Q2 2020 Oxford Immunotec Global PLC Earnings Call
Good morning, ladies and gentlemen, and welcome to the Oxford Immunotec second quarter 2020 earnings call.
As a reminder, this conference is being recorded.
It is now my pleasure to turn the call over to make them often chief financial officer.
Good morning, Thank you for joining us to review, Oxford Immunotecs financial results for the second quarter of 2020.
Before we begin I'd like to caution listeners that comments made financial information provided during this conference call include certain statements that are estimates beliefs forward looking and or subject to various risks and uncertainties.
Any statements made during this call that are not statements of historical or current facts or tended to be forward looking statements pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
We want to emphasize that such forward looking statements reflect our current expectations assumptions and currently available data under neither predictions nor guarantees of future events or performance actual results could differ materially from those stated or implied by these forward looking statements due to risks and uncertainties associated with our business, including.
Those under the heading untitled risk factors in our annual report on form 10-K for the year ended December 31st 29 team and in subsequent reports, including our quarterly reports on form 10-Q, including the form 10-Q being filed today and our current reports on form 8-K.
Addition, today, we will make a number of comments about the impact of the Coca 19 pandemic pandemic on our business. We provide these comments to give investors insights into what we're observing however, given the dynamic nature of the pandemic. There's a high degree of uncertainty around any forward looking statements made.
The company disclaims any obligation to update or revise any forward looking statements, except as required by applicable law.
During the call. We'll also refer to certain financial information on a non-GAAP basis, we believe that non-GAAP financial measures taken in conjunction with GAAP financial measures provide useful information for both us and investors to evaluate the company's performance. These include constant currency comparisons EBITDA and adjusted EBITDA.
Reconciliations between certain gap and non-GAAP results, such as EBITDA and adjusted EBITDA are presented in the tables accompanying our earnings release, which can be found in the Investor Relations section of our website.
Further as a reminder, in November 2018, we completed the sale of our U.S. Laboratory services business to quest diagnostics.
As such the now divested U.S. Laboratory services business is shown as discontinued operations in our press release and forthcoming form 10-Q.
With that it's my pleasure to turn the call over to Oxford, Immunotecs, Chief Executive Officer, Peter Wrighton Smith.
Good morning.
On today's call I'll provide a brief overview of operating performance for the second quarter of 2020 before turning to an update on our business and all strategic priorities.
Not will then take over to discuss our financials before handing the call back to me to discuss the near term outlook for the business. We'll then open up the mine to take your questions.
For the second quarter Twentytwenty, we posted revenues of $5.8 million inline with the guidance we gave in may.
U.S. revenue was $1.2 million, reflecting both the week testing demand due to the corporate 19 pandemic as well as reductions in stock levels by quest.
We believe we've now completed the plans de stocking of quests meeting this will no longer be a headwinds to revenues revenues for the back off of 20 to 21 now better reflect underlying consumption growth.
You can rest of world revenue was $1 million, reflecting the week testing demand across the region as a result at the corporate 19 pandemic.
Asia revenues were $3.6 million again, reflecting the week testing demand across the region. As a result at the corporate 19 pandemic adult is ought to continue to normalize stock levels in Japan.
Let's take a few moments to talk about the impact of the corporate 19 pandemic on the business and what we're seeing in various countries.
Firstly, all lost all fall safe and well, we've had limited cases of illness and absences from work.
We have in many cases, putting additional protective measures over and above covenants that government advice and we've implemented social distinguishing meshes for those employees who needs to work in all facilities.
This allows not for firebreaks should be unfortunate enough to have any cases.
Dolphin Raleigh's, good people busy and productivity at the company's extremely high.
We've had no supply interruptions, we are continuing to money function ship kits and continuing to process samples and all UK Odeon Laborde tree.
We have good levels of stock of raw materials and finished goods and consequently be feel we're well covered in the event of any future possible disruption to the supply chain.
We sell to over 50 countries and as such we're seeing the pandemic playing out across the world in different ways.
Starting first with China.
We've continued to see volumes for a couple of strongly since the low point in February.
Consumption volumes and now running in line with all run rate of all business immediately post the transition to more direct model and prior to conform to Corona virus.
Travel within China, and Celtra accessories, notwithstanding loss due to normal.
We're starting to see the positive effects of Orange sales and marketing teams in China.
We have won a number of new you accounts in the last few weeks and that bodes well for our ability to continue growing volumes for the remainder of the yet.
Pricing is coming in line with their expectations and meaningfully higher than last year as result of going direct.
Given all those factors, we expect to join the to post strong positive year over year growth in the second half.
