Earnings Call Transcript - TRIB Q3 2020

Operator, Operator

Good day, and welcome to the Trinity Biotech Third Quarter Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, that this event is being recorded. Now I'd like to turn the conference over to Mr. Kevin Tansley, CFO. Please go ahead, sir.

Kevin Tansley, CFO

Thanks very much, Nick. Good morning, everybody. I'm joined today as well by Ronan O'Caoimh, our Chief Executive Officer; and also, John Gillard, our new CFO, as you would have seen from the release. Before we begin with our prepared remarks, we submit for the record the following statements. Statements made by the management team of Trinity Biotech during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will and other similar statements of expectation identify those forward-looking statements. Investors are cautioned that such forward-looking statements involve risks and uncertainties, including, but not limited to, the results of research and development efforts; the effect of regulation by the U.S. Food and Drug Administration and other agencies; the impact of competitive products, product development, commercialization and technological difficulties; and other risks detailed in the company's periodic reports filed with the Securities and Exchange Commission. Forward-looking statements reflect management's view only as of today. The company undertakes no obligation to publicly release the results of any revision to these forward-looking statements. In addition, there is uncertainty about the spread of the COVID-19 virus and the impact it will have on the company's operations, the demand for its products, global supply chains and economic activity in general. Moving on then, today I'll be taking you through the financial results for quarter three 2020. Getting with our revenues; this quarter we saw a substantial increase in revenues from $24.6 million to $32 million; this represents an increase of over 30% compared with the equivalent quarter last year. And Ronan will take you through the makeup of this later in the call. Obviously, an increase in revenues of this level will have a significant impact on the income statement. Firstly, you'll notice that our gross margin has increased from 41% to 52.4%, and by far the biggest factor driving this was the increase in revenues that I've just mentioned. As well as the underlying margin inherent in these sales, the overall gross margin has also benefited from the spreading of the company's fixed costs over a wider base. Other factors have played this quarter with the impact of fewer instruments sales and a lower depreciation charge, partly offset by adverse FX movements, that both, individually and combined, these are much smaller than the revenue effect. Moving on to our indirect costs; our R&D expenses for the quarter grew very slightly from over $1.2 million to just under $1.3 million. However, more significantly, our SG&A expenses fell from $7.3 million to $6.3 million. In this regard, we're seeing the benefit of cost-cutting measures that were implemented in quarter two in response to the onset of the pandemic. In response to the expected severe decline in revenues at the time, we implemented a series of measures aimed at significantly reducing or eliminating all discretionary expenditure; this includes lower T&E and sales marketing costs; for example, tradeshow costs. Though it is fair to say that some of these costs would have reduced naturally, anyway, given the pandemic restrictions that have been put in place. Meanwhile, our share option expense for the quarter dropped from $252,000 to $156,000. Both on an overall basis, our total indirect costs fell from $8.8 million to $7.7 million for the quarter, a reduction of over 12%. The net result from this is that our operating profit for the quarter grew from nearly $1.3 million to close to $9.1 million; this increase was achieved through all of the key metrics moving in a positive direction, namely higher revenues and improved gross margin and lower indirect costs. Moving on to our financing costs. Our financial income for the quarter was lower than in the comparative periods due to lower levels of cash deposits and lower interest rates. Meanwhile, our financial expenses were broadly in line at $1.2 million quarter-on-quarter. This consisted of $1 million of interest due on our exchangeable notes, and approximately $200,000 relating to notional interest and pre-users into lease transactions which have become a feature of our income statement since the introduction of IFRS 16 last year. Further down the income statement, you will see an additional non-cash expense of $161,000 which represents the non-cash accretion interest arising on our notes. Tax charge for the quarter was $400,000, and this represents a nominal effective rate of 4.5% of operating profit. This is lower than normal due to our eligibility for R&D tax credits. On an overall basis, the profit after tax for the quarter was over $7.3 million compared to close to breakeven last year. This equates to an EPS of $0.35, or nearly $0.36 when non-cash financial charges are excluded. Meanwhile, fully diluted EPS for the quarter was just over $0.32 compared to $0.043 for quarter three last year. I'd like to remind you that the profit figures that I have mentioned so far do not include any element of forgiveness of the $4.5 million loans received under the Paycheck Protection Program. While we expect that these loans will be forgiven, we are waiting for the validation process to be completed before reflecting this in the financial statements. Finally, on the income statement; earnings before interest, tax, depreciation, amortization, and share option expense for quarter amounted to $10 million; and the constituent parts of this can be seen on the release. I will now move on and talk about the significant balance sheet movements since the end of June. Property, plants and equipment increased slightly from $9.3 million to $9.5 million; this is due to additions of $600,000 being offset by depreciation of $400,000. Same period, our intangible assets increased by $1.1 million; this was made up of additions of $1.4 million offset by amortization charges of $300,000. Moving on to inventories; you'll see these have decreased by approximately $1.8 million to $29.6 million; this was due to lower level of COVID-related inventories. As expected, trade and other receivables have increased significantly from $17 million in June to $21.7 million at the end of September; this is obviously due to the strong increase in sequential revenues, though the fact that the percentage growth in receivables significantly lags the increase in revenues from quarter two to three demonstrates that cash collection rates have remained strong. Meanwhile, our trade and other payables, including both current and non-current have remained broadly flat at approximately $39 million. Moving on to our cash flows for the quarter, next. Cash generation from operations for the quarter was just over $7.2 million. Not surprisingly, this was impacted by working capital outflows, especially in relation to accounts receivable following on from the steep change in our revenues from quarter two to quarter three. Obviously, the biggest single factor in the increase in cash flows was the enhanced revenues where we are fortunate today, but we are also seeing the impact of the closure of our Carlsbad facility, which occurred at the end of June. Meanwhile, capital expenditure in the quarter was $1.9 million versus $3.8 million last year, continuing the trend of lower capital expenditure in recent quarters. Other principal cash flow movements in the quarter included a repayment of $800,000 in relation to the capital element of leases, which under IFRS 16 are now treated as a financing item. This has resulted in an increase in cash balances of $4.3 million for the quarter, bringing the cash balances at the end of September to just under $20 million.

