Quanterix Corp Q1 FY2022 Earnings Call

Good day, and thank you for joining us. Welcome to the Quanterix Corporation Q1 2022 Earnings Conference Call. Currently, all participants are on mute. After the presentation, there will be a session for questions and answers. I would now like to turn the call over to your speaker today, Mike Doyle, Quanterix CFO.

Good morning, everyone, and thanks for joining us today. With me on today's call is Masoud Toloue, President and CEO of Quanterix. 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. With that, I will turn the call over to Masoud.

Thanks, Mike and good morning. Before we start, I'd like to thank Kevin and the Board for their support in this new chapter at Quanterix. Kevin's dedication and passion for this company and its impact on health care goals are shared. I look forward to working with him, the Board, our employees and customers. Since I joined Quanterix last year and transitioned to this new role, two weeks ago, what has been very clear to me is that our ultra-sensitive single molecule array Simoa technology is being used every day to see, detect and measure proteins in a way that's unparalleled. But it's how we effectively deploy this technology that counts. This includes unlocking new biomarkers, playing a key role in breakthrough research, and ultimately developing tests that will have a significant impact on the human condition. Last quarter, we reported total revenues of $29.6 million, which represents a 9% growth year-over-year. And as previously stated, we are on track to achieve revenues between $122 million and $134 million with higher growth rates in the back half of the year. Our growth was driven by strong performance in our consumables segment, which grew 28% year-over-year. Excluding our 2022 Lilly collaboration, that growth was partially offset by instrument and accelerator decline, driven by strong demand in 2021 for pandemic testing in our laboratories. We realized the benefits of our collaboration with Eli Lilly, which is a partnership that Quanterix has been working towards for several years and provided $2.7 million in revenue during the quarter. As a reminder, this multifaceted agreement provides Quanterix access to Lilly's P-tau217 antibody technology for near-term Simoa based research products and services and future in vitro diagnostic applications. It also establishes a framework for collaboration that we expect will drive continued growth as well as revolutionize the diagnosis and treatment of Alzheimer's disease. Our adjusted gross margin of 49.3% declined by approximately 1,000 basis points compared to last year. As part of our transformation and scale with a quality focus, we are implementing several new processes, one of which is around inventory management, which did have an impact on margins this quarter. These new process changes will be an important foundation for future performance. Operating expenses were approximately $32.7 million compared to $26.1 million in Q1 2021, due to personnel increases and lab expansion to take on several new projects. In terms of cash, we spent approximately $22.1 million to support our operations and additional factors that Mike will discuss. Looking at our revenue growth by geography, we continue to have a very strong presence in North America where we grew 18%. Our year-over-year growth in Asia was driven primarily by lack of activity in 2021 due to COVID and a reduction in the EU was due to strong prior-year COVID-related demands for pandemic testing in our labs. We maintained a roughly even split between revenue earned from pharma CRO clients and academic clients during the first quarter. Publication pull-through continues to grow. Our Simoa technology was highlighted in a record 151 new publications in the first quarter of 2022, bringing total Simoa specific inclusions to over 1,700 since its inception in 2006. 82% of our first quarter revenue stemmed from neuro related offerings, up 77% compared to the prior year period, driven by strong adoption of Quanterix's neuro capabilities, strong demand for our pTau-181 and neuro multiplex assays. Now, I'd like to spend some time highlighting a few of our exciting operational and business developments that we announced this quarter. Starting with the receipt of our breakthrough designation from the FDA for our Simoa Neurofilament Light Chain or NFL plasma test, which follows our announcement last year for the same designation on our pTau-181 test. Using our technology, researchers from Basel were able to quantitatively measure NFL and human serum and plasma, which when used in conjunction with clinical imaging helped to identify relapsing-remitting multiple sclerosis patients who were at risk of relapse within four years. This could, therefore, be useful in tailoring the therapeutic approach to more effectively treat the disease. If approved, the Simoa NFL test could help the community by offering a more effective detection method. It is really important to achieve this, but I want to caution that developing these IBD tests takes time and we don't expect any near-term revenue impacts from regulated products. One of the limitations of the NFL biomarker test was establishing a baseline that corrected for age and body mass; as people age their NFL levels increase. This study looked at over 10,000 samples from over 5,000 subjects to establish a baseline and give us a better understanding of NFL and identifying individuals with brain health concerns. The data rates established by this study was published in the Lancet and is an important milestone for our Simoa NFL test. Quanterix’s Simoa technology also enabled the completion of multiple other high-profile studies, the results of which were published during the quarter. Through a recent study from the Harvard School of Public Health, Simoa technology was instrumental in detecting NFL protein at ultra-levels to reveal a high prevalence of Epstein-Barr Virus associated with MS. This evidence suggests that EBV is the leading cause of MS, a truly revolutionary finding for the entire MS community. We're thrilled Simoa was a key part of this discovery. Now, I'm going to turn it over to Mike to discuss some more financial details. Mike?

