Quotient Limited
Q3 2015 Earnings Call Transcript

Published: 3 Feb 2015

[Operator:]

Greetings and welcome to the Quotient Limited's Third 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 our host Mr. Stephen Unger, Chief Financial Officer for Quotient Limited. Thank you sir, please go ahead.

[Stephen Unger:]

Thank you, Melissa. Good morning everyone and welcome to Quotient’s earnings conference call for our fiscal third quarter ended December 31, 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 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 last night’s press release. The forward-looking statements including guidance and projections provided during this call are valid only as of today’s date, February 3, 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. Thank you for joining this call to review Quotient’s operational and financial results for the quarter and nine months ended December 31, 2014. We continue to make strong progress scaling up consumer manufacturing for MosaiQ developing the MosaiQ instrument. In parallel, the results achieved from our ongoing assay development for both the blood grouping and serological disease screening consumables continues to be very positive. We remain committed to commencing field trials for MosaiQTM before the end of 2015. Last week’s announcement regarding our collaboration with Ortho-Clinical Diagnostics validates our confidence in MosaiQ, both technically and commercially, and we remain focused on execution against the project plan in transfusion diagnostics. Given the transformative nature of MosaiQ for blood grouping and serological disease screening, we are targeting revenues in excess of $800 million over the ten years following launch for these two applications alone. Over the next twelve months, we also plan to establish feasibility for MosaiQ within a broader set of diagnostic applications to potentially expand our strategic focus beyond transfusion. Our conventional reagent business continued to progress to plan during the nine months ended December 31, 2014, despite the impact on reported revenues of a stronger than forecast U.S. dollar during the quarter. While this has only had a limited impact on our reported profits or operating profit, reported revenue growth over the next twelve months will likely be impacted by the recent appreciation of the U.S. dollar against both the Euro and Pound Sterling. Let me now provide you with some brief overall on the quarter’s highlights. We finished the third quarter finalizing the selection of our commercial partner for the MosaiQ Projects which we announced last Friday. We’re very pleased to be partnering with OCD, the global market leading in transfusion diagnostics and with him we’ve had a long and successful track record developing and commercializing innovative transfusion diagnostics products. OCD will be able to bring a deep understanding of the customer needs to the projects particularly as we complete the design of the MosaiQ instrument. In the fiscal third quarter, we also successfully completed an equity offering raising just over $27 million of new equity to fund the ongoing development and commercial scale-up of MosaiQ. Together with the funding provided by the OCD collaboration and expected proceeds from the excisable warrants issued at the time of our IPO, we have over $90 million of funding in place to support MosaiQ. Continued successful development of MosaiQ should also result in a recede of an additional $59 million of milestone payment under the OCD collaboration. And taking together, we have an excellent platform to fund MosaiQ through to commercialization. With regard to MosaiQ, the manufacturing scale-up continues to make excellent progress, conversion of Eysins facility for manufacture of consumables is progressing to plan with elevation of the facility to completed it the second quarter of calendar 2015. Design of all key custom manufacturing elements such as the print system and final assembly is now complete and our automation partners are building them for us. Installation of major components of the first manufacturing system is on schedule to commence in the second quarter of calendar 2015. Assay development from MosaiQ is progressing to plan. The focus remains for blood grouping on developing formulation and optimization protocols to the individual antibodies to be the MosaiQ consumable. We expect to complete this work and transfer the process is to manufacturing prior to commencing final validation of the manufacturing plant in the second quarter of 2015. Included in our press release is an overview of the blood grouping assay development were currently underway. Specific cell lines for inclusion on the blood grouping consumable have now all been defined, including second cell lines to be included on the consumable for key ABO and Rhesus specificities. The most recent interim performance evaluations continue to develop - sorry demonstrated excellent concordance validating the formulation and optimization process - protocols developed to-date. Over the next two quarters assay development work will continue to focus on procuring all remaining cell lines both internally and externally, formulating and optimizing the reagents in line with our recently developed protocols and further validation. The first instrument prototype was delivered equation on schedule during the third quarter of fiscal 2015 and is performing in line with expectation. Results using the prototype instrument are consistent with those of the individual breadboard modules used prior to recede of the instrument. So the prototypes’ software upgrades are expected in the near term. As regards, the Conventional Reagent business, the strong start to the fiscal year for the Conventional Reagent business has continued in the third quarter with product sales in line with plan excluding the impact of foreign currency translation driving 12% year-on-year growth. At the same time, ongoing product rationalization continues to release production capacity for higher margin products with great potential and also assay development to support the MosaiQ Project. In the third quarter of 2015, we launched four new red cell products in the U.S. market with another two products being filed with the FDA for approval. All of these products are to be sold directly by Quotient and this excludes the filing of 14 reagent products for OCD during - just prior to the third quarter. Year-to-date 72% 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 external facility audits were successfully concluded by the company during the fiscal third quarter. Results from audits performed in the current fiscal year have demonstrated continued improvement in the underlying quality processes at our Edinburgh, Scotland reagent manufacturing facility. With that, I’ll now hand back to Steve for the financial review.

