Atomo Diagnostics Limited (AT1) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to this morning's event. It's an Appendix 4C Results Wrap. A lot of Appendix 4Cs have been dropping over the last week or so. And I'm delighted to say we've got 2 companies here presenting this morning. My name is Mark Tobin. I'm the Founder of Coffee Microcaps. For anybody who is joining us for the first time, you're very welcome. And to all our regular listeners and attendees, welcome back. Just a quick few intro slides, and then we'll get into it. I just quickly do want to mention we've got a live conference in person happening in Melbourne here tomorrow. I'm actually down in Melbourne for it, and there are still a few tickets still available for tomorrow's event, which you can get from the Humanitix ticketing platform. As always, I'd like to mention our virtual event sponsor here, Coffee Microcaps, DMX Asset Management. If you are looking for a micro-cap or a small-cap fund manager, please do check out the DMX Asset Management website for all relevant the guides and application forms. Compliance and disclaimer slide. Finally, who's joining us for the first time? The companies we normally have presenting on here are capped under 300 million in revenue and the cash -- and approaching cash flow breakeven or, indeed, would be already profitable. We generally don't have companies from the resources or biotech sector, what I'd like to call industrial micro-caps, which covers everything of the other sectors: financial services, health care, consumer goods, professional services firms. Structure of this morning's webinar, as I said, we've got 2 presenters presenting over the next hour. Each company has got a 30-minute slot, which will roughly break down into a 20-minute preso, 10 minutes of Q&A. If you do have any questions for either of our presenters this morning, please type them in the Q&A box rather than the chat function, and I will put into our presenters at the Q&A session time. Please note the webinar is being recorded and will be posted under the Coffee Microcaps YouTube channel later in the week. You can follow us pretty much on all the socials: Twitter, LinkedIn, YouTube. And I also write a free monthly newsletter that goes on the Substack newsletter platform. First up this morning, we've got a returning presenter [ in the likes of ] Atomo Diagnostics with John Kelly, CEO; and Will Souter, the CFO. And then after we've also got another returning presenter, and 8Common [indiscernible] joined by Executive Chairman, Nic Lim. And without further ado, I'm going to stop sharing my screen and hand over to John and Will, who are patiently waiting in Sydney for us. I can see the Appendix 4C announcement now, John, so you and Will can take it away when you're ready.

Very good. Thank you, Mark, for the introduction.

Thanks, Mark. We'll jump straight into the cash and revenue position. So cash receipts from customers during the quarter of in excess of $1 million, which was mostly made up of HIV sales, the collection of HIV sales from the previous quarter and some sales related to OEM during the quarter as well. So that brings our total cash received year-to-date from customers to just under $3 million. Revenue for the period continued to grow. We've had quarter-on-quarter growth. Obviously, last year, there was a lot of COVID revenue that dominated the P&L. And this year, we've been able to, I guess, get back to the focus on HIV and our OEM business. So we've gone roughly $0.5 million revenue in Q1, similar in Q2, $600,000 in Q3. And we're anticipating that growth to continue Q-on-Q into Q4. In terms of the quality of revenue, I think that continues to improve post COVID, with HIV growing across a number of customers and markets. And John will talk a little bit more about that. And obviously, with new products in the pipeline to be delivered in FY '24, we can maximize those channels that we've opened up now across a number of different markets and a number of different geographies. And I think that quality of revenue and recurring revenue, as well as opening up across different markets, gives us an opportunity to have more of a portfolio approach, which improves our overall margin position as we move into '24. At the end of the quarter, we had $8.9 million of cash on hand and remain debt-free. And in terms of our spend, we are maintaining a clear prioritization on activities that are maximizing opportunities for returns on our installed manufacturing asset base and also our intellectual asset portfolio. So what that means is leveraging our existing Galileo and Pascal platforms, in particular. They're already in market and taking those platforms into new markets and to new products. And John will talk some more about that. Obviously, with that, comes a focus on a couple of key areas of spend, business development. So there's been a lot of activity across Australia, U.K., Europe and the U.S. in that regard, both for finished products and for our platforms. And also, obviously, to maintain and grow our portfolio, we need to continue to focus on regulatory activities and quality activities. So that's been the main areas of spend during the period. Very limited spend on capital because, as I say, we have that installed asset base and production facilities ready to leverage. And really, it's been a focus on business development and product pipeline development.

