Quotient Limited (NASDAQ:QTNT)
Q3 2016 Earnings Conference Call
February 8, 2016 08:30 ET
Paul Cowan - Chairman and Chief Executive Officer
Roland Boyd - Group Financial Controller and Treasurer
Brandon Couillard - Jefferies
Andrew Peters - UBS
Josh Jennings - Cowen & Company
Greetings and welcome to the Quotient Limited Third Quarter Fiscal 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Paul Cowan, Chairman and Chief Executive Officer for Quotient Limited. Thank you. Please go ahead.
Thank you, Melissa and good morning, everyone and welcome to Quotient’s earnings call for the fiscal third quarter ended December 31, 2015. Stephen Unger would normally be presenting this introduction, but due to illness, he cannot join us today. Standing in for Steve is Roland Boyd, our Group Financial Controller and Treasurer. And with that, I would like to hand over the call to Roland.
Thank you, Paul. Today’s conference call is being broadcast live through an audio webcast and a replay of the conference call will be available later today at www.quotientbd.com.
During this call, Quotient will be making forward-looking statements, including guidance and projections as to future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in Quotient’s filings with the U.S. Securities and Exchange Commission, as well as in today’s release.
The forward-looking statements including guidance and projections provided during this call are only valid as of today’s date, February 8, 2016 and Quotient assumes no obligation to publicly update these forward-looking statements.
With that, I would like to turn the call over to Quotient’s Chairman and Chief Executive Officer, Paul Cowan.
Thanks, Roland. I am pleased to say that during our fiscal third quarter we made considerable progress on the development in commercial scale up of MosaiQ. Significant headway has been made in commissioning the initial manufacturing system for MosaiQ consumables, while also advancing final development of the MosaiQ instruments. We look forward to beginning field trials later in this calendar year.
We are also excited by the positive results of our initial efforts to expand the use of MosaiQ to include molecular disease screening or NAT or nucleic acid testing, which increases the addressable global market for MosaiQ within transfusion diagnostics to over $3.4 billion annually. At the same time, we continue to believe significant opportunities remaining to expand MosaiQ, the MosaiQ platform into the broader field of routine medical diagnostics testings. In parallel, our conventional reagent business delivered solid results during the third quarter of fiscal 2016 with double-digit product growth and gross margin improvement.
During the final quarter of fiscal 2016, we expect product sales growth to continue with a meaningful improvement in gross profit over the prior year. Last week, you will also have seen that we announced the pricing of a fully underwritten equity offering to raise gross proceeds of $40 million, which we expect to complete on February 10. During the final quarter of calendar 2015, we continue to make considerable progress on the development of MosaiQ, our next-generation automation platform for blood grouping and disease screening, which is in an advanced stage of development in commercial scale up.
Current development efforts are focused on final assay optimization for blood grouping and serological disease screening applications, further assay development and expansion of the test menu for NAT, commissioning the initial manufacturing system for MosaiQ consumables and completing development of the MosaiQ instruments. Quotient intends to initially launch MosaiQ as the MosaiQ blood grouping consumable in the European and North American donor testing markets. Simultaneously, working with our commercial partner, Ortho Clinical Diagnostics, the blood grouping consumable will be launched into the European and North American patient testing markets. Ortho will also be responsible for launching MosaiQ into the Japanese market for donor and patient testing. Once licensed for sale, MosaiQ will be the first fully automated diagnostics testing solution for blood grouping providing for the comprehensive characterization of both donor and patient blood. Turnaround times using MosaiQ will also be significantly quicker than existing methods.
Quotient also intends to initially launch MosaiQ into the donor testing market with the serological disease screening consumable comprising assays for the detection of CMV and Syphilis. Within 6 to 12 months of this initial launch, Quotient plans to launch a second disease screening consumable incorporating all mandated serological disease screening assays. Ortho will be responsible for launching these products into donor testing markets in geographies not covered by Quotient.
In early January, Quotient announced it had completed an initial feasibility study demonstrating the ability to detect nucleic acid using the MosaiQ methodology. In the study, Quotient and its external development partner successfully detected DNA sequences of the conserved region of the human immunodeficiency virus. As a consequence of this, Quotient announced plans to extend the capability of MosaiQ to include nucleic acid testing for donor testing.
