Quotient Limited. (NASDAQ:QTNT)
Q1 2017 Earnings Conference Call
August 09, 2016 8:30 AM ET
Paul Cowan - Chairman and Chief Executive Officer
Stephen Unger - Chief Financial Officer
Brandon Couillard - Jefferies & Company
Joshua Jennings - Cowen and Company
Greetings and welcome to the Quotient Limited First Quarter Fiscal 2017 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, the conference is being recorded.
I would now like to turn the conference over to your host, Mr. Stephen Unger, Chief Financial Officer. Please go ahead, sir.
Thank you, Alason. Good morning, everyone and welcome to Quotient’s earnings conference call for our fiscal first quarter ended June 30, 2016. 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 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 last night’s release.
The forward-looking statements including guidance and projections provided during this call are valid only as of today’s date, August 9, 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, Steve. MosaiQ is a transformative and highly disruptive technology addressing the $3.4 billion global market for transfusion diagnostic products. It will deliver major cost savings and efficiencies to end-users while advancing patient care through the better matching of donor and patient blood. Given the considerable advantages offered by MosaiQ, over existing instrument platforms the commercial case with MosaiQ is compelling.
Significant progress continues to be made on commercial scale up of MosaiQ in advance of its planned European launch in early 2017. Installation of the full manufacturing system for MosaiQ consumables was completed earlier this year and over the past quarter we moved up focus to validation of that manufacturing system in advance of field trials and commercial launch.
After short falls carry out a minor factory modification validation of the initial manufacturing system for MosaiQ consumables is now back on track with completion planned for the end of this month. Having made the modification needed to better control humanity levels issue is a stickiness surrounding the final assembly of MosaiQ consumables have now been resolved. The validation process is demonstrated that the initial manufacturing system for MosaiQ consumables is proving to be robust.
Quotient has now taken delivery of five field trial instruments for its development partner STRATEC with the most recent two instruments incorporating field trial ready software. These field trial instruments will be used initially to support internal validation studies before being moved to field trail sites in Europe. We expect further software features to be added prior to the plant start of European field trials.
Assay development from MosaiQ blood grouping, for the MosaiQ blood grouping consumable and the initial serological disease screening consumable is now largely complete with the process of transferring those assays from development to final manufacturing now well underway. Work in connection with the transfer of these assays from developments to production continues to demonstrate positive results for the MosaiQ methodology.
We are scheduled to complete two internal evaluation studies for MosaiQ – for the MosaiQ blood grouping consumable and initial serological disease screening consumable over the coming months prior to commencing field trials in Europe in the calendar fourth quarter of 2016. We plan to report results of the European field trials in early calendar 2017 with U.S. field trials to commence shortly thereafter.
Integration of the full mandated serological disease screening menu beyond CMV and Syphilis continues to progress very positively. Assay development for the expanded testing menu is planned for completion by the end of this month with the assays being transferred from development to manufacturing shortly thereafter.
With respect to the expansion of MosaiQ to incorporate molecular disease screening, we have now established the capability to reliably detect HIV, Hepatitis B, Hepatitis C, and West Nile virus using the MosaiQ methodology. Over the coming months and working with our development partner, we expect to demonstrate multiplex detection for all of these four targets as well as the capability to detect the Zika virus.
Different amplification methods are also being evaluated which are expected to generate additional intellectual property. While MosaiQ continues its strong progress towards commercialization, the conventional reagent business I am pleased has recorded a record quarter in terms of both the dollar value of product sales and year-over-year growth.
The conventional reagent business has had a very strong start to the new fiscal year with product sales growing 18% year-over-year. Strong revenue growth was achieved from product sales to both OEM and direct customers with particular strength from our U.S. direct sales operation which grew product sales 32% year-over-year during the quarter. Recently launched new products contributed directly to the strong performance of this business.
With that, I’d now like to hand back to Steve who will present the financial overview.
Thanks, Paul. In line with our preliminary results announcement issued on July 11, fiscal first quarter total revenues and product sales were $5.7 million, an increase of 18% from last year’s first quarter or 19% excluding the negative impact of foreign currency translation. The increase in product sales was mainly attributable to growth in sales to OEM customers and direct sales to customers in the United States.
OEM sales of $3.9 million grew 14% year-over-year and represented 68% of product sales. While direct and distributor sales of $1.8 million was up 27%year-over-year and represented 32% of products sales. Direct sales in the United States increased 32% year-over-year which was mainly attributable to recently launched new products and growth in sales of our reagent red blood cell products. Direct sales outside of the United States increased 10% year-over-year.
Product sales from standing orders in the quarter were 76% versus 74% last year. Gross profit on total revenues and product sales was $2.6 million growing 25% year-over-year compared with $2.1 million last year. The increase was attributable to the positive impact of greater sales volumes. Gross margin on product sales was 45.9% compared to 43.3% last year.
