Clever Culture Systems Limited (CC5) Earnings Call Transcript & Summary

Welcome to our quarterly investor call. [Operator Instructions] An audio recording of this call will be made available on the company's website later today. I would now like to hand the conference over to Brent Barnes, CEO and Managing Director.

Thank you, Jack. Welcome, everyone, and thanks for joining today's investor call. It's with pleasure to speak with you all today. Over the past 6 months, we've made significant efforts in repositioning the commercialization strategy for our core technology, the APAS Independence to focus on the biopharmaceutical marketing sector, automating culture plates generated for the purposes of environmental monitoring. This shift in commercial focus does not mean we're walking away from the clinical market but adds a new large market opportunity for the company that we believe will be a major growth driver for the business. In today's call, I'll provide a company presentation that aims to really link together the recent announcements around our commercialization milestones. Ray Ridge, our CFO, will provide an overview of our financial performance before I wrap it up at the end. There will be an opportunity for questions and answers at the end of our call. I'll now hand it over to Ray Ridge, our CFO, who joins me on the call today.

Thank you, Brent. The usual formality before we commence. I would like to remind those on the call that today's update may contain forward-looking statements, which do involve inherent risks and uncertainties. Those risks and uncertainties include those disclosed in our ASX lodgments, which we recommend that you review. There are reasonable grounds for any forward-looking statements made today. However, due to their inherent uncertainties, we do recommend that you do not place undue reliance on those statements. And of course, actual results may differ materially from those forward-looking statements. We're now ready to go back to you, Brent.

Fantastic. Thanks, Ray. For those joining online, I've got a brief presentation, but I'll be talking through the point. So if you're not joining on a computer and can't see my screen, that doesn't matter. Look, we're really laser-focused in our pursuit to bring our Automated Plate Assessment System into the biopharmaceutical marketing sector for environmental monitoring. Our focus on APAS PharmaQC technology development started over 12 months ago in combination with our partnership with AstraZeneca, who committed $1.1 million of R&D fundings. This development is centered around analysis module development, and that's the AI-based software we train to read and interpret growth on culture plates, specifically for environmental monitoring applications. The project has been tracking on schedule over the past 12 months with delivery of milestones linked to progress payments by AstraZeneca, which have now largely been completed. It's the successful progress we've made in our technology development that has led to our early commercial success, specifically our announcement last week of our first sale of the APAS PharmaQC product to Thermo Fisher. I'm now sharing the slide that summarizes the linkage and the importance, the research and development has had on our commercialization efforts of the product within this new market. The partnership and the funding agreement we announced in January of 2023 over a year ago now was really the foundational milestone that has paved the way for us to start marketing and introducing APAS into this new biopharmaceutical market. In April 2023, we delivered the APAS Independence instrument to AstraZeneca, which gave us access to real-world environmental samples that assisted our algorithm development. Subsequent to this, we have delivered to AstraZeneca, a number of pre-validated analysis modules whereby the first study demonstrating performance of a bit over 1,500 samples was completed by AstraZeneca in August of last year. This study was expanded to over 8,000 samples and presented by AstraZeneca at the PharmaLab Conference in November of 2023. I want to emphasize the importance of real-world data. More significantly is real-world data presented by a customer. November 2023 was an important commercial milestone where our APAS PharmaQC technology gained credibility because of the positive performance data that was presented by AstraZeneca. Our commercial development of APAS PharmaQC has been a clear focus over the past 5 months following successful technology development and supported by our partnership with AstraZeneca. During this time, we've attended key pharma conferences in the U.S., Europe and Australia. This month, AstraZeneca presented APAS performance data once again at a virtual BioPhorum event. And last week, hosted a 2-day in-person Modern Microbiology Methods industry event where APAS Independence was showcased in situ at their facility in the U.K. The feedback we've had as a result of these commercialization efforts have been extremely positive. And as a result, we announced last month that we've upgraded our expectations for sales to occur in the first half of 2024 calendar year, which is approximately 6 months ahead of previous guidance that we've given to the market. Last week, we announced the first sale of APAS PharmaQC to Thermo Fisher. We have an exclusive distribution agreement with Thermo Fisher, who sell APAS into the clinical microbiology market. Thermo Fisher don't have rights to distribute APAS into the biopharmaceutical market. However, through this relationship, we were introduced to their contract drug manufacturing organization. Thermo acquired a company called Patheon in 2017, who are a leading contract drug manufacturing organization or CDMO. Back in 2016, when they acquired that company or the revenue generated in 2016 was approximately $1.9 billion. It gives you an idea of the scale and the size of the CDMO that we've been introduced to here within Thermo Fisher, now we're a Thermo Fisher company. And now that we have an APAS instrument installed at one of the largest CDMO companies globally. It's really a big deal that we're able to achieve this sale. The great news is that we're coming to the end of the formal product development and validation to the APAS PharmaQC analysis module. Once this is finalized, we will install and qualify the latest software and algorithms onto the APAS instrument at AstraZeneca, who will then commence the formal validation of the product. We expect this to take some months. And once finished our rollout of the technology will occur across a number of their manufacturing sites globally. We expect this to commence in the second half of this year of calendar year 2024. I'll now hand it over to Ray to talk through the financial results for the quarter.

