Quotient Limited (NASDAQ:QTNT) F3Q 2017 Earnings Conference Call February 7, 2017 8:30 AM ET
Roland Boyd - Group Controller, Treasurer & Interim CFO
Paul Cowan - Chairman and CEO
Brandon Couillard - Jefferies
Josh Jennings - Cowen & Company
Greetings and welcome to the Quotient Limited Third Quarter Fiscal 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr. Roland Boyd, Group Controller, Treasurer & Interim Chief Financial Officer for Quotient Limited. Thank you Mr. Boyd, you may begin.
Thank you, Michelle. Good morning, everyone and welcome to Quotient’s earnings conference call for our fiscal third quarter ended December 31, 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 US 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, February 7, 2017 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.
Thank you, Roland. We continue to work diligently to advance MosaiQ (inaudible) final and general validation process, prior estimates in European field trials. Since the end of the quarter, we’ve reported successful outcomes for the final internal performance evaluation studies for both antigen typing and the initial disease screening panel for CMV and syphilis. We remain on schedule to complete European field trials for MosaiQ for blood grouping and this initial disease screening panel in the first half of calendar 2017.
In parallel, we are in discussions with multiple potential customers throughout Europe regarding MosaiQ. Like the US, feedback continues to be very positive. In collaboration with a number of key prospective customers, we are developing the detailed economic case for adoption of MosaiQ. While still very early days, the initial results of this work supports our early conclusions about the cost saving opportunity offered by MosaiQ to DNA testing laboratories.
Over the next one to two months, activities surrounding MosaiQ will be focused on completing the internal performance valuation studies for antibody detection which are currently underway, completing the manufacturing or manufacture of validation batches of each antibody and red blood cell to be included on the initial MosaiQ IHC consumable, development work on these antibodies and red cells is not complete, completion of validation of the final manufacturing system in advanced European field trials, including the manufacture of validation batches of MosaiQ IH Microarrays and the initial MosaiQ SBS Microarrays for field trials and completing validation of the MosaiQ instrument and instrument reagents.
Following completion of these steps, Quotient will be in a position to commence the final internal validation studies in advance of European field trials. As mentioned previously, this validation study is designed specifically to mimic the field trial environment itself.
We reported the successful completion of the company’s internal valuation studies for antigen typing in early January. Yesterday we also reported the successful completion of the internal valuation studies for the initial disease screening panel for CMV and Syphilis. Results for the detection of Syphilis demonstrated 100% sensitivity and specificity. Results for detection of CMV were also strong with 100% specificity and 96.7% sensitivity.
While there were three false negatives for CMV, we understand the samples tested were very low positive samples. We are reconfirming the validity of the predicated results and will consider adjusting the algorithm parameters to CMV accordingly.
We are continuing to make strong progress with regards to the development of the extended disease screening panel for MosaiQ. Assay development is now largely complete, manufacturer of microarrays incorporating the full disease screening panel using the final MosaiQ manufacturing system will commence over the coming months. We will then complete our internal evaluation studies for the full disease screening panel using final manufactured microarrays and MosaiQ instruments.
Working with our external development partner, we continue to make strong progress on the development of MosaiQ for molecular disease screening and expect to report in greater detail on this exciting development in the coming months. We remain confident that MosaiQ offers considerable advantages over existing molecular disease screening platforms which includes undertaking required testing on a single unified testing platform alongside blood grouping and serological disease screening, spend around times of less than one hour and illuminating the need to pull samples as is currently required.
Turning now to the conventional reagent business briefly, the business continues to perform very well with strong revenue growth being generated in all key categories of the business. Both the OEM and US direct business had another exceptional quarter with product sales growing 22% and 21% respectively year-over-year.
Also importantly, product sales from standing orders in this business remain high at 75% compared to 71% last year.
With that, I’d now like to hand back to Roland, who will present the financial overview.
