Quotient Ltd. (NASDAQ:QTNT) is a Jersey Island corporation developing a microarray-based testing platform for typing and screening blood. The company was formed following the privatization of Scotland's blood testing reagent manufacturing and R&D facilities in 2007. The company and its management have a 30-year history of developing, manufacturing and marketing reagents for the transfusion diagnostic market. It has coupled that expertise with microarray technology to develop MosaiQ, an instrument platform that with a single drop of red blood cells and a single drop of plasma will be able to provide a full antigen profile and antibody identification in a turnaround time of 35 minutes, versus a mostly manual process that currently takes several hours to complete. QTNT estimates its total addressable market at approximately $3 billion.
Blood Testing Market:
There are two customer segments to the blood testing market.
The first segment is Donor Centers which collect donated blood from volunteers, e.g. the American Red Cross, United Blood Services and independent members of America's Blood Centers. There are 12-15 million units of blood collected in the US each year (ARC and UBS collect about 70% of it). Globally, between 35 and 38 million units of blood are collected by approximately 20 potential customers. All collections need to be tested within 48 hours of donation.
The second segment is the Transfusion Services, primarily hospitals, which transfuse the donated units into compatible patients. Every unit of donated blood needs to be tested both at the Donor Center and Transfusion Service, and all patients receiving the blood at the Transfusion Service need to be tested before being transfused to ensure compatibility. The importance of correct blood typing has been known for several decades, as well as the testing procedures, so the liability associated with transfusing incompatible blood is significant.
In order to ensure the blood being transfused is safe for a patient, there are three types of testing that need to be performed:
Currently, no single machine can do all three of the above test processes, nor can the full range of testing currently be done without a significant manual component. QTNT is designing MosaiQ to be able to do just that.
The US transfusion market is dominated by two players, Immucor and Ortho Clinical Diagnostics, which essentially split the market. BioRad has a small segment of the market.
Immucor markets its own line of manual reagents and two automation platforms, Echo and Neo. These platforms work off the same serological "Capture" technology developed by Immucor and first launched in an automated platform in 1998. The technology is essentially unchanged since 1998, but user-friendly improvements to the analyzers and their throughput are the major changes since the original instruments. Echo, launched in 2007, is aimed at smaller customers such as traditional hospital transfusion services, while the NEO, launched in 2010 to replace the older Galileo, with its higher throughput, is targeted toward larger hospitals and Donor Centers. Both machines are well thought of in the market, but their use is limited primarily to ABORh testing and Antibody Screening. Some antibody identification can be done, but rarely is, and neither instrument is capable of disease screening.
Immucor also markets its molecular platform PreciseType HEA. This instrument was named one of the top 10 innovations of 2014 by The Scientist, but its use in immunohematology is limited to special situations by the fact that it can only analyze antigen type, not antibody identification, and typical of molecular analysis, it has an estimated 6 hour turnaround time.
Immucor is a pure play in transfusion diagnostics and was taken private in 2011 by TPG for $1.97 billion. Its sales were $333.1 million in FY 2011.
Ortho Clinical Diagnostics also markets its own line of manual reagents and has automation platforms based on its MTS gel technology, again technology from the late 1990s. The newest automation platform for the US market is the Ortho Vision instrument, which is meant to replace the aging Provue instruments due to the expiration of the supply agreement with its manufacturer. The technology used on Provue and Vision is essentially unchanged with a few bells and whistles added. The Vision has higher throughput than the Provue, though not as high as Immucor's Neo. The Vision primarily is used to test ABORh and does not have disease testing capability. Ortho does, however, market the Summit instrument which is used in Donor Centers as a serological disease screen, one of the two methods required.
Ortho was sold by Johnson & Johnson (JNJ) to The Carlyle Group in 2014 for approximately $4 billion; this included not only the transfusion diagnostics business but also Ortho's immunochemistry business.
Abbott Diagnostics also has a serological disease screening instrument called the Prism. It and the Summit instrument from Ortho essentially divide the serological disease screening load for Donor Centers. Abbott has no relevant blood grouping business.
Novartis (NVS), through its Chiron acquisition, dominates the molecular screening portion of disease screening. This segment is not relevant to MosaiQ at this point.
