date totaled $9.8 million in line with plan and 16% higher than product revenues in the corresponding period during fiscal 2014. With that introduction let me get into a bit more granularity with respect to where we are, where we currently stand with MosaiQ and the Conventional Reagent business. As you know, we’re developing MosaiQ our proprietary technology platform for blood grouping and serological disease screening to better address the comprehensive needs of the transfusion diagnostics market worldwide. MosaiQ represents a transformative technology capable of significantly reducing the cost of blood grouping in the donor and patient testing markets, while improving patient outcomes. It is designed to offer breadth of diagnostic tests for blood grouping and serological disease screening that is unmatched by transfusion diagnostic instrument platforms currently available. Now getting to some more specifics regarding the rapid progress I talked about with MosaiQ. Assay development for MosaiQ is progressing to plan. The focus for blood grouping has been on developing formulation and optimization protocols for the antibodies to be included in the MosaiQ consumable. We expect to complete this work and transfer the processes to manufacturing prior to commencing final validation early in fiscal 2016. Blood grouping assay development including cell line selection, formulation and manufacturing development continues to achieve anticipated performance. As expected, results using the MosaiQ methodology have improved with the increased use of automation in particular benefiting from the use of instrument breadboard modules delivered by our development partners STRATEC. As a consequence concordances from interim performance evaluations continue to leap or exceed requirements. Included in our press release is an overview of the blood grouping assay development currently underway. Specific cell lines for inclusion on the blood grouping consumable have now been defined, including second cell lines to be included on the consumable for key ABO and Rhesus specificities. The most recent interim performance evaluations have demonstrated excellent concordance validating the formulation and optimization protocols developed to-date. Over the next two quarters work in this area will be focused on procuring the remaining cell lines both internally and externally, formulating and optimizing the reagents in line with our recently developed protocols and further validation. This work will benefit significantly from the receipt of the prototype instruments over the coming months. We have completed the design of all custom equipment for the consumable manufacturing system with key elements now de-risked. Delivery of the first elements of the initial manufacturing system occurred in the second quarter of fiscal 2015 and validation has commenced. We remained on plan to receive the final elements of this initial manufacturing system early in fiscal 2016 and we expect validation of that system to be completed around the end of the second quarter of fiscal 2016. We are continuing with our strategy to minimize risk by adopting wherever possible manufacturing technologies already utilized in other industries such as the silicon wafer industry. Construction work associated with conversion of the Eysins facility to manufacture MosaiQ consumables has also now commenced. Detailed design of the MosaiQ instrument is well underway and as I said earlier the first prototype instrument will be delivered to Quotient on schedule this month. Risk mitigation steps utilizing breadboard modules, the key instrument functions are now largely complete and this work will now transfer to the first prototype instrument. As I touched on earlier, we presented the model of the MosaiQ instrument at the recent meeting in Philadelphia of the American Association of Blood Banks. The model represented a near final design of the instrument and we are able to present a detailed overview of the system functionality and key user interfaces. Over 50 perspective U.S. and European customers and end-users were able to view the model over the three days of the conference. In addition to positive feedback received from these customers, we also received a number of recommendations regarding the instrument’s planned functionality which we will build into the final instrument. As we finalize the instrument design and functionality over the coming months we expect to interview many of these customers once again to ensure that we have incorporated as much input as possible from end-users. Moving on to the Conventional Reagent business, the excellent start to the fiscal year for the Conventional Reagent business continued in the second quarter with product sales in line with plan and 16% higher than the corresponding period in fiscal 2014. At the same time, ongoing product rationalization continues to release production capacity for higher margin products with great potential. In line with plan, we launched four new red cell products in the U.S. market at the 2014 AABB Meeting in October. Two additional products are currently in an advanced stage of development and are expected to be launched in the first half of calendar 2015. Additionally, during the quarter we filed Biological License Applications with the U.S. Food & Drug Administration for approval of 14 rare antisera products to be manufactured for a key OEM customer. We expect these products to be launched in the second half of calendar 2015. Year-to-date 71% of product sales were accounted for by the sale of products sold by monthly standing orders compared with 73% in the prior year, reflecting growth in recently launched antisera products for a key OEM customer. While continuing to successfully serve our customer’s increasing requirements FDA and UL or CE-Marking production facility audits were successfully completed by the Company in September and October. Results from both audits demonstrated continued improvement in the underlying quality processes at our Edinburgh, Scotland reagent manufacturing facility. With that, I’ll now hand it back to Steve.