Thanks Paul. Fiscal third quarter product revenues were $4.8 million, an increase of 11% from last years’ third quarter or 13% excluding the negative impact of foreign currency translation. The increase in product sales was mainly attributable to growth in product sales revenues from OEM customers and incremental direct sales to customers in the United States.
OEM sales of $3.5 million grew 22% year-over-year and represented 72% of product sales. The increases were primarily driven by better pricing, increased sales to existing customers, and the impact of recently launched new products.
Direct and distributor sales of $1.3 million decreased 9% year-over-year and represented 28% of product sales. But direct sales from the United States increased 21% year-over-year which was mainly attributable to the impact of new product launches and expansion of our customer base. Direct sales outside of the United States decreased 40% year-over-year consistent with the ongoing rationalization of our product offering Europe.
Gross profit and product sales increased 5% year-over-year to $2.2 million compared with $2.1 million last year, as the positive impact of better pricing and greater sales volumes was offset by the impact of product sales mix and higher levels of waste at our Edinburgh manufacturing facility in Scotland.
Gross margin on product sales was 46.3% compared to 48.9% last year. In the third quarter, we recorded an operating loss of $22.4 million compared with $12.8 million last year. Operating expenses increased by 9.8 million from last year to 24.7 million with a 10.3 million increase in research and development expenses to $17.2 million and a 1.4 million decrease in general and administrative expenses to $5.7 million.
The increase in research and development expenses reflects incremental costs associated with the commercial scale-up of MosaiQ including initial production costs which are currently expensed as research and development. Research and development included a $2 million expense of licensing fees during the third quarter. These fees related to the exclusive license over MosaiQ print technology we acquired from the technology partnership.
The decrease in general and administrative expenses reflects the allocation of production overhead cost to research and development following our establishment of specific product department cost centers. Sales and marketing expenses of $1.8 million increased [9.9] million from the prior year, reflecting the scaling up of the MosaiQ commercial group and cost of attending trade conferences. Stock compensation expense was $1.1 million in the third quarter versus $[0.6] million last year.
In the third quarter, net other expense was $8.7 million compared with net other income of $3 million last year. Net other expense consisted of interest expense of 4.2 million, 0.6 million of foreign exchange losses and 4 million of deferred debt cost written off following the repayment of our debt facility with midcap. Overall, our net loss for the quarter was 31.2 million or $1.06 per ordinary share.
Net cash used in operating activities totaled $13.8 million in the third quarter of fiscal 2017, compared with $16.2 million in the third quarter of fiscal 2016. During the same period, capital expenditures totaled $5.8 million compared with $5.8 million in the third quarter of fiscal 2016, largely reflecting expenditures in connection with the construction of the company’s new conventional reagent manufacturing facility near Edinburg, Scotland.
Moving to the balance sheet, cash and cash equivalents and short term investments were $44.3 million on December 31, 2016. Following our private placement of 12% senior secured notes due 2023 in October 2016 term debt totaled $80.1 million at the quarter end. $84 million of notes were issued at the outset with net proceeds received $78.5 million. Quotient repaid all outstanding obligation under its existing loaned agreement with MidCap Financial Trust which amounted to $33.5 million from the net proceeds.
Under the terms of the private placement, we plan to issue an additional $36 million of notes following the announcement of positive field trial results in Europe for the MosaiQ IH Microarray. At December 31, accounts receivable totaled $1.6 million and inventory totaled $13.2 million.
Moving to guidance, for fiscal 2017 we forecast full year revenue in the range of $21.0 million to $21.3 million including 1.3 million of product development revenue recognized in our fiscal second quarter. Product development fees linked to regulatory approval totaling 0.8 million previously forecast by our conventional reagent business for the fourth quarter fiscal quarter are now forecasted to be received in fiscal 2018. We forecast fiscal 2017 product sales revenue interest the range of $19.7 million to $20 million.
