Quanterix Corp Q1 FY2021 Earnings Call

Hello, and welcome to the Quanterix Corporation First Quarter 2021 Earnings Conference. My name is Michelle and I will be the operator for today's call. At this time, all participants are in a listen-only mode. I will now turn the call over to Amol Chaubal, Quanterix' CFO. Sir, you may begin.

Thank you, Michelle. Good afternoon, everyone, and thanks for joining us today. With me on today's call is Kevin Hrusovsky, our Chairman and CEO; and Shawn Stetson, our Corporate Controller. Before we begin, I would like to remind you of a few things. Today's call will be recorded and will be available on the Investor Resources section of our website. Today's call will contain forward-looking statements that are based on management's beliefs and assumptions and on information available as of the date of this call. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. The risks and uncertainties we face are described in our most recent filings with the Securities and Exchange Commission. During today's conference call, we'll discuss some financial measures that are not presented in accordance with US Generally Accepted Accounting Principles, or non-GAAP financial measures. In the Q1 earnings release and in the appendix of our presentation, which are available on our website, you will find additional disclosures regarding the non-GAAP measures, including a reconciliation of these measures to comparative GAAP measures. We believe that these non-GAAP financial measures provide investors with relevant period-to-period comparisons of our operations. These financial measures are not recognized under GAAP and should not be considered in isolation or as a substitute for a measure of financial performance prepared in accordance with GAAP. With that, I will turn the call over to Kevin.

Thank you very much, Amol. And we're very excited about our Q1 performance. I’ll start off with an agenda on Slide 3, basically going to talk about our accelerated growth, numerous growth catalysts for the remainder of this year and next year, as well as the scaling potential that we feel we have, along with the strategy that we're evolving. We'll then talk through financial results and growth, particularly the growth margin and capital. Finally, we'll spend some time discussing our 2021 objectives. So on Slide 4, you can see we had 58% non-GAAP growth year-on-year, which we felt was an incredibly productive quarter. Certainly, some catch-up here from the COVID crisis. I would say that most of this growth, 80% of it, was due to just primary recovery of the markets that we're serving. Maybe 20% of it could be viewed as catch-up, but still very robust for us, and on a GAAP basis, that was 73% growth. That GAAP includes some of the RADx NIH funding that was declared as revenue in Q1. You can also see that we had a very strong Instrument quarter, 86% on a non-GAAP basis for revenue and 86% for Consumables. These two are our primary product dimensions of our business. The lab services had modest growth, and we expected that this year would be somewhat flat versus last year, where we had nearly 100% growth due to a surge in COVID demand for our services as well as many of the HDx being validated. So we did expect this year to be rather flat on Services compared to the previous year for that reason. You'll also see that we had a 1000 basis point improvement, primarily due to volume which creates good momentum and dilution of fixed costs when the volume kicks in, particularly for Consumables. On Slide 5, you can see in addition here, our two focus areas in Q1 were COVID and neuro, and we got two antigen EUAs and submitted some appendixes and addendums for other sample matrices. We also got our serology EUA. We see that there was great progress in diagnostics based on the NIH and FDA relationships as well as relationships with some payer groups that further build out the opportunity for diagnostics in the long-term through the COVID pivot that we did in the second half of last year. We also launched a really effective antigen test called the Advantage Assay for COVID that is now actually being deployed across 2 or 3 different drug trials. NIH is running a major 10-arm trial utilizing our antigen viral test to see which drugs perform against COVID, both for acute COVID as well as long-hauler COVID. We also had numerous consumable catalysts primarily in the neuro linkage to COVID, where we had NfL with loss of taste and smell, coupled with advances on LDTs for COVID being a key research growth area, as well as the long-hauler drug trials I mentioned. We launched pTau-181 at the end of last year, which allows you to see dementia prior to symptoms and also stratify Lewy Bodies in frontal temporal dementia to enhance trial cohorts. We had record revenue for Instruments at $7 million, and consumer utilization surpassed pre-COVID levels, which was key for our advancement. We also announced the WuXi joint venture in China, which holds a lot of opportunity. Under the leadership of our COO, Will Geist, we've continued our progress in scaling Quanterix. We also added Laurie Olson, formerly at Pfizer, to our Board, who has been a strong player in the strategy group for many years. We raised over $0.25 billion in cash this quarter, further enhancing our balance sheet. You can see on Slide 6 that the number of publications continues to expand, validating our technology, with over 400 biomarkers now being measured, mostly in immune and oncology, and 108 in neurology representing a major portion of our business today and over the next five years. Instrument placements continue robustly, with over 40 instruments placed in Q1. We now see 139 Phase I, II, III drug trials running inside our accelerator. On Slide 7, over the last 12 months, our North America growth has been strongest at 40%, now representing 62%. We have a lot of opportunity in Asia, where we had some pullback due to COVID, but it's a major area of expansion for us over the next several years. Customers remain primarily pharmaceutical and CROs, now growing at 23%. Neurology continues to dominate and should dominate for the next several years due to the strength of opportunity. We have now almost approached 45% of our revenue from consumables with a growth rate of 27%. Expecting a CAGR from 30% to 40% over the next few years as we bring more value to our customers through our technology. We see several other companies now evolving drug trials and this is an important strategy for us. We announced record revenue for Instruments at $7 million, and consumer utilization was above pre-COVID levels, surpassing the 50% mark. We also announced the WuXi joint venture over in China, which we feel holds a lot of opportunity. We've continued our progress with scaling operations, scaling Quanterix under the leadership of our new COO, Will Geist, who's been doing a fabulous job with the rest of the team over the past six months. We also added Laurie Olson, who formerly worked at Pfizer, to our Board, and she has been a strong player in strategy and corporate governance for Pfizer for many years under Ian Read. Additionally, we raised over $0.25 billion in cash in the quarter, further enhancing our balance sheet. Our publications continue to expand, and that's a lot of the validation for our technology, with now over 400 biomarkers measured, primarily in immune and oncology; and the 108 biomarkers we have in neurology represent a major portion of our business today and over the next five years. Instrument placements remain very robust, with over 40 instruments placed in Q1. To summarize, we are very bullish about our position in the market and continuing to leverage these growth catalysts.

