Quotient Limited (QTNT) CEO Franz Walt on Q4 2019 Results - Earnings Call Transcript

Quotient Limited (NASDAQ:QTNT) Q4 2019 Earnings Conference Call May 28, 2019 8:00 AM ET

Company Participants

Chris Lindop - Chief Financial Officer

Franz Walt - Chief Executive Officer

Conference Call Participants

Brandon Couillard - Jefferies

Sung Ji Nam - BTIG

Operator

Greetings. Welcome to the Quotient Limited Fourth Quarter and Fiscal Year 2019 Financial Results Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Chris Lindop, Chief Financial Officer. Thank you. You may now begin.

Chris Lindop

Thank you, Rob. Good morning, everyone and welcome to Quotient’s earnings conference call for our fourth quarter and fiscal year ended March 31, 2019. Joining me today is Franz Walt, 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 and expected development and commercialization timeline. 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 this morning’s release. The forward-looking statements include guidance and projections provided during this call are valid only as of today’s date and Quotient assumes no obligation to publicly update these forward-looking statements.

With that, I would like to turn the call over to Chief Executive Officer, Franz Walt.

Franz Walt

Thank you very much, Chris and good morning everyone. A year ago when I stepped in as the CEO, we set expectations for the next chapter in Quotient’s evolution. We wanted to have a clear focus on committing to and achieving realistic goals which when taken one after the other would result in successfully achieving our shared objectives. I am pleased to report that this first year has been a year of terrific achievement made possible by the creativity and vision that sustained the company in the past and upon which we have been proud to build.

Highlights of this last year include the successful conclusion of our first EU field trial, a submission for CE Mark of our first IH microarray, the CE marking of the MosaiQ device, which was followed by the ISO certification of our MosaiQ microarray manufacturing system, and culminated in the recent receipt of the CE Mark for the first IH microarray. As to all of this, the successful move to our new state-of-the-art liquid reagent manufacturing facility while continuing to grow that business at a strong double-digit rate to record level of revenues. And all of these achievements made it possible to raise about $180 million of new capital, providing us with the strongest balance sheet in the company’s history, quite a year setting us up well for the future. But as I often tell my colleagues that caution becomes the one moment rest on our laurels, because we still have much to do to realize the promise of our company. Our business strategy has always been the systematic replacement of competitive platforms based on the available MosaiQ testing menu. So, now it’s all about menu and more specifically, menu expansion.

I am happy to report that there is good news to report here too. We recently completed a successful European field’s trial of our initial Serological Disease Screening microarray permitting us to move forward with our plans to file for CE Mark approval for this important additional menu in June. The results of the EU field trial have encouraged us to accelerate the planned U.S. field trials for this microarray, which is now planned to commence in the second fiscal quarter. In addition, we continue to make progress with our expanded IH microarray, which will include additional diagnostic probes of 19 clinical relevant antigens on one low cost consumable for use in a single highly automated testing event. MosaiQ’s unique ability to optimize multiple diagnostics assay in a single testing field is powerfully demonstrated in the extended IH panel. This work paves the way for the completion of our verification and validation phase and the move to U.S. field trials also in the second quarter of this fiscal year.

Lastly, as promised, we remain on track with our stated plan to bring forward independently derived performance data for molecular disease screening later this summer. This data will be derived using our innovative approach to molecular diagnostics by an independent research organization and will be designed to demonstrate the state-of-the-art performance of our unique approach to microarray-based molecular testing. We believe that demonstrating the strength of our menu pipeline will play an important part in the commercialization of our early testing menu.