Thanks, Brent, and hello. I will now provide a brief overview of the financial results as reported in our Appendix 4C lodged with the ASX in January. All figures are in Australian dollars and in accordance with ASX listing rules, they are not audited. So LBT reported net cash inflows of $1.6 million for the quarter with an ending cash balance of $3.2 million at the 31st of December. The cash flow is comprised of net cash outflows from operating and investing activities of $1 million, which included receipts of $0.5 million from customers and government grants. And the second part was the net cash inflows from financing activities of $2.6 million, which reflected the financial restructure which had three elements. Firstly, we're partly underwritten rights issue and shortfall placement, which raised the maximum gross proceeds of $4.5 million. The raising is well supported by management, board and strategic shareholders, both new and existing. Second, the restructuring of the quarterly repayments of [ $0.25 million ] that had been due under the South Australian Government Loan. Third was the cash payment of $1.4 million to settle the amount outstanding on the Lind Partners Share Placement Facility. This terminates any future issue in LBT shares to that value. This restructure has provided a runway to support our expansion into the pharmaceutical market. Back to you, Brent.

Thank you, Ray. Look, turning to the future outlook for the company. I want to stay on this focus of research and development. Investors can expect that we will finalize our primary validation program to the APAS PharmaQC product and expect that in the nearer term. This will provide formal performance data supporting the product, and it means more broadly the product will be available for sale and distribution to our customers, but importantly, sets a new standard for performance of the technology. As described previously, we will then install deliver that validated product to AstraZeneca, who will then commence their own validation program. Investors can expect this process of validation biopharma customers to occur on a go-forward basis. And that's really then to establish the performance of the technology within their own manufacturing workflow and manufacturing practices. And that's super important in order for them to use the product on a routine basis. Investors should also expect market development in the biopharma sector to continue, and that's through increased attendance at pharma conferences and events. We do expect AstraZeneca will again share their experience using the technology at an upcoming conference in Europe before the end of the half of this calendar year. It's really an important part of our commercialization strategy to have customers advocating for their technology. And clearly, AstraZeneca has been a fantastic partner of ours over the last 12 months, and they continue to support the development and the creation of awareness of the platform across the industry peers on a global level. As a result of our initial commercialization efforts, we do expect to complete additional placements within the biopharma sector and see traction building over the 6 to 9 months. So what that means in terms of additional placements, it means with customers other than Thermo Fisher and AstraZeneca that we've already disclosed to the market. So this is new customers who will commence this placement program. And we look forward to providing further updates as that occurs. It's been a really encouraging start to 2024, and I'll now hand it over to Jack to facilitate any questions.

[Operator Instructions] So first question from Peter Gregory.

Thanks very much for the update. I'd like to reflect back on, I guess, the situation that we've had with the clinical business for the last couple of years, which has really been a statement of customers not having enough funding to be able to invest in the product. To me, this is just another way of saying either LBT has not provided enough -- a strong enough value story to move the money from somewhere else. And I'm asking this question for two reasons. One is, firstly, to reflect on the clinical business, whether you can comment on whether this situation reflects the messaging or if it's because there is not enough value being provided to clinical customers? And secondly, I asked the question from the point of view of the pharma business. To ask you if you have really absolutely established that the value is there and that it will result in sales. And also, is there a risk in terms of the validation process that might undermine what's planned?