Thanks, Kevin. It's been an incredible learning experience for me under your leadership. I'm very proud of what we've achieved here at Quanterix. I'll be providing some additional financial details about our Q1 2021 performance. I'll be referring to Slide 29. As Kevin noted, GAAP revenue in Q1 2021 was $27.2 million and included $2.3 million of revenue from our RADx awards. Excluding this nonrecurring item, our non-GAAP Q1 2021 revenue was $24.9 million, reflecting a 58% increase from prior-year Q1. We had record Instrument revenue in Q1 2021 at $7 million, an increase of 86% compared to prior-year Q1. Consumables revenue grew 86% in Q1 versus prior year to $11.3 million, driven by significant demand for pTau-181, neuro multiplex assays, and COVID RUO assays. Our strong revenue performance in Q1 may include some recovery of demand deferred during the pandemic as customers returned to more normal operations. Service revenue increased 11% in Q1 to $6.4 million and was somewhat limited due to resources and supply diverted to support our strong consumables demand. As stated previously, we are not providing revenue guidance. Customer activity has returned to pre-COVID levels; however, a potential renewed spread of new coronavirus strains could force renewed lockdowns, potentially impacting installations and utilization. On a GAAP basis, our Q1 gross margin was 60.1%, favorably impacted by our RADx grant revenue versus prior year GAAP revenue margin of 43.3%. Our non-GAAP gross margin was 58.5% in Q1, which was an approximate 1,000 basis points improvement compared to 48.5% in the same quarter of 2020. Our non-GAAP gross margin excludes the impact of our RADx awards as well as noncash acquisition-related purchase accounting adjustments related to our 2019 acquisition of Uman, thus providing investors with relevant period-to-period comparison of our operations. Gross margin expansion was driven by volume, productivity gains, and pricing, demonstrating significant opportunity for gross margin expansion in the future as we evolve the mix towards high-margin consumables and accelerator services, scale our overall business, and reduced product costs. Our GAAP operating expenses totaled $26.1 million in Q1 2021, with non-GAAP operating expenses totaling $24.4 million, excluding nonrecurring expenses associated with RADx grant revenue. In Q1 2021, our cash balance increased by $261.5 million driven by $269.7 million in net proceeds from our public offering in February. Cash usage in Q1 2021 was $8.2 million, with an ending unrestricted cash balance of $442.7 million. Basic weighted average shares outstanding for EPS totaled 34.4 million for the Q1 2021 period. Overall, we are pleased with our Q1 2021 performance and progress made on our strategic priorities and remain committed to delivering solid 2021 results in line with expectations. With that, I will turn it back to Kevin.