Yes, and I think we've seen just on the financials a reduction in the overall OpEx of the business, about $1 million of OpEx over the last year. And that's been to, I think, run as lean as we can and, as Will said, utilize the existing validated capacity that we have and focus on delivering new product opportunities as well as restructure our go-to-market channel partners to really focus on the emerging consumer health market, where traditional diagnostics companies have not been focused and don't have core expertise. And we'll talk a little bit about some of those channel partners and why we're excited about those. If we go -- initially, the HIV sales test, we're encouraged by the return to HIV within the public health sort of landscape. There was for a number of years, obviously, an overwhelming focus on everything COVID, and that was not only our customers and partners but also public health providers in global health as well as developed countries. And we saw, as a result, a drop of HIV interest over a period. That's now, I think, returned to normal. And we're also very encouraged by the normalization of at-home testing. That's come about from the pandemic, and that's made self-test, particularly for HIV, more of an option now for public health providers. Prior to the pandemic, self-testing was not really -- outside of global health, not really seen by public health as a preferred channel. And now we're seeing in the U.K., in the U.S. and, more recently, with some positive discussions in Australia, public health recognition of self-testing as a channel. And that's really encouraging for us in 2 ways: one, because it diversifies the amount of public health channels that we can push into. But more importantly, it's dealing with countries where we get better margins. So selling, obviously, products in Europe and in Australia generates a significantly better per test revenue and per test margin than selling into global health. And we'll start to see not only, we think, significant step-up in revenues but also better gross margins associated with that. The first step in that restructuring was to move to a more consumer-focused partner in Europe. We announced an initial order with Newfoundland Diagnostics, who have pushed into retail channels through their COVID business, and they're now expanding into a range of other testing applications. And that shows the appetite in the U.K., in particular, for consumer testing, and they announced -- if you check their website, you'll see they announced a deal where they push into Tescos over 3,000 stores. They put a sizable order in for our HIV self-test, which we're yet to see in the revenue numbers. We expect to see that come through in the coming quarters. And that's not only in the U.K. but Germany and a number of German-speaking markets as well, and they've got solid demand there. And I think that demand will only grow, not only for HIV but for other applications, and we're very mindful of the ability for Atomo to bring quite cost effectively now other applications onto the platform. We have the regulatory approvals. We have the channel partners with access into retail. We have the validated facility in South Africa, where we can make finished products quite cost effectively. And that was done to support global health, which is why we had to really focus on low cost of goods. But that now means that pushing into markets like Germany, the U.K. and Australia, New Zealand and others, we get a healthy margin, and we expect to see our margins improve as we do that. Outside of the HIV business, we are looking to bring a pregnancy blood test to market. That's a very exciting opportunity for us. We submitted to TGA that dossier a number of weeks back. That's based off a dossier that's already been approved in Europe. The product CE-marked and sold in a number of countries by NG Biotech, and they're seeing solid growth in their French business, and we're then reporting that through as new OEM business through NG Biotech as they build up their business in Europe. We went to APP '23 up in the Gold Coast, the largest pharmacy expo in the Southern Hemisphere. During the quarter, we were very, very encouraged by the interest from pharmacy chains and independent pharmacists. The blood-based pregnancy test that we're looking to commercialize here has 2 very significant benefits over urine rapid tests: that they are, one, better early detection. HCG levels in blood build up quicker than they do in urine, which gives blood-based test an earlier detection window and better reliability in that first week of pregnancy. And secondly, blood could be used at any time. So if you go into a pharmacy and buy a pregnancy test at lunch time, you're advised that you cannot use it until the following morning with first flow. Most women who are keen to understand their pregnancy status don't want to wait an extra day, and using a blood test enables them to test immediately. Those 2 benefits are considered by the pharmacists that sell pregnancy tests to be material product advantages. And add to that, the ease of use on the Atomo platform, we're very confident that, that will be a sizable product opportunity for us in Australia. And off the back of approval by TGA, we'll be looking to register in New Zealand, and we've already had solid demand from a number of Asian markets as well. So that's an interesting opportunity for us and one that we're looking to prioritize with revenues coming online, we hope, early in the FY '24 period. We've also worked with a specialist consultant in the U.S. to put together a pre-IDE submission package for FDA. We did secure the rights for North America with NG Biotech in that restructure, and we'll be looking to move forward with an engagement with the FDA to finalize that plan with NG Biotech later this year. So we see pregnancy being not only the next finished Atomo product to market but a very sizable one that's playing into an established market, and we're coming into that market with a very defined value proposition for the user, which we think is valuable. And certainly, the feedback from pharmacists would suggest that, that is a product of potential scale and opportunity. Beyond that, we've had from our channel partner discussions in the U.K. as well as feedback from APP '23, a solid list of next products for us to prioritize on the platform, and we'll be looking to announce, in the coming weeks, the product behind pregnancy. We're already well advanced on putting together that dossier, and we'll be looking to complete some equivalency study testing in the next month or 2 and then submit later in the year for regulatory approval in both Australia and Europe. And we would expect that product to be approved and in market by the end of calendar year F -- sorry, financial year FY '24. So we'll not only be seeing a buildup of HIV revenues over the year but also the introduction of pregnancy test and other tests through this financial year. And that will, we believe, show ongoing quarter-on-quarter growth. And it's important to note that, that doesn't require a lot of additional investment from Atomo. We have the platform. We have the validated manufacturing. We have the certified facility, and we now have the channel partners waiting for product. And I think that allows us to bring a number of products to market in the next 12 to 18 months with a very modest investment from the business now to get those products to market. We also announced in the period the granting of a number of, we believe, valuable patents in key health care markets, primarily U.S. and China. The IP that underpins our technology is fundamental to the value of the business and the ability for Atomo to become a market leader in consumer testing. We have unique usability that the regulators recognize that consumers really value, not only in terms of the ease of use but also the reliability. That's now been proven in a number of independent studies, and those studies are showing that our device gets regulatory approvals in markets where bits-and-box formats struggle. This IP now being granted off the back of a number of first-line patents gives us a defendable proprietary position that allows us to generate a unique position in the market that we can get a premium for as well as obviously a list of OEM customers interested in accessing that platform. Very encouraged to see our existing OEM customers back ordering product. We did have a hiatus on our OEM business through the COVID pandemic when all of our partners and pipeline partners were focused on COVID solutions. Now that COVID has essentially fallen away from the diagnostic market as a priority product, we're seeing NG Biotech reordering at a rate above the orders we were seeing before the pandemic, and they're very bullish about the opportunities for further orders. We're seeing a new pipeline of opportunities coming through our -- based on discussions in the U.S. So that OEM business, I think, albeit been behind schedule because of COVID, is continuing to grow. And again, we have that validated capacity online that is ready to fulfill that demand. So we don't need to really spend any more CapEx to get there. So where that leads us moving into the final quarter, I think, is recognizing that the COVID revenues that we saw, like a lot of companies, has fallen away. We have restructured the channel partner arrangements that we have to move away from diagnostic company partners to consumer health companies, both retail and online. That's where the growth is in self-test markets. That's where our technologies and products add the most value, and that's where we have a defendable patent position that we can leverage off. We're starting to see now interest from companies like Newfoundland and others for accessing our HIV product. They've already put a short list of other opportunities on the table. We have had similar lists provided by local pharmacy partners here at the conference. So I think we're not looking to execute on that, bring pregnancy to market and a number of tests behind that, and we have the capacity now to supply into that, and we're ready to start to grow beyond COVID.