Ronan O'Caoimh, CEO

Thank you, Kevin. I'm going to review our revenues for quarter three before opening the call to our question-and-answer session. Our revenues for quarter two were $32 million compared with $24.6 million in the comparable quarter last year, which is an increase of 30%. Point-of-care revenues were $2.1 million compared with $3.9 million in the comparable quarter, which is a decrease of 47%. Clinical Laboratory revenues were $30 million compared to $20.7 million in the corresponding quarter, which is an increase of 45%. Coming back to the point-of-care, our revenues decreased 47% but this reflects the fact that HIV testing was impacted by COVID-19. The reduction compared with last year also reflects that quarter three 2019 was an unusually high quarter for point-of-care revenues. Our expectation is that HIV revenues in the current quarter will be at normalized levels. Looking back to Clinical Laboratory, our revenues increased 45% to $30 million compared with $20.7 million in the comparable quarter. During the quarter, all of the company's product lines recovered significantly from quarter two 2020 levels, which had reflected the most severe impact of COVID-19. However, as expected revenues in quarter three 2020 did not fully return to their pre-COVID-19 levels, particularly in our diabetes business where instrument placements were slow with 40 placements. This is hardly surprising as hospitals and clinics were unlikely to purchase new capital equipment in the midst of the pandemic. However, we are confident that these placements will recover in a post-pandemic environment. Meanwhile, our autoimmune business was approximately 10% shy of normal levels as due to COVID-19 many patients avoided hospital and doctor visits, except when absolutely necessary. However, these negatives were more than offset by strong sales of COVID-19 related products, which include: firstly, our COVID-19 IgG ELISA antibody test; secondly, our FDA approved PCR viral transport media products; thirdly, our monoclonal antibodies through our lifetime supply business, Fitzgerald; and fourth, and lastly, a very significant boost to demand that we've experienced for our rapid respiratory products, which includes Strep pneumonia and Legionella Urinary Antigen. Dealing with these four factors individually: firstly, during the quarter the company filed its submission to the FDA for an emergency user authorization for its COVID-19 IgG ELISA antibody test, and we are currently awaiting EUA authorization. However, as permitted under the EUA regulations, the company has already launched this product in the USA. Meanwhile, we expect to obtain a CE Mark for the product within the next two weeks, thus allowing us to sell the product throughout the European Union. The product has specificity in excess of 98%, and sensitivity in excess of 95% in samples drawn at least 14-days from symptom onset. These percentages comfortably exceed the requirements of the FDA emergency use authorization pathway. The product is manufactured in our facility in Jamestown, New York, and is capable of being run on a wide range of instrumentation platforms, allowing access to virtually every testing laboratory in the world. As the utility of this product is to detect individuals with an antibody response to COVID-19, indicating past exposure and potential immunity, the specificity is the key performance metric. A high percentage specificity means that there are virtually no false positives, and therefore, for example, patients are not given a false impression that they may be immune. The test may potentially be used for the screening of people prior to vaccination, to avoid vaccinating individuals who already have a circulating antibody response; individuals who have doubts about the vaccine may choose this path. The test can be used to prove further that an individual had previously had COVID-19 and is now assumed immune, and can also be used by governments to manage the prevalence of COVID-19 immunity in the population. Additionally, the test can be used to monitor patients' serological response in the weeks and months following vaccination, as their immune system builds an antibody response to the virus. So in summary, we believe that with the onset of vaccinations, the use of antibody testing will be much more prevalent. Moving back to the development of COVID-19 tests; we have previously indicated that the company is also developing a rapid point-of-care COVID-19 test to detect IgG antibodies. The test can run in 12 minutes using one drop of whole blood procured by a spring-loaded lancet or finger prick. Like the ELISA test, this test will determine which individuals within the population have been exposed to COVID-19, and are therefore regarded as immune. We expect to complete the development of this test and file an emergency use application with the FDA, thereby launching it for sale next February. We already have in place existing and substantial automated manufacturing capability for such a test given that we already manufacture many millions of HIV tests each year on the same automated equipment. Meanwhile, the company is benefiting from strong sales of the FDA approved PCR viral transport media product, which is a sample collection device for COVID-19 PCR molecular testing, used to store the nasal pharyngeal swab containing the patient sample, allowing it to be transmitted in a stable environment. The transport medium stabilizes the sample and prevents bacterial growth, maintaining its integrity until such time as the test can be run in a laboratory. The company has scaled up its manufacturing capabilities for this product and demand is expected to be strong, as long as molecular PCR testing volumes remain significant. Meanwhile, the company has also experienced significant increased revenues from our COVID-19 monoclonal antibodies. These monoclonal antibodies are the key raw material used in the manufacture of COVID-19 antigen tests. Lastly, as a consequence of COVID-19, we have experienced a significant increase in revenues from our respiratory point-of-care products, which include Strep pneumonia and Legionella Urinary Antigen. So, at this stage, could I hand it back to Nick for our question-and-answer session, please.