In the first quarter, the operating loss was $16.4 million compared with $10.5 million last year. Operating expenses increased $6.4 million from the prior year to $19 million with a $5 million increase in R&D expenses to $11.8 million and $0.8 million increase in G&A expense to $5.9 million.
The increase in R&D expenses reflects 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.
Sales and marketing expenses of $1.3 million increased $0.6 million from the prior year. This increase was mainly attributable to the newly formed MosaiQ commercial group. Stock compensation expense was $898,000 in the first quarter versus $337,000 last year.
In the first quarter, net other income was $143,000 compared with $339,000 last year. Net other income consisted of interest expense of $1.2 million and $1.3 million of foreign exchange gains. Overall, our net loss for the quarter was $16.2 million or $0.64 per ordinary share.
Moving to the balance sheet, cash and cash equivalents were $22.4 million on June 30, while term debt was $29.1 million. On August 3, we completed an underwritten public offering of 3,220,000 ordinary shares at a price of $5.50 per share. The net proceeds from this offering were $16.3 million, after deducting underwriting discounts and commissions and other estimated offering expenses.
As a result, our available cash resources this quarter increased to $38.7 million. On June 30, accounts receivable totaled $2.4 million and inventory totaled $12.8 million, capital expenditures totaled $6.6 million in the first quarter.
Moving to guidance, for fiscal 2017 we are raising our forecast for full-year revenue by $1.3 million to the range of $21.7 million to $22.7 million which now includes $2.7 million of product development fees that we expect to recognize as other revenue during the remainder of our fiscal year.
These product development fees assume the receipt of milestone payments that are contingent upon achievement of regulated approval for certain conventional reagent products under development. As such the receipt of these milestone payments involves risks and uncertainties.
We now forecast fiscal 2017 product sales revenues in the range of $19.0 million to $20.0 million, which is an increase of $500,000. For fiscal 2017 we forecast an operating loss in the range of $55 million to $60 million, and capital expenditures of $25 million to $30 million, which includes approximately $20 million of expenditures associated with the replacement of our Edinburgh manufacturing facility.
For our fiscal second quarter we expect product sales in the range of $4.4 million to $4.9 million compared with $4.3 million in the second quarter of fiscal 2016. We also anticipate the recognition of $1.3 million of other revenue related to product development fees.
I’ll now turn the call back to Paul.
Thanks, Steve. MosaiQ will address the significant unmet need in the $3.4 billion for transfusion diagnostics delivering major cost savings and efficiencies while also advancing patient care. Customer feedback continues to be overwhelmingly positive and all of its equations continue believe that MosaiQ will indeed transform the field of transfusion diagnostics.
Set against this commercial backdrop, we continue to deliver against key commercial scale up milestones. European field trials have planned to commence in the calendar fourth quarter of this year. U.S. field trials will commence shortly after the European field trials have reported.
Near-term we will remain absolutely focused on execution of the remaining steps to bring MosaiQ to market in advance of commercial launch in Europe in early 2017. With that, I would like to thank all of our employees and partners for their continued tremendous contribution towards the success of Quotient.
I will now ask the operator to begin the Q&A session.
Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question will come from Brandon Couillard of Jefferies. Please go ahead.
Thanks. Good morning.
Good morning, Brandon.
Paul now that you’ve got the humidity device installed just want to confirm the nothing new his popped up anywhere in the process and what are the biggest hurdles you proceed from here and kind of walk us through the timeline sort of over the balance of the calendar year.
Okay. So yes the adjustment to the humidity control is now being completed its working well we are not seeing stickiness as we had seeing previously so we continue to move forward. So we now very much see the remainder of the validation process which is scheduled for completion at the end of this month to be larger process oriented. We don’t in visits there being any material sort of further challenges from a manufacturing perspective as of today.
As far as sort of reaching out now in the period between now and commencing a field trial as you know our strategy has always being to do a major internal evaluation to demonstrate the platform works and works very well before we go to field trials. And so between now and then we will produce final consumables on the final validated manufacturing system incorporating all of the various assays that we’ve been working on over the past year three years to five years.
We will establish that they are all working and what I would say is that there is some risk associated with all of them working first time out of the blocks. Now we’re well aware of that and in the case of what I would call the key antigen typing assays, we’ve mitigated risk by incorporating more than one assay for those particular specificities on the consumables.
So that will certainly enhance the probability of success there and where we feel confident that for those key commercial assays or test. We will have a working assay at the end of the day that will - on the first consumable.
With regard to the remaining 15 or so assays much less commercially important, but nevertheless we important, if any of those don’t work first time out we have the ability to just drop them off the first consumable at least for European field trials we can continue to work on them up and until the U.S. field trial start. And if we can’t get them to work first time out we will continue to work on them and then ultimately deliver them on version 2 of the consumable.
