Quanterix Corp Q2 FY2022 Earnings Call

Hello, thank you for joining us. Welcome to the Quanterix Corporation Second Quarter 2022 Earnings Conference Call. Currently, all participants are in listen-only mode. After the presentation, there will be a question-and-answer session. I will now turn the conference over to your speaker today, Mike Doyle, the CFO. Please proceed.

Thanks very much. Good afternoon, everyone, and thanks for joining us today. With me on today's call is Masoud Toloue, President and Chief Executive Officer 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. To supplement the Company's financial statements presented on a GAAP basis, the company has provided certain pro-forma financial measures. Management uses these pro-forma measures to evaluate the company's operating performance in a manner that allows for meaningful period-to-period comparison and analysis of trends in its business. Management believes that such measures are important in comparing current results with other period results and are useful to investors and financial analysts and assessing the company's operating performance. The pro-forma financial information presented here should be considered in conjunction with and not as a substitute for the financial information presented in accordance with GAAP. Investors are encouraged to review the reconciliation of these pro-forma measures to the most directly comparable GAAP financial measures set forth in the appendix of this presentation. The risks and uncertainties that we face are described in our most recent filings with the Securities and Exchange Commission. With that, I will now turn the call over to Masoud.

Thank you, Mike. And good afternoon, everyone. We're at a unique and transitional moment both at Quanterix and in the broader life science industry. Never before have there been more measurable parameters to assess normal or disease processes in human health. Using new biometrics screening, imaging, genomics, and proteomics technologies, this industry is about being more lab parameters to discover and help make decisions related to the assessment, diagnosis, and treatment of disease. Perhaps even more importantly, industry participants are accelerating their understanding that a multi-marker approach and the data associated with them will provide better predictive indications of changes in protein state and expression. Quanterix sits in a key translational space in its continuum, where our ultra-sensitive detection of protein uniquely propels new discoveries and early indications of disease. Alzheimer's is one of those diseases where there is an early symptom-free phase that, if detected, could revolutionize the way we treat patients. An important step in this direction, last week we launched the first pTau-181 plasma laboratory-developed test for clinical diagnostics and research. This is an early move as we equip researchers and clinicians with new tools to provide insights into poorly understood pathologies and empower therapeutics companies with a growing menu of multiplex blood-based markers to advance brain health. Now, Quanterix is at a pivotal juncture where operations and the ability to scale have not kept up with growth and customer demand for our Simoa technology. This has manifested itself into quality challenges that will, in the near term, impair our growth rates. Costs to manufacture assays with current processes are not sustainable in the long term. Following our strategic review and top-down assessment of our operations, we announced a comprehensive plan that is imperative to fully realize the potential of Simoa while ensuring the company's technology is built and scaled with operational rigor and excellence. First, we have set in motion an assay redevelopment program with the objective of improving our ability to manufacture and deliver high-quality assays at scale. We anticipate making initial progress this year and expect to complete this program in 2023. Second, we have refocused and aligned our capital and resources along three go-forward principles: Quality, Innovation, and Positioning Quanterix to unlock the value of translational markets. We have initiated several decisive actions to reallocate resources and capital, eliminating projects and reducing spending on initiatives not related to assay redevelopment and innovative research. These adjustments will put us on a path to accelerate the return to strong growth and put us in a position to achieve positive cash flow. These actions will result in a reduction in force affecting approximately 130 employees across the company's worldwide operations. On to our Q2 results. We reported total revenues of $23.5 million, which represents a 7% decline year-over-year. Revenues were impacted due to a reduction in consumable revenue as we addressed assay quality challenges. As shown on Slide 3, consumable revenue declined year-over-year by 29%. As I discussed, we have initiated critical steps to realign our business so we can focus on improvements required to remediate these challenges. On a pro-forma basis, Q2 gross margin was 28.3% versus the prior year Q2 pro-forma gross margin of 47.5%. Our Q2 gross margin reflects the reallocation of resources, mainly headcounts for ongoing quality-related activities, as well as adjustments relating to shipping costs to our cost of goods sold. These increases in the cost of goods have a corresponding reduction in operating expenses, with no overall change to the company's total expenses. We believe the presentation of pro-forma gross margin provides visibility into the progress of our quality process initiatives and their improvement on a cost of quality. Forward-looking, we now expect total year '22 revenue to be flat compared to total year '21. On a longer-term basis, we expect to return to double-digit revenue growth in 2024 when the benefit of our restructuring and business realignment plan are fully realized, and we will accelerate at a faster pace once new growth categories are unlocked. The difficult but necessary changes to improve our operations and cost structure are far-reaching and will affect approximately 25% of our employees across the company worldwide. We regret the impact of these changes on our departing employees and would like to thank them for their contributions to our company. Moving forward from here, we're committed to executing to achieve our operational, market, and growth goals. We are dedicated to advancing our mission of transforming diagnostics of neurodegenerative diseases, biomarker research, and discovery. Today, we also announced that Kevin Hrusovsky has stepped down as our Company's Executive Chairman and is leaving our Board of Directors. As we move forward in the next phase of our company's evolution, this is also a natural point in the evolution of our Board structure. I would like to thank Kevin for all his efforts in helping Quanterix become a leader in our field. With Kevin's departure, the board has appointed Martin Madaus to serve as Independent Non-Executive Chairman of the Board. Martin is deeply familiar with our company and industry, and we look forward to working with him in his new role as we embark on the next phase of our journey. Now, I'll turn it over to Mike to discuss some more financial details.