Operator, Operator

First question comes from Jim Sidoti of Sidoti & Company. Please go ahead.

Jim Sidoti, Analyst

Good afternoon. Can you hear me?

Ronan O'Caoimh, CEO

Morning, Jim. Loud and clear.

Jim Sidoti, Analyst

Okay. Well, first of all, I just want to say congrats. Good luck to Kevin, in whatever you do. And congratulations, John, and welcome to Trinity.

Kevin Tansley, CFO

Thanks very much, Jim.

John Gillard, New CFO

Thank you, Jim.

Jim Sidoti, Analyst

You called out four items related to COVID that really helped in the quarter; the IgG test, the media, the antibodies, and the respiratory products. Can you give us some quantities; how much revenue they generated? And if you think that they'll continue to generate revenue in the fourth quarter and into 2021?

Ronan O'Caoimh, CEO

Yes, I believe the revenue figures were approximately $13 million. Kevin, is that correct?

Kevin Tansley, CFO

Yes.

Ronan O'Caoimh, CEO

I won't provide a breakdown of the four categories. However, I will say that predicting our future performance is challenging. We are not offering guidance, which might seem odd given that we are already halfway through the quarter. The evolving COVID situation impacts both our traditional business and new ventures, making it hard to forecast. What I can say is that antibody testing is likely to become more common, especially with the rollout of vaccinations. People appear to understand that COVID is here to stay for the long term, and we have to accept that. I expect PCR testing will also remain significant through 2021. Under these conditions, I anticipate our COVID-related revenues will stay robust, but predicting them with certainty is challenging. Therefore, we are reverting to our usual practice of not providing guidance. I believe our fourth quarter will be strong, but we prefer not to project further than that.

Jim Sidoti, Analyst

Okay. So do you anticipate that even once the vaccine is out that patients will need to get antibody testing prior to the vaccine to make sure they're not already immune?