I think just to emphasize that point. Because it's something we've been talking about for some time but we're really starting to see it in practice now, I think the Newfoundland order is the first really, really good tangible example of that shift. Conversations we were having previously with customers, as John said, we're diagnostic customers, and they were trying to figure out how to get out of the lab and how to get into the hands of the consumers. These potential customers and existing customers like Newfoundland are coming out of it from the other direction. They're coming out of it from the consumer's direction. They're coming out of it from an FMCG kind of background. And they're coming out of it from a go-to-market and partner with Tescos and Coles and Boots and so on. And that is a totally different approach and one that fits tremendously well with what Atomo is offering. So I think that shift in the landscape that's being brought about by COVID, those guys opened up, all those channels through COVID is now really starting to play out in practice. And we think that's just the first example of how we're going to be able to leverage that shift. We leverage that, I guess, different approach to the market that these guys take as compared with the traditional diagnostics company. So that's really, really encouraging and gives us, I think, an opportunity to generate that really quality revenue that we've been talking about, recurring revenue into bigger markets, different markets with higher margins and also a diversification of the product portfolio. If we find ourselves in a position where we've got U.K., Europe, we've got Australia, we've got North America opened up and it's all underpinned by global health business and OEM, then that's what we're pushing towards, and that's what we're targeting. And I think we're just starting to see the real first tangible steps of that through the last quarter.

