Q3 2022 Quanterix Corp Earnings Call

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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Good day, and thank you for standing by and welcome to the Quanta Eric's Corporation's third quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star one one.

On your telephone.

Please be advised that today's record.

Is being recorded.

I'd 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 Netsuite, <unk>, president and CEO of <unk>.

We began 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 a meaningful period to period comparison and analysis of trends in its business.

Management believes that such messages 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 measure is 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 and 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 Quant, Eric is that a pivotal juncture, where our ability to scale with quality hasnt kept up with customer demand for some of our technology.

Last August we announced a comprehensive plan to improve the companys 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 we will provide much better visibility into the progress of BSA remediation program. We recently launched.

Starting with that program.

One quarter and I am pleased to say we are on track.

The first phase was heavily focused on evaluation of raging components to streamline across assays for improved manufacturer ability and reduction in variability.

This will help with lot to lot performance issue as 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 <unk> to unlock the value of translational market.

As anticipated with initial efforts, we saw 700 basis points of gross margin improvement with a Q3 'twenty two 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.

4% decline versus third quarter prior year.

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.

Process improvements are implemented over the next several quarters.

Increased demand for services offered in our accelerator lab continue to partially offset consumable 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 some of our technology has been key to showing <unk> <unk> hundred 17 to be one of the most prominent biomarkers being present at neurological clinical studies recently demonstrated at AIC in July .

The moa 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 <unk>.

The ability of approval.

Okay.

Our publications continue to grow providing evidence of the industry's reliance on our ultra sensitive technology for breakthrough discovery and research.

And clinical applications.

In the third quarter of 2002, we added 159 publications, bringing total sum or specific inclusions to over 2000.

We continue to see steady demand for our instruments and have placed approximately 130 instruments year to date aligned with 21, bringing.

Bringing our total of placements to over 800.

It's no secret that high rates of discovery follow those who are testing and measuring and domains others don't participate.

Means or the single molecule and digital level.

Empowered by our <unk> technology.

Geography geographically, while North America represents 65% of our revenues, we continue to expand our regional capabilities, most notably our recent strategic IBD partnership with Ultra Dx in China.

We believe we are 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 ADF to accelerate Alzheimer's disease diagnostic test development.

We've kicked off our efforts with the Amsterdam University medical centers on four phases of our clinical trial to validate <unk> multi analyte test.

50% through phase one we're 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're participating in is nearing completion and.

At the beginning of 'twenty three.

<unk> is a prospective trial in partnership with the global Alzheimer's platform Foundation the.

The trial spans 17 U S sites and will include around 1000 early Alzheimer's patients.

These patients will have amyloid pet scans.

All of the sites are in the U S and the trial will include underserved populations and cognitively unimpaired subjects.

This prospective validation trial for <unk>, one will generate data in support of our existing FDA filing for clearance of the test now.

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 of 2022 performance and for your reference for those following on the call I am starting on slide four.

As <unk> 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 a $1 million of <unk> revenue, excluding <unk>, we were flat to Q3 2021.

We have 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 'twenty one.

As <unk> mentioned, we continue to manage production demand for consumables, while we address the asset quality.

Instrument revenue increased 20% versus the third quarter of 2021 aided by the sale of instruments to ultra Dx in China.

Third quarter service revenue increased 42% versus the prior year third quarter to $8 4 million <unk>.

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 cost 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 cost not built 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 resulted 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 to gross margin.

We have made these changes to give greater visibility and our quality activity and allow investors to better monitor our progress.

Now, let's review margin performance of the 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 500 basis points there.

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 <unk> pointed out earlier, our efforts are already resulting in improved gross margin with an increase of approximately 700 basis points and pro forma gross margin from Q2 of 'twenty two to Q3 of 'twenty two.

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 two.

<unk> thousand 21.

We had a few significant items 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.

The subsequent analysis resulted in an impairment of $8 $2 million to goodwill a noncash charge to our P&L.

Third we incurred an impairment charge to our Bedford, Massachusetts, real estate, which we will not be utilizing and a write down for abandoned software totaling $8 7 million.

A noncash charge to the P&L and finally, we incurred $600000 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 and we ended the second quarter of 2022, which is detailed on slide five.

Ending unrestricted cash balance was $343 7 million as of September 32022.

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 size that business for a 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, beating our internal revenue targets and exceeding consensus is.

As <unk> discussed we are making good progress on rebuilding our assays as.

As we head into the fourth quarter, we project Q4 revenue between 24% 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 <unk> 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.

So over the last several months, we're seeing a ramp in new discoveries using similar narrow filament light a key biomarker to monitor neural damage impact of a wide range of health developments and issues.