Thanks, Masoud. I'm here to provide some additional financial details about our second quarter 2022 performance. And for your reference for those following on the call, please view Slide 3. As Masoud noted, our total revenue in the second quarter of 2022 was $23.5 million, a 7% decrease versus the second quarter of 2021 revenue. We had product revenue in the second quarter of $14.8 million, a decrease of 21% versus the second quarter of 2021. Within product revenue, consumables revenue was the biggest driver of the shortfall, declining by 29% versus the second quarter of 2021. As Masoud discussed, we had quality-related issues that we are addressing. Instruments declined by 4% versus the second quarter of 2021. While during this second quarter, we shipped 10 instruments for the value of $1.9 million to a new customer, which we did not record revenue due to the startup nature of the business. We will be recording this revenue when the cash is received. The second-quarter 2022 service revenue increased 51% versus the prior year second quarter to $8.5 million. Included within services revenue is $2.7 million recognized during the second quarter of 2022 from our collaboration with Eli Lilly announced during our Q4 2021 release. I'd now like to spend some time talking about gross margin for the business. During the second quarter, based on a deep-dive review of the business, we made a few changes in how we capture costs in our P&L this quarter. We've changed the cost allocation of three departments based on focused activity in quality and operations. In addition, we are capturing freight costs not billed to customers and recording them as operating expenses as a pro-forma adjustment to cost of goods sold. We've made these changes to give greater visibility into our quality activities and allow investors to better monitor our progress. First let me walk you through the impact of that change from the first quarter of this year to the second quarter of this year. If you look at Slides 5 and 6, we have revised gross margin and operating expenses from the first quarter GAAP to our second quarter pro-forma presentation. When you look at the gross margin change from our GAAP Q1 performance to our second quarter pro-forma, both the allocation change and freight expenses had corresponding operating expense decreases, which you can see on Slide 6. Of the gross margin decline of 21 percentage points from our first GAAP to our second quarter pro-forma, 16 of the 21 points relate to the allocation change and pro-forma freight adjustments. The remaining difference reflects volume and mix shortfall primarily due to the decline in consumable revenue mentioned previously, partially offset by the improvement in our excess and obsolete charge. The pro-forma operating expenses totaled $31.6 million in the second quarter of 2022, an increase of $5.9 million versus operating expenses in the second quarter of 2021. Major expense drivers were headcount increases, stock compensation expense, and increased lease expense related to the new facilities in Bedford, Massachusetts. We are considering our options including terminating leases or sub-leasing some or all of this space in order to reduce the drag on operating expenses. During the second quarter of 2022, our cash balance decreased by $13 million and our unrestricted cash balance was $361.3 million at June 30, 2022. Our basic weighted average shares outstanding for earnings per share totaled $36.9 million for the second quarter of 2022. Cash outflow from operations was $8 million during the quarter, driven by higher operating expenses primarily from headcount increases and CapEx, partially offset by tenant improvement rebates from our landlord-owned in the New Bedford facility. With approximately $10 per share in cash and no debt, our balance sheet remains in excellent shape, and we are well-positioned with adequate resources to pursue our strategic objectives. The difficult decision we made with our restructuring announced today will reduce expenses on an annualized basis by approximately $25 million, excluding the impact of our leased facilities in Bedford, Massachusetts. These adjustments aim to offset the reduction in revenue guidance and allow us to continue to strategically invest going forward. The changes we have made in how we show our financial results will provide greater visibility to investors in the future and will allow you to observe our progress towards improved quality and scalability. With that, I'll turn it back to Masoud.