In Japan testing demand has been more rip off the we initially expected despite the confident on t. loss demonstrations and probably stuff.
Test consumption is now back to 29 team levels, we hope to show year over year gross for the second half of the yet as we drive test growth through all sales and marketing activities as well as the potential for some testing volumes with the food during the first half to come back in the second half.
In the U.S. volumes are recovering from than they do not currently running at about two thirds of 2019 levels.
Well, if there was some uncertainty given the rising cases in some parts of the U.S.. We current expect demand to continue to recover from here.
We do however, expect the U.S. recovery to proceed more slowly than knowledge of the jurisdictions due to the severity of the pandemic in the U.S. other like situation that continued look down restrictions.
We all know it's currently ambition U.S. volumes to return to growth over 2019 levels. This year.
In Europe and rest of World, that's clearly a lot of diversity placed on each country's epidemiologic situation.
Do you Miss for all European lab customers and now at about 80% of 29 team levels on a rising.
Some countries such as the UK a further behind on the code, but in general a cool markets. So seeing end user demand on an upward trajectory.
We currently expect volumes to get back to close to 2019 levels by the end of the yet.
Overall, we're seeing demand for all test recovering across the board with Asia, leading the way.
Obviously, our current views on that business could change rapidly, especially if we have a sizable second peaks of disease, a we re into significant long films in light of those in many other continuing uncertainties over the end demand outlook in uncertainties over the global impact of covalently team will generally would not in a position to give her level revenue guidance for the full year. However, I will.
Comment later on the new at some expectations acute Q3 revenues.
As you May recall, we recently launched a research use only test.
Made available to measure T cell responses against solves calls to the forest the cool hiccup at 19.
Based on all T cell technology.
This test provides a measure of the strength the T cell response against a wide range of solves coal to antigens.
We produced this test because we feel that T cells have an important role to play in the immune response to solve too we want to be well positions to move quickly if a clinical use case for measuring T cells emerges.
We'd be taking a sequential approach towards the end goal of first objective all staffing designed to meet the test has been to support the gathering and publication of evidence to demonstrate the T cell responses can be found in those exposed to salt scope to.
And to show how T cell responses differ from what we can learn from the covering pathogen detection.
Lucky, though antigen detection.
So lets you methods.
We are starting to see the first results come in from that from a two and a whole smells and patient UK government destroyed.
Well test as expected detected the T cell responses in a large number of people expose to solve too.
So that's expected to T cells, all detectable in patients who do not have a measurable antibody response.
In some cases these responses move very robust supporting the notion that we're seeing from all the evidence and b cell depletion patients. That's T cells may be able to control the virus even in the absence of antibodies.
We would like to get this data on all test published as soon as practical.
The next step is to learn more about the differences between T cell responses and the pathogen detection and symbology methods. We currently have available and then to see whether use case images for T cells in routine clinical practice to complement those tools we already have.
Should that use case emerge than we would pursue more targeted collaborations in clinical trials for that use case and submit that data in support of regulatory approvals.
Notwithstanding the understandable focus on krona Volaris right now we believe this pandemic will be temporary.
And when the debates we believe the outlook for TB testing will remain as strong a little stronger than it was before Corona Vars and there were several reasons for that.
We know from history that whenever TBS neglected the is being right now it Unfortunately comes back with the vengeance.
Hey, Cisco undiagnosed transmission accelerates unchecked I'm, what can expect will be a price to pay in terms of new cases, and contact fracing ones public health resources or it again able to focus on things other than coughing 19.
We already sitting a pent up demand for contact investigations for TV, which you're waiting on public health resources being available.
Along with the longer transmission for TV remains on checked the launch of the eventual outbreaks will be.
We believe it's likely that there'll be an increase in public health funding in general as governments painfully redoing the importance of public health doffing funding and infrastructure and protecting populations.
TV is a leading cause of death from infectious disease and the increased funding for public health will likely benefit TB and TB testing programs.
On a more specific level. This early evidence the presence of TB may increase susceptibility to covered 90 morbidity.
If proven this could provide a rationale for stepping up TB testing of infected patients those for the possible exposure to confidently team.
We started to see certain countries talked already about screening corporate 19 patients for TV for example.
We're also starting to see some shifts in behavior within TB screening programs.
Skin tests required to patient visits and then in a world where we're trying to eliminate unnecessary into person contact. We've now seen accounts for example in the U.S. switch from the skin tests to benefit from the single visit with all test.
As a consequence of these factors were extremely confident but long term demand outlook for all tests, and therefore watchful being mindful of Opex and we're conserving capital where appropriate we all continuing to spend in areas that we believe will maximize all growth and success as we come out of this.
