Quanterix Corp Q3 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Quanterix Corporation Q3 2021 Earnings Conference Call. I would now like to turn the call over to Quanterix's Chief Financial Officer, Michael Doyle. Please go ahead.

Thanks very much. Good afternoon, everyone, and thanks for joining us today. With me on today's call is Kevin Hrusovsky, our Chairman and CEO. Before we begin, I would like to remind you about a few things. The 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 that we face are described in our most recent filings with the Securities and Exchange Commission. During today's conference call, we will discuss some financial measures that are not presented in accordance with U.S. Generally Accepted Accounting Principles or non-GAAP financial measures. In the Q3 earnings release and in the appendix of our presentation, which are available on our website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations 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, Mike. On slide three, you see the agenda. I'm going to talk about our accelerated growth opportunity and also what I consider to be some of the transformation around utilizing our Simoa franchise to enable therapeutic drugs. Mike will then do some financial results summaries. And I'll then close the meeting with an update to the objectives that I updated after our last earnings call, so that you could see some of the advances that we're working toward between now and year-end. So to start, we showed this slide last time, blood-based biomarkers are fast becoming a gold standard for traditional Abeta PET imaging. The biomarker has become a buzzword as a way to help evidence efficacy and also evidence, in some cases, safety. So I'd like to start off on slide five by showcasing the fact that we received at a record pace, a breakthrough device designation from the FDA for our pTau-181, blood-based assay, which will be utilized primarily with other modes of diagnostics, including imaging to help triage patients as the intent for this application that we've been given the breakthrough designation, which gives us a priority with the FDA. There also were some really important publications, namely in the Lancet, the Simoa diagnostic accuracy data were published. Also pTau-217, which is a next-generation of phosphorylated tau that we're also working on, Lilly showcase that they used it in Trailblazer 2, and they have also been given an accelerated pathway for their drug. They actually showed that it correlates pTau-217, both with the images, the PET images as well as clinical benefit, which is a pretty significant advance. On the financial results, on a non-GAAP basis, we grew at nearly 50%. Year-to-date, we've been growing actually a little greater than 60% on a non-GAAP basis. Basically, the difference between GAAP and non-GAAP is removing all of the one-time items from GAAP to give us the non-GAAP. In 2021, our utilization of consumables has actually been increasing fairly. We have been running at least the 60% level, which is significantly beyond our expectations going into the year. And we do have $411 million of cash balance at the end of Q3. Our value creation chain reaction has really been kicked off by utilizing biomarkers and trials and then getting them validated particularly for Alzheimer trials. And then the utility being an opportunity for us to transition over into diagnostics where there's a need for scalable blood-based testing of Alzheimer's to be able to really, at a full scale level, be able to move patients into the drug and then monitor drug performance. And this is an area of opportunity. We also, interestingly, were able to get very good progress on our EUAs in the COVID landscape. We really got to know the FDA pretty well by being able to get an asymptomatic reading on COVID saliva test for the Delta variant for antigen. This is a pretty significant breakthrough. And there also have been a couple of major webinars that further reference especially the University of Emory showcasing how they deploy four of our HD-Xs and measured over 120,000 saliva points for COVID. So this is the kind of advance that we are continuing to try to pursue. When you look at our financials on slide six, you can see that we had the 46% growth, very good movement on the non-GAAP basis. And what's also really impressive is the product growth, both instruments and consumables in Q3. Consumables, particularly almost 100% growth. Lab services, which we had projected would be down this year compared to at least last year, we had very significant one-time events of COVID. We knew for the full year, we would probably be about the same level of lab services as 2020. But on a two-year CAGR from '19 to '21, we are continuing to progress at an 18% level. So we are still seeing nice growth. Overall, I would say the RADx and the Abbott licenses, both from last year and then this year, having RADx, those being removed from our GAAP performance to create non-GAAP allows you to see the real growth of 46% in Q3. On a margin basis, on slide six, you can see that our Q3 delivered almost 55% gross margin, up from 51.5% last year. On a year-to-date, same type of performance. Interestingly, consumables is actually over 100% growth and instruments is over 70% growth. Lab services is basically flat with last year for the first three quarters of the year. But on a CAGR basis, it's up 24%, the two-year CAGR from '19 to '21. You can see that our gross margins for the three quarters have gone from 48.4%, up to 56%. When you look at the demographics on slide eight, you'll see that geography, we continue to be very strong in North America, but also evolving very nicely in Europe and Asia. Primarily, we see a lot of our position increasing in pharma CROs, but we continue to get a lot of publication pull-through through our academics. We've had very strong growth in academics so far in the last 12 months as well. In neurology, we're up over 100% in the last 12 months. This is really the area that we're honed in on. You can also see in consumables over the last 12 months, we're up nearly 100%, accelerated down slightly over that 12-month period, primarily due to the one-time effect in the previous year. Instruments, greater than 50%, which is a very strong indicator for future consumable pull-through growth. On slide nine, you can see that the publications, which is the way we validate third-party validation of our technology continue to accelerate, and we're nearly 1,500 third-party peer-reviewed publications now, and we have over 650 instruments installed around the world. You can see in the accelerator that we do know our growth this year is not going to be like the last 12 months due to COVID. Still have up to 160 Phase I/II/III trials that have been run in our laboratory. On slide 10, I'd just like to showcase that we started out in research. We moved very productively into antigen serology for COVID and research. Then we've utilized the technologies that we've got for COVID in creating the diagnostics, that's how we got the two EUAs, one for serology, one for antigen. We're now taking those advances we showcased at Emory, working with the NIH, which gave us $20 million to scale up given our capabilities. We're now moving that down into Alzheimer's, where we got the breakthrough designation for phosphorylated tau. You can also see in slide 13 that we continue to have really strong growth catalysts in our research business. This breakthrough designation for pTau-181 is causing many customers who want to utilize our technology for their drug trials, given our access and our direction moving into the clinic. This has also further represented the drug trials being revitalized using