[Steve Unger:]

Thanks Paul. For our fiscal second quarter total revenue in products sales were $4.5 million, essentially flat from last year’s second quarter. Higher sales volumes were offset by the timing of certain standing orders falling within the first two quarters of fiscal 2015 and ’14, which we discussed on last quarter’s call. Specifically our quarterly product sales can fluctuate depending upon the shipment cycles for certain red blood cell-based products. In fiscal 2014, the greatest impact of extra product shipments occurred in the second quarter, while the greatest impact in fiscal 2015 occurred in the first quarter. Year-to-date product sales were $9.8 million in fiscal 2015, an increase of 16% when compared with 8.4 million last year. Year-to-date total revenue was $10.4 million, a decrease of 7% when compared with 11.2 million last year. We have recognized $650,000 of product development fees in the first quarter of fiscal 2015 compared with 2.8 million in last year’s fiscal first quarter accounting for the difference. For our fiscal second quarter OEM sales represented 69% of product sales, declining 3% year-over-year, while direct and distributor sales represented 31% of product sales, growing 8% year-over-year. Both were impacted by the timing of standing orders for red cell-based products relative to the previous year. Year-to-date OEM sales represented 71% of product sales growing 16% year-over-year, while direct and distributor sales represented 29% of product sales, growing 17% year-over-year. Moving to the income statement, gross margin on total revenue and product sales was 40.2% in the second quarter compared with 49.6% last year. Gross profit on product sales of 1.8 million was down 0.4 million year-over-year, as a result of adverse foreign exchange movements specifically a stronger British pound versus the U.S. dollar higher shipping costs and incremental manufacturing costs. There is also a mix impact associated with extra shipments of red cells in the second quarter last year which boosted the gross margin. Year-to-date gross profit on total revenue was 5.3 million compared with 6.9 million last year. The decrease in gross profit was attributable to the recognition of less product development fees in fiscal 2015. Gross profit on product sales was 4.6 million, an increase of 13% when compared with 4.1 million last year. The increase was attributable to higher sales volumes partially offset by adverse foreign exchange movements and higher shipping costs. Year-to-date gross margin on product sales was 47.3% compared to 48.6% last year. In the second quarter, operating expenses increased 5.8 million from last year to $10.0 million with a 3.8 million increase in R&D expense to $5.4 million and a $2 million increase in general and administrative expenses to $4.0 million. Sales and marketing expenses of $0.6 million were flat from the prior year. Year-to-date operating expenses increased $9.6 million from the last year to $17.9 million with a $5.9 million increase in R&D expenses to $9.1 million and a $3.6 million increase in general and administrative expenses to $7.5 million. Sales and marketing expense of $1.3 million increased $0.1 million from the prior year. The increases in R&D expenses both in the quarter and year-to-date reflect greater investment in MosaiQ following the completion of our initial public offering, while the increases in general and administrative expenses reflect the impact of increased personnel, increased facility rental charges and greater corporate costs, including costs associated with our transition to a public company. The Convention Reagent business year-to-date EBITDA remains on plan at slightly positive impact and MosaiQ expenditures year-to-date are on plan. Stock compensation expense was $283,000 in the second quarter of fiscal 2015 versus $223,000 in the second quarter of last year. Year-to-date stock compensation expense was $509,000 versus $422,000 last year. In the second quarter, net other expense was $3.5 million compared with $0.1 million in the second quarter of last year. Net other expense consisted of a $2.6 million unrealized loss related to the change in fair value of the warrants issued with our IPO which we are required to mark-to-market. As discussed last quarter, we will be required to mark-to-market these warrants, while they remain outstanding recording unrealized gains or losses. We also recognized interest expense of $0.5 million and the foreign exchange losses of $0.4 million. Overall our net loss for the quarter was $11.7 million or $0.82 per ordinary share. Year-to-date net other expense was $1.7 million compared with $0.2 million in the first quarter of last year. Net other expense consisted of a $1.0 million unrealized gain related to the change in fair value of the warrants issued with our IPO offset by interest expense of $1.1 million, foreign exchange losses of $0.6 million, IPO fees of $0.6 million and a $0.4 million legal settlement. Overall, our year-to-date net loss was $14.3 million or $1.6 per ordinary share. Moving to the balance sheet cash and cash equivalents were $17.1 million on September 30th while long-term debt was 15.2 million. Accounts receivable totaled $2.7 million and inventories totaled $4.4 million. Capital expenditures totaled 5.3 million in the second quarter and $10.3 million year-to-date. During the second quarter, we spent approximately $2.0 million on the development of the MosaiQ consumable and instrument and $5.0 million on the MosaiQ manufacturing facility and initial manufacturing system for consumables. Year-to-date we have spent approximately $5.0 million on MosaiQ instrument and consumable development and $10.0 million on the MosaiQ manufacturing facility and initial manufacturing system. Moving to guidance, for fiscal 2015 we continue to forecast full year revenue in the range 19.4 million to 20.4 million, which includes $650,000 of product development milestone, of a product development milestone received in our fiscal first quarter. We continue to anticipate product sales revenue in the range of $18.7 million to $19.7 million, which represents growth of 10% to 16% over fiscal 2014. We also continue to expect a net operating loss in the range of $30 million to $33 million. For our fiscal third quarter, we expect product sales in the range of $4.0 million to $4.5 million, representing growth of 2% to 15% from the third quarter of fiscal 2014. The recent strength in the U.S. dollar relative to the British pound will likely have an adverse impact on reported product sales in our third quarter, but a positive sequential impact on our reported gross margin. Our forecast currently assumes an exchange rate of $1.60 per British pound. At this rate or lower, our revenue results would likely fall near the lower end of our annual guidance. I’ll now turn the call back to Paul.