During the fourth quarter of calendar 2015, Quotient continued the transfer of individual blood grouping assays to production, which is expected to be completed in the second quarter of calendar 2016. The final step for the blood grouping panel has now been defined. Quotient has also completed a series of internal validation studies on individual assays being developed to detect CMV, Syphilis, hepatitis B surface antigen and HIV types 1 and 2. The results of these validation studies exceeded the company’s internal performance targets for this stage of the development process.
In addition, Quotient has commenced development of the remaining assays intended to be included on the second serological disease screening consumable and expects to report preliminary sensitivity and specificity data for these assays in the first quarter of calendar 2016. Based on results achieved to-date, Quotient expects the transferred production assays for the detection of CMVs and Syphilis in the first quarter of calendar 2016 and the remaining serological disease screening assays in the second half of calendar 2016.
Having established the feasibility of MosaiQ to detect nucleic acid, Quotient will now move forward with the next phase of development for NAT on the MosaiQ platform involving further assay development and expansion of the test menu to include hepatitis B, hepatitis C and West Nile virus and Quotient expects to complete this next phase of development work during the first half of 2017.
We expect to complete commissioning of the initial manufacturing system for MosaiQ consumables in the first quarter of 2016. Manufacturer of both MosaiQ blood grouping and the initial MosaiQ disease screening consumables for European field trials is expected in the second quarter of calendar 2016. Design of the MosaiQ instrument has been completed with the current focus on software development and manufacturing scale up. Quotient has received final prototype instruments which are processing assays for development purposes. Field trial instruments are expected to be built in the first quarter of calendar 2016 with final software development to be completed in the second quarter of 2016 products commencing the field trials.
Quotient expects to commence field trials in Europe for both the MosaiQ blood grouping and the initial disease screening of serological disease screening consumables in the third quarter of calendar 2016. The company expects to file regulatory submissions in Europe in the fourth quarter of calendar 2016 to obtain required marketing clearances for MosaiQ. Field trials in the United States are expected to commence in the fourth quarter of 2016 and regulatory submissions are planned to be filed in the first half of calendar 2017 to obtain required marketing clearances in the U.S. Field trials for the second serological disease screening consumable comprising all mandated serological disease screening assays are expected to commence in the first half of calendar 2017 both in the United States and in Europe.
Quotient expects to begin marketing MosaiQ in Europe during the fourth quarter of calendar 2016. If approved for sale, the company also anticipates commercial launch in the United States in the first quarter of – sorry, calendar 2018. The company also anticipates commercial launch of the second disease screening consumable in Europe during the second half of calendar 2017 and in the United States during calendar 2018 if approved for sale.
With that, I would now like to hand back to Roland who will present the financial overview.
Thanks, Paul. Our fiscal third quarter total revenues were $4.4 million, an increase of 7% from last year’s third quarter. Product sales revenue increased 10% to $4.4 million, which was mainly attributable to growth in direct sales to customers in the United States. We also recognized $100,000 of product development fees in last year’s fiscal third quarter which did not repeat this year. OEM sales of $2.9 million grew 3% year-over-year and represented 66% of product sales, while direct and distributor sales of $1.5 million was up 27% year-over-year and represented 34% to product sales.
Direct sales in the United States increased 27% year-over-year, which was mainly attributable to recently launched new products and growth in sales of reagent red blood cell products. Direct sales outside of the United States also increased 27% year-over-year, despite our decision to rationalize our product offerings in Europe. Product sales from standing orders in the quarter were 71% versus 74% last year. Gross profit on total revenues was $2.1 million growing 15% year-over-year despite a $0.1 million decrease in other revenues. Gross profit on product sales grew 21% year-over-year to $2.1 million compared with $1.8 million last year. The increase was attributable to the positive impact of greater sales volume. Gross margin on product sales was 48.9% compared to 44.4% last year. In the third quarter the operating loss was $12.8 million compared with $7.3 million last year.
Operating expenses increased $5.7 million from last year to $14.9 million with a $2.5 million increase in research and development expenses to $6.9 million and $3.1 million increase in general and administrative expenses to $7.1 million. Sales and marketing expenses of $0.9 million increased $0.1 million from the prior year. The increase in R&D expenses reflect incremental costs associated with the commercial scale up of MosaiQ including initial product costs which – sorry, including initial production costs which were currently expensed as research and development. The increase in general and administrative expenses reflected greater personnel related costs, increased facility rental charges and greater corporate costs. Stock compensation was $566,000 in the third quarter versus $305,000 last year.