biomarkers given the success of ADUHELM being approved by the FDA. We're pretty excited that the whole industry is now revitalized on Alzheimer's trials, and that puts a lot of pressure on us scaling our company and also making sure the HD-X is ready for clinical use, expanding our accelerator, and we think Alzheimer's even earlier before cognitive impairment is benefited by the 100 times. So you'll see that we would be planning to accelerate a lot of our investments to really bring these four items into a very sharp focus of opportunity in '22 and '23. You'll see us making additional OpEx investments particularly around these four items in fourth quarter in 2022. On the right-hand side, you can see that this diagnostic where we do believe the TAM is about 10 times the size of the research TAM. We're seeing mounting evidence of these plasma phosphorylated tau biomarkers for Alzheimer's creating a significant opportunity on the diagnostic side. We see a lot more value and potential with greater risk. If we can get an Alzheimer plasma test into the market via the breakthrough designation, it represents a way to triage, screen, and diagnostically improve scaling and monitoring of patients with Alzheimer's with our biomarkers. For that reason, we're accelerating our LDT footprint in our accelerator and believe that we will be able to run LDT and you'll see later slide in 2022 at the latest. Payer leapfrog for health screens, we think, is a big growth catalyst longer term for our diagnostics business opportunity. Slide 11 has shown over the years that by increasing the sensitivity, it's a significant opportunity to take the IVD proteins today that are measured. There's about 200 of them—collecting about $25 billion, almost all being after patients have symptoms. By moving earlier before symptoms and creating multiplex for greater disease specificity, we think we can move the number of IVD proteins over the next 20 years from 200 proteins to as many as 1,000, significantly ramping up the opportunity for diagnostics of protein measurement. To do that non-invasively in blood, saliva, and urine, we think creates a chance to revolutionize healthcare. We believe that this will be fueled by the research products, where today, there are 1,300 proteins under analysis. With a lot of new entrants into the industry, there is a chance to significantly ramp up the number of proteins tested from a research standpoint. Slide 16 and 17 show that the sensitivity is what really enables neuro and cancer's ability to see disease before symptoms present and to do it non-invasively in blood, saliva, and urine. Our goal would be to truly get utility from this technology in a diagnostic setting with non-invasive, sometimes home care sampling for testing. It’s very non-invasive for infectious diseases that might plague society, if you can get home care testing and/or at least sampling and then disease before symptoms, it has a profound effect on the overall opportunity. Slide 19 shows that traditionally, the diagnostic industry is $30 billion in revenue roughly, and the pharma industry is more like $300 billion, 10 times the size. Many of the pharma and diagnostics have a lot of research on antibodies and proteins that lead to these incredible two markets for Life Sciences. We're showing the brain in all the different biomarkers that we can now see in blood, with some of them actually multiplexing and advancing the field for both diagnostic and pharmaceuticals. We think there’s a whole new category of neurodiagnostic therapies, which is about getting the therapy into the patient before symptoms. The earlier you can get these diagnostics to teach you when a patient has the pathology, you can then deploy the drug got to do it safer and with greater efficacy. That’s a lot of what we see drug companies are attempting to achieve with our technologies. On slide 20, you can see that the TAM, over on the left-hand side, when it's simply a research biomarker for Alzheimer's, is really only like $0.5 billion for the drug trials. We do have the probability, we think, of significantly increasing the probability of a drug getting approved by using these biomarkers for earlier phase disease. In the center, you can see one of the game-changing publications that showed you could create correlations by measuring in blood our biomarkers with what was used to see in a spinal tap sample result as well as a PET image or an MRI. That breakthrough correlation, we believe, has allowed a much less invasive high-throughput approach to move into utility and diagnostics, which we think the TAM might be as much as $11 billion versus the original $0.5 billion. We are focused on trying to capture 10% of those TAMs someday. On slide 21, Lilly has received the accelerated pathway for their drug, utilizing our technologies as they've stated in their press releases. We're excited to see if we can continue to evolve. Slide 22 just shows the area under the curve for our phosphorylated pTau-181, where we got the breakthrough designation. Third-party peer view publications show that the area under the curve is roughly 80% if it's before cognitive impairment, but it's as high as 90% after cognitive impairment starts. We want to continue advancing our sensitivity. On slide 23, there's different biomarkers that can measure disease pathology sometimes as early as 10 to 15 years before. The earlier you can see this pathology, the better chance these drugs can be approved using these biomarkers, as well as longer-term moving patients into these drugs utilizing these same biomarkers. On slide 24, today, there are 55 million people that have Alzheimer's with dementia, projected by 2050 to be 152 million, three times the level. If you assume that 10% of the world has access to diagnostics, and those that actually get diagnosed with Alzheimer's would utilize our technology four times a year to ensure that the biomarkers are progressing, it suggests that the TAM could be as large as $7.5 billion today, and someday, as large as $22.5 billion with the emergence of greater levels of aging and population around the world. On slide 25, our overall approach is to start with an LDT, which we feel conservatively is by the end of 2023, and we see an opportunity for Alzheimer testing using pTau-181 and/or even beyond that in a multiplex for even greater specificity. We think there's an investment of $10 million to $15 million to achieve that. To get a single-site IVD or a laboratory IVD, which has FDA approval for dual source reimbursement of Medicare with regulatory approval, we believe it's more like $40 million to $60 million, and we feel by 2024 this is achievable if we can continue advancing the way we are. Ultimately, we think distributed IVD would be beneficial for the Alzheimer landscape. We already have relationships with Abbott and Siemens. This may be done via partnership, but we could require as much as $100 million to achieve those TAMs. Partnering could further derisk and accelerate our ability to get into the diagnostic landscape. Initially, it's triage but ultimately it's screens. We’re making these advances and would like to increase our investment, given that the certainty has been improved. What we don't know right now, from a clinical perspective, is how neurologists want to utilize the test, which would need to maximize sensitivity or would rule in, saying that for certain this patient has Alzheimer's, which would require maximum specificity. We think both of these are achievable with different cutoffs. Finally, we planned to file for MS' breakthrough designation sometime in 2022, so that remains our goal for the second half. With that, Mike, I'll turn it back over to you for some financial review.