Thank you, Mike. Before we go into questions, I want to summarize a few important points. First, the market opportunity in neurodegenerative research and the demand for ultra-sensitive tools for early biomarker detection has never been stronger. From grant agency spending to clinical enrollment in drug and late-stage trials, we expect continued growth in this category. Second, we have shown through our over 1,800 publications that Simoa technology is a robust and critical element in advancing discovery and accelerating drug approvals from research to post-market clinical studies. Similar blood-based testing can enable non-invasive, cost-effective identification of patients more likely to benefit from disease-modifying therapy, accelerating trial enrollment and increasing profitability of approval. There is no mistaking that we do have some challenges; both we’ve sized and understood them and have a comprehensive operational plan to address them. This plan will improve our quality and manufacturability of our assays, along with scaling and improving our cost structure in preparation to accomplish our translational goals. It's the single greatest priority of the company and we have aligned our resources around it. At the conclusion of this transformation, success will be profitably capturing a larger share of the proteomics market, innovating, and growing at a much faster pace than before, thereby placing us in a leading position to propel new discoveries and advance neurodegenerative disease research and diagnostics. We can now open the line for questions. Operator?

Thank you. Our first question comes from Puneet Souda with SVB Leerink. You may proceed.

Yes. Hi Masoud, thank you for the question. So, first one is really, can you talk a little bit about the quality challenges and just walk us through that? Why was this not detected or identified earlier? And also, help us understand sort of what the ongoing impact is to how much is it to the clinical trial side of the business versus the academic side of the business? Help us to just understand what exactly happened on the quality side of consumables?

Alright, Puneet. Thanks for the question. So, on the consumer quality side, as you can see from some of the charts that we provided, we have a high cost of quality for our assays, which involves our manufacturing process, product stability, and the associated costs, which include rework, scrap, and our distribution costs. The level of rework required to center our products around quality is something that cannot be sustained in the future. That's why we're launching this redevelopment program for our assays to ensure we have sustainable growth. Regarding clinical customers, we've done a lot of work piloting some redevelopment efforts in our Accelerator Lab. The work done in our Accelerator Lab includes several initiatives around quality. From that perspective, many of our clinical customers and the work we're doing in the Accelerator benefit from that. That being said, it will be a significant effort, which is why we've reduced our guidance for the year.

Okay. And then, on the guidance part, what gives you confidence in this flat year-over-year guide? As you said, 25% of the employees are being laid off. I wanted to understand what gives you confidence given that this obviously causes disruption within the workforce, morale, and such. So, there could be a further impact on that and just walk us through what gives you confidence on the flat number for the year?

