Quanterix Corp Q3 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the Quanterix Corporation's Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Michael Doyle, CFO. Please go ahead.

Thank you very much. Good afternoon 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. 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 in 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 their most directly comparable GAAP financial measures set forth in the appendix of this presentation and in the earnings release issued earlier today. With that, I will turn the call over to Masoud.

Thank you, Mike. Good afternoon. Before we begin the discussion of our results, I'd like to take a few minutes and provide a brief overview of our strategic realignment and its progress. As we shared in our last earnings call, Quanterix is at a pivotal juncture where our ability to scale with quality hasn't kept up with customer demand for our Simoa technology. So last August, we announced a comprehensive plan to improve the company's quality and operations. In addition, last quarter, we made a number of changes to the way we report gross margin that we feel better reflect our current cost of quality and will provide much better visibility into the progress of the assay remediation program we recently launched. Starting with that program, one quarter in, I'm pleased to say we are on track. The first phase was heavily focused on evaluation of rating components to streamline across assays for improved manufacturability and reduction in variability. This will help with lot-to-lot performance issues we were experiencing, ultimately leading to improved gross margin. We also executed on our restructuring plan, which reset focus on our three principal objectives shared in August: number one, quality, innovation and positioning Quanterix to unlock the value of translational markets. As anticipated, with initial efforts, we saw a 700 basis points of gross margin improvement with a Q3 '22 pro forma gross margin of 35% versus 28.3% in Q2 2022. We expect continued improvement as we enter the next phases of our redevelopment program and we'll keep you updated on its progress. Moving on to the third quarter performance. We delivered $26.6 million in total revenue, a 4% decline versus the third quarter prior year but a sequential increase of 13% versus prior quarter when our quality and scaling efforts began. We continue to manage demand while addressing quality and expect revenues to improve as process improvements are implemented over the next several quarters. Increased demand for services offered in our Accelerator Lab continue to partially offset considerable decline, and have been an important lever as we balance that demand. As our redevelopment program progresses, we continue to strengthen our leading position in ultra-sensitivity space, particularly in neurology. Our Simoa technology has been key to showing pTau-217 to be one of the most prominent biomarkers being present at neurological clinical studies, recently demonstrated at AAIC in July. Simoa non-invasive and cost-effective blood-based testing can enable identification of patients more likely to benefit from disease modifying therapy, accelerating trial enrollment, and increasing probability of approval. Our publications continue to grow, providing evidence of the industry's reliance on our ultra-sensitive technology for breakthrough discovery in research and clinical applications. In the third quarter of '22, we added 159 publications bringing total Simoa specific inclusions to over 2,000. We continue to see steady demand for our instruments and have placed approximately 130 instruments year-to-date, aligned with '21, bringing our total replacements to over 800. It's no secret that high rates of discovery follow those who are testing and measuring in domains others don't participate. Those domains are at the single molecule and digital level empowered by our Simoa technology. Geographically, while North America represents 65% of our revenues, we continue to expand our regional capabilities, most notably a recent strategic IBD partnership with UltraDx in China. We believe we're in the beginning of a neuro decade of research and clinical testing, not just in North America but in China, Asia, Europe and around the world. Now shifting to our progress on trials and test development. As we shared in May, we have received funding from the Alzheimer's Drug Discovery Foundation, ADDF, to accelerate Alzheimer's disease diagnostic test development. We've kicked off our efforts with the Amsterdam University Medical Centers on four phases of a clinical trial to validate Quanterix's multi-analyte test. Fifty percent through Phase 1, we are already showing promising results for Alzheimer's detection and differential diagnosis of memory complaints, which have resulted in four abstracts at international conferences. The Bio-Hermes trial we are participating in is nearing completion at the beginning of '23. Bio-Hermes is a prospective trial in partnership with the Global Alzheimer's Platform Foundation. The trial spans 17 U.S. sites and will include around 1,000 early Alzheimer's patients. These patients will have amyloid PET scans. All the sites are in the U.S., and the trial will include underserved populations and cognitively unimpaired subjects. This prospective validation trial for pTau-181 will generate data in support of our existing FDA filing for clearance of the test. Now, I'm going to turn it over back to Mike to discuss some more financial details. Mike?