That's great. Thanks, Kevin. I'm going to provide some additional financial details about our third quarter 2021 performance. For your reference for those following on the call, it will be slide 27. As Kevin noted, our GAAP revenues in the third quarter of 2021 was $27.7 million and included $1 million of revenue from our RADx awards. Excluding this nonrecurring item, our non-GAAP third quarter 2021 revenue was $26.7 million, a 46% increase versus the prior year third quarter non-GAAP revenue. We had record product revenue in the third quarter of $20.7 million, an increase of 77% versus third quarter 2020. Within product revenue, consumables revenue grew 98% in the third quarter versus the prior year third quarter to a record of $14.2 million, driven by our strong demand for pTau-181 and our neuro multiplex assays. Like Q2, our revenue performance in Q3 may include some recovery of previously deferred demand due to the pandemic as customers return to more normal operations. Service revenue decreased 10% in the third quarter to $5.9 million. 2020 was a strong year for services revenue. We knew for the full year, we would probably be about the same level of lab services as 2020. But on a two-year CAGR from '19 to '21, we’re continuing to progress at an 18% level. Year-to-date, total revenues were $80.3 million. Excluding revenue from our nonrecurring RADx awards, non-GAAP year-to-date total revenues were $76 million, a 61% increase over the year-to-date 2020 non-GAAP revenue. We are not providing revenue guidance. Customer activity has returned to pre-COVID levels. However, a potential renewed spread of new variants could force renewed lockdowns and potentially impact installations and utilization. On a GAAP basis, our Q3 gross margin was 55.1% compared to 67.2% in the third quarter of 2020. Our third quarter 2020 gross margin was positively impacted by a one-time license fee of $10 million from Abbott. Our non-GAAP gross margin was 54.8% in the third quarter, which is an approximate 330 basis point improvement compared to non-GAAP gross margin of 51.5% in the same quarter of last year. Non-GAAP gross margin was 56.1% for the year-to-date 2021 period and is an approximate 770 basis points improvement from non-GAAP gross margin in the same period of 2020. Our non-GAAP gross margin excludes the impact of our RADx awards and non-cash acquisition-related purchase accounting adjustments relating to our 2019 acquisition, thus providing investors with relevant period-to-period comparison of our operations. Gross margin expansion has been driven by volume, particularly in consumables, productivity gains, and pricing. Our GAAP operating expenses totaled $30.5 million in the third quarter of 2021. Non-GAAP operating expenses, which primarily exclude nonrecurring expenses associated with RADx grant revenue totaled $30 million for the third quarter of 2021, an increase of $12.5 million versus non-GAAP operating expenses in the third quarter of 2020. Major expense drivers were volume-related activity, accelerated laboratory expansion expenses, and operational scale expenses. During the third quarter of 2021, our cash balance decreased by $19.8 million driven by our scaling efforts and debt repayment. Ending unrestricted cash balance was $410.7 million at September 30, 2021, and basic weighted average shares outstanding for EPS totaled 36.5 million for the third quarter 2021 period. Overall, we're pleased with our third quarter '21 performance and progress made on our strategic priorities, and remain committed to delivering solid 2021 results in line with expectations. With that, I'll turn it back to Kevin.