Thanks, Masoud. I'm going to provide some additional financial details about our first quarter 2022 performance. And for your reference, for those following on the call, it will be Slide number 8. As Masoud noted, our total revenue in the first quarter of 2022 was $29.6 million, a 9% increase versus the first quarter of 2021 revenue, which included approximately $2.3 million from our non-recurring and now completed RADx awards. We had product revenue in the first quarter of $20.7 million, an increase of 13% versus the first quarter of 2021. Within product revenue, consumables revenue once again had solid growth increasing 28% in the first quarter versus the prior year, driven by our strong demand for pTau-181 and our neuro multiplex assays. First quarter 2022 service revenue increased 37% versus the prior year first quarter to $8.8 million, included within services revenue is $2.7 million recognized during the first quarter of 2022 from our collaboration with Eli Lilly announced during our Q4 2021 release. We feel comfortable that customers’ activity has returned to pre-COVID levels. However, the potential spread of new variants could force renewed lockdowns. In addition, global uncertainty with rising inflation and the war in Ukraine, continues to have the potential to impact our performance. Our Q1 2022 gross margin was 49.3% compared to 60.1% in the first quarter of 2021. There are a few factors that drove this change. Our recent growth has highlighted inefficiencies in our inventory management processes and the response we made a change in the way we estimate and reserve for excess and obsolete product. This change looks at 12 months of activity versus three months and should result in a more accurate assessment of the E&O reserves. The initial impact of this change materially affected our results for this quarter. Due to higher inventory balances, we also instituted a longer early quarter shutdown in Q1 of 2022 as compared to quarter one of 2021 to perform our annual physical inventory count, which impacted productivity. We've made a number of process changes to how we manage inventory that will allow us to scale with quality and improve margins going forward. Our operating expenses totaled $32.7 million in the first quarter of 2022, an increase of $6.6 million versus operating expenses in the first quarter of 2021. Major expense drivers were volume related activity, personnel increases, outside services and laboratory expansion as we scale the organization and invest in process improvements. During the first quarter of 2022, our cash balance decreased by $22.1 million, ending with an unrestricted cash balance of $374.3 million at March 31, 2022, and basic weighted average shares outstanding for EPS totaled 36.9 million for the first quarter 2022 period. Cash outflow from operations was $22.1 million, driven by higher operating expenses, primarily driven by headcount increases, timing of vendor payments and CapEx. With $10 per share in cash and no debt, our balance sheet is in excellent shape and we're well positioned with adequate resources to pursue our strategic objectives. Overall, we're pleased with the first quarter performance and the progress made on our strategic priorities and remain committed to delivering solid remainder of the year 2022 results in line with expectations. With that, I'll turn it back to Masoud.

Thanks, Mike. Now, before we open up the line for questions, I want to recap where Quanterix is today and talk about where I see the company headed in the future. Looking ahead to the rest of fiscal 2022, we want to be clear that we're focused on three primary areas. Starting with scale with quality. As we enter a new chapter and realize the full potential of our platform, we're keenly focused on scaling our products and services to meet increasing demand. I want to send a message that we want the best operations people and scientists to join our existing group of extraordinarily talented individuals, and organizing around these incredible people and executing our new model are going to be critical for us. Second, in the biomarker space, it's clear that we are on the front lines of innovation. Key drivers behind this innovation are our people, the feedback we receive through our deep relationships with customers and researchers. Quanterix is rooted in a deep heritage of scientific breakthrough, and we believe it’s early innings for us. We announced the release of our 100x sensitivity in our accelerator by the end of this year, and we expect to provide for the first time pTau-217 on the Simoa platform in the same timeframe. We will pursue both organic and inorganic investments as we enter this new chapter. Finally, we're focusing on the translation of research biomarkers to those that are being used in clinical testing and ultimately diagnostics. We're validating both pTau-181 and then NFL in our CLIA lab and look forward to making these tests available in the near future. Simoa is uniquely positioned to detect biomarkers early and play a differentiated role in this continuum. Let's open up the lines for questions. Operator?