Thank you very much, Amol. I just want to close with our objective slide, where we show RUO growth from 2019 to 2024, projecting a compounded annual growth rate of 30% to 40%. We are looking to increase our trial penetration in neurology to greater than 10%, with 65% of our HDx installed base at year-end 2021; which means the HD ones will be a much lesser component of our future mix, with HDx having greater pull-through and higher consumable growth opportunity. We also plan to advance the NfL diagnostic LDT plus AD pharmaceutical drug trials, leverage Antigen & Serology EUA penetration, and capitalize on the scale-up provided through the RADx funding. Financially, we aim to place 240 HDx’, SRx’, and SPx’ this year, with 60% of those installations expected to be HDx, which is our most profitable instrument with the highest pull-through. Lastly, we will continue scaling our supply and global channels while defining pathways to deploy this increased sensitivity through partnerships. We are opening the lines for questions, and I’d like to ask the operator to take it from here.

Thank you, sir. The first question I have in the queue comes from Tycho Peterson.

This is Casey on for Tycho. I guess the first one is around COVID contribution for Q1. Can you just quantify what the antigen and antibody tests contributed to the quarter? And then also on the research side for COVID between research being done on long COVID and the ongoing drug trials, any sort of way you could quantify the COVID contribution here this quarter and moving forward?

I'll start, and Amol, you can provide additional clarity or Shawn. We don't provide a lot of granularity, but I would say that the COVID revenue for Q1 is less than 10% of our revenue. Primarily, we are seeing it in research supporting LDT research as well as some of the drug trials we mentioned. It was not a significant component of Q1, nor was it much in 2020. The only exception is if you go from non-GAAP to GAAP, you will find we had a little over $2 million of NIH funding that would have been COVID related. Any additional color, either Amol or Shawn?

As Kevin noted, right, the revenue from the EUA COVID approval has been minimal. The major revenue comes from RUO assays, as we see new dimensionality added to our technology. We're excited about the level of adoption we've seen in leading research institutions like NIH, which continue to work with our technology on long-haulers and that could provide long-term applications for this technology. But again, for the quarter, most of it was research assays used in LDT or research settings.

Can you talk to any progress made by Siemens and Abbott from respective partnerships? What are the next steps and timelines for milestone payments?

Good question, Casey. We remain very bullish on both Siemens and Abbott. We've seen Siemens continuing to evolve the NfL, which we believe will add value over the next 12 months as they develop it for their installed base. In the case of Abbott, their use of our Simoa license will take time due to necessary engineering advancements. You can't simply reengineer their installed technology; it requires specific components. Therefore, we don't expect significant advances from Abbott in 2021, unlike Siemens.

Can you elaborate on any progress on signing liquid biopsy partnerships? Also, how should we think about the Lilly Alzheimer drug data disclosed in March? What does that mean for Quanterix?

We already have two companies, Freenome and Volition, using our technology in liquid biopsy, aiming to see proteins sensitively and with lower limit quantitation. The proteins in the Thrive algorithms could enrich their algorithms as our technology delivers lower detection limits than Luminex. However, drug companies are less interested in utilizing companion diagnostics in oncology compared to neurology because it's often restrictive. That’s where our collaboration with drug companies in neurology is significantly beneficial. Regarding Lilly, they remain one of our most strategic customers, and we've seen strong interest in anti-tau technologies correlating blood plasma utility with imaging and CSF. These breakthroughs could change the economics of drug trials, enabling the recruitment of patients pre-symptomatically. We are well-positioned to support drug trials and potentially develop blood plasma diagnostics for health screenings once a drug receives approval.