Thank you very much. I appreciate that very much, Mike. I want to close before questions with slide 28 that just updates the objectives given the advances that we've had this year on so many different levels, whether it be the COVID EUAs or the pTau-181 breakthrough designation. You can see under neurology, we updated this to achieve the 181 as well as to file the Nf-L MS breakthrough device designation. This was an objective to submit it going into the year. Because of COVID, we actually said that this would be delayed. We were able to submit the Nf-L MS breakthrough device designation. This can take a year or two, particularly given that this isn't the primary area of focus, but we have, in fact, been able to make that application submission. In the area of COVID, we got the expansion of label claims for our objectives, and we were able to achieve that. The one area that we are deferring in order to accommodate our efforts in neurology and COVID is immunology. We are slowing down some investments to stay prioritized around the increased opportunity surrounding ADUHELM, donanemab, and other Alzheimer's drugs now in trials. Immunology will pick back up in the later years. But for the moment, we decided that it's better to stay highly focused on neurology and COVID. We want to accelerate our diagnostic investments and the 100 times OpEx investments. We think getting to probably more of an OpEx around $121 million for 2021 is reasonable. For next year, we probably will be looking to increase our OpEx by 25%, somewhere to around 30% of where we were in 2021. We are committed to staying efficient but want sufficient investment for the strategic optionality around these trials to advance our opportunity ahead. Finally, the 100 times goal is to increase that opportunity to get to disease even earlier, which is very important for the future. So with that, we'll turn it over for questions.

Our first question comes from Kyle Mikson from Canaccord Genuity. Your line is open.

Thank you. Hi, it's Alex. This is Alex on the line for Kyle Mikson. Great quarter, guys, really impressive results. I have one quick question about your COVID offerings. More specifically, I was just curious if you could quantify what kind of revenue you were looking at for your COVID offerings over the quarter? I have two others after that, if that's okay.

Yes. I would say that I would not put a lot of emphasis on our COVID growth. There are kind of two comments there. There's the research side where we have seen good momentum that we think will be sustainable going forward because we believe infectious disease will continue to be an area that the NIH and others will be studying. We have our technology now in Anthony Fauci's lab, and our technology is being analyzed for different drugs for COVID and other infectious diseases. So we do believe that the research side has shown nice growth, but we also believe that's going to be sustainable moving into the future. On the diagnostics side, we haven't seen a significant advance for our own diagnostic revenues. It takes time to get established in that landscape. From our vantage point, we don't believe the diagnostic revenues for COVID will be a long-term sustainable area for growth focus. We believe it's more important to focus on research and Alzheimer's diagnostics.