Ronan O'Caoimh, CEO

It varies; different governments will adopt different strategies. While individuals may want to proceed with vaccinations, some governments might suggest widespread vaccinations or choose to identify those who are already immune. However, I believe they will likely lean towards blanket vaccinations. That said, individuals might feel that if they already recognize their immunity—perhaps recalling an illness from six months ago—they may hesitate to receive a vaccine. There are multiple factors to consider. I believe there are various reasons, as I mentioned earlier, for the increasing relevance of antibody testing with the rise of vaccinations. The emphasis now appears to be shifting toward immunity instead of just current infections.

Jim Sidoti, Analyst

Okay, understood. And then, switching over to the HIV business. Any update on trial screen and the progress you're making in Africa to get that approved by the WHO?

Ronan O'Caoimh, CEO

We have submitted all of the modules to the WHO for Trinscreen, except for the actual clinical trials. Unfortunately, those trials have been stalled due to COVID-19, and we are likely a few months away from completing them. We have recently restarted in the last country we were operating in, and I estimate that we will have our clinical trials data ready for submission by mid-2021, likely by the third quarter. I anticipate submitting the final data to the WHO in the first quarter and expect approval within four to five months. However, it's important to note that completing trials in hospitals remains challenging at this time.

Jim Sidoti, Analyst

Okay, all right. Well, that was it for me. Thank you.

Operator, Operator

Next question is from Paul Nouri of Noble Equity Funds. Please go ahead.

Paul Nouri, Analyst

For the COVID sales, are they all into the U.S. and Western Europe? Or is it all over the world?

Ronan O'Caoimh, CEO

Paul, they are all over the world, but mostly in the United States.

Paul Nouri, Analyst

Okay. And Jim just asked about the WHO submission; but is there anything else in terms of pipeline development or FDA submissions that you could update us on?

Ronan O'Caoimh, CEO

Our premier resolution variant instrument and test are in the final stages for submission to the FDA. We have experienced delays due to hospitals being reluctant to conduct trials at this time. However, we are hopeful for approval in April. This is likely the most significant development in our pipeline aside from Trinscreen.

Paul Nouri, Analyst

Okay. Regarding the lab in Buffalo, which has been a consistent growth story since your purchase, is it still growing, or has its growth stalled due to COVID?

Ronan O'Caoimh, CEO

It's still growing, but we saw a 90% drop in revenue for April, and we're still down around 10%. We're about to start PCR testing in the lab, which had previously been focused on auto-immune testing. We need to equip ourselves and hire personnel to conduct PCR tests, which should provide us with a boost. We hope to begin this just before Christmas, pending final authorizations, which can be challenging to obtain. We're aiming to get PCR testing for COVID started, and though it's taken some time, we expect it to significantly enhance our capacity. In the meantime, I believe our testing volumes will rebound as the pandemic stabilizes with vaccinations. Currently, many people are avoiding hospitals, leading to lower testing volumes. However, I remain confident in our core business as a growth model and believe that, without COVID, it will quickly return to normal levels.

Paul Nouri, Analyst

Okay. So, where are you in getting PCR testing in the lab? Have you purchased all the equipment that you need already? And you need validation and something like?

Ronan O'Caoimh, CEO

We basically just need a certificate from New York State to proceed. We had to bring in particularly qualified individuals, and our focus has been on auto-immunity. Most of our lab technicians wouldn't be authorized to run PCR testing, so we needed to bring in new people and new equipment.

Paul Nouri, Analyst

Okay, and then last question, yes, good.

Ronan O'Caoimh, CEO

So we're just waiting for the State of New York authorization to proceed.

Paul Nouri, Analyst

And the authorization is a COVID-specific authorization or it's a traditional New York State approval that you need?

Ronan O'Caoimh, CEO

It's more related to PCR testing. Essentially, individuals need to be certified to perform PCR tests, which are part of a broader category of molecular testing, not just for COVID.

Paul Nouri, Analyst

Okay. And then my last question; I know you guys have been placing a good deal of instruments into Brazil, the diabetes instruments; has that proceeded or not yet because of the currency issue still?

Ronan O'Caoimh, CEO

We've really stopped placing instruments in Brazil because the currency situation is poor from our perspective; there’s been a significant weakening of the Brazilian currency. With rare exceptions, we are basically not placing any instruments unless we receive a very strong price. So, effectively, we've stopped placing instruments in Brazil.

Kevin Tansley, CFO

Nick, just based on the listing here; I think we've got one more question just to take?

Operator, Operator

That's correct. One last question. Bill Lap, private investor. Please go ahead, sir.