Firstly, we continue to work on delivering automation.
Although sales processes of being interrupted by covered 19, we have a growing pipeline of customers seeking to automate the T spot CMV workflows.
We continue to make good progress in a U.S. submissions FDA approval during the process if they to clean up an analysis and we expect to submit to the agency in a couple of them at this time.
We continue to make good progress on platform development on a working towards providing automation in other jurisdictions.
As we previously communicated a major focus has been sell some marketing expansion, especially in China, where it's been in transition to a new business model away from approach exclusive distribution partner to model, whereby we take more direct control of the sales promotional in market development activities.
We continue to add results there given the magnitude of the untapped opportunity and we've also been strengthening our results and talk to southeast Asian countries.
We continue to seek to grow up commercial partnerships, starting with quest who's a key partner for the company in the U.S.
As you know a principal Russian off the transaction with quest was to significantly increase the reach and competitiveness of T spot TV in the U.S. smoke it.
Corporate 19 pandemic has interrupted the integration plans and this will unfortunately delay the full benefit to the partnership being realized until that works can resume.
Nonetheless quest continues to make some progress on the integration for example, T spot to be is now available in almost all of course patient service centers nationwide and a fully integrated peaceful TBS being launched in the first of course regions. So wants to full benefits. This partnership will be delayed due to corporate 19, when number less encouraged by the continued continued.
Progress the quest is making.
We continue to invest in programs to reduce our cost of goods. Both to continue our long term trend of gross margin expansion as well as to provide us with more pricing flexibility as we seek to penetrate more the global market.
We also continue to build fill that foundation to support the company's growth the planned capacity expansions at auction facilities as well as the relocation of all to Massachusetts sites into one smaller size continue to progress.
We've also initiated the projects replace all antiquated operating and financial system within your ERP system, which will once implemented give us new analytics and bring multiple efficiencies to common processes.
So despite the significant disruption from the corporate 19 pandemic. The company continues to execute on this long term growth agenda, and we remain optimistic about the future growth of the business.
I'll now hand, it over to match he'll give you some more detail come in small financials.
Thank you Peter.
Full GAAP results as shown on our press release issued today show the comparison of our Q2 2020 with Q2 2019.
Total revenues in the second quarter of 5.8 million were down 70% versus revenues in Q2 2019.
Breaking down a reported revenues on a regional basis U.S. revenue was 1.2 million representing 20% of our revenue Asia revenue was 3.6 million, representing 62% of our revenue in Europe and rest of World revenue was 1 million representing 18% of a revenue.
Turning to volumes in the second quarter, we sold over 60000 TB test in the U.S. via kit sales and almost 250000 tests in our or U.S. region, both via kit sales and test process and our UK Odell service business.
Gross profit for the quarter of 3.7 million was down 74% from the gross profit in the prior year period.
Overall gross margin for the quarter was 62.8% a decrease of about 960 basis points from the prior year period, driven by the abnormally low volumes in the quarter in per crop precautionary reserves, we've taken on inventory.
As volumes recover we expect to see strong gross margin performance driven by favorable ASP changes in manufacturing cost reduction efforts.
We're also benefiting from the roll off of royalties as we move to protecting our products through company generated IP.
As a consequence, we continue to expect an expansion in gross margins for the total year versus 2019 total year.
Turning to operating expenses operating expenses decreased 11% from the prior year period to 13.5 million.
Sales and marketing expenses decreased to 5.5 million, primarily driven by cost control measures and a reduction in marketing and travel expense from the cobot 19 pandemic.
[noise] offset continued head count additions, particularly in Asia.
Research and development expenses increased to 2.5 million due to our continued investment in automation initiatives, including clinical studies to support regulatory approvals.
General and administrative expenses were slightly higher than last year at 5.6 million just due to natural variations in quarterly spend.
Operating expenses for the second quarter included approximately 610000 of share based compensation.
Consistent with the low revenues in the quarter net loss for the second quarter 2020 was 9.7 million compared to net income of $590000 in the second quarter of 19.
EBITDA for the second quarter of 2020 was a $9.5 million loss, adjusted EBITDA, which excludes share based compensation unrealized FX gains or losses and unusual items if any.
Wasn't $8.9 million loss for the quarter.
Both EBITDA and adjusted EBITDA, our non-GAAP measures.
Turning to the balance sheet, we finished the second quarter with a very healthy cash position of over $165 million similar to the balance at the end of Q1.
Despite losses in Q2, the relatively stable cash balance is it is a result of our receipt of the second escrow payment relating to the sale of our U.S. Laboratory services business to quest.