[Stephen Unger:]

Thanks Paul. For our fiscal third quarter total revenue were $4.1 million, an increase 4% from last year’s third quarter total revenue of $3.9 million. Product sales were $4.0 million, an increase of 1% from last’s year third quarter. Higher sales volumes were offset by a $0.2 million negative impact of the strong U.S. dollar relative to the British Pound and Euro, which we discussed on last quarter’s call. We also recognized a $100,000 of product development fees in the quarter compared with none in the last year’s third quarter. Year-to-date total revenue was $14.5 million, decrease of 4% when compared with $15.1 million. Year-to-date product sales were $13.8 million in fiscal 2015, an increase of 12% when compared with $12.3 million last year. Higher sales volumes were offset by a $0.1 million negative impact of a stronger U.S. dollar relative to the British Pound and Euro. We also recognized $750,000 of product development fees year-to-date compared to $2.8 million last year. For our fiscal third quarter, OEM sales represented 71% of product sales, growing 2% year-over-year, while direct and distributor sales represented 29% of product sales essentially flat year-over-year. OEM sales were impacted by the stronger U.S. dollar relative to the British Pound and Euro. Direct sales in the Unites States increase $0.1 million compared with last year’s third quarter, while direct sales outside the United States declined $0.1 million, as a result of our decision to offer fewer products in Europe. Year-to-date OEM sales represented 71% of product sales, growing 12% year-over-year, while direct and distributor sales represented 29% of product sales also growing 12% year-over-year. Moving to the income statement, gross margin on total revenue was $1.9 compared with $2.0 million last year. Gross profit on product sales of $1.8 million was down $0.2 million from the prior year as a result of a higher shipping costs and incremental manufacturing costs which we discussed last quarter. Gross margin on product sales was 44.4% compared to 50.4% last year. Year-to-date gross profit on total revenue was $7.1 million compared with $8.8 million. The decrease in gross profit was attributable to the recognition of less product development fees in the fiscal 2015. Gross profit on product sales was $6.4, an increase of 6% when compared to the $6.1 million last year. The increase was attributable to higher sales volumes partially offset by higher shipping costs and incremental manufacturing costs. Year-to-date gross margin on product sales was 46.5% compared to 49.2% last year. In the third quarter, operating expenses increased $4.4 million from last year to $9.2 million with a $2.7 million increase in R&D expense to $4.4 million and $1.7 million increase in general and administrative expenses to $3.9. Sales and marketing expense of $0.8 million were flat from the prior year. Year-to-date operating expenses increase $14 million from last year to $27.1 million with an $8.7 million increase in R&D expense to $13.6 million and a $5.3 million increase in general and administrative expenses to a $11.4 million. Sales and marketing expenses of $2.1 million were flat from the prior year. The increases in R&D expenses 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 contribution remains on plan excluding the negative impact of foreign exchange movements, while MosaiQ expenditures year-to-date are on plan. Stock compensation expense was $305,000 in the third quarter of fiscal 2015 versus $279,000 in the third quarter of last year. Year-to-date stock compensation expense was $814,000 versus $701,000 last year. In the third quarter, net other expense was $35.0 million compared with $0.5 million in the third quarter of last year. Net other expense consisted of a $34.6 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 a balance sheet liability. We also recognized interest expense of $0.5 million and a foreign exchange gain of $0.1 million. Overall our net loss for the quarter was $42.3 million or $2.80 per ordinary share. Year-to-date net other expense was $36.7 million compared with $0.7 million last year. Net other expense consisted of a $33.6 million unrealized loss related to the change in fair value of the IPO warrants, interest expense of $1.6 million, foreign exchange losses of $0.5 million, IPO fees of $0.6 million and a $0.4 million legal settlement. Overall, our year-to-date net loss was $56.6 million or $3.95 per ordinary share. Moving to the balance sheet, cash and cash equivalents were $33.1 million on December 31st, which includes $25 million of net proceeds from our private placement of equity that was completed in November, while long terms debt was $15.2 million. Our current pro forma cash balance is $58 million, which includes $25 million of proceeds from our recent sales of ordinary and preferred share to Ortho-Clinical Diagnostics and we also have an additional $35 million of potential funding from the exercise of our ordinary share warrants issued with our IPO. Accounts receivable totaled $2.0 million and inventories totaled $4.6 million. Capital expenditures totaled $3.4 million in the third quarter and $30.4 million year-to-date. During the third quarter, we spent approximately $4 million on the development of the MosaiQ consumable and instrument and $3.0 million on the MosaiQ manufacturing facility and the initial manufacturing system for consumables. Year-to-date, we have spent approximately $9 million on MosaiQ instrument and consumable development and $13.0 million on the MosaiQ manufacturing facility and initial manufacturing system. Moving to guidance, we're revising our outlook for fiscal 2015 to reflect the stronger U.S. dollar relative to the British Pound and Euro, which we expect to have a 2% negative impact on product sales relative to plan. In addition, the launch of certain rare antisera products developed by Quotient for an OEM client has been delayed by the OEM client resulting in a 2% lower expected product sales relative to plan. For fiscal 2015, we now forecast full year revenue in the range of $18.5 to $19.0 million which includes $750,000 of product development fees received year-to-date. We anticipate product sales revenue in the range of $17.8 million to $18.3 million, which represents growth of 5% to 7% over fiscal 2014. However, given lower than previously expected research and development expenses, we now forecast a net operating loss in the range of $28 million up to $32 million. For our fiscal fourth quarter, we expect product sales in the range of $4.0 million to $4.5 million compared with $4.7 million in the fourth quarter of fiscal 2014, reflecting the adverse impact of reported product sales and the recent strength in the U.S. dollar relative to the British Pound and Euro. Our revenue forecast currently assumed an exchange rate of a $1.50 per British Pound and a $1.15 per Euro. During the third quarter, Quotient will be making the following public appearances. We will at the Leerink Healthcare Conference February 11th in New York and Cowen Healthcare Conference March 4th in Boston. I’ll now turn the call back to Paul.