Thank you. Our first question comes from Max Masucci of Cowen and Company. Please proceed.

Hi. Thanks for taking the questions. First one, last week, the FDA approved the first IBD test used in the detection of Alzheimer's disease. It's the CSF based test and that earned approval through the breakthrough device designation pathway. Masoud, it would be great to hear your thoughts on the CSF based test approval, whether you've had any recent dialogue with the FDA related to your breakthrough device designation for pTau-181 and Serum Neurofilament Light and whether you would expect a similar timeline in terms of how quickly your two tests could advance through the breakthrough device designation pathway.

Hi, Max. Thanks for the question. So the way we look at this is that on our breakthrough designation on the NFL test, we just received that this quarter, and we're very excited about that and being able to measure NFL and what it's going to do for relapsing-remitting MS patients. We heard about the test, the CSF test. Obviously, we had the 181 breakthrough designation last year for Alzheimer's. And I think when you look at measuring whether it's 181 or NFL the best screen is probably going to be ultimately in blood. And so, CSF is great for us because it now serves as a marker that we can measure to as opposed to a PET. So, we're very happy that it was approved, but we think that the plasma blood screen will be the final ultimate perfect screen for the market.

Okay. Great. And then Masoud, can you give us any sense of how your conversations and interactions with Alzheimer's drug developers and regulatory authorities have changed in the past month since the final NCD sort of beta amyloid antibodies. It's been about a month now. And just, if you've seen any changes in the behavior in your customer base over the past month?

I think the - obviously, the NCD came out and there's a lot more interest now to do more testing and more trials with our 181, our 217 and a lot of the other antibodies, A beta 40, 42. And clearly, there are a few other shots on goal for Alzheimer's, with a few other pharma companies. Now, what is consistent is that more work has to be done in the field. And when those people are doing that work, they're using our tools and our technology. So, it's been positive for us, with a lot more interest in doing more testing and examination of different types of biomarkers. From a regulatory standpoint, we don't see any major difference here. We talk about our single-site IBD breakthrough designations with the FDA. At the same time, we also announced, at the beginning of this year, that we're also looking at some LDTs to our CLIA laboratory. And so, that is the first step and then single-site IBD as a second step in the future.

Great. Final quick one for Mike. We've seen a number of companies in our coverage chart out their path to profitability. It would just be great to get a sense for how you're thinking about the revenue level that would be required for Quanterix to crossover into cash flow breakeven or any other details around how you're thinking about the path to profitability?

Thank you for the question, Max. We previously mentioned that our RUO business is projected to reach cash flow breakeven in the fourth quarter of this year or early next year, and our position on this remains unchanged. While we haven't specified a revenue target, our goal is to maintain our revenues and achieve our historic growth rate of 30% to 40%. Although this isn't the guidance we provided for this year, we plan to emerge from this year and accelerate our growth into next year, aiming to return to that range. We will likely offer more details on this in a future call.

Great. Thanks for taking the questions.

Thanks, Max.

Thanks, Max.

Thank you. Our next question comes from Kyle Mikson of Canaccord. Please proceed.

Thanks. Hey, Masoud and Mike. Thanks for the questions. I wanted to start with the financials. So on the soft gross margin, recognizing that 49% is not well below like what I would think Quanterix kind of could be in the near-term like at mid-50s, high-50s kind of business, but I just want to understand that if there are any kind of number one supply chain issues, I heard, Mike, your kind of explanation there in the remarks, but just supply chain is pretty topical to understand that. And then the accelerated gross margin dynamics, I mean, what could margins be a scale for that business versus maybe typical consumables. I know I think it's stronger I believe but Louis was in there. Of course, I was just curious about that? And then maybe Mike or Masoud, can you just comment on like next quarter, how should kind of think about this going forward in the near term for gross margins? Thanks.