Thanks, Masoud. I'm going to provide some additional financial details about our third quarter 2022 performance. And for your reference for those following on the call, I'm starting on Slide 4. As Masoud noted, our total revenue in the third quarter of 2022 was $26.6 million, a 4% decrease versus the third quarter 2021. Our third quarter revenue in 2021 included $1 million of RADx revenue. Excluding RADx, we were flat to Q3 2021. We had product revenue in the third quarter of $17.7 million, a decrease of 14% versus the third quarter of 2021. Within product revenue, consumables revenue was the biggest driver of the shortfall, declining 30% versus the third quarter of '21. As Masoud mentioned, we continue to manage production and demand for consumables while we address asset quality. Instrument revenue increased 20% versus the third quarter of 2021, aided by the sale of instruments to UltraDx in China. Third quarter service revenue increased 42% versus the prior year third quarter to $8.4 million. Included within services revenue was $2.7 million recognized during the third quarter of 2022 from our collaboration agreement with Eli Lilly. I would now like to spend some time talking about gross margin for the business. As a reminder, during the second quarter, based on a deep dive review of the business, we made a few changes on how we captured costs in our P&L. We changed the cost allocation of three departments based on their focused activity on quality and operations. In addition, we are capturing freight costs not billed to customers and recorded as operating expenses as a pro forma adjustment to cost of goods sold. The pro forma adjustment is reflected in prior year comparisons. Both adjustments result in a move of costs from operating expense to cost of goods sold, with no impact on the bottom line but with a significant impact on gross margin. We have made these changes to give greater visibility in our quality activity and allow investors to better monitor our progress. Now let's review margin performance in the third quarter versus prior year. In Q3 of 2022, our pro forma gross margin was 35% compared to 49.8% in the third quarter of 2021, a decline of almost 1,500 basis points. There are a few factors that drove this change. First, our inventory reserve increased significantly versus last year to capture the impact of quality. This negatively impacted margin approximately 800 basis points. Second, the change in allocation of resources associated with quality and operations in the second quarter of this year negatively impacted the year-over-year margin by approximately 500 basis points. However, as Masoud pointed out earlier, our efforts are already resulting in improved gross margin, with an increase of approximately 700 basis points in pro forma gross margin from Q2 of '22 to Q3 of '22. As a result of reorganization actions taken in Q3 and the change in allocations to cost of goods sold, operating expenses, excluding the impact of restructuring and related expenses, decreased to $26.5 million in the third quarter of 2022, a decrease of $4 million versus the operating expenses in the third quarter of 2021. We had a few significant items hit restructuring and related charges during the quarter. First, we incurred restructuring charges for severance totaling $3.4 million. Second, as a result of the announced restructuring and reduced guidance in our Q2 call, the stock price dropped meaningfully causing a review of our goodwill. The subsequent analysis resulted in an impairment of $8.2 million to goodwill, a non-cash charge to our P&L. Third, we incurred an impairment charge for our Bedford, Massachusetts real estate, which we will not be utilizing, and a write down for abandoned software totaling $8.7 million, a non-cash charge to the P&L. Finally, we incurred $600,000 related to other lease expenses related to the Bedford facilities. During the third quarter of 2022, our unrestricted cash balance decreased by $17.5 million from the end of the second quarter of 2022, which is detailed on Slide five. Ending unrestricted cash balance was $343.7 million as of September 30, 2022. Basic weighted average shares outstanding for EPS purposes totaled 37 million for the third quarter of 2022. Cash outflow from operations was $14.5 million driven by our net loss, severance expense and CapEx, partially offset by collections on past due balances. With over $9 per share in cash and no debt, our balance sheet is in excellent shape and we are well positioned with adequate resources to pursue our strategic objectives. The decision made to restructure the business in August of this year right-sized the business for our projected near-term revenue, but still retained adequate resources to address the quality issues and build our business to scale in a profitable manner. We had a good quarter, meeting our internal revenue target and exceeding consensus. As Masoud discussed, we are making good progress on rebuilding our assays. As we head into the fourth quarter, we project Q4 revenue of between $24 million to $26 million and full revenue of between $104 million to $106 million, which would have us finishing the year flat to prior year, excluding the impact of RADx in 2021, which is consistent with our previous guidance. With that, I'll turn it back to Masoud.