[Paul Cowan:]

Thanks Steve. And I’d like to stop by congratulating all the staff of Quotient for delivering yet another excellent quarter of performance. This is include and supporting discussions with OCD and other perspective partners with regard to the MosaiQ Project as those potential partners and the detail due diligence on the project. With that, I would now like to hand it over for questions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Josh Jennings with Cowen and Company. Please proceed with your question.

[Josh Jennings:]

Hi good morning, gentlemen, thanks a lot.

[Paul Cowan:]

Hi Josh

[Josh Jennings:]

I just wanted to start just a follow-up question on the OCD partnership first but - I am sorry, I am actually travelling and - but if you need to repeat anything but can you help us size up a donor testing in patient testing market in Japan as well as any timeline expectation for regulatory approval, are they later than expectations for the U.S. and - you guys start with that.

[Paul Cowan:]

Okay, so we have got volume data that we can provide you with Japan which equates to roughly in the donor side about 5 million donations per annum. And consistent with the presentation we made last week, we would - while it’s actually under the control of OCD, so it rather not be too specific on pricing there because that’s ultimately in their corner. But that product will be subject to the transfer processing arrangement ended into between Eysins and OCD it might be reported as direct sales to us. As regards the launch - our launch schedule you know that remains as previously discussed, we expect to be commencing few trials before the end of this year with regulatory submissions both in Europe and in the U.S. in the first half of 2016, launching in Europe in the second half of ’16, launching in the U.S. for blood grouping and the initial disease screening assays CMV and Syphilis in the end of the first half or middle of 2017, so no change on the schedules there.

[Josh Jennings:]

Okay, no - I am sorry - I meant to ask about Japan regulatory timelines?

[Paul Cowan:]

Again, we’ve not focused specifically on this but we would expect the Japan will run in parallel with the FDA approval.

[Josh Jennings:]

Okay, great. And then over the next - you mentioned in the press release I think on the last call as well about plant that there was feasibility within a broader sort of diagnostic applications from MosaiQ and expand your strategic focus beyond transfusion, any further color there, I am sorry if I missed this earlier but on terms of where you likely to expand first and when should we think about that being impactful?

[Paul Cowan:]

Well, the key is first of we remain a 100% focus on delivering in blood grouping and serological disease screening. With the benefit of the manufacturing system and then our ability to print arise very, very efficiently. We’re going to - we’re going to provide some results this year to focusing two areas. First of all is to establish feasibility from molecular testing with an initial focus around disease screening, so again to allow us to offer a full spectrum of testing in the donor lab encompassing serological and molecular disease screening. And in the second item then is also to establish feasibility for broader clinical chemistry, so again here about the ability to do quantitative immunoassay as well qualitative immunoassay. We’re not talking about developing a major clinical platform there, not so, it’s not on our earn, what we would then be looking at to do is developing niche applications within the sort of clinical chemistry lab for commercialization.