Yeah. Hey, Kyle. Thanks for the question. I will start and then I will have Mike chime in on parts of your second question. So, I think the key thing for us, Kyle, is that we’re trying to scale with quality and trying to organize our ability to deliver products to customers. And as we do that, we mentioned some specific changes to our inventory quality process, the way our mix changes as we get new demand from our customers. So, part of that was a gross margin effect that we view as a low point, but we see us improving that gross margin with a lot of these process initiatives that we plan on implementing.

To pick up on the quarter, we made some significant changes. Our focus has been on scaling with quality, and we've taken a close look at how we manage our inventory. This led to an increase in excess and obsolete inventory, resulting in a record charge. We also adjusted our methodology and reserve estimates going forward to better reflect current conditions. By shifting our perspective from a three-month to a 12-month historical view, we had to increase our reserve initially. While this change will not happen again, we remain dedicated to scaling effectively while maintaining quality. I believe this business has a mid-50s margin and we are committed to working our way back to that level.

All right. Perfect.

With respect to Accelerator, we have Lilly involved, and the advantage of this partnership is that we are starting to effectively utilize our Accelerator lab. Consequently, we expect to see significant improvements in margins year-over-year as the year moves forward. While we haven't set a specific margin goal for Accelerator, we have mentioned in the past that our consumables business yields the highest margins, and over time, Accelerator should approach that at scale.

Okay. That was great. Thanks so much for that. And then just looking at revenues ratification by disease type or I guess application. Oncology applications grew 31% year-over-year. Last quarter, that was flat. I know this includes immunology inflammation, but could you guys just walk through like what's driving the growth, if it's sustainable, because it's obviously exciting given neurology clearly remained strong, but oncology is an interesting application for you guys.

Yeah. Thanks, Kyle. I think from a high macro view obviously, neurology was a big pick up for us as well. On the neurology side, we see a lot of increasing demand from our customers. On the oncology side, there were a few key publications that came out. And mainly, as you said on the immunology side, and that continues to be an area that's growing, especially from the academic standpoint. So, I would say probably our biggest impact though has been on neurology.

Okay. Actually on that note, so you received funding from the Alzheimer's Drug Discovery Foundation to accelerate this multi-analyte test. I'm just wondering, it's incremental to your other testing you've mentioned for Alzheimer's and other diseases. What's kind of like the end game, and how many workshops annual do you want to really have here with this type of test? And what's the kind of path forward with this, in particular, obviously was interesting, I just wanted to kind of ask about that.

Yeah. Hey, Kyle. The way we look at this market is everything you've seen up to us on the FDA filings or even what we've mentioned as an LDT; those are all single analyte tests. And we think they're going to be very important in triaging and screening. And then when you start to look towards, hey, what's a test that's going to be able to replace in the future imaging or supplant more invasive method. We think that's going to be a multi-analyte test that's anywhere between three and four or five analytes, and so with this funding and this collaboration that we're doing with UMC, we're going to be developing an algorithm along with those multi-analytes for a diagnostic test that actually replaces some of these more invasive methods. So, that's the basic idea. So, a little bit different from what we're offering today or what we've announced.

All right. Great. If I could just ask a final question, great to see the guidance being reaffirmed today, but clearly, it kind of implies an acceleration in the second half of the year or at least kind of going forward, beating the second quarter. Could you guys talk about what's going to drive that second half performance? Is there any kind of pharma contribution baked in there or something like that? Just curious about that.

Yeah. I'll take that. And then Mike might have some additional color. Our view is that it's definitely back end loaded for terms of our revenue. If you look at how we performed this quarter and we maintain on track till the end of the year. And I think you hit it on the head, it's exactly our pharma partnerships collaborations, a big part of that obviously is that big announcements with Lilly and then follow-ons from Lilly, the ability to offer new antibodies on the neuro side and this being a very active area of research, testing, and clinical testing in neurology is really going to drive that back half.

