Oxford Immunotec Global's (OXFD) CEO Peter Wrighton-Smith on Q2 2014 Results - Earnings Call Transcript

| About: Oxford Immunotec (OXFD)

Start Time: 08:07

End Time: 08:39

Oxford Immunotec Global PLC (NASDAQ:OXFD)

Q2 2014 Earnings Conference Call

August 5, 2014 08:00 AM ET


Peter Wrighton-Smith - CEO

Richard Altieri - CFO

Mark Klausner - Westwicke Partners


William Quirk - Piper Jaffray & Co.

Doug Schenkel - Cowen and Company

Jeffrey Elliott - Robert W. Baird & Co.


Good morning ladies and gentlemen, and welcome to the Oxford Immunotec Second Quarter 2014 Conference Call. As a reminder, this conference is being recorded. It is now -- I’d like to now introduce your host for today’s conference Mr. Mark Klausner, of Westwicke Partners. Sir, you may begin.

Mark Klausner

Thank you. Good morning and thanks for joining us today for Oxford Immunotec second quarter 2014 conference call. Joining us on today’s call are Oxford Immunotec’s Chief Executive Officer, Dr. Peter Wrighton-Smith; and its Chief Financial Officer, Rich Altieri.

Before I begin, I’d like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the Company’s business. The Company undertakes no obligation to update information provided on this call.

For a discussion of risks and uncertainties associated with Oxford Immunotec’s business, I encourage you to review the Company’s filings with the Securities and Exchange Commission. Oxford Immunotec disclaims any obligation to update any forward-looking statements made during the course of this call.

With that, it’s my pleasure to turn the call over to Oxford Immunotec’s Chief Executive Officer, Peter Wrighton-Smith.

Peter Wrighton-Smith

Good morning. Thank you for joining us today. I’m pleased to be discussing our Q2, 2014 results. On today’s call, I will provide some general comments on our results and progress in the second quarter, before handing over to Rick, who will walk you through our financial results in detail. Once Rick’s completed that, he will hand the call back to me to discuss our guidance for the third quarter of 2014 and the full-year. We will then open the lines to take your questions.

Turning to 2014 second quarter results, we posted revenues of $11.8 million, which represents year-on-year growth of 16% and exceeded our guidance for the $11.1 million to $11.6 million. We sold over 350,000 tests in the quarter, which brings the cumulative number of tests we’ve now sold to over 3.4 million.

Breaking down our second quarter growth regionally, we sold 35% year-on-year growth in our U.S business. Our growth continues to be driven by the acquisition of new customers as well as high utilization by existing customers.

Turning to Europe and Rest of World, year-on-year growth was 7%. The growth in this geography reflects the more fragmented nature of this market and our investment priorities.

Lastly, in Asia, we saw year-on-year growth of 2%. This growth rate is not representative of the underlying test growth in the market due to an exceptional Q2, 2013 as a comparator in Japan, as well a quarter-to-quarter volatility in shipments to our Chinese distributor.

Looking at sequential changes in revenues, as we had anticipated in our guidance and explained in our last earnings call, we had expected revenues to pull back from Q2 from our strong Q1. So comparing Q2 revenues to Q1, revenues declined 4% sequentially over the last quarter, which is a smaller decline than we had expected.

U.S revenue grew from $5 million in Q1 to $5.5 million in Q2. Once we’re pleased with this quarter-over-quarter growth, our U.S revenues were slightly disappointing versus our expectations.

In analyzing the quarter, we saw a number of small effect that together led to revenue growth modestly lower than we had expected. Firstly, volumes per customer were slightly lower. One of the things we’re hearing from a number of our customers is they’ve reduced hiring and in some cases frozen hiring in response to the Affordable Care Act. Clearly, this impacts the new higher testing volumes that we see in the hospital segment.

Secondly, we’ve seen a slight slowdown in our growth of customers. We attribute this primarily to two factors. Despite growing the size of our sales force, we’ve actually had a temporary decline in the number of fully trained and productive reps as we’ve promoted some of our more experienced reps into sales training and sales management positions. We believe the strength in our sales organization over the medium term, but it temporarily reduces the numbers of fully trained and productive reps we have in the field.