In the third quarter, net other income was $3 million compared with net other expense of $35 million last year. Net other income consisted of interest expense of $1.1 million and a $3.8 million unrealized gain related to the change in fair value of the warrants issued with our IPO. We also recognized $0.3 million of foreign exchange gains. Overall, our net loss for the quarter was $9.8 million or $0.48 per ordinary share.
Our fiscal year to-date total revenues were $13.5 million, a decrease of 7% from last year. Product sales were $13.5 million, a decrease of 2% from last year. The decrease in product sales was attributable to an $800,000 negative impact of a stronger U.S. dollar relative to the British pound and euro. We also recognized $750,000 of product development fees last year, which did not repeat this year. Year-to-date, OEM sales of $9.1 million was down 6% year-over-year and represented 67% of product sales while direct and distributor sales of $4.4 million was up 9% year-over-year and represented 33% of product sales. OEM sales growth was impacted by the stronger U.S. dollar relative to the British pound and euro and lower shipments of bulk antisera.
Direct sales in the United States increased 13% year-over-year. Direct sales outside of the United States decreased 3% year-over-year, given our decision to rationalize our product offerings in Europe. Product sales from standing orders were 72% versus 72% last year. Year-to-date, gross profit on total revenues was $6.4 million compared to $7.1 million last year. The decrease was mainly attributable to the $0.8 million decrease in other revenues. Gross profit on product sales was $6.4 million compared with $6.4 million last year. Gross profit on product sales was negatively impacted by the stronger U.S. dollar. Gross margin on product sales was 47.3% compared to the 46.5% last year.
Year-to-date, the operating loss was $36.2 million compared with $20 million last year. Operating expenses increased $15.5 million from last year to $42.6 million with an $8.5 million increase in research and development expenses to $22.1 million and $6.7 million increase in general and administrative expenses to $18.1 million. Sales and marketing expenses of $2.4 million increased $0.3 million from the prior year. The increase in research and development expenses reflect incremental costs associated with the commercial scale up of MosaiQ including initial production costs which are currently expensed as research and development. The increase in general and administrative expenses reflected greater personnel related costs, increased facility rental charges and greater corporate costs. Stock compensation expense was $1.380 year-to-date versus $814,000 last year.
Year-to-date, net other income was $11.9 million compared with net other expense of $36.7 million last year. Net other income consisted of interest expenses of $3.0 million and $15.9 million unrealized gains related to the change in fair value of the warrants issued with our IPO. We also recognized $0.6 million of previously deferred costs as a result of the refinancing of our credit facility and incurred $0.4 million of foreign exchange losses. Overall, our year-to-date loss was $24.4 million or $1.33 per ordinary share.
Moving to the balance sheet, cash and cash equivalents were $24.1 million on December 31, 2015, while long-term debt was $28.7 million. On February 4, we announced the pricing of an underwritten public offering of 4,444,445 ordinary shares at a price of $9 per share. The net proceeds from this offering are expected to be $36.9 million upon closing after deducting underwriting discounts and commissions and other estimated offering expenses. As a result our available cash resources this quarter increased to $61 million. Accounts receivable totaled $1.5 million and inventory totaled $7.8 million. Capital expenditures totaled $5.8 million in the third quarter and $19.9 million year-to-date.
Moving to guidance, our outlook for fiscal 2017 is essentially unchanged from last quarter and reflects the stronger U.S. dollar relative to British pound and euro, which has had a meaningful impact on product sales relative to the prior year. For fiscal 2016, we forecast full year revenue in the range $19.2 million to $19.7 million which includes $1.9 million of product development fees that we expect to recognize as other revenue in our fiscal fourth quarter. These product development fees assume the receipt of milestone payments that are contingent upon achievement of regulated approval for certain products under development for a large OEM customer. As such the receipt of these milestone payments involves risks and uncertainties.