Now, with respect to the conventional reagent business, the Alba by Quotient product, in January of this year following successful audits by both the FDA and our European Notified Body during 2018, we completed the transition of our liquid reagent manufacturing processes to our recently constructed Allan-Robb Campus manufacturing and research facility. One might say that this whole project work like a clockwork with largely flawless planning and execution. More remarkable perhaps is that we were able to pull it off without any interruption in supply while supporting the cost growth in revenues. In the fourth quarter, product sales in this business grew at 28% and we started to see a return to positive trends in profitability as we shed the duplicate cost of our former manufacturing facility after the full switch over to the new. The FDA has also approved 7 additional blood bank reagents for extended antigen type. Completing our core product offerings to the U.S. market, it is important to acknowledge the effort, planning and collaboration required to pull off this kind of performance. So, my special thanks to the reagent team for a job very well done.

So with that, I would like to hand back to Chris for the financial update.

Chris Lindop

Thanks, Franz. The fiscal fourth quarter product revenues were $7.8 million, an increase of 28% from last year’s fourth quarter. The increase in product sales was attributable to strong growth in both product sales revenue from OEM customers and incremental direct and distributor sales.

In the quarter, OEM sales of $5.5 million grew 30% year-over-year and represents 71% of all product sales. The increase continues to be driven by better pricing, increased sales to existing customers, and the impact of recently launched new products. Direct and distributor sales of $2.3 million increased 24% year-over-year and represented 29% of product sales. Direct sales in the United States increased 28% year-over-year which was mainly attributable to the impact of new product launches and the expansion of our customer base. In the current year’s fourth quarter, other revenues include $450,000 earned from the achievement of development milestones related to new OEM products, which did not arise in the prior year’s fourth quarter.

In the fourth quarter, gross margin on product sales was 43.5% compared to 58.7% last year. Gross margin has been adversely impacted by additional operating cost associated with the new facility. Included in gross margin in the current quarter are incremental recurring non-cash cost of $700,000 related to bringing the new ARC facility online during the year, which contribute an 8.3% headwind to the gross margin comparisons quarter-over-quarter. The comparison of fourth quarter gross margins to full year gross margins of 39.9% reflect sequential margin improvement as we shed duplicate costs and benefited from contractual pricing increases during the year. We anticipate continuing solid top line growth with support improved margin performance during 2020.

In the fourth quarter, we recorded an operating loss of $20.3 million compared $17.9 million last year. In the quarter, operating expenses were $24.2 million, an increase of $2.6 million over the prior year. Research and development expenses were $13.3 million, a $62,000 increase year-over-year. General and administrative expenses were $8.5 million, up $2.2 million compared with the prior year, and this includes stock compensation expense, which increased from $700,000 to $1.4 million, an increase of $700,000. The remaining $1.5 million increase in general and administrative expenses reflects third-party project costs associated with consulting and communications and other incentive compensation paid in response to our strong execution in the last year. Sales and marketing expenses of $2.3 million increased $400,000 from the prior year’s fourth quarter, reflecting the continued scaling up of the MosaiQ commercial group.

In the fourth quarter, depreciation and amortization were $3.3 million versus $2.7 million in the prior year at other expense was $6.3 million compared with $2.8 million in the fourth quarter last year. Net other expense consisted of interest expense of $5.4 million and $900,000 of foreign exchange loss compared to the interest expense of $3.7 million and $900,000 of foreign exchange gain in the prior fiscal year. Interest expense increased year-over-year due to incremental borrowing. Overall, our net loss for the quarter was $26.6 million or $0.41 per ordinary share compared with $20.1 million or $0.44 per ordinary share in the prior year’s fourth quarter.

For the fiscal year, product revenues were $28.7 million, an increase of 19.9% over the prior year. Total revenue for the year also includes other revenues of $469,000 earned by the achievement of certain product development milestones. In the prior fiscal year, other revenues of $819,000 represented product development milestones earned on the approval for sale by the FDA of certain liquid reagent products developed for our principal OEM customer and also by the sale of two MosaiQ instruments for evaluation purposes. For the year, gross margin on product sales was 39.9% compared with 56.2% in the previous fiscal year.