I want to add that, as we mentioned during our fourth quarter call, we have a lot happening as we start the year, particularly with our new Chief Commercial Officer who is building his team. These developments will benefit us in the second half as we ramp up and focus on resolving other processes that will allow us to scale and maintain quality. This is part of our plans for the first half of the year, and I believe that as we move past these initial challenges, we will be able to accelerate our progress in the second half.

All right. Great. Thanks so much guys.

Thanks, Kyle.

Thanks, Kyle.

Thank you. Our next question comes from Matt Sykes of Goldman Sachs. Please proceed.

Hi. Good morning. Thanks for the questions, Masoud and Mike. Maybe I could just start out on the OpEx side. You guys, I think it was the third quarter of last year, you talked about increasing OpEx growth this year. Are you still kind of inline with where you see OpEx growth over the course of this year, or how should we think about the cadence in terms of OpEx as we move through '22 and maybe into '23?

I think we're in line. We're down a bit versus the fourth quarter. I think that Masoud has taken a hard look at where we sit right now and I think from a resource standpoint, I think we're in a good place. I mean, we said we were going to staff to begin to get our arms around of the opportunities we had in front of us. So, I think from here on, Matt, you should see quarter-over-quarter probably a little bit more consistency. I don't expect that we're going to have a big jump up this year in OpEx.

Got it. Thank you for that. And then in terms of segments revenues. I think you've talked in the past about this being probably a higher growth year for consumables and maybe Accelerator, less so for instruments. But as you think about maybe instruments versus consumables, how should we think about that mix in terms of growth over the course of the year?

Yes. I can take that one, Matt. So, the view that we have is that obviously the instruments that we have in the field, they're increasing utilization. And as a result, we see that driving our consumable increase in the quarter. And we also are thinking of this as Accelerator when we see a lot of demand in the field. The fastest way to get an answer on biomarkers is to send a sample or send a test to our Accelerator. And so, we see that growing in the year, especially towards the back half of 2022. So between consumables and Accelerator that's where we see a lot of attention. I think instruments can be a little bit quarterly, but that instrument drive is going to continue, but consumables and Accelerator expect probably the strongest drivers in the quarter and in the year.

Some color on instruments, Matt, because I know you focus on that. Our placement activity has been remarkably consistent in terms of what we add on a net basis, what we saw this quarter was a higher mix of SRx versus HDx. So, that impacts you have that revenue mix impacts these HDx is our highest priced machine. So, we had a little bit of a mix issue going on when you look at the activity in quarter, even though our overall net placement is consistent with what it was in Q4. It's just more of a mix towards SRx.

Got it. Great. And then Mike, just one last one for you on this inventory management that you put in place in Q1. It sounds like the reserving and the process you put in place is more of a one-time event in terms of Q1. So we should expect gross margins are trying to upwards as you talked about earlier in the call, but just maybe help me understand about sort of the one-time nature of these process improvements? Is it sort of isolated to Q1 and move forward or should we be thinking about these types of adjustments as you move through the year? Just want to understand how that works.

It's a good question, Matt. There are two main factors affecting our gross margin activity. One is the high amount of product we obsoleted this quarter, which we have closely examined. The second factor relates to our Q4 activities, where we revised our reserve estimates from a three-month look back to a 12-month look back. The initial adjustment to increase the reserve this quarter is more of a one-time event, while the obsolete product issue may persist, and we need to focus on managing our inventory better to reduce future obsolescence. Both Masoud and I believe that our margins will improve moving forward, although there may be some bumps along the way. We are focused on expanding margins from this point onwards.

Got it. Thanks, Mike and Masoud. Appreciate it.

Thanks, Matt.

Thank you, Matt.

Thank you. Our next question comes from Puneet Souda of SVB Securities. Please proceed.

Hi, Masoud, and thank you for taking my question. First, could you provide more details about HDx? What is the current penetration for those products, and who is looking for this product compared to SRx? You mentioned that SRx performed better this quarter. Can you clarify why HDx struggled this quarter? Was it mainly due to inventory issues, input factors, or something else? Additionally, as we look towards 2022 and 2023, how should we view instrument placements? Quanterix has had strong placements previously, but with the evolution of clinical trials, how should we assess the core business of instrument placements in the long term? Thank you.