Yes. And I think while we wait for that revenue to build up on those products to come to market, we're mindful of the cash-on-hand position that we have. We've worked really hard to pull OpEx cost out of the business, about $1 million over the year. And we'll continue to run as lean as we can. Our headcount has contracted a little bit as we try to do more with what we've got. And that's to ensure that we've got the capital on hand to deliver these new products to market and start to deliver a range of products into these consumer health channel partnerships that we're now looking to firm up and scale.

Yes, we've had some questions about that cost base and what does that look like in terms of the executive pay, the overall cost base of the business. And I think the point to emphasize is there's a line that needs to be taken during a period like this in the market, which is to be careful with your capital and be sensible with it, but also to continue to invest. And that's what we've been doing. And in order to do that, there is a core cost base to any business and a poor cost base to any ASX-listed business that needs to be sustained. So I think we've been very, very careful and very judicious with our capital. But as John said, every expenditure decision that we're making, we're thinking about how that plays into the business' overall strategy and how it plays into current market conditions. And the good thing is that we've used shareholders' funds from the IPO to build out our production capacity so that we are now in a position to leverage that. And really now, it's about spending on that core business development, the core regulatory and quality activities and the core -- the quality, I guess, team support for all that activity. So that means having engineers that can onboard products. It means having a team that can deal with regulators in Australia and WHO in the U.S. It means having individuals in our different markets that can talk to customers. And that's really the core of the business that we've got in place right now. And I think that's what's required to deliver on the growth that we're talking about.

Yes. So Mark, happy to take some questions from anyone that wants to put them.

Thank, John. Thanks, Will. I mean we had one question there, as you say, on I guess profitability in executive pay, but I think you guys have, in your remarks there, have kind of covered it off. I just wanted to delve a bit deeper into the TGA approval for the pregnancy test in terms of what is the kind of a time line of steps that happens. Let's say, TGA email back tomorrow, or you get some notification back tomorrow that's approved. What are the steps that then has to follow so that if somebody goes to Chemist Warehouse, your product is going to be on the shelf there beside a traditional Clearblue one, so that they can actually have the option to buy it and kind of roughly how long that kind of process would take before we kind of really start seeing stocking orders or first orders coming through and, obviously, revenue is coming through from it? I just want to kind of get a bit of a deeper sense of how that would go.

