Quotient Limited's (QTNT) CEO Franz Walt on Q4 2018 Results - Earnings Call Transcript

| About: Quotient Limited (QTNT)

Quotient Limited (NASDAQ:QTNT) Q4 2018 Results Earnings Conference Call May 29, 2018 8:00 AM ET

Executives

Franz Walt - Chief Executive Officer

Chris Lindop - Chief Financial Officer

Analysts

Joshua Jennings - Cowen & Company

Brandon Couillard - Jefferies

Operator

Greetings, and welcome to the Quotient Limited Fourth Quarter and Fiscal Year 2018 Financial Results Conference Call. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Chris Lindop, Chief Financial Officer of Quotient. Thank you. You may now begin.

Chris Lindop

Thank you, Robert. Good morning everyone and welcome to Quotient's earnings conference call for our fourth quarter and fiscal year ended March 31, 2018. Joining me today is Franz Walt, the 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 and expected development and commercialization timeline. 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 this morning's release.

The forward-looking statements including guidance and projections provided during this call are valid only as of today's date, and Quotient assumes no obligation to publicly update these forward-looking statements.

With that, I'd like to turn the call over to Quotient's Chief Executive Officer, Franz Walt.

Franz Walt

Thank you very much Chris and good morning everyone. So since stepping into my responsibility as CEO of quarter at the end of March, I have been thoroughly impressed with the team's focus and energy which has resulted in the delivery of a low cost, microarray platform for diagnostics.

Other organizations with more resources and more experience have tried and failed in this quest in the past. In roughly five years we have achieved the reality of an automated testing platform working with state-of-the-art microarrays. Microarrays produce in a high throughput automated manufacturing process, all designed to work together to deliver blood grouping in our customer environment at the required level of concordance.

The Quotient team has the vision and the determination to take on the dual challenges of invention and funding to bring the MosaiQ technology to the initiation of its commercialization phase. Building up on the company's legacy expertise as a developer and manufacturer of liquid reagents for blood typing, Quotient has responded to this market need for a comprehensive automation solution for high throughput industrial scale processing, allowing the use of multiple markers and diagnostic methods on a single sample. There is no question that the era of microarray as a tool for affordable diagnostic screening has arrived now and I'm proud to be able to play my part in bringing this to customers globally.

With that said, I'm particularly proud to report our progress with respect to the European field trials for the initial immunohematology or IH Microarray. Since starting field trials earlier this month, we have made good progress in the first phase which focuses on the concordance of the MosaiQ with predicate technologies.

While the concordance phase of the field trial is ongoing, based on our daily discordance analysis, all antigens are exceeding the targeted concordance level and for antibody detection, we are also in excess of the required concordance. So we remain confident about the outcome of this phase of the field trial.

These results were not yet conclusive demonstrate that MosaiQ platform is working in our customer environment. MosaiQ is designed to deliver substantial operational savings to our customers through a truly walk-away automation solution. This, with standardized testing workflows and simplified reagent supply chain management while it's affordability permits a comprehensive characterization of each unit of donated blood.

So while we have come a long way in the journey from our PhD thesis on paper, we acknowledge that along the way we lost credibility as managers of the development process due to many missed milestones and unexpected delays. I can tell you from experience that any diagnostic development program of this scale will inevitably experience unexpectedly delays, especially in those early phases involving parallel development pathways or device, manufacturing systems and microarray delays which are usually only recognized within the organization attempting the innovation.

So Quotient's challenge was running three parallel development processes in the public eye and perhaps being overoptimistic about the speed at which it might deliver an industry revolutionizing technology. Nonetheless, we understand the importance of reestablishing credibility and the future milestones that I will share at the end of the call reflects the detailed review of our development timelines and objectives going forward to ensure that we have achievable targets with an appropriate amount of flexibility built in committing us to deliver consistently in the future.

The good news is, we have now a working manufacturing platform and an automated device and much of the future development relates to adding additional diagnostic probes to our existing working microarrays. So it's all about first the platform and then adding content.

So turning to the conventional reagent business, earlier this year we completed the construction phase of our BioCampus manufacturing and research facility, which will be the new home of our Scottish operations for many years to come. We also successfully refinanced our investments in the BioCampus through a sale and lease back transaction, freeing out $15 million of capital for reinvestment into our business. The company recently held the official BioCampus opening at which we were honored to host the Princess Royal.