Thank you, Mike. Before we get into questions, I want to share a few market developments. Over the last several months, we're seeing a ramp in new discoveries using Simoa neurofilament light, a key biomarker to monitor neural damage impact of a wide range of health developments and issues. Key recent applications include using serum neurofilament light levels as a predictor of stroke severity and recovery, the direct monitoring of common and critical neurological side effects from CAR-T therapy, and to use as a biomarker to monitor critical chemotherapy side effects. Several more examples of using serum NFL as a secondary endpoint in the development of new therapeutics and continued advances in the use of NFL as both a diagnostics and a treatment monitoring biomarker for MS. These, among many other publications, serve as direct evidence of the value of Simoa NFL as an important check engine light for the brain. It's fair to call Quanterix unique, with over 800 instruments installed, strong IP, and one of the very few commercial proteomics companies with revenues over $100 million, we are well-positioned for the next big pharma market in neuro. Recent exciting data presented at the Alzheimer's Association International Conference in July demonstrated that plasma tau levels, particularly 217 and 231, as measured with Simoa, elevate early in cognitively unimpaired patients and correlate with Aβ pathology. This suggests that these Simoa biomarkers may be excellent tools for screening patients into new preventative trials, instead of having to screen by PET or CSF. As these similarities are being developed and validated by our pharma partners, we are just starting to see first published data that in fact lower pTau-217 levels could be an ideal biomarker to advance these exciting new drugs. Later this month, at the Clinical Trials on Alzheimer's Disease, CTAD, in San Francisco, we will participate in an all-day panel on the use of these blood-based biomarkers and clinical trials where we expect to see and hear several top line readouts and update to ongoing Alzheimer's work. It's truly an exciting time for this space. Simply put, the market opportunity in neurodegenerative research and the demand for ultra-sensitive tools for early biomarker detection have never been stronger, and the steps we are taking to ensure that we remain at the forefront of this market. We still have challenges but we're meeting them head-on and are confident that the steps we are taking will improve our quality and manufacturability of our assays, allowing us to both scale and improve our cost structure in preparation to accomplish our translational goals. It continues to be the single greatest priority of the company. We believe that the conclusion of this transformation will be capturing a larger share of the proteomics market, innovating, and growing at a much faster pace than before and in a leading position to propel new discoveries, advancing neurodegenerative disease research and diagnostics. Let's take some questions. Operator?

We have a question from Puneet Souda with SVB Securities. Your line is open.

Hi. Thanks for the question. I appreciate that you're still in the midst of assay redevelopment. Given the progress you've seen so far, do you see any upside to the flat year-over-year guidance?

Hi, Phil. This is Masoud. As we mentioned on the call, the assay redevelopment program and roadmap is progressing as expected, with no delays to report after three months. We believe it is on schedule and balanced, and our guidance remains unchanged from last quarter, indicating a flat performance in 2022 compared to 2021.

Okay, great. Thanks. And just a quick follow up. I was just wondering if you could share any updates on how instrument orders have been trending. It looks like, I think, you said 20% growth here in the quarter, which is pretty good. So I was just wondering like has there been or do you expect to have a negative impact from some kind of broader challenges in the assay consumables business?

Yes. So you can see that we have some challenges in the consumables side. A lot of those were self-inflicted, as we improved the quality of the processes, the stability and variances of the assay. You see that instruments are on track versus what we did last year in '21. So they're per our expectations and nothing unusual.

Okay, thanks. I'll hop back.

Thanks, Phil.

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

Hi, this is Alex Vukasin speaking on behalf of Kyle Mikson. I have a couple of questions. I was wondering if you could talk about any geographic-related challenges you faced during the quarter, whether they were related to consumables or instruments. Additionally, I'm curious to know if there were any further workforce reductions during the quarter. Thank you.

I'll answer that question. Mike can provide more details on the regional aspects. We announced a workforce reduction last quarter, and we do not plan any additional cuts. The realignment we implemented last quarter has helped enhance our focus on quality, innovation, and translation initiatives, which are progressing as anticipated. Some improvements in the profit and loss statement are evident. From a geographic standpoint, Mike can elaborate, but generally, there are no significant challenges in any specific region. In fact, we formed a partnership with UltraDx, leading to growth in the instrument sector in China. Mike, would you like to add anything?

Yes. If you look at it, we're down slightly from a revenue perspective year-over-year, and expect almost evenly between North America and Europe. Asia Pac, to Masoud's point, is up double digits driven primarily by the UltraDx shipments of instruments to China. So that's pretty much the way it breaks out. It doesn't seem to be isolated to any one region. North America obviously is still our largest region at about 63%. But it looks like it's spread pretty evenly.

Got it. Thank you very much.

Thank you. And our next question will come from Matt Sykes with Goldman Sachs. Your line is open.

Hi, Masoud and Mike. Thanks for taking my questions. Good afternoon. Maybe just to start on the assay redevelopment operations, clearly the slide is very helpful to show the improvement that you've seen. Just wondering when you're talking about managing volume resulting in some of the clients we saw in consumables, how's that being communicated to customers? Meaning it sounds like demand is still there. But if you're managing volume, is there a risk that you're missing business? Is there some substitution risks for some of those assays where they could go elsewhere, or is what you're providing onto a closed system and/or unique in that they're able to wait as you manage that volume and work through the redevelopment?

Hi, Matt. I'll take that. So the great news is that to achieve the ultra sensitivity that you need, in a lot of cases, Simoa and our ability to measure with great limits of detection is unmatched. And so a lot of these customers, we have been able to manage the volume and say, hey, we want to validate things and we put up a quality wall. So things aren't getting out to their hands as fast as we might expect. So I think a lot of it is managed. Will there be some customers that can't wait? Of course. But, overall, we're trying to manage demand. We've moved some of our demand to the Accelerator Laboratory. So we fill that. In terms of capacity, you can see we have big projects with Lilly and other pharma partners that we've moved there. So when we say volume management, it's partly some orders have been delayed, some orders are going to Accelerator and we've been doing a triage.