Fair observations, Peter, and I'll do my best to kind of work through that. So let me start on the clinical question that you have. I think, first and foremost, the challenge we have, I think, is a combination of budget and value. And so I think there's a fair assumption that over -- well, very clearly, over the last 2 years, the sales performance has not met our expectations, both internally and expectations that we've stepped to the market. As part of unpacking and really trying to understand that customer segment being hospitals and private pathology labs and understanding the long sales cycle, that bureaucratic process, we've kind of said to the market that as we look at that customer profile, as we look at the value that our technology provides that market on a go-forward basis, we would expect a steady but slow churn of sales to come through. So we're not walking away from that market. We still have Thermo Fisher as our distributor in the U.S. and Europe. But on its own as a product in that market, we don't see that as a sustainable business. And in other words, you could say that all best efforts were made to develop the technology to get early adopters, to get through the regulators, to appoint Thermo Fisher and our expectations were absolutely that the adoption of the product would be -- would exceed what we've been able to deliver today. And so what we're saying is that going forward, we still expect there is going to be some sales in that channel. But on its own, that value proposition doesn't resonate in a meaningful way. And so what we've done, and it was really over 18 months ago, we kind of, I guess, looked at other opportunities where our technology could benefit other sectors. We looked at things like water, food, dairy, pharma, and in our pursuit of understanding that value driver and that market dynamic, we're able to establish this contract, this partnership with AstraZeneca back in January of 2023. I think that agreement in its own right is a good demonstration of value. AstraZeneca did go through a process of looking at alternative technologies in the market so they can either continue with their standard manual workflow, which is 2 microbiologists looking at all of their plate so they could adopt other automation technologies that combine incubation and reading. And there's 2 other competitors that provide solutions to that extent. Both of those solutions haven't really taken off in terms of market traction. And in absence of really an attractive alternative, AstraZeneca decided to sign an agreement with us, pay us about $1.1 million of R&D funding with a view to validate and standardize APAS across their global network. So 12 months on from that agreement, we now nearly finished the R&D. AstraZeneca have presented now at multiple conferences, the performance data of over 8,000 specimens. The performance is very good, and we've had really positive feedback. And so I think to answer the second part of your question around, well, what's different in terms of that value dynamic between clinical and pharma? And why would investors, I guess, believe us, why would you consider that this new market is more enticing and different to clinical. I think the value drivers are materially different. I think to start with having a customer paying us to develop the technology from an R&D perspective is a great example that demonstrates that value proposition for us to bring forward our expectations by 6 months, we have been able to generate another sale to one of the largest contract drug manufacturing organizations in the world within Thermo Fisher is another example of that. And we're making very clear guidance to the market now, and that's based on some real confidence that we are expecting additional sales to occur throughout the year. So I think there's a few things there that lead a very different outlook in the pharma market, and that's kind of some of the color, I guess, that I hope described some of the questions that you had.

I guess reflecting back on the experiences in the past where you've been extremely optimistic. We see the same optimism again, and that's really the reason for my question to understand what's underlying that now optimism?

Yes. No, look, it's fair enough and in complete transparency, Peter. We completely acknowledge the company has missed expectations around the clinical market. You can say, in other words, we've got it wrong. We informed the market, we genuinely thought that the product would take off in a much more expedited manner in the clinical market that didn't happen. But we've been able to really repurpose the technology. We've spent a huge amount of money, and we recognize that over a lot of years to develop what is still a groundbreaking industry first in terms of having an independent automated culture plate reader, and that still exists in both the clinical market and the pharma market. And what you'll see the company describe on a go-forward basis is an absolute focus and an absolute rigor on the growth driver of this business and it is the pharma industry as our growth market sector, and it's complemented, I think, by the work we've done within clinical, but we're not expecting that clinical market to take shape in the same way that we had described it to shareholders in the past.

We have another question through the Q&A panel. And says as, "Hi, Brent, I love all the work with pharma. However, can you please explain how shareholders can have confidence in pharma when we will have extreme confidence in APAS and didn't deliver. Can you please also mention what happened with all the advanced sales we had at the end of each quarter."