Gross margins were impacted by incremental cash and non-cash expenses incurred to bring online the new ARC facility, and to a lesser extent, by duplicate costs incurred while both the old and the new manufacturing facilities were being operated during the manufacturing transfer, which was completed in January. I’ll draw your attention to the gross margin performance in the fourth quarter as being indicative of the new baseline for the reagent business’ margin performance going forward. For the year, operating expenses increased $6.6 million to $90.9 million. This increase related primarily to investments in key personnel, independent market research costs and enhanced corporate communications, and sales and marketing costs incurred on a project basis during the year. Increased operating expense included approximately $1 million of incremental non-cash expenses related primarily to stock compensation.

Our fiscal 2019 operating loss of $79 million included $18.1 million of non-cash expenses which compares to $70 million operating loss including $14.1 million of non-cash expenses in fiscal 2018. In the fiscal year, net other expense was $26.4 million compared with net other expense of $13 million last year. Net other expense consisted of interest expense of $20 million and a $5.4 million non-cash loss on foreign exchange and $1 million of costs related to the December 2018 amendment of the terms of our senior notes. Overall, our net loss for the year was $105.4 million or $1.92 per ordinary share compared with $2.02 in fiscal 2018.

Net cash used in operating activities totaled $14.1 million in the fourth quarter of fiscal 2019 compared with $15.4 million in the prior year’s fourth quarter. During the same period, capital expenditures totaled $1.7 million compared with $4.3 million in the prior year, largely reflecting the winding down during the fourth quarter of fiscal 2018 of expenditures in connection with the construction of the company’s new conventional reagent facility near Edinburgh, Scotland. For the full year, capital expenditures totaled $4.8 million compared with $21.6 million in fiscal 2018.

Moving to the balance sheet, available cash and cash equivalents and short term investments were $94.8 million at March 31, 2019. Under our 12% senior secured credit facility due in 2024, long term debt totaled $120 million at the end of the fiscal year and we held $7.5 million in an offsetting long-term restricted cash reserve account. Under the terms of that facility, as amended, we issued an additional $25 million of notes on May 15, 2019, following the announcement of the receipt of a CE Mark for our initial IH microarray. On March 31, the cash receivable totaled $3.3 million and inventory totaled $15.6 million.

Moving to guidance, for fiscal 2020, we are forecasting full year revenue from product sales in the range of $30 million to $31 million. Other revenue consisting of additional product development fees totaling approximately $1 million is also expected to be earned during the year. For fiscal 2020, we forecast an operating loss in the range of $77 million to $82 million including non-cash charges for depreciation, amortization and stock compensation expense of approximately $18.5 million and capital expenditures of between $5 million and $10 million during the year.

With that, let me turn the call back to Franz.

Franz Walt

Thank you, Chris. For fiscal 2020 is shaping up to be a very exciting year for all of us here at Quotient. It is a year in which we will be able to demonstrate to customers and competitors the capabilities of our expanding testing menu while showcasing the power of our unique microarray diagnostics capability. As I have often commented to my colleague with immunohematology, we take what is probably one of the most difficult diagnostic targets to make work in a multiplex technology. But the good news is that we have been able to make it work. This was not just an accident. We have spent over seven years learning by doing, to create a game changing tool that we believe adds tremendous value to customers in the transfusion diagnostic market but which also has a place in the much wider domain of clinical diagnostics. And I know, from experience that this is a nut that many of us have tried and failed to crack over the years. The ability to optimize the performance of multiple assays operating in parallel in a single diagnostics field, doing a single testing event is truly game changing and I am proud to say that Quotient engineers have been able to do just that with what we call an individual stock optimization, I repeat individual stock optimization approach. Equally important for all of us and for the investors who have supported this groundbreaking effort over many years it is a pathway which will be difficult to follow, made up as it is of many unique insights and patented technology leads.