Key recent applications include using serum <unk> levels as a predictor of stroke severity and recovery.

Direct monitoring of common and critical neurological side effects from car T therapy.

And use as a biomarker to monitor critical chemotherapy side effects.

Several more examples of using serum NFL as a secondary endpoint and the development of new therapeutics.

And continued advances in the use of NFL at both diagnostics and treatment monitoring biomarker for MFS.

These among many other publications served as direct evidence of the value of <unk> NFL as an important check engine light for the brand.

It's fair to call Quanta Ericsson unique with over 800 instruments installed.

<unk> IP.

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 <unk> levels, particularly $2 17, and $2 31 as measured with similar elevated early and cognitively unimpaired patients and correlate with a beta pathology.

Suggest that these <unk> biomarkers may be excellent tool for screening patients and to new preventative trials instead of having to screen by pet or CSF.

<unk> assays are being developed and validated by our pharma partners. We are just starting to see first published data that in fact, lower P. Tau to 17 levels could be an ideal biomarker to advance these exciting new drugs.

Later this month at the clinical trials on Alzheimer's disease <unk> in San Francisco will participate in an all day panel on the use of these blood based biomarkers and clinical trials, where we would 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 and neuro degenerative research and the demand for ultra sensitive tools for early biomarker detection has 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're taking will improve our quality and manufacturer ability of our assays, allowing us to both scale and improve our cost structure and 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 <unk>.

Innovating and growing at a much faster pace than before.

And then in a leading position to propel new discoveries advancing neuro degenerative disease research and diagnostics.

Let's take some questions operator.

As a reminder to ask a question you will need to press star one on your telephone.

Please limit yourself to one question and one follow up and then re queue.

Please standby, while we compile the Q&A roster.

We have a question from Puneet <unk> with SBB Securities. Your line is open.

Paul Thanks. Thanks for the question this is still a bonds for cleaning.

I appreciate that Youre still in the midst of assay redevelopment, but.

Given the progress you've seen so far I'm just wondering if you see any upside to flat year over year guidance.

Hi, Phil This is Matt soon.

Yes, so as we said on the call.

Redevelopment program and road map.

And.

It's meeting our expectations that we set out from the beginning of last quarter and so three months and now we don't see.

Any sort of.

Delay and our progress on time and.

And measured and.

Our guidance.

Reiterating our guidance on the call that Hey, this is going to be similar to what we said last quarter, which is which is flat.

<unk> 22 versus 21.

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.

Quarter.

Okay.

So.

Just wondering like.

Has there been or do you expect kind of a negative impact from.

Some kind of the broader challenges.

Consumables.

Yes, so you can see that.

We have some challenges on the consumable side a lot of those were self inflicted as we.

Improved.

Quality processes the stability.

And so as of yesterday, you see that instruments are on track versus what we did last year in 'twenty one so.

Per our expectations.

No nothing unusual.

Okay. Thanks.

Ill hop off.

Thanks Bill.

Our next question comes from Carl Mixon with Canaccord Genuity. Your line is open.

Alright, thanks to careful alarm com MX.

Let's turn to your questions. So I was wondering if you could.

Because any geographic related headwinds that you experienced during the quarter.

Whether it be consumables are in share related.

Also I was curious as to whether there is any more.

Any further workforce reductions during the quarter as well thank you.

Yes.

I'll take the question, maybe Mike can add some color on the.

On the regional breakdown so no.

Announced the reduction in force last quarter.

We don't have any plans for additional reductions.

And I would say that the.

The realignment that we had in last quarter really focus.

<unk>.

The quality the innovation and the translation of initiatives that we announced so that's progressing as expected.

You can see some of the.

Improvements in the P&L.

From a geographic perspective I think.

I can go into it but broadly speaking.

No major headwinds in any particular region.

In fact.

<unk> partnership with Ultra Dx and so we saw some growth from instrument side in China, but.

Mike why don't you.

Yes, I mean, if you look at it.

Down.

Down slightly from a revenue perspective year over year and spread almost evenly between North America, and Europe Asia Pac to to <unk> point is up double digits, driven primarily by the ultra Dx shipments.

Of instruments to China, So that's pretty much the way it breaks out it doesn't seem to be isolated to just say any one region North America, obviously is still our largest region.

63%, so, but it looks like its spread pretty evenly.

Got it thank you very much.

Thanks.

Thank you and our next question will come from Matt <unk> with Goldman Sachs. Your line is open.

Hey, this is 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 I'm just wondering when you were talking about managing volume.