The MosaiQ Platform:
MosaiQ is a consumable assay and instrument analyzer platform that uses microarray technology where the relevant known antibodies and known antigens are printed on a specialized glass slide. The instrument will deposit a single drop of RBCs on the antibody slide and a single drop of plasma on the antigen slide, diluents will be added, the slide will be agitated, and after a set period of time slides, will be rinsed leaving only bound antigen and antibody on the array. The instrument will then take a picture of where there is binding. Based on the location of binding, the instrument will be able to provide a full antigen profile and antibody identification of the tested blood. A similar process on an assay will be completed for disease screening. QTNT is promising a 35 minute turnaround time.
The technology behind the testing is identical to what is done on a daily basis in labs throughout the world using Quotient's manual reagents. The advance is that Quotient has figured out how to print those reagents on a microarray so that all testing can be done simultaneously. Thus, contrary to new technology tests like molecular testing this is not a new way of testing that needs significant validation, it is better described as an engineering solution to conduct the same, proven serological testing on a miniaturized basis.
QTNT has 30 years of experience developing and manufacturing reagents for the transfusion diagnostic market. Not only does it make and commercialize reagents for itself, it is also an OEM supplier to most of the world's other transfusion reagent companies, including Ortho, Grifols, and BioRad, among others. Reagents for MosaiQ will continue to be manufactured at its facility near Edinburgh, Scotland.
QTNT does not have instrument expertise, thus has outsourced instrument development and manufacture to STRATEC BioMedical. STRATEC has experience in this space, having designed and developed instruments for other transfusion diagnostic companies. Assays will be printed and assembled in QTNT's new state of the art facility in Eysins, Switzerland.
Progress on MosaiQ:
In its last earnings call, QTNT reaffirmed its intended timeline to submit MosaiQ for FDA approval by the second half of 2016, assuming a 10-12 month review time leading to a US launch in the first half of 2017. QTNT promised in its last earnings call that field-ready instruments would be delivered by the end of 2015. Given that, and that event invitations are being delivered to customers, we would expect that QTNT will have a field-ready version of MosaiQ on display at this year's AABB Annual Meeting. AABB is the premier conference for transfusion science and is scheduled for October 24-27th in Anaheim, CA.
We should note that the first launch of the product will probably have just the blood grouping assays, not disease screening, due to different regulatory expectations. That should not be an impediment to its adoption, as disease screening is already done on separate machines, so can easily be phased in later.
QTNT Value Proposition:
QTNT has an active commercial presence in the manual blood grouping reagent business both in Europe and in the US, and has significant OEM sales to other transfusion diagnostics companies, most prominently, Ortho Clinical Diagnostics.
This business will generate approximately $20 million in revenues for FY 2016 which ends March 31, 2016, is profitable and could support QTNT as a stand-alone business were it not for the significant resources being invested in MosaiQ.
However, the value of the company is all driven by the promise of MosaiQ. MosaiQ is a game changer for the company, ramping its revenue prospects from tens of millions of dollars currently to several hundreds of millions of dollars in a few years time. QTNT has projected revenues in excess of $100 million in its first full year after launch.
The current market capitalization for QTNT is approximately $230 million, but we believe is undervalued for several reasons:
When Immucor, another pure play in transfusion diagnostics, was purchased in 2011, it was valued at $1.97 billion with sales of $333 million. We believe that QTNT has a near-term, market-changing platform that will propel its sales very quickly to similar heights.
Additional Value Considerations:
Ortho Distribution Agreement: QTNT, as a small company, has entered into a sales and distribution agreement with the larger Ortho, giving Ortho exclusive rights to the hospital/transfusion service segment of blood testing. Rather than bear the infrastructure costs required to effectively market to the roughly 4,000 hospitals in the US alone, QTNT will rely on Ortho for market penetration and sell the instruments and assays to Ortho at an agreed price. QTNT will retain the Donor Center commercialization rights, of which there are in the order of 100 in the US, with ARC and UBC accounting for nearly 70% of the testing volume. QTNT estimates the Donor Center segment represents a $1.9 billion opportunity while the hospital/transfusion service segment represents $0.9 billion. As part of that agreement, Ortho purchased equity in QTNT at a subscription price of $22.50 per share.
QTNT Warrants (QTNTW): As part of its IPO, QTNT issued warrants to its stockholders, enabling them to purchase shares of QTNT at an exercise price per share of $8.80. The exercise period expires October 25, 2015. The combined market price of the warrants and its $8.80 exercise price is currently trading at a discount to the market price for the common shares.
As referred previously, the risk profile of QTNT is significantly less than a typical biotech given its technology has been proven over several years and essentially the new technology is one of miniaturizing the antibody-antigen reaction. Having said that, as with any new technology, there are some risks to consider:
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Disclosure: I am/we are long QTNT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.