So now, with our device and manufacturing system approved by European regulators and our first microarray approved for use by customers, we have the opportunity to engage fully with potential customers as they use MosaiQ in a controlled hypercare launch. As I commented previously, we now have to have the self discipline to test market MosaiQ before opening commercializing broadly. This hypercare phase will provide us with valuable insights with regard to any fine tuning that maybe required in our system by permitting those early customers to field test MosaiQ and to begin to develop the standard operating procedures required for implementing the MosaiQ technology within their laboratories.

As I have reported to you before, our plans include 8 testing centers spread over 6 European countries. As we expand our test menu, we plan to establish additional sites, focused on usability testing, which will receive early versions of the expanded testing menus for research only to accelerate the learning on the field and to deliver larger datasets in parallel with ongoing field trials and regulatory pathways. During this quarter, we will submit the initial SDS menu for CE Mark approval followed by taking this microarray into our first U.S. field trial during the second fiscal quarter, which is earlier than originally planned and communicated. Also in the second fiscal quarter, we will initiate our first U.S. field trial for the expanded IH microarray. So by the second half of fiscal 2020, we anticipate having submissions made for both the expanded IH microarray and the initial SDS microarray in both Europe and the U.S. We remain committed to our previously stated commercialization plans and expect our first MosaiQ revenues during calendar 2020.

With that, I would like to hand over back to the operator please.

Question-and-Answer Session

Operator

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

Brandon Couillard

Thanks. Good morning.

Chris Lindop

Good morning, Brandon.

Franz Walt

Good morning, Brandon.

Brandon Couillard

Franz, in terms of the U.S. field trial for MosaiQ, could you remind us how many clinical trial sites you expect to enroll? How many samples you will be running for each microarray and what the field trial performance requirements are for each microarray and whether those differ relative to the European field trial?

Franz Walt

Yes. So, I don’t have all this information here, because we still have to finalize all these contractual arrangements there, but it will be around 3 and field trials is always a little bit at the mercy of customer availability. So for us, for IH 2, it was not possible during the summer months. On the other hand when we said we are actually ready with SDS, the initial SDS already now, they also accommodated us with actually one quarter earlier. So we are in midst of finalizing all these details. But we are very confident that we can do both U.S. field trials for Serological Disease Screening as well as for the expanded IH panel in the third quarter of the calendar year 2019, but I can’t give you any details on the – I don’t have the details here with me?

Brandon Couillard

Okay. And then Chris, looking at fiscal ‘20 guidance, a two-part question, number one, are there any MosaiQ revenues, commercial revenues included in the $30 million to $31 million of product sales guidance. And then as far as your product sales outlook, it implies only about 5% to 8% growth despite coming off of three straight years of double-digit growth. Just curious if there is just a level of conservatism in there or tougher comps? And then would you remind us how much of that is actually pricing in terms of the outlook?

Chris Lindop

Okay. So yes, I mean we are obviously trying to set ourselves an outlook – set an outlook for the company that is achievable compared to some very, very strong comps. And so I think we have beaten on our numbers in just about every year in the past 3 or 4 and I hope that, that’s going to be the trend that we have. It’s a little bit of caution in the outlook. We don’t have any MosaiQ revenues in there once again, because ultimately as we have said before, the revenue generator will be the IH 2 microarray and we would rather have those approvals in hand before we make commitments for what would essentially be the first quarter calendar ‘20. And once again we will work very hard to make it as good as it can be. In terms of pricing, in about two-thirds of our revenues, the pricing is in the sort of mid single-digits.

Brandon Couillard

Okay, very good. And then just one more follow-up, Chris, I think you mentioned in your prepared remarks the sale of two MosaiQ instruments for evaluation purposes in the fourth quarter could you elaborate little bit more on what those placements were for?

Chris Lindop

Yes, they were with our – one of our OEM partners who is a commercialization partner for MosaiQ in the hospital market and that was prior year fourth quarter.

Brandon Couillard

Okay, got it. Very good. Thank you.

Operator

Thank you. [Operator Instructions] And the next question is from the line Sung Ji Nam with BTIG. Please proceed with your question.