Notwithstanding all of this nonoperational activity the reagent business continued to perform very well with strong product revenue growth for both the quarter and for the fiscal year and very strong cross margin improvement in both periods driven by price, volume and product mix. The predictability of this business continues to be underpinned by the fact that 75% of all product sales came from standing orders in fiscal 2018.

So with that, I would like to hand back to Chris who will present the financial overview.

Chris Lindop

Thanks Franz. So fiscal fourth quarter product revenues were $6.1 million, an increase of 30% from last year's fourth quarter. The increase in product sales was attributable to the growth in both product sales revenue from OEM customers and incremental direct and distributor sales. In the quarter OEM sales of $4.3 million grew 27% year-over-year and now represents 70% of all product sales. The increase continues to be driven by better pricing, increased sales through existing customers, and the impact of recently launched new products.

Direct and distributor sales of $1.8 million increased 35% year-over-year and represented 30% of product sales. Direct sales in the United States increased 12% year-over-year which was mainly attributable to the impact of new product launches and the expansion of our customer base. In the prior year's fourth quarter other revenues included $800,000 earned from the achievement of development milestones related to the approval of new OEM products, which did not recur in this year's fourth quarter.

In the fourth quarter gross profit on product sales increased 54% year-over-year to $3.6 million compared with $2.3 million in the prior year due to the positive impact of pricing, sales volumes and product mix. Gross margin on product sales was 58.7% compared to 49.4% last year. In the fourth quarter we recorded an operating loss of $17.9 million compared with $17.7 million dollars last year. In the quarter opening expenses were $21.5 million, an increase of $600,000 over the prior year.

Research and development expenses were $13.3 million, a $300,000 decrease year-over-year and general and administrative expenses were $6.4 million up $400,000 compared to the prior year. Microarray production costs are currently expensed as research and development. The increase in general and administrative expenses reflects greater personnel related expenditures and increased facility rental charges.

Sales and marketing expense of $1.9 million increased $600,000 from the prior year's fourth quarter reflecting the continued scale up as we move towards commercialization of MosaiQ. In the fourth quarter stock compensation expense was $800,000 versus $1.1 million last year and depreciation and amortization was $2.7 million versus $2.4 million in the prior year. In the fourth quarter net other expense was $2.8 million compared with $2.6 million last year. Net other expense consisted of interest expense of $3.7 million and $900,000 of foreign exchange gain.

Also in the quarter we recorded a non-cash tax benefit of $600,000 which reflects a reduction in the valuation allowance against deferred tax assets in a subsidiary as a result of improvement in the profitability of the subsidiary concerned. Overall our net loss for the quarter was $20.1 million or $0.44 per ordinary share compared with $0.69 in the prior year's fourth quarter.

For the fiscal year product revenues were $23.9 million, an increase of 19% over the prior year. Total revenue for the year also included other revenues of $800,000 earned by the achievement of certain product development milestones and by the sale of two MosaiQ instruments for evaluation purposes.

In the prior fiscal year other revenues of $2.1 million represented product development milestones earned on the approval for sale by the FDA of certain liquid reagent products developed for our principal OEM customer. For the year gross profit from product sales as $13.4 million, an increase of $4.2 million or 45%, while gross margin on product sales was 56.2% compared with 46.1% in the previous fiscal year.

For the year operating expenses decreased $1.2 million to $84.2 million due primarily to a $5.9 million decrease in research and development spending and certain MosaiQ development activities wound down, offset in part by growth in sales and marketing and general and administrative expenses related to the preparation for MosaiQ commercialization.

In the fiscal year net other expense was $13 million compared with net other expenses of $11 million last year. Net other expense consisted of interest expense of $15.4 million and a $2.4 million gain on foreign exchange. Overall our net loss for the year was $82.3 million or $2.02 per ordinary share. Net cash used in operating activities totaled $15.5 in the fourth quarter of fiscal 2018 compared with $13.4 million in the prior year's fourth quarter.

During the same period, capital expenditures totaled $4.3 million compared with $4.9 million in the prior year, largely reflecting expenditures in connection with the construction of our new conventional reagent BioCampus facility near Edinburgh, Scotland. For the full year cash used in operating activities totaled $68.4 million compared with $56.2 million in the prior fiscal year and capital expenditures totaled $21.6 million compared with $20.2 million in fiscal 2017.