Kevin, Amol, thanks for taking my questions and congrats again, Amol. Kevin, could you update us on your oncology market efforts? Growth there has lagged behind neurology, but Simoa seems uniquely positioned in that market. Also, can you comment on the potential catalyst for oncology growth given the launch of a 10-plex assay?

COVID caused many oncology labs to shut down and turned into COVID labs due to the rise in cytokine storms—resulting in a shift in lab focus. Now that we’re transitioning back, we believe that our oncology growth will recover in the second half of 2021 and into 2022, as we’re aiming to gain traction with our 10-plex assay. It is important to capitalize on the strong opportunities in neurology and COVID operationally before diversifying into oncology. We’re confident that after capturing the momentum in these areas, we will see a resurgence in oncology growth. We have seen increased investor interest, which allowed us to boost our balance sheet for better downturn protection and explore strategic M&A assets. We look for opportunities that enhance our strategy rather than opportunistic M&A. We see potential in laboratory accelerator services and for developing higher value-assays and antibodies, which we believe could advance our diagnostic capabilities. Our strong balance sheet enables us to invite in newer investors, enhancing our pipeline and opportunities for our technology.

I heard that the catch-up dynamic contributed 20% to revenue growth this quarter. Did that primarily impact the Instrument business, or did it benefit Consumables and Services as well?

In general, there’s some level of catch-up due to customers depleting their stocks during COVID. We estimate that 15% to 20% of Q1 growth can be attributed to this. While Instrument demand showed strong performance—a peak we haven't seen in years—consumables demonstrate more rapid growth due to an installed base's utilization and increasing menu expansions. That’s where we see the most compelling growth moving forward.

With the vaccine rollout, could you describe which antibody testing projects are seeing the most traction? Are they for serial testing, vaccine effectiveness, or something else?

We see traction across various fronts. Our serology tests enable the quantitation of antibody levels, and we're one of the few that can quantify. We've initiated a focused effort on developing a diagnostic franchise and enhancing our serology capabilities in collaboration with NIH and others for quantitation and neutralization studies. We understand the importance of neutralizing antibodies and their durability post-vaccination—making our specialization in quantitation essential as we prepare to address emerging variants.

Given the global nature of your customer base, do you expect the demand catch-up to be drawn out over 2021? What can you tell us about the split between new customer wins versus utilization increases from existing users?

We believe in the continued rebound of research activity and customer operations. The return to normalcy in many regions and the reopening of states in the U.S. will allow notable growth of activity across our accelerator. We anticipate enhancing our customer relationships and increasing consumable sales. In Q1, many Instrument sales came from new customers, reflecting the 'double-pronged' opportunity from both new customer acquisition and expanded utilization from existing users. This is a strong sign of growth potential going forward.

Kevin, congratulations on the quarter, and Amol, congrats on your new role. Regarding neurology, as you're seeing increasing involvement in trials, how do you view long-term diagnostic opportunities if and when those drugs are approved?

We are preparing for the diagnostic opportunity in Alzheimer’s due to our relationships with pharma that want to evolve our blood plasma markers into health screens and managing residual disease. Our strategy involves developing a multiplex diagnostic that includes NfL and pTau markers. Our payer relationships also contribute significantly, revealing potential increases in patients with precognitive impairment, thus advancing shared goals with drug companies, giving all parties an incentive to utilize diagnostics post-approval. The CROs we've partnered with have seen strong utilization, and we anticipate even stronger relationships going forward to bolster our accelerator revenue. We appreciate your investment in Quanterix and your understanding of our story. We are focused on delivering transformative technologies for early disease detection across neurodegeneration, COVID, and eventually oncology. Thank you all for today's call.

Thank you, ladies and gentlemen. This will now conclude today's teleconference. Thank you for participating. You may now disconnect.