That was extremely helpful. I had one other sort of high-level question. I was just curious if you could provide an update on the competitive landscape of what you're looking at right now and I guess going into 2022 as well.

Absolutely. The competitive landscape depends on the magnitude of opportunity you're searching for and trying to influence. At the highest level, we would look at imaging as the primary competitor to a lot of what we do with biomarkers, meaning today, there’s an opportunity to use imaging to see in the brain and observe plaque and other brain atrophy. We look at what we’re doing as a greater systemic opportunity to give less invasive neurology advancements in pathology. Imaging is often viewed as competition, but we think for the next five years, it's complementary as there will be much triaging. Imaging is the gold standard for neurology today, and we’d like to think of us as increasing the scalability of imaging. Longer term, we may become more competitive than complementary. In diagnostics, we’re not really in there yet. Roche, Abbott, Siemens are productive companies with distributed IVD. We see LabCorp, Quest, and Mayo as partners as they are evolving. They mostly all have our technology and could run trials, which could lead to providing diagnostics to patients. Again, we see them as partners. The third way to look at this is in translational research, where we are pioneering without a lot of direct competition, but we respect companies doing great work identifying proteins that may lead to the pipeline. So we think those companies are complementary, but they could move downstream.

Thank you.

Your next question comes from the line of Matt Sykes from Goldman Sachs. Your line is open.

Hey guys, this is Dave on for Matt. It looks like revenue and gross margin came in strong in the quarter, but SG&A was a little heavier than what we were expecting. Could you tell us a little bit more about what went into that?

Yes, absolutely, Dave, and thanks for the question. We're in a scenario where you might recall, we started to build a diagnostics organization that kicked off about four or five months ago when we brought in the leader from Perkin Elmer, who's heading up our diagnostics. This is an area that we believe has a significant opportunity for the future for investors and for the growth of our company. We've taken the advances of the COVID franchise with the FDA and payers to advance our overall diagnostic capability. We have about 10 individuals in the diagnostics group. If you look at our Accelerator business that we see as a laboratory developed test center, there are probably another 15 individuals that we've been able to pull into this diagnostic landscape. We're now making investments on the diagnostics side given that breakthrough device designation advances that probably have happened at breakneck speed. We didn't expect ADUHELM to get approved so quickly, which has revitalized the entire Alzheimer pipeline, ultimately needing to find ways to obtain payment and scale diagnostics for Alzheimer's. The payers are showing interest in technologies to better diagnose and monitor whether a drug is performing. Because of these viable opportunities, we are investing aggressively in the diagnostics side of our business as we build this out and are surprisingly getting quicker returns than expected. That’s the reason op-ex is up. We feel confident investing in this opportunity for long-term returns.

Got it. That's helpful. On the pTau breakthrough designation, any additional color you could share on how you think about the timeline with the FDA there?

Yes. I would caution investors to take a cautious posture when it comes to the diagnostic landscape, particularly due to regulatory challenges. It's uncommon to receive breakthrough designation 55 days after submitting an application. So this was somewhat unprecedented. I wouldn't expect that pace moving forward since it requires delicate proofs of the area under the curve to advance utility. We would anticipate that it may take a couple of years for a breakthrough designation to turn into 510 approval. I cannot overstate the speed in which the FDA may act, given it is very busy with COVID-related priorities. We did go ahead and submit the Nf-L MS application as well. Again, I wouldn't expect fast action there, but we are pushing forward for our LDT approach over the next 12 to 18 months for pTau-181 that won't require FDA approval.

Got it. That's helpful. Thank you.

Our pleasure.

And that concludes our question-and-answer session. I will turn the call back to Quanterix Chairman and CEO, Mr. Kevin Hrusovsky, for closing remarks.

Thank you very much. We've received a lot of inbounds indicating that these were remarkable results, and we've made significant strategic advancements. However, I want to emphasize that our employee base consists of some of the most dedicated individuals I've worked with in my career, working tirelessly around the clock throughout the pandemic to make advancements in our company on multiple levels. I also have a Board of Directors that's among the best I've experienced throughout my 25 years as a CEO. We'll continue to work towards our greater purpose to materially impact Alzheimer's over the next years and see lethal diseases earlier and less invasively. Thank you for your support, and we look forward to discussing year-end results with you. Thank you very much.

And that concludes today’s conference call. Thank you for participating. You may now disconnect.