For fiscal 2017, we forecast an operating loss in the range of $70 million to $75 million, an increase of $10 million and capital expenditures of $20 million to $25 million, a decrease of $5 million. Capital expenditures for the remainder of the fiscal year primarily involved items associated with the replacement of our Edinburg manufacturing facility.
For our fourth quarter, we expect product sales in the range of $4.3 million to $4.6 million, compared with $4.5 million in the fourth quarter of fiscal 2016.
I will now turn the call back to Paul.
Thanks Roland. We remain on schedule to complete European field trials for MosaiQ during the first half of calendar 2017. As MosaiQ progresses towards commercialization, we continue to believe that it will transform the field of transfusion diagnostics and will be well placed to disrupt existing and aging testing platforms. MosaiQ will also advance patient care at no extra cost to the healthcare system.
The advantages MosaiQ has to offer are compelling. It will be first fully automated testing platform capable of delivering a comprehensive characterization of both donor and patient blood, allowing for the better matching of donor blood to patients. It will eliminate the need for routine and expensive manual testing for blood grouping. It will offer a single unified testing platform for blood grouping, serological disease screening and molecular disease screening simplifying testing processes and consumable requirements.
It will significantly reduce sample volume requirements and waste and it will also allow for more streamline processes for the matching of donor units to patients. MosaiQ has the potential to offer major efficiencies and lower cost for testing laboratories worldwide. The target addressable market for MosaiQ is very highly developed and at $3.4 billion annually substantial.
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 this year and in the United States in late 2018.
With that I’d like to thank all our employees and partners for their tremendous contribution towards continued success of Quotient. I’ll now ask the operator to begin the Q&A session.
[Operator Instructions] our first question comes from the line of Brandon Couillard with Jefferies. Please proceed with your question.
Paul curious if you could give us a little more clarity on how you exactly plan to communicate the upcoming milestones and catalyst in real-time? Will you report out the initial internal study on the antibody detection and the full internal validation in three parts or will we sort of know that the milestones have achieved when you move this in to field trials? Just how do we think about the upcoming announcements?
So much the same as for antigen typing and for the initial disease screening panel, we’ll report the antibody detection results once we have them. And then we will also report the results of the final internal validation studies essential which essentially will come in to place just prior to commencing field trials. So yes, we’ll be reporting as and when they occur.
And for the CMV and Syphilis data that you reported last night, is there some reason that the number of samples tested for Syphilis and CMV were so much different. And then what exactly is involved in modifying, I think you referred to as modifying the algorithm for CMV, what’s involved there?
So sample numbers, it’s just accessing the samples and then accessing sufficiently positive samples which sort of limits our ability to power up the trial size of they were very confident at the levels of testing we are talking about here.
As you’re probably aware, we have a cut-off for positive, negative. It’s related to the ratio of the foreground result to the background and we set that ratio and depending upon that it gives you a confidence level. And it works perfectly okay on Syphilis at those levels, and it is perfect in terms of sensitivity and specificity.
On CMV, we do believe that we have come across three very weak positives which resulted in these false negatives. We are retesting those on the predictive technology now to confirm that. But in any case, because CMV is quite prevalent, it may be that as we bring in more data around the CMV results, we might just adjust down what - or adjust what the instrument classify as a positive versus a negative based on the power of the results, and arguably start to favor calling it a positive rather than a negative what’s key in this is to come up with the correct negative.
And then two for Roland, the R&D spike in the third quarter was any of it related to the root cause investigation and if so how much? Secondly, the licensing fee, the $2 million that you spoke to is that a new IP purchase or is that related to the legacy system? And then any update on the status of the sale lease back valuation process?
The license fee effectively is the arrangement that we have TTP for a number of payments over a period of years to acquire the license technology and this was just the second payment on the license fee that we made during the quarter, and we expensed them as they arise.
As regards to the increase in the research and development that was a factor and we’ve also called out the impact of the production areas that are now classified within research and development as a factor. But there was nothing specific that we can point to that was related to the ongoing expenditure on the root cause analysis, effectively it’s just ongoing work and it takes time to complete the work.