In addition, our sales managers have been working very hard to recruit according to our ambitious hiring plan to significantly increase the size of our sales force by the end of Q1, 2015. We’ve made great progress in that regard and are ahead of plan, but the focus on recruitment has necessarily reduced the time the sales managers can spend out in the field, which has also temporarily impacted sales productivity.

Europe and Rest of World revenues declined slightly from $1.9 million in Q1 to $1.8 million in Q2. This is a reflection of the usual quarter-to-quarter volatility evolved and any underlying shrinkage in our business here. Results were in line with our expectations.

Asia revenues pulled back from $5.4 million in Q1 to $4.5 million in Q2. As we quote out in May, we expected a sequential decline in Asia revenues due to the large, booking orders placed for China Q1 and indeed Q2 revenues from China were significantly lower than Q1.

However, what surprised us to the upside were our revenues from Japan in the second quarter, which were remarkably higher than Q1. We’ve come to learn there were some seasonality in the Japanese market with much routine screening organized around the start of the fiscal year in April, which therefore boosts Q2 revenues. Consequently, we want to see Q3 results before we draw any firm conclusions about how much of our growth in Japan revenues can be attributed to underlying growth versus just seasonality.

We are making good progress on executing against the key 2014 investment priorities we articulated in our last earnings call, starting with the U.S and in line with plans we’ve previously communicated. Firstly, we’ve increased the size of our sales force in the U.S focused on the institutional, that is the hospital and public health segments. As mentioned previously, as well as adding sales representatives, we’ve also strengthened sales management and our sales training capabilities.

We are somewhat ahead of our plans timing to reach our goal of 30 to 40 reps by the end of Q1, 2015. To remind you, even with earlier hiring because of the lag between hiring and our rep becoming fully trained and productive, we do not expect to see the full benefit of this hiring until the end of 2015.

Secondly, we’re continuing to ramp up our marketing activities and medical education program. For example, we conducted 28 medical education events in the second quarter, up from 17 in the first quarter, and we hope to see this number grow as we build out this program.

Lastly, we continue to make progress on our pilot program in the physicians’ office market. We’ve now pulled some of our sales management to sales rep physicians and expect to fill the remaining hires in the next month or two. This will give us (indiscernible) intelligence in our ability to successfully and profitably penetrate this segment. We believe we’re still on track to have initial results from this pilot program and a decision whether to invest further in the physicians’ office market by the end of the year.

Outside the U.S., we continue to strengthen sales and marketing, with a particular emphasis on Asia. In light of our revenue performance, we're considering whether to invest faster here.

On our last earnings call, I highlighted several positive guideline releases in Japan that incrementally improved the market for IGRA testing. Since then there have been two new announcements that could also signal further support for utilization of IGRAs.

Firstly, I wanted to draw investor’s attention to the recent announcement by the WHO, targeting the eradication of TB in 33 countries with the lowest TB rates. Whilst it’s too early to access the impact of this announcement, it’s clearly positive that the WHO called out screening for latent TB as one of the key interventions required to achieve that target.

Secondly, the U.S Preventive Services Task Force announced their intention to draw recommendations for latent TB screening in the U.S primary care setting. Whilst it will take some time for these recommendations to become published, we view their engagement on the issue of latent TB screening as a positive for this market over the longer term.

Lastly, we continue to make great progress on the expansion and development of our product pipeline. You may have seen that we announced today the closing of the acquisition of substantially all the assets of Boulder Diagnostics.

We made an upfront cash payment of $1.8 million and may make contingent milestone payments of up to $6.1 million that could ultimately bring the total purchase price to $7.9 million. These assets fill -- fits well with our strategy of building a leading immunology focused diagnostics company and we believe will fit with the commercial infrastructure that we’ve or are building in the U.S to Europe and Asia.