[Paul Cowan:]

Thanks Steve. And I’d like to start by congratulating the staff of Quotient for delivering yet another excellent quarter of performance. The commercial scale of MosaiQ continues to advance rapidly results from ongoing assay development remained very positive and building of the initial manufacturing system is well underway. Instrument development is also progressing at a great pace with the first prototype being delivered this month. The reaction of customers and end-users to the model of the MosaiQ instrument presented recently at the AABB has both been very positive and highly encouraging. Our Conventional Reagent business continues to move from strength-to-strength acting as our bridgehead into the market for MosaiQ. The successful completion of recent FDA and UL facility audits also confirmed our ability to operate within a high quality and highly regulated environment. We continue to be very confident in the company’s ability to meet its near-term commercial, operational and MosaiQ targets. And with that, I’ll ask the operator to begin the questions-and-answers. Question-and-Answer Session

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Jeff Elliott of Robert W. Baird. Please proceed with your question.

[Jeff Elliott:]

First with AABB, can you talk about some of the feedback you got there? Did any of these conversations lead to initial orders for the MosaiQ instrument? And then the comments you gave on the suggested changes in the instrument, would that impact the timelines or the development cost for the instrument?

[Paul Cowan:]

So taking the first part, the feedback in terms of the utility of MosaiQ was very-very positive indeed and people across the board got it that for the first time there will be a truly automated capability, largely eliminating all routine manual testing and that’s being received very positively. And importantly -- and the purpose of actually putting it on display was to receive feedback and comment on some of the functionality. And there are a number of items dealing with how we build in the quality assurance processes into the instrument. Some feedback on the user interface as well, what people would like to see there, and also some comments along the lines on while you have got a stack capability, but how about it like loaded the instrument fully with samples, can I just identify specific sample that I want to be tested next. This was all very positive it’s really what the purpose of the meetings were, what I would say is that was the reason why we have it there, it won’t impact timetable, it won’t impact cost. These are features that we can build in through primarily through software, and we have time to make changes in the instrument even at this point in time.

[Jeff Elliott:]

And on the commercial partnership for the patient testing side, can you give us a feel for how the competitions are evolving in terms of what the structure of the partnership would look like, I guess financial terms or just how would you work together on commercializing the product?

[Paul Cowan:]

As we mentioned in the press release, we are in discussions with three major parties today. Each structure that we are discussing is actually is slightly different. What I’d like to do is probably just leave that disclosure as it is in the press release today and then clearly we will be updating you in the near-term as we come to sort of a finalization of that process. But there will be financial commitment there will be long-term license and profit and/or royalty, profit share and/or royalty.

[Jeff Elliott:]

And then Steve two quick ones for you, the FX impact. I guess can you give us a little more color on how we should think about the revenue gross margin impact in the quarter and in going forward. And then in terms of modeling the warrant fair value adjustments, how should we think about that, should we just zero it out or is there a way to give us a little color at least on the near-term impact?

[Steve Unger:]

Sure. So I guess I’ll start with the warrant, because at this point it’s really reflecting the stock. I think when the stock appreciates we will experience a continued unrealized loss in the warrants. So the key there is just to recognize where the stocks at, at a point of time in the quarter and it will be difficult to model from that perspective, but in general we would expect further unrealized losses as the stock appreciates. And then on the FX impact going forward, on the revenue line we are expecting the British pound for our financial guidance to be around a $1.60 and then we also have revenues in euros which we’re expecting around a $1.24. And the impact that we expect then as far as the translation of those revenues in foreign currencies would be somewhere between $200,000 and $300,000 per quarter and that would be in this current third quarter that we’re in today and our fiscal fourth quarter. The impact of currency on revenues in this quarter that we just reported, the second quarter was minimal. And then on the gross margin and operating margin, the fact that the U.S. dollar is getting stronger relative to the British pound gives us a sequential boosts to both the gross margin and operating margin.

[Jeff Elliott:]

Okay. Thanks guys.

[Paul Cowan:]

Sorry, Jeff, one thing I would add just on the warrants very quickly is that of course all of these unrealized gains are just going to reverse out whenever the warrants are exercised probably at the end of in sort of calendar Q2 of next year. There will be, while there may be a short-term impact expect also next year some impact as it reverses out.