Resulting in some of the declines we saw in consumables, how is 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. As there is some substitution risks for some of those assays, where they could go elsewhere.

Or is what youre, providing onto a closed system <unk> unique and that they're able to wait as you manage that volume and work through the redevelopment.

Hey, Matt I'll take that so great.

Great News is is that.

To achieve the ultra sensitivity that you need in a lot of cases.

And our ability to measure with great limits of detection.

Matched and so a lot of these customers.

We have been able to manage the volume in and say hey.

One.

Validate things and.

Put up.

Quality wall, so things aren't getting up to their hands as fast as we.

We might expect so.

Thank 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 accelerated laboratory. So we feel that in terms of capacity you can see we have big.

Big projects with Lilly 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 accelerate our 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 I mean, you've talked a lot about the pharma.

The partnerships and the work Youre doing there.

Early in the year.

Talk a little bit about <unk> and the potential there and just given the slide you had up on the versus pet screens and in kind of the lowering of costs. You can provide from 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.

<unk>.

Absolutely yes.

We are very clear that through our own laboratory Arthur.

Doing here internally, we're not going to be able to ourselves match all of the demands in neurology and so we absolutely want to enable.

CRO partners partners are working with pharma companies and so for us it's.

Now, let's enable them they are a big part of the market.

The account for.

Anywhere from 40.

60% of our business.

Depending on the quarter.

And so.

A big Fat and will continue to support zeros.

Got it and then just one final follow up for Mike.

As we look at the sequential improvement in gross margins. That's that's fair to see that is apples to apples in terms of all the.

The exceptions and changes that you've made on an accounting basis I'm talking about sequential not year over year.

No on a sequential basis, absolutely right, Matt for your Q2, and Q3 capture the impact of the allocation changes captured the impact of the pro forma distributions. So it's a real improvement primarily driven by <unk>.

Expense reductions.

That were the result of.

The restructuring and then we had some product mix bump up in that pretty much offset some of the inventory reserve. So it's a real quarter over quarter improvement.

Got it and Youre not expecting any additional changes there.

In terms of your plans. So we can see sort of Q2 as a base to work from going forward.

I think thats 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 <unk> on for Matt.

Thanks for taking my question.

So the way I'll turn the call.

Welcome and thank you.

Okay great.

Helpful.

November data readout and Makena map.

I'll try to influence demand for.

Product and service revenue.

Following.

A landmark catalysts, our album with patient care.

Hey, Stephanie.

We're incredibly excited as well.

I think that it's going to be a great conference a lot of.

As I said as you mentioned top line Readouts and just progress.

In the hall.

<unk>.

Area, we really believe this is the neuro decade.

Yes.

In addition to the ALS Readouts that we expect to hear at <unk>. There's also a lot of work happening in ischemic stroke.

Yes.

Yes.

Tbi Parkinson's so we think that.

<unk> had a great start for Alzheimer's.

Obviously.

You are aware a lot of our tests in the market are being used in clinical trials. Our tests are being used for monitoring drug effects.

Pre screening enrolling.

Its population.

Really just improving the whole disease continuum. So.

The readouts in the results I think it's just great for the field and we're incredibly fortunate that the technology and the products. We have are going to really enable.

That disease improvement and then continue on so we're excited about the conference.

We're looking forward to the to the results.

Great Thanks for that color.

And then just.

Alright.

President of neuroscience.

Comparable earnings power Blackpool.

<unk> plans to launch <unk> diagnostic Nexium could you provide some additional context around the requirement.

Should we assume that the customary if work Brian .

Brian .

Okay.

Yes, so Stephanie we're not.

We will make comments on.

On this call.

But I can say publicly that we do have a partnership with Lilly.

We have released and that is public information.

And we're very active in this space.

But.

No.

Wouldn't want him.

Hadn't listened Tonight.

Specific call I wouldn't want to make.

Got it.

Got it understood.

And just one more.

One <unk>.

101, RV pullback commercially launched in late July .

For clinical use open great. Thank you.

101.

Who.

Revenue contributor exiting Q3.

Can you describe what demand trends.

Article customized research customer.

Yes, that's a great question so.

We did launch the <unk> <unk> first of its kind.

In North America.

No.

An important test for us and they take diagnostics for Alzheimer's.

Say very early innings.

No nothing material in terms of revenue for diagnostic side, but for clinical testing for research applications.

I was having this as absolutely.

Driven interest in us being able to provide a diagnostic pathway.

And ultimately something that.

Could be regulated and.

Get a FDA approval for in the future so.

Answer to 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 trials screenings.

Pre screening is high.

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.

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