The acquired assets include products focused on diagnosing Gout, Lyme disease, and determining autoimmune biologic treatment response. These products work on immune measuring technology complimentary to our own T-SPOT technology.

Although some of these products are currently marketed on limited basis, we will like to deemphasize the marketing of these products as we believe that they need further development and clinical validation to be commercially successful. As a result, we anticipate very little revenue from this transaction for the foreseeable future.

We expect that we will incur incremental operating expenses of between $1.5 million and $2 million in the second half of 2014. We continue to make good progress on our product development in the transplant space. We’ve been hiring and expect to continue to hire additional R&D staff to support our objectives and prepare for large scale clinical studies. Notably, we hired Louis O’Dea as our Chief Medical Officer, who joined us at the end of June.

To summarize, we’re pleased with our results and progress in the second quarter. We continue to be excited about the multiple growth opportunities for our business. And as I’ve just stated, we continue to execute on our investments to maximize those growth opportunities.

I’ll now hand it over to Rich, who will walk you through the numbers.

Richard Altieri

Thank you, Peter. Total revenues for the quarter were $11.8 million, a 16% increase over revenues of $10.2 million in the second quarter of 2013.

Turning to some comments on pricing and volume. We sold over 100,000 tests in the U.S via both our kit sales and test process in our service business, Oxford Diagnostic Laboratories or ODL for short. ASPs in our U.S business remained stable for the second quarter. We sold over 250,000 tests in our OUS region, both via kits and tests process in our U.K. ODL service business. In-country pricing remains stable in the second quarter, although ASPs for the OUS region as a whole varied from quarter-to-quarter due to due to geographical revenue mix.

Gross profit of $5.8 million increased by $0.5 million or 10% from the prior year’s quarter. Overall gross margin of 49.2% decreased by 2.9 percentage points in the second quarter versus the same period last year with product gross margins at 52.1% and service gross margin at 46.3%.

The year-on-year decrease was primarily due to currency effects as the majority of product cost of goods sold and the kit component of our service cost of goods sold are denominated in pounds sterling, while the majority of our revenues are recognized in U.S dollars and Japanese yen, both of which have weakened against the pound. We expect currency effects to remain a headwind to gross margin for the remainder of the year.

In addition, we made some operational decisions to add infrastructure to our ODL service business, which weigh temporarily on margins. As with our decision to promote individuals within our sales organization, this decision was made because we believe this is the right way to support the Company’s growth in the medium-term, even though there is a small negative short-term impact.

We expect gross margins to improve in the second half of the year. But such improvements will be at a more moderate pace and would otherwise have been achieved as in these currency and operational effects.

Turning to operating expenses. Research and development expenses were $1.5 million in the second quarter of 2014, up $985,000 versus the second quarter of 2013. We expect R&D spend will continue to increase for the remainder of the year as we hire additional personal for our product development activities in our transplant and other programs.

We also expect to see increase in clinical trial costs as we progress with our new product development. In addition, the acquisition of the assets of Boulder Diagnostics will increase R&D expenses as we had three new development projects to our pre-existing pipeline.

Sales and marketing expenses were $6.3 million in the second quarter of 2014, up $3.1 million from the second quarter of 2013. The increase in sales and marketing costs are primarily driven by the expansion of our sales force in both the U.S and Asia, as well as by higher marketing spend. We expect expenses related to sales and marketing to further increase in the remainder of the year, as we continue to expand our sales force in marketing programs.

General and administrative expenses were $4 million in the second quarter of 2014, up $1.7 million from the prior year period. Increase in G&A spending reflects the greater infrastructure necessary to support for growing successful public company. G&A expenses were close to flat sequentially from the first quarter.

Excluding the Boulder acquisition, we expect G&A to remain relatively flat for the remainder of the year. However, the second half of 2014, we do expect to increase legal and accounting costs related to the completion of the transaction. Operating expenses for the quarter included $760,000 of share-based compensation.