[Jeff Elliott:]

Sure, in near-term that’s just a non-cash adjustment?

[Steve Unger:]

It’s a non-cash item, yes.

[Operator:]

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

[Josh Jennings:]

Just a quick question on MosaiQ disease screening, can you just give us a quick update, I’m sorry if you had this in your prepared remarks and I missed it, but my understanding of feasibility testing on CMV and Syphilis has been completed, can you just give us some details on where we are there and what are the next steps going forward?

[Paul Cowan:]

So, as the initial feasibility has been established and we’re sort of moving forward with that now through to establishing the manufacturing protocols and then essentially waiting for the new instruments come onboard and we will do some further feasibility work. And then in parallel, we are also extending now to the next pair of disease screening assays HIV or two assays of HIV which we’re now working on again seeking to establish feasibility first and then moving it forward into manufacturing development and then as that progresses we will then move into other payors such as the Hep B and [indiscernible].

[Josh Jennings:]

And then just on the Ortho Clinical customer relationship that uses the first full quarter post spin from J&J can you just give an update on how that relationship is fairing it seems that it has been some process from Quotient’s perspective but insight there are things moving as smoothly as they seem?

[Paul Cowan:]

No, they are moving smoothly to plan and clearly we got CE-Marking on the product in Europe in the first quarter we’ve just filed the products in U.S. in the second quarter so the relationship continues to progress very positively.

[Josh Jennings:]

And on the Conventional Reagent business into four new products to expand the reagent red cell offering in this quarter and get 40 and in the press you said 40 new delayed submissions for rare antisera products, can you talk about those potential opportunities to the Reagent business and does the cadence of new product launches that you have in play keep the growth trajectory in the double-digit range or could we see some acceleration from 2014 levels in ’15 and ’16?

[Paul Cowan:]

Our view is as with the launch of our direct products or the four red cell products and the two other products which are coming through early next year which we’ll publish details on in the first quarter of next year I’d expect us to see acceleration in growth certainly in our direct business and overall. And then likewise once, we’re still in a growth phase with our existing rare antisera products launched outside of the U.S. with Ortho and then once those products come on screen Ortho in the U.S. again that will continue to contribute towards sort of increasing acceleration in revenues in that area.

[Steve Unger:]

So just as far as growth for the following year we would expect that double-digit growth would be -- I mean double-digit growth or better would be definitely within the plan.

[Operator:]

Thank you. [Operator Instructions] Our next question is coming from Andrew Peters of UBS. Please proceed with your question.

[Andrew Peters:]

A couple of questions related to an earlier one. I guess just the first, in terms of feedback or reactions to MosaiQ, I guess how would you characterize the level of detail around potential cost savings versus just discussions around the capability and utility of MosaiQ versus kind of the current standard. And then in terms of kind of who you are meeting with, can you characterize at the customer base in terms of what percent of the key targets you met with and was it really kind of the top customers that you are really targeting?

[Paul Cowan:]

So, let me start with the second question first. So we did meet with all three of the top U.S. groups. Red Cross, Creative Testing Solutions and Blood Systems, the OBCA, sorry the final purchasing group and feedback from all of them was very-very positive. They can see the clear advantages offered by full automation for blood grouping by combined disease screening blood grouping platform and also as we talked to them about the opportunity to further automate their labs, there was considerable interest presented there as well. And then we met with a wide group of potential hospital users, both clinicians and also lab managers, the people who we are actually operating the platform, again full understanding of the capabilities. We didn’t get into details with them about cost saving opportunity it was really a focus on the utility of the platform. And really where they did ask us questions about the cost of the consumable we were indicating that we would be keeping them whole as far as the cost of the consumable versus the current cost of reagent use, so that didn’t create any major issues for anybody but a wide selection, both hospitals and blood grouping also in DNA testing labs, and then across the board a great deal of enthusiasm.

[Steve Unger:]

And we also met with large reference labs and the major plasma testing group. And so, as far as the various customers that we plan to work with going forward, we pretty much touched everybody.

[Paul Cowan:]

Actually that is a good point and on the plasma testing front, a great deal of interest was actually shown in the fact that we need a much smaller sample size here. Given the volumes of testing that they do, taking one or two or three milliliters out of waste per sample is actually a very meaningful amount of plasma for these people. And they could actually see that with MosaiQ only getting less than a milliliter actually of plasma for testing that would deliver just on the face of a significant advantage just there in.

[Operator:]

Thank you. We are showing no other questions at this time. I would like to turn the floor back over to management for any additional or closing comments.

[Paul Cowan:]

Well, thank you very much everybody. We look forward to reaching out to you with the further positive results in our next quarter’s earnings announcement. And no doubt in the meantime we will be keeping posted on the discussions with our partners. Thank you very much.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. And have a wonderful day.