Yes, that's a good question regarding guidance. We believe first of all, there's no decrease in demand. I would say that demand for Simoa products and our ultra-sensitive detection is unmatched, and our customers need the ability to measure these proteins at low levels. So, that’s a strong positive. Secondly, with the high growth we had, we have to take a step back on developing some of the products and assays to ensure we are consistent in that growth in the future. We focused this reduction in force around two key areas: one, the focus on quality and this redevelopment program; and two, around innovation. From a focus and resource perspective, we haven't reduced anything there. We've put all our effort into those areas. We think this new focus will help from a cost and focusing perspective.

And just last one from me. Does this impact your agreement with Eli Lilly or other previous commitments that you have with pharma companies, including previous agreements with Abbott, BARDA, and other government agencies? I just wanted to understand if any of those are impacted at this point?

None of those that you mentioned are impacted. We don’t expect any impacts to the collaborations we have or that we've announced. We don’t anticipate any impact to them at all.

Okay, alright. Thank you.

Thanks, Puneet.

Thank you. Our next question comes from Max Masucci with Cowen. You may proceed.

Hey, thanks for taking the questions. We've been longtime supporters of Quanterix and the company's mission. This will be a bit more blunt with the questions. I guess just to start, what triggered this strategic review of the business? It sounds like manufacturing scale was one area of focus. But can you explain the other items that were on the short list of key findings from this strategic review, whether it’s quantitative actions, competitive positioning in the proteomics ecosystem, or anything else?

Hi Max, thanks for the question. First of all, I think with me coming on board, it’s natural to conduct a strategic review of the operating model. Anyone new coming into the business will take a look at how we want to allocate our resources and capital. When we did this strategic review, it was clear, as you can observe from some of our charts, that our cost to deliver product to customers is significant. We do a lot of rework, scrap, and have high distribution costs. That is not sustainable for the future as we look for profitable growth. That’s the first point. Secondly, this is an incredible time where there are several trials and a lot of research and diagnostics being done, with a few therapeutics in the market to be launched in the next couple of years. It was a great time to take a top-down review of the business and shape it to meet the strong demand we anticipate going forward. I hope this provides color on why we performed the review and why the focus is on our operations.

Okay, got it. And as a company with a relatively mature installed base compared to specialty tools peers, consumable revenue has run nicely for years. Still, there's a long way for growth even in research and biopharma end markets. One would assume that you might be able to break through to cash flow breakeven with volume leverage, but it doesn’t sound like that's the case after the strategic review. Quanterix underwent a major transformation nearly 10 years ago and has proven the technology's utility in biopharma and research markets up to now, with a strategic entry into diagnostics. I’m not clear if the strategy moving forward is more diagnostics focused, or how you're prioritizing that.

The way we think about this is that all of our revenue today comes from the research and translational market around academia, pharma, and our CROs. That's for the discovery of a new biomarker or translating that biomarker into the clinic or during a clinical trial. So, that's the majority of our revenues, and we want to ensure that we can sustain that base moving forward. That being said, as these markers are transitioning into the pharmaceutical space, we see their utility in a diagnostic setting. Our view is that we want to offer tests in a diagnostic context in our LDT laboratory. We announced our first pTau-181 test for this purpose. However, we do not anticipate significant volumes or demand for that until a therapy is on the market. It’s important to begin taking small steps in diagnostics, and we believe there will be larger steps in the future, but right now we want to focus our efforts on the translational space that Quanterix excels in.

One comment regarding cash flow: when we conducted the deep-dive, one of the highlighted aspects was the cost of quality that Masoud addressed and the ongoing need for resources and expenses associated with product rework and getting it to market. This will delay us from reaching cash flow breakeven. We believe this was a necessary next step, considering how we manage our internal forecasts and ensuring the best route towards achieving cash flow breakeven.