EBITDA for the second quarter was a loss of $5.8 million, compared to a loss of $600,000 in the second quarter of 2013. Adjusted EBITDA was a loss of $4.9 million in the second quarter of 2014 compared to a loss of $0.5 million in the prior year period. Adjusted EBITDA was in line with our expectations. Both EBITDA and adjusted EBITDA are non-GAAP measures.

Net loss for the quarter was -- for the second quarter of 2014 was $6.2 million, compared to $1 million in the second quarter of 2013. As we’ve previously communicated, we continue to expect our net losses to widen as we further invest to grow the business.

Turning to the balance sheet, we finished the quarter with a cash balance of $65.8 million, compared to $67.6 million at the end of Q1. The cash spend in the second quarter of $1.8 million decreased in comparison to the first quarter of 2014.

As we mentioned on the last call, cash spend in the first quarter is typically higher than other quarters as a result of a number of factors including the payment of royalties and payment of year-end bonuses. Looking forward, we expect cash spend to increase in subsequent quarters as we continue to invest to drive growth in the business.

I'll now hand it back to Peter, who will talk about our business outlook.

Peter Wrighton-Smith

Thanks, Rich. So looking at our revenues for the remainder of the year, we continue to be confident that we can continue to grow the U.S strongly. However, for the reasons explained earlier, we’re trimming our expectations for the U.S for the next two quarters, given the temporary slowdown of rep productivity associated with the build out of our larger U.S organization.

We are encouraged by the performance of our Asia business, which has been delivering ahead of our expectations. However, we're taking the conservative approach not to raise our expectations for the remainder of the year, until we can see Q3 revenues from Japan and then assess how much of the Q2 strength with the results of seasonality rather than underlying growth.

Based on this current view of the second half of the year, we're narrowing our annual guidance on revenues for the full-year to $48 million to $50 million from $47 million to $50 million.

For the third quarter of 2014, we're expecting strong sequential growth in our U.S business, which reflects the usual seasonality in that business were Q3 is the largest quarter of the year due to the addition of [ph] [student] testing volumes.

In Asia, we’re expecting a rebound in Chinese revenues as our distributor stocks out as a precaution against delays in our re-approval authorization there. As a reminder to investor’s diagnostic products such us ours must be recertified every four years in China.

In Japan, we're expecting lower revenue sequentially as we move beyond the seasonally strong Q2 peak in test volumes. Taking these in aggregate, we’re expecting Q3 revenues overall of between $12.4 million and $12.9 million.

That concludes our formal prepared remarks. And we will now open the line for questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Bill Quirk of Piper Jaffray. Your line is now open.

William Quirk - Piper Jaffray & Co.

Great. Thanks. Good morning, everybody.

Peter Wrighton-Smith

Good morning.

William Quirk - Piper Jaffray & Co.

So first question Peter, I realize certainly that the China can be lumpy and you spoke to that on the first quarter conference call. Can you just give us an update on, I guess, most recent communications with (indiscernible) kind of how they view the market? It sounds like you’re expecting to see another nice stocking order here in the third quarter.

Peter Wrighton-Smith

Yes. So, clearly the seasonality and volatility in our business kind of make it difficult to understand what’s going on the underlying growth in the market. Certainly we remain extremely positive about the long-term growth trajectory and potential of the Chinese markets. Speaking to Q3, in particular, yes we’re expecting a sequential rebound in volumes. But it's also fair to say I think that given the magnitude of the orders in Q1, we’re expecting that maybe some of that Q1 stocking or so has a slight over hang for the second half of the year.

William Quirk - Piper Jaffray & Co.

Okay. Got it. And then, just staying in Asia for a moment, any update with respect to the overall competitive dynamic either in China or for that matter in Japan?

Peter Wrighton-Smith

Not particularly. To remind investors, we have multiple competitors in the Chinese market, including a number of locally produced cloned products of IGRA. We feel good about our competitive positioning there and given the size of the market, we’re expecting that market to support a number of competitors going forward. So we still remain very positive about the growth there and nothing is fundamentally changed. In Japan, we’re really encouraged by our progress there. We -- I’m very glad to now report that over top five private lab groups in Japan now offer T-SPOT TB and our volume growth to each of them has been increasing. So, again, we feel extremely comfortable and confident in our competitive position there and in the overall long-term growth opportunity in that market.