Yes. No, that's a great question. So I mean, obviously, the largest variable there is how quickly the TGA responses back and how much time then is required to close that process. Assuming that, that is smooth, we would be hopeful of initial sales potentially in that first quarter of FY '24. Certainly, off the back of that '23, we're talking to distribution channel partners in Australia and New Zealand. We've also had inbound inquiries from a number of markets in Asia, which, we believe, we can get Fast Track approval once we have the TGA approval. The time to get product in country pretty quick because NG is already making their version on an ongoing regular basis, so swapping out the branding and packing to the Atomo versions already sort of set up. So once we get approval, we could have a product in country within a matter of weeks. We're talking to channel partners in advance of the approval. The idea is that we have those agreements, either executed prior to approval or ready to go with approval, maybe being a sort of requirement to execute on the final data but having that partner lined up which means then that the go-to-market time on the other side is relatively prompt. So we certainly would be looking and hoping to be selling product in Australia this side of Christmas, potentially not that far into the new FY.

And I guess just to add, we're already selling HIV tests into pharmacies. So we have a network of pharmacies that are already Atomo customers. So we'll be able to go to them. Obviously, that will be our first order of call and ones we can get into quite quickly. And then secondly, we announced that we're selling through API as well. So we would expect to be able to put some stock through them reasonably quickly as well. So as John said, it's about getting through the TGA, getting the product in country. And once that happens, then we'll be up and running, and we'll be able to move fairly quickly to at least hit that first batch of existing customers and expand that out from there.

And then just an extension on that. The kind of age and expansion as the -- let's say, the second order of that, can you directly leverage the TGA approval or the CE mark approval in Asia? Or is there like another in-country regulatory approval that needs to -- process that needs to happen if you were to move it into Asia?

Yes. It depends on the territory, Mark. Normally, the export certificate can, in some countries, facilitate a straightforward registration where you normally need an in-country partner to be sort of the product sponsor to register it. But it doesn't necessarily require any additional clinical evaluation. There are some companies that want to receive a batch of product and do some basic testing to prove efficacy before they'll approve it, but that's normally quite quick. I mean the thing to remember here is that, most territories, a pregnancy test is a Class II. We've obviously been working to a higher standard with HIV being a Class IV. In those types of products, countries normally do want to do some independent evaluation, albeit a sort of summary version, but we don't believe, for pregnancy, that there's an extensive in-country requalification requirement. So we think the time and effort and cost to get follow-on Asian registrations off the back of TGA is pretty quick.

Very great. And in terms of expanding the sales in Europe, is that more about just getting the pharmacy partners on board? Or is it getting different OEMs, channel partners for different markets? Like can NG Biotech expand into other countries for you with their -- so it's just finding the in-country pharmacy partners? Or is it the case of looking for a specific channel partner like [ OGM ], specifically for the Spanish market, and then it's -- they got to find a pharmacy partner for you?

Yes. So within the pregnancy market, NG have access to Europe under the agreement, so they're launched in France, they're launching or have launched very recently in the U.K., they have a distributor in Germany that covers the German-speaking territories, and they're looking to expand outside of those markets, particularly in Eastern Europe over time later in the year, I understand. They've also placed the first order for Brazil, they got Brazilian approval, and we're hoping for a second order for Brazil soon. So they are growing in their markets. And then we decided to divide and conquer. So we took over Australia, ANZ, specific potential opportunities in Asia as well as North America. So I think by spreading our go-to-market resources across both businesses, we're able to get into more countries quicker than we would if we just let NG try and do it all organically. Outside of pregnancy, obviously, we're in discussions with Newfoundland or on opportunities beyond that first order. We're very excited by them having a channel into Tescos. We know that Tescos are interested in a range of different test applications, a number of which are suitable on our platform. So we'll be looking to expand the offering that we bring to Europe. And certainly, the next product that we announced shortly will be not only an Australian-focused submission but also an IVDR submission into Europe for European consumer market that's really growing quite rapidly across a whole range of different applications, not just HIV.