Hey, Puneet. So, I think that the instrument story hasn't changed significantly. I mean, we've got some variation in the quarter. Obviously, there are high throughput customers who use HDx and that hasn't changed. It's still the preferred instrument for high throughput from our CRO customers and the SRx still comments or comment in academia and low throughput users. So, that hasn't changed. But what has changed, and it's an interesting view is that, as there's new breakthroughs, as we have access to new technology, we announced 217, how can you get your samples and tested with that biomarker as fast as possible, and that's through our Accelerator Laboratory. And so, you see our accelerator growing faster this year based on some news in the market, some of the Alzheimer's drug shots on goal that we expect to see over the next year and just demand for some of the new biomarkers that we announced. So, that's a little bit of a mix shift towards accelerator and consumables, but no significant events or changes on our instruments. We expect that to continue.

Okay. That's great. On the product side, your performance was below our expectations. Can you clarify where you are seeing momentum, especially considering the large NFL study? As a result, you're maintaining your guidance, which makes the second half appear steeper than before. Can you provide more insight into where you expect the most momentum? We would appreciate a more detailed description of the guidance itself, so we can understand which segments are likely to experience the most acceleration compared to others.

We believe the back end increase will continue to come from our Accelerator and pharmaceutical customers. We anticipate that the biomarkers in highest demand, such as our NFL test, 181, and 217, will lead to a significant increase in the third and fourth quarters, while we maintain our guidance. The NFL study you mentioned was very promising for us. NFL is one of our top-selling biomarkers, and together with Simoa, it allows for ultra-sensitivity. A key aspect of that study was the establishment of a normal serum NFL level, highlighting that these levels increase with age and higher BMI. This study not only established a baseline by examining over 10,000 samples and 5,000 subjects but also created a normal or normative range. This information is crucial not just for multiple sclerosis but also opens a database to the public, enhancing the versatility of NFL as a research tool. We're very enthusiastic about the results of this large Basel study, which we believe will benefit the biomarker and aid in assessing disease activity.

Okay. And then just last one. Do you think any changes on the competitive landscape. Overall, with respect to Alzheimer's diagnostics, obviously, this is an exciting field. So, it seems that there is significant interest. I'm just wondering, given the capabilities you have, the 217 and the NFL, other NFL being your own capability. I mean, just overall, are you seeing sort of changes in the competitive landscape? Obviously, it's good that you have breakthrough designation on some of these products, but just wanted to get a sense from you as to how you see the rest of the market evolving around you.

Yeah. So, the one thing I would emphasize is that it's pretty hard to measure phosphorylated tau in blood at the sensitivity required for some of the pre-cognitive disorders, including Alzheimer's. And you think about Quanterix as pTau-181, for example, our LOD for our 181 test is 0.03 picomoles per mL and that's two orders of magnitude better in local sensitivity than other pTau out there. So, I think that we have a two orders of magnitude delta between us and some of our competitors, especially around pTau-181, and if you're going to test it in blood that context is one of the more sensitive products in the market. So, I think that remains CSF. We obviously have tests for CSF, you need less sensitivity and some good news, some positive news in the market around tests that the FDA has cleared for CSF measurement, which is more invasive. We are very excited about that news, because that's also a good step in the direction for just this research in general and we can compare to more invasive tests. So overall, I think the dynamic is interesting. You see a lot of activity. We're excited to participate in it.

Okay. Thanks, guys.

Thanks, Puneet.

Thank you. I would now like to turn the conference back to Masoud Toloue for closing remarks.

When I joined Quanterix, the situation was straightforward, and I believe it’s the same for every new employee. On average, there are one to two peer-reviewed research findings each day that utilize our technology. Even more impressively, Simoa is facilitating new discoveries daily. This quarter, we highlighted the connection between Epstein-Barr and MS, a breakthrough that could lead to increased focus and intervention for this challenging disease. As customer demand for such research grows, we must make this technology more accessible; Simoa should reach more users. Therefore, one of our main priorities will involve implementing several organizational changes to ensure we can scale while maintaining quality. This initiative starts with a new operational model, skilled team members, and strong ties to our user community. We are in the early stages of this journey and look forward to updating you on our progress in future calls.

This concludes today's conference call. Thank you for participating and you may now disconnect.