Sung Ji Nam

Hi, thanks for taking the questions and congratulations on the quarter and for all the progress that you are making. Was curious about just on the conventional reagent side, you know you kind of touched on some of the drivers there for growth. Is the – just curious as to, it’s still growing at a faster rate than the underlying market, is my assumptions are correct and was curious if you are taking share and kind of what the market dynamics are currently? I am just curious given the strong growth over the last few years.

Franz Walt

Yes, I think – okay, Chris, just go ahead.

Chris Lindop

No, no, Franz, you go ahead. I will talk to the numbers. You can talk to the business, yes.

Franz Walt

Yes, we are growing faster than the markets. And we think it should be sustainable in the high single-digit or low double-digit range. And as we mentioned before for the last quarter, we had actually 28% grow rate and I think the growth is of course stimulated by the additional reagents we got approved. So since we last spoke it’s an additional 7, I mentioned that, but overall it’s around 10 additional assays. So the growth mainly comes from innovation from new tech.

Chris Lindop

And what we find in our – especially in our U.S. business I would say is that the new products open up new customers and then our other products follow the new products into new customers. And that’s one of the phenomenon that we see and of course the other one is we have been developing and extending the product offering of our key OEM partners and their businesses. They are doing very well as well.

Sung Ji Nam

Great. That’s very helpful. And I am not sure if it’s too early, but any feedback from your hypercare launch, the customer site, is it too early or has sties...

Franz Walt

It’s too early.

Sung Ji Nam

Okay.

Franz Walt

It’s too early. We are just about to slate everything up and so we take the customers as we have said before and they will participate over a 6 to 9-month period in this hypercare phase. And I think we have to be patient and wait on what the feedback is and what we also do in addition we will provide future panels like the expanded IH without CE marking already for research only, also then in future, expanded SDS panels without the CE Mark for research only, so that we can get feedback from the customer as thoroughly as possible in the process and continuously optimize our product offering. What I can say however we calculate that hypercare means being around 24/7 for the customer with service support and re-servicing and we have the capacity for 8 customers. They are all gone in no time. So we have much more demand for such from the different sites to participate and we actually have capacity to serve. So, if you see how it grows and how much maintenance is needed and we are open to add on more sites if our resources permit to do so. But for the time being, everything is blocked and they are all in Europe over 6 – spread over 6 different countries and I hope I can give already some feedback in the next call.

Sung Ji Nam

Fantastic. And then just lastly from me, you had talked about beyond transfusion diagnostics, potentially pursuing our partnership out there, and we are curious if there are any updates in terms of discussion - potential discussions with partners for further development?

Franz Walt

Yes, we of course got some inquiries from the industry and we provided some information. But at this point in time, there is no concrete discussion ongoing. We are really focused on the transfusion diagnostic piece first and we have all of them come back to make this happen. But until the end of this financial year, we will see what the interests are and how we could potentially collaborate. And I think as I mentioned in one of the previous calls, ideally we would take the content and put it on a microarray. That’s much easier than reinventing the wheel and doing everything on our own. So if the content is provided, we reckon something like two years, 2.5 years to put it on a microarray, it likely would take long. And for the time being transfusion diagnostics first, I think with the SDS field trial, we have shown it works in [indiscernible] phase. So this is a very important signal to the market, it works in [indiscernible] phase and doing this some of this we will also get, I am absolutely sure, a confirmation that it works for molecular disease screening as well. So these are the two proof points we need also for a meaningful discussion with potential partners. So the SDS just came literally couple of weeks ago and the MDS is just about to follow in the next few months, if that answers your question?

Sung Ji Nam

Yes. Thank you so much.

Operator

Thank you. At this time, I’ll turn the call back to Franz Walt for closing remarks.

Franz Walt

Yes. Thank you very much. So thank you everybody for joining us on this call today and we really look forward to updating you on the progress we expect to have made by the time of our first quarter fiscal 2020 conference call. So thank you very much and goodbye, everybody.

Operator

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

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