Moving to the balance sheet, cash and cash equivalents and short-term investments were $25.8 million on March 31, 2018. Under our 12% senior secured credit facility due in 2023 long-term debt totaled $85 million at the end of the fiscal year and we held $5 million in an offsetting long-term cash reserve account. Under the terms of that facility we are able to issue an additional $36 million of notes following the announcement of positive concordance results for the initial IH Microarray from the ongoing European field trials. In March 31st the cash receivable totaled $2.9 million and inventory totaled $16.3 million.

Now moving to guidance, for fiscal 2019 we are forecasting full year revenue from product sales in the range of $25 million to $26 million. Other revenue, consisting of additional product development fees totaling approximately $1.5 million are also expected to be earning during the year. For fiscal 2019 we forecast an operating loss in the range of $50 million to $60 million including non-cash charges for depreciation, amortization, and stock compensation expense of approximately $15 million and expenditures of between $5 million and $10 million.

Now with that, let me turn the call back over to Franz.

Franz Walt

Thank you very much Chris for this overview. So when I joined the Board of Quotient earlier this year, I was inspired by the Company’s vision of microarray technology taking a leading position in the field of diagnostic screening. I knew that it had been tried before and that everyone skeptics around who said it couldn’t be done. Yet this small company, based in Switzerland, in my own backyard so to speak, is the first to make it reality and it has done it while taking on one of the top diagnostic challenges that of blood grouping.

While the European field trial is underway for our first immunohematology menu offering we stand on the brink of commercialization. We have already begun the early stages of this process. We have engaged with many of our potential customers in Europe initially to help design the MosaiQ platform and thereafter to update them on the development process. Commercialization is an area in which I have a lot of relevant experience gained in my 30 years carrier.

A couple of those I think lessons is that it will often take extra iteration in product development to get to a great product and that one may face unanticipated challenges when undertaking truly novel product development. So establishing timelines for the company before produce is critical. Without being overly conservative, we have incorporated this philosophy into the timelines underpinning our outlook for MosaiQ going forward.

Over the next 12 months, activities surrounding MosaiQ will be focused on the completion of the European field trials including the field trial for SDS1, our initial disease screening microarray. We expect to file for European regulatory approval for the initial immunohematology microarray in the second half of calendar 2018 and for the initial SDS Microarray currently in 2019. The ongoing commercialization of MosaiQ in Europe will continue where we have already received invitations to participate in tenders once we have obtained European approval for the initial IH Microarray.

The completion of the development of the extended antigen detection menu for the IH Microarray is expected by the end of fiscal end year and the commencement of the U.S. field trials are now planned to occur in the first half of 2019. So upon completion of the U.S. field trial we expect to file for the U.S. and European regulatory approval for the expanded IH menu in the second half of calendar 2019.

The fact remains that when we do reach our goal the opportunity that we are pursuing is large and highly attractive from many perspectives. MosaiQ is well placed to disrupt the aging testing platforms existing in the transfusion diagnostic market today. MosaiQ will also advance patient care at no extra costs to the healthcare symptoms. The advantages MosaiQ will offer are compelling. Firstly, a fully automated testing platform capable of cost efficiently delivering a fast, fault proof and comprehensive characterization of donor and patient blood, allowing for the better matching of all donated blood to patients.

Secondly, the elimination of routine and expensive manual testing for blood grouping required Q2 higher, failure of the existing technology, ambiguous results or simply because current matters make it impractical to follow all donated bloods to be characterized to the full extent that may be required by a clinician. And last and not least, a single unified testing platform for blood grouping, Serological Disease Screening and ultimately for molecular disease screening, simplifying testing processes and consumable requirements.

So MosaiQ has the potential to improve transfusion medicine while offering major efficiencies and lower costs for donor testing laboratories worldwide. The target addressable market for MosaiQ is both highly developed, and at over $3.4 billion of reagent spend annually, it is substantial. Near term, we will remain absolutely focused on execution of the remaining steps to bring MosaiQ to the market in advance of commercial launch in Europe.

With that, I would like to thank all of our employees and partners for their tremendous contribution towards the continued success of Quotient. I will now ask the operator to begin the Q&A session. Thank you very much.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question comes from the line of Josh Jennings with Cowen and Company. Please proceed with your question.