Got it. Thanks for that color. And then maybe just more of a high level question on sort of end markets. You've talked a lot about the pharma partnerships and the work you're doing there. Earlier in the year, you talked a little bit about CROs and the potential there. And just given the slide you had up versus PET screens and the lowering of costs you can provide from trial work with your eventual diagnostic. Any inroads into the CRO market? Do you see that as a market if you look a few years out as being an important one for Quanterix?

Absolutely. We're very clear that through our own laboratory or through what we're doing here internally, we're not going to be able to ourselves match all of the demand in neurology. And so we absolutely want to enable the CRO partners, partners that are working with pharma companies. And so for us it is let's enable them. They're a big part of the market. They account for anywhere from 40% to 60% of our business, depending on the quarter. And so we're a big fan, and we'll continue to support CROs.

Got it. And then just one final follow-up from Mike. As we look at that sequential improvement in gross margins, that's fair to see that as apples-to-apples in terms of all the exceptions and changes that you've made on an accounting basis. I'm talking about sequential not year-over-year.

Yes. On a sequential basis, you're absolutely right, Matt. Q2 and Q3 capture the impact of the allocation changes, capture the impact of the pro forma distribution. So it's a real improvement, primarily driven by expense reductions that were the result of the restructuring. And then we had some product mix bump up and that pretty much offset some of the inventory reserves. So it's a real quarter-over-quarter improvement.

Got it. And you're not expecting any additional changes there in terms of your plan, so we can see sort of Q2 as a base to work from going forward?

I think that's right. I think that's a good baseline to work from. And once we get beyond Q1 of next year, the year-over-year comparisons are going to be easier as well. But we're going to try and call it out in each call just so people understand what's in and what's out.

Got it. Thanks very much. Appreciate it.

Thanks, Matt.

Thanks, Matt.

We have a question from Max Masucci with Cowen. Your line is open.

Hi. This is Stephanie on behalf of Max. Thank you for taking my questions. The results from the study will be presented at the CTAD later this month. How do I expect the late November data readout and PDUFA to affect demand for product and service revenues in the acute phase, following what will be a significant event for Alzheimer's patient care?

Hi, Stephanie. We're very excited as well. I believe it will be a fantastic conference. There are many important top-line readouts and progress in the entire neuro field. We truly see this as the neuro decade. In addition to the readouts we anticipate at CTAD, there is significant activity happening in ischemic stroke, MS, ALS, TBI, and Parkinson's. We view CTAD as a strong kickoff for Alzheimer's. You know that many of our tests in the market are utilized in clinical trials, helping to monitor drug effects, prescreen and enroll diverse populations, and enhance the overall disease continuum. The readouts and results are promising for the field, and we feel fortunate that our technology and products will significantly contribute to disease improvement and continuity. We're looking forward to the conference and the anticipated results.

Great. Thanks for that color. Additionally, so Eli Lilly's President of Neuroscience indicated during the company's earnings call last week that the company plans to launch a pTau blood diagnostic next year. Could you, one, provide some additional context around Lilly's comment; and two, should we assume that the test Lilly is referring to will be run in your CLIA lab?

Yes, Stephanie, we cannot comment on that during this call. However, I can confirm that we have a partnership with Lilly, which is public knowledge, and we are actively engaged in this area. I haven't listened to that specific call, so I wouldn't want to make any comments on it.

Got it. Understood. And just one more for me, if I can sneak one in. So on the pTau-181 LDT that you commercially launched in late July to potential clinical users and researchers, was pTau-181 LDT a revenue contributor exiting Q3? And can you describe the demand trends that you've seen from clinical customers versus research customers?

Yes, that's a great question. So we did launch the pTau-181 LDT first of its kind in North America. It's an important test as an aid to diagnostic for Alzheimer's. I would say very early innings, nothing material in terms of revenue for the diagnostic side. But for clinical testing, for research applications, us having this has absolutely driven interest in being able to provide a diagnostic pathway and ultimately something that could be regulated and we could get FDA approval for in the future. So to answer your question, very minimal on the revenues. There isn't a drug available today. We anticipate that revenues would stay minimal until there was a drug approved. But the interest driven from biopharma to do testing and to do clinical trial screening, prescreening is high, and having that test helps.

Great. Thanks so much for taking my questions, again.

Absolutely. Thanks, Stephanie.

Thank you. And there are no other questions in the queue. This concludes today's conference call. Thank you for participating. You may now disconnect.