We anticipate product sales revenue in the range of $17.3 million to $17.8 million, which includes a $0.9 million or 5% drain on growth from the stronger U.S. dollar. For fiscal 2016, we now forecast an operating loss in the range of $45 million to $50 million versus our previous range of $50 million to $55 million and we now forecast capital expenditures of $25 million to $30 million which includes expenditures associated with the replacement of our Edinburgh manufacturing facility. For our fourth quarter we expect product sales in the range of $3.8 million to $4.3 million compared with $3.9 million in the fourth quarter of fiscal 2015. This includes a $0.1 million drain on the growth from the stronger U.S. dollar.
I will now turn the call back to Paul.
Thanks Roland. MosaiQ represents a truly novel testing platform for transfusion diagnostics with a proven capability to detect antibodies, antigens and nucleic acid. Through MosaiQ, Quotient aims to deliver substantial value to donor and patient testing laboratories worldwide with the unified instrument platform for blood grouping and both serological and molecular disease screening. Of over $3.4 billion of reagents spent annually, the transfusion diagnostics market represents significant commercial opportunity for Quotient and our partnership with Ortho Clinical Diagnostics validates MosaiQ both technically and commercially. Near-term, we will remain absolutely focused on execution of the remaining steps to bring MosaiQ to market in advanced commercial launch in Europe prior to the end of 2016 and in the United States in early 2018.
With that, I would like to thank all our employees and partners for their continued contribution towards the success of Quotient and I will now ask the operator to begin the question-and-answer session.
Thank you. [Operator Instructions] Our first question comes from the line of Brandon Couillard with Jefferies. Please proceed with your question.
Thanks. Good morning. Paul, how would you describe the risks to further development of MosaiQ from here? I mean, it seems like the outstanding measures left before the field trials are largely engineering more mechanical, if you will rather than scientific, but just how do you sort of view the next steps prior to entering the field trials?
Yes, hi, Brandon. Thanks for your questions. Personally, I characterize these risks now as largely behind those, because given the stage of where we are in terms of the build-out of the manufacturing facility and then also development of the instrument itself. We are undergoing this week final factory acceptance testing on the final assembly line at a partner in Scotland we expect that to be delivered by mid-February. We are quite confident about that now. And then likewise, we are getting towards the end of the sort of final setup of the print system demonstrating near-term that we can print with all 66 heads. So on the manufacturing side, very, very confident that many of the potential big challenges are now very much behind us and risks are likely to be minor and clearly given our record to-date capable of being overcome.
On the instrument side, similarly, design is locked. Instrument is now being built for us. Field trials, very pleased with the progress and sort of work that’s been undertaking with the prototypes, I don’t really envisage any major redesigns there that could create a material timeline extension. Software development is in hand and has been a known subject for us and again very confident that all of the software development and integration will be completed in the second quarter.
Super. And could you give us an update on where you stand in terms of the number of print-heads that have been totally validated so far?
It’s – well, we started in sort of fully validated print system on the first module of 4 print stations, which is 8 print-heads, but still 4 print stations out of 66. We have now got all 66 working mechanically and expect to have all 66 actually physically printing in the very near future and certainly in line with our target to have the system fully commissioned by the end of March. We are essentially in sort of final sort of calibration on that side.
Super. And then one more, as far as the NAT testing I guess program goes, would that be dilutive to the P&L to any extent over the next 12 months and kind of what are the next milestones that would influence I guess next steps of the program?
So, we have been undertaking that side of the program with the development partner and we expect that to continue to be the case this year. And then as we released development personnel from MosaiQ this year within the sort of R&D spend, we will redeploy some of that resource to the NAT testing platform. So, I don’t actually expect any sort of dilutive impact from that investment and very much the next set of milestones we will sort of report as appropriate through the year, but certainly by the beginning of next year, we expect to have the menu extended to cover Hep B, Hep C and West Nile viruses and then also have the final sort of work undertaken on the sensitivity and determination of whether we will need amplification or not and then also determination of what the impact would be on the instrument platform itself, but again that I don’t expect to be dilutive to P&L this year. And certainly, we are having an impact on the initial timetable to launch MosaiQ for blood grouping and serological disease screening.
Super. Thank you.
Thank you. Thanks, Brandon.
Thank you. [Operator Instructions] Our next question comes from the line of Andrew Peters with UBS. Please proceed with your question.