Thanks for the question. Look, I think I'll kind of answer that first part of the question with respect to that confidence in the pharma just with the question that just happened. In terms of the second part with the advanced sales, I'm assuming that's related to the clinical side of the market. And I think what we've found, and I just kind of reiterate perhaps, again, the same reflection of the clinical market and sales over the last 2 years is that we see a trend of APAS being put into a budgeting cycle where they want to adopt the technology, and what we've observed is that other priorities come into play and APAS continues to be pushed out in terms of that budgeting process. And we see that trend now over 2 years. And so that view and that's back to the outlook that I just provided and giving guidance for. That outlook from a company perspective is acknowledge we're changing our outlook around that, but we're changing that in a way that we understand the dynamic. We still have a number of leads that are generated. We have a pipeline of customers. We have multiple customers where APAS in the clinical side of the market is being put into budget cycles, but we really don't have the degree confidence around when we close those opportunities. And that's demonstrated over, I think, the last 2 years.

A further question through the Q&A panel from Scott Power. Brent can explain in more detail the difference between your product and competition in the pharma market.

There are two technologies that we compete with. Both of the competing technologies have an incubator and a reader in one. So it combines incubation and reading. By comparison, our product is an endpoint reader. So it means that customers use their existing incubators. They use their existing media and they rolled in APAS. And after the incubation occurs, a technician will simply just take the plates from the incubator and move them to APAS and load the instrument start a session and walk away. The biggest difference between those two approaches is the capacity of the incubators. One competitor has an incubation capacity of 660 plates. And so when you think about the workflow, every one of these plates needs to be incubated for 5 days. So if you kind of do the math there, 660 divided by 5 is about 132 plates. So it means that a lab needs to be generating 132 plates per day in order to have 1 instrument. I'll give you a case study of AstraZeneca, where our instrument is currently at in their U.K. facility. That one facility is doing 1,000 plates per day. So it would mean that AstraZeneca for one site would need 7 or 8 of those competitor instruments in order to meet that kind of demand for the plates. And so it just becomes economically impossible that instrument sells at USD 600,000. And so you're looking at millions of dollars of investment to combine that incubator and reader in one. And really that, I think, is a great demonstration of why AstraZeneca having looked at what else is in the market came to us and it still made economical sense for them to have a partnership agreement with us, to pay us $1.1 million and then to start to roll that through their network. So there's significant differences between our technology and the competitive technology. And just more generally for shareholders, there is a slide on our updated corporate debt, which kind of aims to visualize some of those data points and the differences between those instruments.

We have no further questions at this time. So that does conclude the conference. Actually, we just had one further question come in, so we'll open it up another question from Peter Gregory.

Brent, I just heard your previous comment there about the competition. Do I understand that to mean that the market is already used to using automated reading?

Yes. So for the pharma market, the one example I gave, which has the most market share, a company by the name of Rapid Micro Biosystems, they claim to have an installed base of 140 instruments globally. And so when you think about what the market opportunity is and that's kind of -- well, they say their market opportunity is 10,000 instruments to be placed. And so really, I think the signal there is, there is some awareness of automation, but it hasn't been -- that there's a low degree of penetration across the market. So it means that there's a lot of opportunity in other words, but for us as a newer entrant into this automation part of the market for pharma.

No, I think that's a really positive bit of information because we have two competitors out there promoting automation is much better than the situation you've got in clinical, where automation wasn't there, you were creating the automation business.

Yes. Yes, sometimes in this case, we would share your view that it's better to be kind of the follow-up where the market awareness and the market education around automation for culture-plate reading has already been established. So I would agree with that. And again, I think probably the other key point to that is that the standard still is a manual culture-plate read for the vast majority of customers globally. So 140 placements have been made by that Rapid Micro Biosystems product, there's probably less than 20 for the other technology that's available. And so you've got a really low penetration of automation. And our view would be that the economics around those competitive products where you have limited capacity, limited scale and you're tied into their own media are reasons why customers haven't more broadly adopted that automation technology over the last few years.

So now there are no further questions. So that does conclude today's conference. Thank you for attending.