In addition to a reduction in our a our balance.
We expect our air balance to come back to more normal levels from Q3, given our current revenue forecast.
I'll now hand, it back to Peter Who'll discuss our business outlook.
Thank you, Matt a there's obviously considerable uncertainty for everybody over the business outlook for that reason, we will not be giving full year revenue guidance.
If I would like to give some guidance for Q3 and make some directional comments on Q4.
We're currently expecting Q3 revenues to full between 18 and $19 million, we're expecting shops sequential increases in each of all three regions, reflecting the recovery that we're seeing in test consumption globally.
Barring a significant resurgence of covet around the world on a substantial reemergence of Lockdown protocols, we'd expect Q4 revenues to be the same it to slightly higher than Q3.
That concludes thoughtful more prepared remarks, we'll now open up along for questions.
At this time I would like to inform everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Tycho Peterson with JP Morgan.
Hi, guys. This is Casey out your Tyco is there an expected catch up in testing revenue in the back half of the year.
On tests that were deferred.
Versus cancelled and can you give sort of some color around what you're seeing in terms of that dynamic.
Yes. Thanks Casey. Thanks, a question. So you typically what we have seen in the past when we've had these kind of disruptions before is the test volumes don't really don't really get significant catch up.
In part that's because you know the healthcare systems in various countries are running pretty close to full capacity anyway. So even if there is pent up demand is not like health care system can confidently double the number of appointments.
I did call out that I think in Japan, there is the potential for that in Japan, specifically on a part of our business. There is annual health check kind of screening on some of that has just been deferred and so.
We might expect some of that's come back in the second half, but other than that as a general rule. We don't you generally see that kind of bounce back.
Okay.
Has there been any sort of change to the T. self select.
Expected timeline for U.S. approval get then.
Oh, the uncertainty around yeah.
No we very much on truck that as I said, we've completed the.
Total the data in hand, we've looked at day to down by analyzing its when we'd expect to submit to the agency in a couple of months, we will obviously give more detail timelines of launch dates told me, let me have some feedback for the agency.
You know certainly a normal routine interactions with the agency we are seeing that it's business as usual, but clearly a called it is.
Isn't making it disruption to everybody so.
Well have to see without that persists and as I said I'll give you more guidance when we actually have some some contraction from the agency once we committed.
Okay, and maybe just one last one for me.
You mentioned earlier that.
The switch from skin testing to choosing to spot.
From.
The impact of code to do you think that could be a net tailwind once regular volumes recover.
Yeah, I mean, it's it's a small a number of cases right now, but certainly we think that is a message that we can I go wide on yes, but the fact is that all tests or new requires one patient visit was this contest for cost too and in a world, where they're trying to maximize social assistance, saying and where obviously, which one it maxim.
<unk> is the number of a physician visits through pretty productive work it doesn't make sense for that to be another.
Reason why people switch from the skin test when like or that 70, something we're communicating in the market.
Okay. Thank you.
Your next question comes on line of sung Ji Nam with BTI G.
Hi, Thanks for taking the questions just a couple of quick ones on Peter could you talk about this stop TD partnership with global truck facility.
The adjustment.
You see that potentially ramping up.
Thank you synergy for the question, yes. So.
The.
The backdrop here is that the world health organization and kind of the broader global public health machinery is really getting behind.
Establishing relation TB screening programs in a whole host all tie up a low income countries around the world.
And one of the ways. They seek to do that is to leverage the global truck facility, which is the largest provider of TV medicines and diagnostics to public health departments in those countries.
And from our perspective, you know, we're really excited to partner with the GDF because it gives us a very.
Efficient channel to reach those countries are these the countries, where we would ordinarily you don't really be expecting to put a road infrastructure.
So it gives us extremely efficient way to partner with the GDF to make sure test can be deployed there as those countries starts to implement screening programs.
I think in terms of.
Our expectations all that there is no material very near term impact it will take time for those countries to I get that programs off the ground.
But this is certainly something that we view will be a tailwind for the company had revenues in the years ahead as those those programs Garo.
Okay, Great and then for the discovery T. and test kits for T cell immune response measurement could you talk about some of the vacuum developer.
Already looking at T cell response as part of measuring.
Their effectiveness at their vaccine banking side, there might be one of them. So I was curious if for those back you get there might be immediate utility for your expert discovery GM.
India, China. So yes. There is it's an excellent question. So that has been no I think if I rapidly growing appreciation of the importance now muttering T cells and this disease.
As it relates specifically to to vaccine approaches that are ready to indications here.