Joshua Jennings

Hi, good morning and thanks for taking the question. Congratulations on making it to the EU field trials and Franz congratulations on the permanent appointment as CEO.

Franz Walt

Thank you.

Joshua Jennings

Maybe you could start on, I know you did add some, some of it is in your prepared remarks the answer to my question, but just wanted to maybe get some more colour on –to what drove your decision to – I think you guys were pretty clear when Franz you were now so the Interim CEO, now you've taken a permanent position, what drove the change of heart, the change of decision there?

Franz Walt

Well, you know what, first of all I was intrigued by the idea to bring a truly innovative game changing technology to the market for this was pretty much a strong inspiration and that’s why I joined the Board of Quotient in the first place. And then as I stepped in as Interim CEO and worked really closer to all of these for two-months it suddenly became very personal. So from, well that’s a huge opportunity to well actually its really close, we can really grasp it. If we do it right now and you also get to know the people and you get to know and like the people.

So I think, I just don’t have to hand it over to somebody else and this other person may drop it, so close before the finish line and I also think that the experience I bring along, you know I was with Roche for many years, everybody knows I was the part of the cobas launch, then I was with Siemens and also there in the driver's seat for the Atellica product innovation. So I'm such a lucky individual to be a part this three times, of yes, when a game-changing technology is going to see the market. So it was just too much of an excitement to let it pass yes, if that answers your question.

Joshua Jennings

Thanks for that answer. I was also hoping or just checking with you on, you are clearly on the path for CE mark submission in the second half of the year. There has been some chatter, noise, and some companies you know device and diagnostics based are talking about a prolonged approval processes, will it in fact bother you to having a longer queue or taking a longer period of time? Can you help us think about potential timelines between submission and CE mark approval where you could actually open up the gates for commercialization?

Franz Walt

Yes, you know it’s, as communicated earlier, we will communicate the concordance results in the month of June. But of course, there are many other steps we have to complete. So internally we need the ISO certification for the Eysins manufacturing facility and as I guess the 13485 ISO certification and then also we need to complete the conclusion of all clinical studies to satisfy all the elements of the common technical specifications so the CTS requirements including repeatability, so that’s not done with the concordance results then the produce stability, product stability as well, as well as studies which are necessary and associated if the product's physical robustness, as well as the inclusion of all the necessary studies related to the population.

So then we have to submit, and here I think what we have done is we decided for a staggered submission. So the technical dossier, clinical trial data, we are not submitting everything in one go, but we submit what we have as early as possible so we can put as much information for review as possible in advance of the clinical trials report into the hands of the notified body.

And so, the strategy is to have a partial review take place in parallel as we finalize the study results and all the reports they require, validation of the trial data. Then also a final step would be aligning the product labeling to the technical dossier and all study results which we are now generating and final approvals we are getting and claims we can make and generation of the final instructions for use and performance claim.

So it’s kind of an illusion to believe once we have the results and emphasizing also that the peak for the last time, well it takes just a week or a couple of days to finalize everything before we can start the field trials, we saw while it took a couple of weeks.

So it’s not a walk in the park and we have to go through those steps carefully and we have to do it in a way that it really holds and it is solid. So basically, we paused for a while when I took over and bend over the books and took some distance to the issue and made sure that we have everything in place we need for - to progress this project successfully.

So it will take a little bit of time to get everything done. We have customers who are eager to engage with us. They have invited us already to participate in and attend, but of course we can only really commence with commercial activities once we have the corresponding regulatory approval and not before that. I hope this gives you a little bit insight that if - although we have made great progress there's still some work to be done.

Joshua Jennings

Understood and last question, just and as you move closer to commercialization, any updates or thoughts in terms of how you’re thinking about the capital sales strategy, outright sale at your lease, is this going to be a placement and also just any update in terms of how you're thinking about building out the European sales force? Thanks for taking all the questions.

Chris Lindop

Okay, Josh. I will take that last question. The commercialization strategy hasn’t really changed from the perspective of capital. We’ve designed this because these are high throughput devices, the actual cost to us of these devices is relatively nominal compared to many other automated systems that go into central laboratories.

And as I think we've said before if one of these devices was running at full tilt, it would, the profitability of the reagent would pay for the device in about a week. So absent regulatory requirement to sell a device in some countries they do require their agencies to buy their capital. We will be very open to pricing these devices. And once again, it’s the intensity of the throughput to the capital cost that makes it almost a no brainer.