William Quirk - Piper Jaffray & Co.

Great. And then, just last one for me, I’ll jump back in the queue, is -- just thinking little bit about Boulder Diagnostics, recognizing Peter that you guys want to explore the -- I think it’s the Lyme disease products on the market right now and retool that, can you give any sense at this point kind of when we might see those products to launch again in the States or just to really to call?

Peter Wrighton-Smith

We are giving more clarity on that, when we talk more general about our pipeline at an Investor Day we intend to hold around the end of the year. But I think you should take as well an initial assumption that this doesn't fundamentally change of previously communicated dialogue around timing of product launches.

William Quirk - Piper Jaffray & Co.

Got it. Thank you.


Our next question comes from the line of Doug Schenkel from Cowen and Company. Your line is now open.

Doug Schenkel - Cowen and Company

Hi. Good morning. So, in your prepared remarks you talked about the reduction in the number of reps in the U.S in the field, that was practically speaking in spite of the sales force headcount expansion and the source attributed to largely just the promotion of some of your more seasoned reps. Recognizing as you noted that it does take time to get new hires up the productivity curve and accordingly that you did make some changes to U.S revenue guidance. Are there some steps you’re taking to maybe counter this dynamic which actually could lead to maybe you’re dealing a little bit better over the next couple of quarters in the U.S?

Peter Wrighton-Smith

So I think the steps that we’ve taken, we generally and we believe places the Company in a better position for the long-term. Having those experienced reps in positions whether able to train, guide, nurture, new reps is clearly a positive thing for the business and it’s all designed in parts to try and to accelerate the timeline to getting new reps onboard skilled and productive. So that remains a very significant focus for the business. But ultimately, there is always -- the predicting rep productivity is not a perfect science and we do expect that there is going to be some variability in productivity not least of which is due to different territory (indiscernible) and the different stages, development of the territory that relatively being placed into how evolve the pipeline already is or isn’t. So these are trends that we will be observing carefully over the coming months and quarters to able to give people better guidance about what we’re expecting in terms of rep productivity going forward. Having said that, I think it's clear that we do expect the reps we’re hiring now to be productive, maybe not fully productive during the course of 2015.

Doug Schenkel - Cowen and Company

Okay. Thank you for that. And then, then on Boulder, a bit more focus this morning subsequent to the announcement on the new products and where you're going with those? I’m just wondering is it fair to say that part of this is also done to accelerate some of the existing immunology programs that you have in-house?

Peter Wrighton-Smith

So the first thing is that we see them as -- Boulder as independent to our in-house transplant development to be absolutely crystal clear. We do not anticipate any change to the timing launch preparation of our transplant products, because of this acquisition. We believe with the staffing up of our R&D department that we have done, that we continue to do, and with the addition of staff from Boulder itself, we’ve the resources to enable us to develop all of these in parallel without impacting the timelines of our transplant product. So the rationale for this acquisition is around continuing to execute against our strategy which is to build a diagnostics company focused around immunology and M&A is essentially opportunistic. But when this opportunity came along, we felt it was a good fit with our immunology focus and it has the potential for sales synergies, given our current core points in the U.S., Europe and Asian markets.

Doug Schenkel - Cowen and Company

Okay. And one more and then I will get back in the queue. You did provide a lot of detail on new investment plans, pursuant to some of the existing as well as the newly disclosed programs. I don't think you provided guidance on total expected cash burn over the balance of the year, must I missed that, would you be willing to provide that detail? Thank you.

Richard Altieri

We have not provided guidance on cash burn over the balance of the year or nor have we in the past. That said, we do have over $65 million of cash in the bank, and our cash burn did decelerate in the second quarter. However, as we continue to invest in the business, we do expect that cash burn to ramp up in the second half of the year. To be clear though the addition of these additional Boulder products does not significantly change our view on the timing of getting to profitability of cash flow breakeven.