The first is that we need to understand the participants in this study whether they are genuinely having genuinely exposed to covert before whether that coffee naive and if we just use we already have evidence to show that if you. Just you symbology you will Miss people, who hot you have been exposed they just haven't produced antibody response.
And that will confound the results of you'll studies, if you know castle. So the first indication is to make sure that we all appropriately categorizing that the cohorts with testing.
The second is to directly measure of course, whether the vaccine is promoting both an antibody and a T cell response, because oh by the won idle both could be protective we don't know what drives immunity at this point, but there was clearly some.
Strong circumstantial evidence the T cells can provide a protective effect even in the absence of antibodies and so I think but we'll see is.
More and more vaccine companies realize that measuring T cells makes sense and uncertainty we started to see.
Some increased interest in all tests along those lines.
Great. Thank you so much.
Your next question comes from the line of Chris Lane with Cowen.
Hi, Thanks for taking my questions.
Peter just starting with your Q4 revenue outlook commentary can you talk about what that assumes in terms of recovery rates now does that outlook has seen largely a continuation of recent trends or does that require some incremental improvement.
No, it's really a continuation of current trends and just.
The the key thing for US is that we talked in the trends are deteriorate, but you know I called it doesn't come back a very strongly in that we don't have a reimposition of substantial lockdowns given all a you know recovery is coming you know at all about revenues come from Asia.
You know, obviously Asia effects would disproportionately affect us so who knows where do you more continuation of current trends.
Okay, and that's a good segue to my next question whatever their geographic assumptions behind your Q3 revenue outlook on a year over year basis me seems like you're assuming that you asked revenue is down somewhere around 30% Asia is relatively flat and Europe is down around 20% is that fair and could you help.
So just talking about how much of your Q3 outlook is based on customer ordering patterns from quest in Shanghai Pharmaceuticals.
So as it relates to the second half of the yeah. Yeah. If I can just summarize what I my prepared remarks.
Asia, we're expecting to start the year over year growth in Asia, I expect that will strengthen as we go through the second half.
In Europe, I think we expect we might get back to 2019 levels by the ended the year I think the U.S. because of the severity. The pandemic that we're not expecting to get back to 2019 levels by the end of year. So that should I think give you some.
Some views on how that the revenues will shake out in Q3 in Q4.
In terms of Q3 in particular, we have a strong confidence in the the number we've given for Q3 not only to be as you know get.
Very good window into underlying test consumption, but that obviously give them with partway through the quarter. We already have a number the purchase orders in hand for the Q3 revenue guidance that we've given I did in fact, a number of larger what is already shipped in July.
Okay and then.
You also provide us an update on the question shows priorities. Their lives are clearly busy with running cobot 19 testing, but I'm curious if there's chosen marketing efforts on T. Spot is normalizing are there any metrics such as new per script, new prescriber additions that you could share.
I don't have the latest states will not I think it's clear that probably not seen has been a very substantial disruption.
In many ways and you know I fight.
Full of.
Kudos to to quest for what they've been doing in terms of standing up high volume coffee testing, which has been a very significant effort on their behalf. Clearly obviously that has this rock destructed that organization from from other matters, such as all tests, but underlying that they all still making some good progress.
Gration and Oh, they all still engaged on T spot and from all perspective.
No we are still very profitable in the relationship and the benefits that will accrue to both parties as we complete that integration.
Okay and for my last question.
Can you just talked about whether the results from a 2.5 K patient trial on T spot discovery is driving incremental interest or demand for that product and I'm curious is this an era in which you need to invest incrementally given that's the research community has not historically been key customer segments. Thank you.
Yes, so the moment that that those they specific results on driving demand because I don't yet public domain as they don't published right in the peer review Journal, we'll see hooked to get them published as quickly as possible. Although we're not obviously the sponsor that study and so it's not a the timelines almost something that we can control there.
I think what's driving the greater interest is the increasing.
Recent research coming out of the academic community showing the importance of T cells in the disease.
In terms of incremental expense.
I think for us what we what we all wanting to do here is to position the company strongly if a routine clinical use case emerges that that hasn't happened, yet where obviously wanting to.
Make sure that we do everything we can add reasonable costs too.
To bring that forwards, but that's what that's what we all waiting for and what will drive significant for the increase in spending commitment by off to go through the process the regulatory approvals globally.
Okay, great. Thanks for taking my questions.
Chris.
And at this time there are no further questions.
Great well. Thank you all for joining us to discuss all second quarter 22 into results will afford to update you on next quarterly cool.
Okay.
This concludes today's conference you may now disconnect.
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