Operator

Thank you. Our next question is from the line of Brandon Couillard with Jefferies. Please proceed with your question.

Brandon Couillard

Thanks. Good morning.

Franz Walt

Hi good, morning Brandon.

Brandon Couillard

Franz, now that you've been there I guess about 60 days as Interim CEO seat, could you just sort of speak to your level of confidence in the refreshed timeliness and that some of the missed milestones and development delays that you spoke to in your prepared remarks, are largely behind the company at this point?

Franz Walt

Yes, I think in the past the assumption was that everything works out perfectly as planned, but in real life you have hiccups, you have to go back, you have to do some of the work and then there were these three parallel development path with interdependencies and it was just a kind of a miscalculation to assume that we just have this move was right and passing has to be repeated or corrected.

So I think what we did is, first of all I have experienced myself how long it takes to develop things. Then the team has reflected on how much time has it actually required in the past versus our original planning and then we also have corresponding examples in the market as a reference. So we took all these together and made it nevertheless ambitious. So the targets are ambitious, but the targets are also allowing for some extra work which is unforeseeable.

It’s like forecasting, if you have already a mature portfolio, a technical forecast with mathematical methods is very easy because you have a history. But if you are engaging in R&D not in something which is already there, like an improvement of something which is already in the market and then you have kind of reference data to go through, but if it’s a complete new groundbreaking technology, that’s just like trailblazer it's something completely new, it's difficult to predict then it’s also less likely that you're accurate with your forecast.

So I have to say that from my perspective, I have confidence in the dates we have communicated today. I think the technology has great potential, otherwise I would not have signed up as CEO here. I am not suicidal right? And nevertheless the technology is not yet perfect, but that's why we are developing the technology. And the good news is, everything I have seen so far is fixable, but it takes time, it takes brains and it takes well motivation of everybody.

And what I have seen is a great team, great experts and the expertise for this technology is definitely in this house. I also see around us that the many other companies are kind of getting up and saying, oh my gosh maybe microarrays is really the turning point here for this industry, but we have like a 10-year head start and five-year intensive research, I don’t see how anybody can copy that apart from all the IP protection. If that answers your question?

Brandon Couillard

That’s helpful, that’s very good, thank you. And then is there some technical hurdle that needs to be achieved that would prevent you from pushing the serological disease screening microarray into field trials prior to the first half of calendar 2019? And then how do you think about the adoption ramp in that context, would you expect labs to really wait to shift volumes over through the MosaiQ until that disease screening consumable is commercially available?

Franz Walt

Well, I think every microarray we are providing, be it the initial immunohematology microarray or the first serological disease screening assay, is an improvement over the work they’re doing now. But for me that’s also kind of testing the concept, proof of concept because everything has to work together from instrument to software to microarrays, the whole manufacturing ramp up, the whole infrastructure around it and then once we have this in the market we are enriching the content.

So I think, real kind of ground break is probably immunohematology will be the IH II, the second phase is already up and running. So we are extending the number of tests. We are basically adding an additional 13 tests in the second phase and for the SDS, I think the first one is also a smaller one and we would like also we here to prove to the world that it can work with infectious disease. And this will be a wake-up call for everybody and I’m very confident it will work with infectious disease.

So the first one, we will replace two tests, but then of course we are expanding, once we have it, we are just expanding the number of tests available and what we put on it depends very much on the requirement of the customers, what they need to get their job done. So yes, I have high confidence level and I think what is the limit for microarrays, you can think widely and assume everything that requires multiple results with one sample volume is kind of eligible for the microarray technology, be it either in transfusion diagnostics or beyond, in traditional diagnostics or even outside of human diagnostics.

And but I think we have to go step by step. First is blood grouping, next step is infectious disease, with the classical serological disease testing and we are doing right now feasibility studies already on molecular testing. So we have a lot of work, more work than hands and money and we go step by step.

Brandon Couillard

Very good, thank you.

Operator

Thank you. At this time, I will turn the floor back to management for closing remarks.

Franz Walt

All right, so thank you everybody for joining us on this call today and we look forward to updating you on the progress we expect to have made in our preparation for EU regulatory submission by the time of our first quarter fiscal 2019 conference call. Thank you all very much and have a good day, bye-bye.

Operator

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.

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