[Stephen Unger:]

And Josh those concepts would be using the same instrument. So that wouldn’t be an additional instrument that would be needed.

[Paul Cowan:]

And it will involve the laying down of antibodies and antigens on the glass substrate much as we doing with blood grouping today.

[Josh Jennings:]

Understood, great and then just my one last from me, just in terms of the development progress in the last 12 plus months, from your internal plan, I mean you guys are ahead of schedule right on schedule and then congratulation on other progress so to date. Thank a lot guys.

[Paul Cowan:]

Thanks. Now, we’re on schedule, we build some contingency in there, we’re using that bit of that contingency now as you would expect as we get place to the milestone but I would say we’re on remaining on schedule at this point.

[Stephen Unger:]

Thanks a lot Josh.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Andrew Peters with UBS. Please proceed with your question.

[Andrew Peters:]

Hey guys congrats on all those progress. I wanted to come back to something that we discussed last week on the call and really kind of OCD using the MosaiQ platform to target some of the higher volume patient testing centers. Just wanting to understand a bit more on kind of the existing infrastructure from that sales to market standpoint at OCD and then you have built out additional capability from a kind of a sales perspective to really target those high volume patient testing centers or you know is it more of a lack of competitors product that keeping them out there? And how do you see kind of MosaiQ you know really being a driving for us to sell into those centers? Thanks.

[Paul Cowan:]

You know so - thanks Andrew. So first of all the comment we made last week is that in the initial or with the initial high throughput instrument, the market or the focus of the patients testing sort of commercial if it is going to be on the larger hospitals or reference labs maybe some of the large medium hospitals, that continues to be the case not also complements all those sort of product offering. I do not - you know we’re not expecting, so I am specifically about it but I would imagine they’ve got all the infrastructure in place, there will be some incremental investment no doubt. But I would imagine that got all the infrastructure, remember it’s not just sales, it’s also about maintaining instruments, installing instruments et cetera, et cetera. They take back today, you know they are launching products today division instruments, division max instruments. We would expect that they would picking back that resource with MosaiQ as it comes to market.

[Stephen Unger:]

And Andrew yeah, but definitely have that in the United States and other certain countries that - you know the question is far when approval comes through in certain European countries, there may be some incremental investment that they need to make in some of the smaller European countries. But in the developed world, Ortho is a market leader in transfusion diagnostics. The infrastructure that they have is certainly substantial.

[Paul Cowan:]

And that was really one of the key drives ultimately you know selecting also is being the ideal partners effectively 20-30 years of experience in this market and they’ve got all the commercial and support infrastructure in place today in the key market to do and to launch product like MosaiQ.

[Andrew Peters:]

Okay, great and then one quick one for Steve, just on the FX side, I mean this is earlier, I apologize if you’ve mentioned it. Do you have any sort of hedging strategy for FX exposure going forward all from the revenue side as well as expense?

[Stephen Unger:]

I think you should understand and made this clear in my comments is that you know a stronger U.S. dollar is actually good for the company. We have most of our costs for the conventional reagent business in British Pounds. So the fact that the revenues are lower doesn’t mean that are profitability for the company or the conventional reagent is lower. There are some adjustments you know foreign exchange gains and losses that occur with various working capital items, but in general you know the - the impact is generally cosmetic on the top line.

[Andrew Peters:]

Okay, great, thank you.

[Operator:]

Thank you. Our next question comes from the line of [indiscernible] with Robert W. Baird. Please proceed with your question.

[Unidentified Analyst:]

Hi guys thanks for the question. I am actually calling in for Jeff Elliott. I am just wondering what has been the response in the market from the Ortho partnership.

[Paul Cowan:]

The customer response that you know has been received and this is what we’ve heard indirectly because communication is primarily being with Ortho, it’s has been positive. And so you know my understanding is they - on announcement, they receive some - quite positive feedback from a number of stakeholders.

[Unidentified Analyst:]

Thanks.

[Paul Cowan:]

Okay, next question.

[Operator:]

Thank you. That was our final question. I’d like to turn the floor back over to Mr. Cowan for any closing remarks.

[Paul Cowan:]

Well, thank you everyone. Thanks for your ongoing support and we look forward to coming back to with the positive news around the progress on the MosaiQ Project and continued strong performance of the conventional reagent business. Thank you.

[Operator:]

Thank you. This concludes today’s teleconference. Thank you for your participating and have a wonderful afternoon.