So I will we would also that at this point in time, the key risk between now and field trials will be getting all of these as well. We know they will getting them all to work together on the assay or so on the consumable is the key risk and we put in place mitigation steps to allow us to address that and reduce those risk.
Just to confirm do you still expect to report out the final internal evaluation study results in October.
Correct. So we were doing a smaller menu of what of those 10 to 15 assays that we think are commercially key, we’ll report out on those in September and then we’ll report out on the full assay menu in October correct, that’s for antigen typing what I would also say is that across the board the antibody ID panel continues to work very well and we’ve got every degree of confidence that we can deliver against that that menu of tests.
Okay. So that fair to assume that you have that data available going into AABB. And then secondly just at a conference how do you sort of plan to present yourself and what’s your dialogue and recently with OCD.
Yes. So we do plan to issue a press release around that data at the end of October for AABB. Our focus at AABB this year is going to be on presenting a working instrument to our key donor testing plants or prospective donor testing customers. As well as continuing to emphasize the importance of the conventional reagent business. And then we can also walk through and discuss that data all that additional data with them.
As far as the discussions with OCD are concerned you know those discussions continue to progress very positively. They’ve been great partners and the dialogue is ongoing and indeed where we’re meeting quarterly on the topic discussing the menu instrument et cetera, et cetera. But we are aligned in terms of everything at this point in time.
Excellent. Steve, any update you can share with us on the prospects of the sale leaseback whether that might be viable given the recent developments in the UK?
Actually, I’ve been taking the lead on that Brandon, so I’ll answer that. We continue to market property, we’ve had three parties through – substantial parties through a really over the last weeks or so. There’s a little bit more interest being shown, probably more to update you on that in the next quarter as we progress through August.
Great. Thank you.
That certainly remains our target.
And our next question will come from Josh Jennings of Cowen & Company. Please go ahead.
Hi. Good morning, gentlemen and congrats on completing the facility modification.
I wanted to just ask – I apologize if – I was jumping off another call if I missed this early in the prepared remarks, but have you locked in the blood center field trial participants for the EU and U.S. field trials or is that still being worked out?
No they are locked-in and waiting for commencement, so we’ve been locked-in for the past six or 12 months and we’ve had ongoing dialogue with them all and they’re waiting to commence field trials.
Great. And then just in terms of the field trial requirements from a design of the trials and the – are there any differences in the E.U. versus U.S. field trials?
No. Pretty well identical actually, it’s between 7,000 and 10,000 samples that we tested. And the test all around, blood grouping is all around concordance to [medical technologies]. And again in both cases the level of concordance is the same 99% concordance for antigen typing and 95% concordance for antibody identification, so very little difference between the two.
Excellent. And just with the EU launch coming up in the next six to 12 months, the initial launch in the EU. Can you frame up for us kind of what preparation plans in front of that and it sounds like you’re having customers evaluating the system at your headquarters. I don’t know Paul or Steve if you can help frame up that first year commercialization in EU and how should we be thinking about system placements and revenues?
Okay. So as you would expect we’ve now started to implement our commercial plan. We’ve been having ongoing dialogue with a fairly wide group or prospective customers at this point in time. Our key focus is on a relatively small number of key target accounts in Europe with initial field trial sites being amongst those target customers particularly on the donor testing side.
So our focus will be in those two key territories where the initial field trials will take place in UK and Germany with sort of Scandinavia, Benelux being following closely behind those, the same with Switzerland. And then we will look to expand that subject to seeing how the U.S. field trials and how the U.S. approval process sort of progresses.
Our objective being to sort of maintain as much capacity of the initial manufacturing for the U.S. market as possible since it’s the most profitable and the highest volume. But next two year, we anticipate launching in the first quarter. We would expect to see our first conversions in the second half of the year and you’ll start to see the initial consumable revenues coming through in third quarter of next year.
Excellent. And I know it’s less relevant for Quotient revenues, but just in terms of what the clinical and their approach to gearing up for the EU patient testing market. Any insight there in terms of how they’re preparing or how they’re looking at the launch in 2017?
Yes. So they are working very hard and diligently on their own commercial launch into the patient testing market and investing heavily in that area in that launch preparation. And as you are probably aware under the contract they do have certain obligations to launch within certain time periods. There are committed, they’re on board and just as excited as we are with the upcoming launch in product.
Great. Thanks for all the answers Paul.
Yes, pleasure. Thanks Josh.
End of Q&A
[Operator Instructions] And ladies and gentlemen we have reached the end of the question-and-answer session. I would like to turn the conference back over to Mr. Paul Cowan for any closing remarks.
Thanks everyone for joining the call today. We remain absolutely committed to delivering against our near-term milestones and we look forward to further positive updates in the coming one or two quarters. Thanks for your time.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.
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