Doug Schenkel - Cowen and Company

Okay. Thanks a lot guys.


Our next question comes from the line of Jeff Elliott from Robert W. Baird. Your line is now open.

Jeffrey Elliott - Robert W. Baird & Co.

Hi. Good morning, guys and thanks for the question. Peter, could you give an update on the competitive landscape in the U.S? I think you commented on China and Japan, but what’s it like in the U.S right now?

Peter Wrighton-Smith

We feel very comfortable with our competitive position in the U.S., nothing again is fundamentally changed. We remain extremely confident and excited about our growth potential in the U.S and despite these temporary headwinds that I’ve called out, we’re extremely confident about our longer term revenue growth in the U.S market.

Jeffrey Elliott - Robert W. Baird & Co.

Got it. And Rick could you, I guess, quantify the FX impact on revenue and margins in the second quarter and then what are you assuming in the second half?

Richard Altieri

Yes, so the -- as you look at the year-over-year comparison, the majority of the change in margin was related to FX. Just to remind you that unlike other companies that you might follow, the majority of our cost of goods sold for product business as well as the kit component of our service business is denominated in U.K. pounds, where our -- the majority of our revenue both our U.S revenue, Chinese revenue are denominated in dollars and our Japanese revenue is denominated in yen, which weakened against the pound. So that represented the majority of the change versus the prior year comparison.

Jeffrey Elliott - Robert W. Baird & Co.

Okay. So should we assume a similar impact in the second half, I guess, you made comments about an improvement in gross margin in the second half. But does that assume to have been similar around the 300 basis point level of FX headwind?

Richard Altieri

Yes, FX is a wildcard. We do expect FX to continue to be a headwind with prior year comparisons for the balance of the year. That being said, we’re making -- we're focusing on cost improvement in both our product business and our service business. For our product business we’re focusing on continuing to improve the component cost of the kits as well as in our service business we focus on continuing to improve efficiency of our ODL service lab in both the U.S and the U.K. So while we’re making underlying improvements in the cost structure of the business, we expect currency to be a headwind for the balance of the year.

Jeffrey Elliott - Robert W. Baird & Co.

Okay. Thank you.


Our next question comes from the line of Tycho Peterson of JPMorgan. Your line is now open.

Unidentified Analyst

Hey guys. This is (indiscernible) for Tycho. Thanks for taking the question. Could you talk about your R&D efforts so far and I guess the types of investment that you plan on making with Boulder beyond like the $1.5 million to $2 in OpEx, just kind of going forward long-term?

Peter Wrighton-Smith

So we have signaled that we expect to incur operating expenses of between $1.5 million and $2 million for the second half of 2014 that relates to Boulder. But within that approximately $0.5 million non-recurring integration costs going into 2015. Therefore we expect the majority of the OpEx increases to full on the R&D line and obviously at a lower level, given those non-recurring items won’t be appearing in 2015.

Unidentified Analyst

Okay. And then, I guess could you give any thoughts on your M&A appetite going forward, I mean considering the cash balance you currently have?

Peter Wrighton-Smith

Sure. So as to rearticulate our vision is to build a significant company based around immunology. We are very excited about the multiple opportunities we have to leverage our own immunology platform. But if opportunities for M&A come along like this one did that we think are synergistic with our strategy and can drive synergies, particularly in relation to our core points and the sales force channel, then those are things that we will consider.

Unidentified Analyst

Okay. Thanks.


I’m showing that there are no further questions at this time, and I’d like to turn the call back over to Dr. Peter Wrighton-Smith for any further remarks.

Peter Wrighton-Smith

Well, thank you so much for joining us for the discussion of our second quarter 2014 results. We are pleased with the continued momentum in our business and we’re optimistic about third quarter and the remainder of 2014. We look forward to updating you on next quarterly call. Thank you.


Ladies and gentlemen, thank you for participating in today’s conference. This concludes your program. You may now disconnect. Everyone have a great day.

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