And just one final question, and John, I don't want to keep on the pregnancy one, but it is a larger opportunity he said than the HIV one. Is there an education piece that has to happen for the consumer where they get the benefits? Are they aware of the benefits of the blood-based one versus the urine-based one? Because that kind of Clearblue one, I know I'm going back to it, but it's been in market for so long, and it's kind of -- for a lot of people, it's probably like a default setting for them, and it's how you educate them to say there is actually a better option here, let's say, a cost-competitive price, I'm assuming. Is there an education piece that has to happen that's either funded by you or funded by NG Biotech or training a pharmacy staff or training at the pharmacies themselves so that when somebody is looking for an option, they're guiding them more in your direction rather than a product that's got a long history in market?

Yes, so this is a great question. There's a couple of bits to the answer. I think the first point I'd make is there is an education requirement, but at the same time, people intuitively seem to understand that blood is better than other sample types for diagnostic accuracy. So we've done a few survey focus groups, and we asked the question: "Is a urine sample more accurate than a blood sample for detecting pregnancy?" And not very many people put their hand up for urine. So I think -- and we've had similar things with the Atomo HIV test versus the oral swab test. People don't trust oral fluid or urine the same way they trust blood. And we quite often get feedback, "When I go to the doctor, he takes blood for test. He doesn't use urine or swab cheek samples." So I think people intuitively know that blood is the most reliable sample type for a lot of these types of tests. That said, you're right, blood is not a typical pregnancy test sample type, and there needs to be, obviously, an education program at the pharmacy. So that when people come in asking for pregnancy tests, people know that the blood test first is available and be that it's potentially more accurate if you think you're just pregnant. Or if you want to get a result immediately, pharmacists do know and have already been told that urine tests are more accurate first flow, which means that if you go in and buy one at lunch time, you really shouldn't use it. And we actually got told the reason that pregnancy tests are sold in packets of 2 quite often is because someone will buy it on their lunch break, take the test and, if it's negative, retake the test the following morning because they've been told that the afternoon test isn't as accurate. With our device, that is, you only need one test, and it's going to be more accurate than either of the urine tests and that early [ fear ]. So I think once that education is out there, the channel, we believe, is [ right ] for disruption. But yes, we need someone that can help us get that message out. And I think a go-to-market partner that has access into the pharmacy network will be really helpful in getting that knowledge out quicker than potentially we could do it organically with 1 or 2 people. So I think we're looking and open to finding a partner that sees that opportunity that can really help us get into pharmacies at scale and get that educational piece quickly quantified. But once you do hear that, people accept it and understand it and it seems intuitive that blood is more accurate, and that's really encouraging that people aren't questioning why could -- how could it be a week earlier, people are saying, "Yes, I get that."

We've also got that infrastructure in place to support online training and do it sort of reasonably efficiently, Mark, because we needed to do that for the HIV self-tests as well. So there's sort of a pathway there that we can follow to a greater or lesser extent. I think as John says, with pregnancy, it's been easier for people to get their head around quite quickly, whereas there were no HIV self-tests in the market when we first came to the market here in Australia. So we were starting from scratch there. [ The advancement ] has taken that up pretty enthusiastically over the last 9 months since we got the TGA approval to approach pharmacies. So you would think pregnancy would be similar, if not easier.

Yes. And I think you hit an important point. HIV is more of a niche market. We have a monopoly here in terms of being the only product to market, but it is a limited market size. I think the pregnancy market, obviously significantly larger, several million tests each year in Australia. We think there's significant growth opportunities in that channel.

Okay. Guys, we'll have to leave it there because we've gone slightly over time, and I do know our next presenter, Nic Lim is -- from 8Common, is waiting very, very patiently for us on the slide here. So thanks, John. Thanks, Will. And Nic, if you want to start sharing your presentation, I'll let you know when I can see you coming through on screen.

Thanks, guys.

Thanks, Mark.