Okay, got it. Final one: with over $300 million in cash and the reduction in the size of the organization, there has been a comment made about your desire to gain access to technologies that can improve your multiplex capabilities. Generally speaking, with your strong balance sheet, how should we think about prioritizing these investments along with M&A and other activities?

Our clear focus today is to ensure scalability. The demand and opportunity we see in the market for Simoa is our top priority. The more we can scale and get these products to customers who need them, the more critical that focus is. The second area is continuing our innovation around higher sensitivity, which is essential for our company, and we have some very interesting projects we're developing that we hope to share in the future. That's where we are putting our resources. We have the cash balance to prioritize these two areas, and while we’re open to any opportunities that enhance them, we wouldn’t pursue anything that might distract us from those goals.

Thank you. Our next question comes from Matt Sykes with Goldman Sachs. You may proceed.

Hey guys, this is Dave on for Matt. Can you provide any additional color on how instrument growth has been trending and what you expect going forward?

Hey, Dave. Instrument growth, I think when you look at the placement activity I mentioned, we didn’t build for it. Instrument growth has been consistent, similar to Q1 and similar to Q4 in the prior year. The placement activity from an instrument standpoint was positive, and so we are not seeing challenges there at this point.

Thank you. Our next question comes from Kyle Mikson with Canaccord. You may proceed.

Thank you. Hi, everyone. This is Alex on for Kyle Mikson. So just a question on competition. LabCorp’s NFL blood-based test facilitates the detection and verification of size. There’s also the Siemens, our CRM NFL assay which achieved BDD in March of 2022. Can you highlight the differentiation of your cell tests versus these competitors? Is it mostly like a sensitivity or value proposition?

Hey, Alex, your line was breaking up. We heard the second part about the Siemens NFL test and didn't catch the first part of your question. But just to address the Siemens test, when we look at our test, RNFL, there are two important points. First, we have the largest number of publications around neurofilament light, compared to any other company or provider of that platform. This publication record is incredibly strong. We spoke about a substantial normative study around NFL, which provides valuable baselines based on weight and BMI across thousands of subjects. So, the extensive data makes NFL incredibly useful to Simoa users. Ultimately, from a sensitivity perspective, it’s a combination of a great antibody and the Simoa technology that pairs to give you the best results. We support Siemens in their initiative and talked about them being our partners. So, we promote the use of Simoa and our NFL product.

Apologies for the miscommunication on my end. So that's a great answer. My first question was actually about LabCorp and how they launched an NFL blood-based test in mid-July.

Yes, we saw that from LabCorp. I think that's a great testament to the growing interest in a marker for brain health. It's an excellent indicator that there's an appetite in the market. Brain health is among the most complex and costly areas to diagnose pathology or disease, and this initiative is a big plus. We applaud that and hope to see more companies undertaking testing with NFL.

Excellent. Thank you for providing me with more color on that. And one additional question before I hop off. I noticed that one of your goals for 2022 includes achieving BDD for the pTau-181 test, as well as clinical trials for pTau-181 and other AD biomarkers. I was curious if you could provide any more data on that.

Your line was breaking up again, but I believe I understood your question. To provide an update: we received our pTau-181 breakthrough designation last year and our NFL breakthrough designation this year, and those initiatives are ongoing. The significant change recently was the launch of our first pTau-181 laboratory-developed test, which serves as an aid in diagnostics. We see that as a crucial development because it will be available through our Accelerator Laboratory soon. Additionally, it provides a great sandbox for us to engage with pharma and CROs interested in LDT tests. Being the first in the market with the most sensitive platform is a promising path for future work. We don't anticipate significant revenue generation from diagnostics just yet, but paving the way with this milestone is crucial for us.

Thanks very much.

Thank you, Alex.

Thank you, and I’m not showing any further questions. At this time, I would now like to turn the call back over to Mr. Toloue for any further remarks.

So, thank you for participating today. We look forward to speaking with you on our next quarterly call.

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