Hey, guys. Thanks for taking my questions. So, a couple here. The first one with the Zika virus now in the news and reports that it has been transmitted due to the blood supply, just wanted to see kind of if there are any initial efforts on your side to maybe incorporate that in future versions of MosaiQ just giving kind of the public health need or increasing public health needs? And then just secondly, I want to understand a bit more as to kind of the how the contracting and customer on-boarding process works once MosaiQ is available both in Europe and the U.S.? How quickly can you kind of begin to turn things turnaround in the derived revenue from new test prices? Thank you.
Sure. Thanks, Andrew and thanks for your questions. So, on Zika, at this point in time really as you know we have really focused our attentions primarily on consolidating existing diagnostics assays on to the MosaiQ platform. So, we don’t want to get involved ourselves in discovery and development of individual assays. So, there is no change from what we plan to do at this point in time with the initial disease screening assays to be included on MosaiQ consumables. We will consider the opportunity and the need subsequently once we see diagnostics. What I would probably say is that we are fairly fixed already on serological disease screening, so I don’t think you would see anything there certainly before launch. If there is an area of opportunity for something like Zika or even a [indiscernible], it’s probably going to be around some of the flexibility that we will be able to building around that NAT testing. So, we will look at that, at that point in time.
And then on the – as far as the customer adoption on-boarding is concerned, clearly, we have got four major potential customers participating in our field trials. So, those discussions have been underway and indeed discussions with all of those perspective customers have been underway for anywhere up to 2 or 3 or 4 years already as those discussions remain positive. And indeed in recent months, we heard corporate executive suite level discussions with both – with all of our key parties, all of our key customers regarding MosaiQ. What I would say is that we remained focused on just going through field trials now, but then also introducing to the customers more detail about the potential for MosaiQ as a testing platform, how it could be configured and we will move it forwards from there. But nevertheless our sort of initial view of that, we would expect sort of first adoption within sort of 3 to 6 months of commercial launch amongst these customers. It remains our view and we continue to work towards achieving that target.
Great, thank you.
Thank you. Our next question comes from the line of Josh Jennings with Cowen & Company. Please proceed with your question.
Hi, good morning gentlemen. Congratulations on all the progress. Paul, just a administrative question I guess if you will, how should we think about your communication to the Street over the next – within Q1, I think there is five different milestones you laid out in the press release in Q1, are they going to be individual press releases or are they going to just going to get an update on the Q2 – Q1 call, excuse me?
No, I would expect that we will update on sort of achievement of the key milestones. And so I look for a range of announcements over Q1, over Q2 as we achieve the milestones we have set out in the press release.
Okay. And then any updates you can provide just on the partnership with Ortho-Clinical Diagnostics, when do you think they began kind of orchestrating or putting in play the strategic initiatives for their commercialization effort, is that in the back half of this year or early next year and just how is that partnership in progress?
Yes. The partnership is being progressing very, very positively and indeed they have already started their sort of strategic moves around orchestration of the commercial launch of MosaiQ. So they would be in consultation with their sort of advisory boards. They are looking at branding, they are looking at sort of key milestones between now and commercial launch and I would hope that by the end of this year with the final MosaiQ instrument we could be jointly sort of launching to the world the product or taking it to the next level of sort of commercial launch to the extent that we can with also our long side offer as I have said before the end of this year. But now they are very well tuned into the project. They are very much excited by us and our working and progressing to launch it on a basis consistent with our launch timetable.
Great. I am maybe getting a little bit ahead of myself, but with the progress on the NAT side of diagnostics world, you have so mentioned in the press release historically about expanding the MosaiQ platform into the products for routine medical diagnostic testing, are we been – are you hearing anything along those lines in the next 12 months or is this a multi-year project that you guys have in the pipeline? Thanks for taking my questions.
It is a multi-year project where we kind of remain laser focused on the transfusion diagnostics market to start with. And then once we have delivered against those milestones, those objectives then we will release that product development capability to look at an extended diagnostics opportunity.
Thank you. Mr. Cowan there are no further questions at this time. I would like to turn the floor back to you for any final concluding remarks.
Thank you everybody for joining us on the call today. Quotient continues to make considerable progress on the commercial scale up of MosaiQ and we look forward to its initial commercial launch at the end of or before the end of 2016. I would like to thank you very much for all participating today. Thank you. Good bye.
Thank you. This concludes today’s teleconference. You may disconnect your lines. Thank you for your participation.
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