And then Brandon on the sale of the Edinburg facility we are in discussion with a number of parties and that is progressing, nothing further to report at this point.
[Operator Instructions] our next question comes from the line of Josh Jennings with Cowen. Please proceed with your question.
Paul I was hoping if you could just talk to us about the performance evaluation study results for antigen typing in initial disease screening and what that’s done to your confidence in the platform now that you have it among your [builds] and will it soon look forward to internal validation testing? Just on top of that where do you see the biggest risk in the final leg of development?
Clearly the performance evaluation results have given us tremendous confidence in the ability to deliver the platform and confirmation that the platform works, that the underlying science continues to be as robust as it has been from the outset. And now we move forward to the final product where certainly for the top 10 antigens we add additional power which will give us greater confidence and ability to deliver (inaudible) platform, primarily as a consequence of using multiple reagents on those 10 key antigen types.
So we remain very, very confident now. The instrument is in good shape, the manufacturing system is in very good shape. Yeah, we at this point see no major risks. We have a substantial process to go through and we are working our way through that process diligently. But we have designed, manufacturing where we’ve designed the platform to mitigate risk and as such we don’t envisage any other major areas of risk at this point in time. There may be some smaller risks, but they can be mitigated and addressed as they [arrive].
And maybe, I hope I don’t know if you’ve reviewed this a couple of times in one-on-one meetings. But just in terms of the initial panels versus the final panels that will come out, particularly in the antibody typing and antigen ID panels, look at the timelines for the full panels to be introduced in to Europe. Is that really - will those internal validations test be run after EU trial starts and then any timeline updates for those four panels will be helpful?
So our plan is, yeah, we are moving forward in to European field trials with the full panels for ABO, Rhesus and Kell with multiple reagents. So I think it’s in excess of 20 spots on that panel. And then with antibody detection as well, we’ll go in to the European field trials with that. And then as we’ve mentioned previously, once we complete European field trials, we move straight in to US field trials. For the US field trials, we expect to have the full antigen typing panel and then again complete antibody identification panel as well.
So we’ll go in to US field trials with that product, and then utilize the data for the additional specificities to apply for CE marking for that full panel here subsequently. So we’ll launch in Europe with the truncated panel, but I expect that within two or three months, and particularly I expect that before actually customers start acquiring the product, we will have the full panel approved for sale in Europe.
Though it’s still early days in terms of communications with customers and marketing in the EU, but how should we think about you rolling out of your marketing campaign, are you introducing these performance evaluation studies to customers, are you going to be marketing in terms of validation data? I just can’t remember the regulations in Europe in terms of what you’re allowed to do and you mentioned on the call just about the early positive reception that you’ve experienced to date, any color on that would be appreciative? Thanks.
We have an ongoing marketing strategy in Europe and to some extent also much earlier in the US. Very much about educating the customers about the power of MosaiQ and the fact that it’s coming along. We will clearly take the opportunity to talk further to the customers once the internal validation is derived and be able to demonstrate to customers our confident in the platform coming to market and also our confidence in the power of the platform.
And then likewise, once the field trial data is available, we’ll again be talking to the customers about that. But, in general, there is a very positive reception for MosaiQ in Europe as it is in the US at this point in time. The customers really just wanting to see data, and as I said we’ll be publishing out data as we complete the internal validation studies and then as we complete the field trials and then soon thereafter we’ll be looking essentially place instruments for internal validation perhaps with multiple targeted customers, and sort of getting them used to every bit about releasing a trial [cycle].
Thank you. This concludes our question-and-answer session. I will now turn the call back over to Mr. Paul Cowan for closing remarks.
A - Paul Cowan
Thank you Michelle and thank you everyone for joining us today. And we look forward to continuing to report on the successful advances of MosaiQ in the next earnings call. Thank you very much.
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participating and have a wonderful day.
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